Dollar Tree Inc (NASDAQ: DLTR) Q4 2019 Earnings Conference Call
Final Transcript
Corporate Participants:
Randy Guiler — Vice President, Investor Relations
Gary M. Philbin — Chief Executive Officer
Michael A. Witynski — Enterprise President
Kevin S. Wampler — Chief Financial Officer
Analysts:
Matthew Boss — J.P. Morgan — Analyst
Robert Ohmes — Bank of America Merrill Lynch — Analyst
Simeon Gutman — Morgan Stanley — Analyst
John Heinbockel — Guggenheim Securities — Analyst
Chuck Grom — Gordon Haskett Research — Analyst
Scot Ciccarelli — RBC Capital Markets — Analyst
Kelly Bania — BMO Capital Markets — Analyst
Judah Frommer — Credit Suisse — Analyst
Presentation:
Operator
Good day, and welcome to the Dollar Tree Incorporated Fourth Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Randy Guiler, Vice President, Investor Relations. Please go ahead, sir.
Randy Guiler — Vice President, Investor Relations
Thank you, Britney. Good morning, and welcome to our call to discuss Dollar Tree’s performance for the fourth fiscal quarter and fiscal year 2019. On today’s call will be CEO, Gary Philbin; Enterprise President, Mike Witynski; and CFO, Kevin Wampler.
Before we begin, I would like to remind everyone that various remarks that we will make about future expectations, plans and prospects for the Company constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors included in our most recent press release, most recent 8-K, 10-Q and Annual Report, which are on file with the SEC. We have no obligation to update our forward-looking statements and you should not expect us to do so.
In the fourth quarter, the Company incurred several discrete charges as described below: a $313 million non-cash charge for goodwill impairment, a $24.6 million reduction in tax expense for the reversal of a valuation allowance related to the Company’s foreign net operating loss carry-forwards, an $18 million charge to the litigation reserve, and a $0.3 million acceleration in non-cash deferred financing cost associated with a debt prepayment. These items are detailed in the reconciliation of non-GAAP financial measures in today’s press release. Unless otherwise noted, all margin, net income, and earnings comparisons presented today exclude the impact of these discrete charges from the fourth quarter and fiscal year.
At the end of our prepared remarks, we will open the call to your questions. Please limit your questions to one and one follow-up if necessary.
Now, I will turn the call over to Gary Philbin, Dollar Tree’s Chief Executive Officer.
Gary M. Philbin — Chief Executive Officer
Thank you, Randy. Good morning, everyone. I’m proud of our team’s accomplishments in fiscal 2019, including the successful consolidation of our store support centers, the material acceleration of the Family Dollar store optimization program and the initial launch of our Dollar TreePlus! initiative. For Q4, despite the compressed holiday shopping season with six fewer days between Thanksgiving, Christmas, we delivered positive same-store sales for the enterprise, while managing margins and costs effectively to deliver adjusted EPS of $1.79, near the top end of our guidance range.
Fiscal 2019 was an important year for our organization, as we further developed the foundation and fundamentals to grow and improve our business. Accomplishments for 2019 include the following: first, consolidation of our store support center brought the Family Dollar and Dollar Tree teams together in one building. This was a major project and announced in September of 2018 and completed this past July. Our working in one space has increased the energy, benefitted our culture and driven collaboration, efficiency and teamwork that will enable us to provide even better support to our stores as we move through 2020.
Our store support consolidation allowed us to organize our management around the key processes within the company and flattened our organization to accomplish the speed and focus we need to have on key initiatives this year. We made significant progress on the Family Dollar store optimization program, including closing more than 400 stores, re-bannering 200 Family Dollar stores to Dollar Trees and renovating more than 1,100 mature stores at Family Dollar into the H2 format.
Third, the Dollar TreePlus! was introduced around mid-year. Mike will provide an update on the initiative, including the details of our Dollar TreePlus! 2.0 that’s being implemented into our test stores this month. Fourth, we repurchased $200 million in shares during 2019. In recent years, we have made significant process [Phonetic] in paying down debt. We have a scheduled debt payment for $250 million in April 2020, and we currently have an $800 million authorization remaining on our Board repurchase plan.
Our merchant teams traveled overseas for their annual post-holiday buying trip in January. This trip was led by our Enterprise Chief Merchant. The teams continue to work directly with a diverse group of qualified factories. In fact, we had vendors from eight other Asian countries attend our qualifying Open Buying Day. We consider this to be one of our most successful buying trips. We were pleased with the continued support we are receiving from our extended vendor group, and we’re able to buy the value in key items and departments for both banners for the 2020 holiday season. Importantly, all returned from China healthy and safe just prior to the news regarding the outbreak of the coronavirus.
Let me give you a bit of an update on the coronavirus, as it affects our supply chain, as we see it today. Our global sourcing group and merchants, along with our logistics team, are meeting daily and updating our progress on visibility to individual purchase orders. Generally, we are seeing production pick up and factory attendants is increasing each week. Our global sourcing team in China and third parties that provide quality assurance inspections are nearly at normal levels. All ports and third-party freight consolidators are open and operating at near-normal levels. And we are getting all needed space on vessels for our freight. At this point, all of our Easter merchandise and Lawn and Garden seasonal product is in our domestic supply chain, either in distribution centers or flowing to stores. At this point, we see a very small percentage of product canceled and some product moving onto later delivery, usually by a few weeks. And our teams are working to mitigate with sources elsewhere, including domestic sources to mitigate any effect there. More to come.
In December, we announced enterprise-level organizational leadership changes to enhance the Company’s execution of our strategy and to improve performance across the Dollar Tree and Family Dollar business segments. Among the management changes were the promotions of Mike Witynski to Enterprise President, Rick McNeely to Enterprise Chief Merchandising Officer, and Tom O’Boyle to Enterprise Chief Operating Officer. These and other actions are designed to increase enterprise-wide focus, efficiencies and accountability. With Mike, Rick and Tom, we now have our senior leadership working together across the Company with increased urgency to move the needle on initiatives that will help us deliver bottom line results that will drive value to our shareholders and customers.
Since joining Dollar Tree in 2010, Mike Witynski has been a key executive and partner in driving performance across the organization. In particular, Mike has led the Store Excellence operational initiatives and merchandising programs to drive sales and margin and has been hands on in managing our tariff mitigation efforts in the past 18 months. Mike’s promotion to Enterprise President will continue our progression of elevating customer-facing initiatives in merchandising and store operations.
I’ll now turn the call over to Mike.
Michael A. Witynski — Enterprise President
Thank you, Gary, and good morning, everyone. For the fourth quarter, enterprise same-store sales grew by 1.8% — enterprise sales grew by 1.8% to $6.32 billion. Our consolidated same-store sales increased 0.4%. Both of our segments, Dollar Tree and Family Dollar, were negatively impacted by the shortened holiday shopping season. We were also cycling early release of February SNAP benefits into January a year ago. We delivered adjusted EPS of $1.79 for the quarter.
Regarding the Dollar Tree segment, sales highlights for the fourth quarter include a 1.4% same-store sales growth, which represented Dollar Tree’s 48th consecutive quarter of positive comps. Dollar Tree had increases in both traffic and ticket with average ticket being slightly outpacing the traffic increase. Geographically, our strongest performing zones were in the upper Midwest and the Northeast. Regarding the cadence of comps through the quarter, December and January were our strongest months. Dollar Tree had positive comps in both consumables and discretionary.
We are pleased with the performance of our seasonal business and closeouts for both Thanksgiving and Christmas. Arts and crafts, pet supplies, and snacks and beverage were also strong during the quarter. During the quarter, we added Snack Zone to 49 stores, bringing our fiscal 2019 total to 1,002 stores. This surpassed our goal of 1,000 stores for the year. We now have Snack Zones in 2,136 Dollar Tree stores.
We continue to be pleased with the introduction of our Crafter’s Square initiative as well. Crafter’s Square is now in more than 650 Dollar Tree stores and consists of new expanded assortment of arts and crafts supplies, all priced at $1. We plan to expand this program to many more Dollar Tree stores later this spring. The values are tremendous and our customers are responding. Using the Store Locator function at DollarTree.com, you can quickly locate the nearest Dollar Tree location with the Crafter’s Square selection. Please drop by and check it out.
Now, looking at Dollar TreePlus!, we are taking learnings from the first phase and moving into our next phase of development, which we refer to as Dollar TreePlus! 2.0. Among the elements from our learnings that will be arriving in the test stores later this month include a shift away from consumable items into more discretionary margin-enhancing product mix. Categories will include electronics, toys, health and beauty, craft, seasonal and more. We are also updating and improving the in-store design elements to create more excitement around the program and to help deliver — to help further delineate the $1 product from the multi-price items. We continue to focus on finding value with our customers will recognize and our assortment will reflect retails at $5 and below. We feel this program will better represent what customers have come to expect from Dollar Tree, extreme value on an array of exciting items. More to come as we continue to learn, evolve and develop our Dollar TreePlus!
Regarding Family Dollar segment, sales highlights for the fourth quarter include, up against Family Dollar’s toughest quarterly compare from the prior year and a compressed holiday selling season, same-store sales were down 0.8% for the quarter. Comps were relatively balanced geographically with the Western zone delivering a positive comp. Regarding cadence of comps through the quarter, both November and December were slightly negative. January, which was cycling the early release of SNAP benefits from a prior year, was our lowest comp month.
The consumables side of the business delivered its 13th consecutive quarter of positive same-store sales. Importantly, all geographic zones have positive comps in consumable. The performance of discretionary side of our business did not meet our expectations for the quarter, and the performance was relatively the same geographically. Shortly, I will share details on how we are addressing the discretionary business at Family Dollar.
Now, regarding H2, our customers continue to be excited about the H2 renovations at Family Dollar. In the fourth quarter, H2 stores in their first year are comping at greater than 10% on average. These stores are driving greater loyalty, earning repeat visits and increasing the value perception. We are committed to this store format and plan to renovate at least 1,250 Family Dollar stores to the H2 format in fiscal 2020. We began rolling out H2 format in Q3 of 2018. We are pleased that two-thirds of the comp lift is being driven by traffic and especially by the fact that H2s are working in both urban and rural locations.
As a reminder, in our H2 stores, our efforts to drive performance are focused on creating price impact, highlighting our Family Dollar private brands, offering expanded and frozen food for convenient fill-in trips, expanding immediate consumption for snacks on the run, adding new impulse areas to drive value and margin, and introducing $1 impact section with ever-changing assortments of value, newness and excitement. The customer feedback we are receiving gives us credit across these areas of the store. We continue to refine the discretionary assortments to drive more business in these areas of the store.
Now, regarding the real-estate for the enterprise during the quarter, we completed more than 230 projects, including 112 new stores, 17 relocations, 10 re-banners from Family Dollars to Dollar Tree meeting our goal of 200 for the year, five Family Dollar renovations to the H2 format, and 95 closing stores primarily at the end of the lease term. We ended fiscal 2019 with 15,288 stores.
Now, let me share a few thoughts of our Family Dollar business. I believe our biggest challenge in turning around Family Dollar has been on the discretionary side. Our consumable business is growing well and is driving traffic. Improving the performance in the discretionary side of our business is a key objective of Rick McNeely and his team in 2020. Rick has been a proven leader at Dollar Tree business for more than 15 years. I’ve seen Rick develop and drive key initiatives in seasonal, stationery, party, Snack Zone and most recently in our Craft business over the years at Dollar Tree.
I’m confident that Rick and his leadership team will take the same approach with driving our discretionary business at Family Dollar. Rick will bring an unwavering focus on our customer by bringing the right products with the right value at the right price points for her basic needs. Price, value and convenience on basic products is critical to our success.
On the most recent buying trip in January, I’ve already seen the discretionary import process come to life. Rick brought the same rigor and processes that Dollar Tree has developed over the years for our import business to Family Dollar. The processes started with the customer in mind and delivering on our expected business goals. Then, Rick and the team dive into the category, the sub-category and the product and price line-by-line, item-by-item. Every item gets scrutinized for value, meeting our customer needs and delivering on our financial goals. Now, we have one leader, we are in the same building on the same floor and going on the same import trips.
Rick brings a consistent singular process and voice to both segments of our business. He has an experienced proven leadership team in place. This allows for sharing insights, moving with speed and leveraging efficiencies with our combined volume on specific items and/or shared vendors. Our merchant teams are engaged, energized and equipped to drive the discretionary business at Family Dollar going forward, and I look forward to the change.
I will now turn to Kevin to provide more detail on the fourth quarter performance and our initial outlook for 2020.
Kevin S. Wampler — Chief Financial Officer
Thank you, Mike, and good morning. Consolidated net sales for the fourth quarter increased 1.8% to $6.32 billion, comprised of $3.52 billion at Dollar Tree and $2.8 billion at Family Dollar. Enterprise same-store sales increased 0.4%. And on a segment basis, same-store sales for Dollar Tree increased 1.4% and for Family Dollar decreased 0.8%.
Overall, our gross profit was $1.96 billion compared to $1.91 billion in the prior year’s quarter. Gross margin was 31% of sales compared to 30.8% in Q4 of 2019 [Phonetic]. Gross profit margin for the Dollar Tree segment decreased 90 basis points as a percentage of sales to 36.2% when compared to the prior year’s quarter. Factors impacting the segment’s gross margin performance for the quarter included merchandise costs, including freight, increased approximately 40 basis points, primarily due to the impact of List 4A tariffs, which represented approximately 65 basis points of headwind. This was partially offset by lower freight costs. Distribution costs increased approximately 25 basis points, primarily due to higher payroll costs and depreciation. Shrink increased approximately 15 basis points based on unfavorable inventory results and an increase to the accrual rate. And occupancy costs increased approximately 10 basis points based on loss of leverage from the lower comp sales.
Gross profit margin for the Family Dollar segment improved 100 basis points to 24.6% during the fourth quarter. The year-over-year improvement was due to the following. Markdown expense improved approximately 100 basis points as we cycled the $40 million reserve for Q4 of 2018, and merchandise costs including freight decreased approximately 60 basis points, driven primarily by improved initial mark-on and freight costs. These were partially offset by a higher percentage of lower margin consumable sales. These benefits were partially offset by occupancy costs, which increased approximately 35 basis points due to higher real estate taxes and loss of leverage on lower comp sales. Distribution costs increased approximately 15 basis points due to increased payroll costs at the DCs and shrink increased approximately 10 basis points.
Consolidated selling, general and administrative expenses, including discrete charges, were 27.1% of net sales compared to 65.4% of net sales in the prior year’s quarter. Excluding the discrete charges in 2019 and 2018, SG&A as a percentage of net sales was 21.9% compared to 21.3% in the prior year’s quarter.
For the fourth quarter, the SG&A rate for the Dollar Tree segment, when excluding its portion of the litigation reserve, as a percentage of sales increased to 20.1% compared to 19.7% for the fourth quarter of 2018. This increase was due to the following. Payroll cost increased approximately 30 basis points, primarily due to an increase in store hourly payroll due to higher average hourly rates, and additional hours to support store initiatives. Operating costs increased by approximately 10 basis points resulting from increased debit and credit card fees due to higher penetration and higher insurance costs, and depreciation increased approximately 10 basis points.
The SG&A rate for Family Dollar segment, when excluding the goodwill impairment and the litigation reserve, increased 20 basis points to 21.5% compared to 21.3% for the fourth quarter of 2018. The increase was primarily due to the loss of leverage on negative comp sales. Depreciation and amortization expense increased approximately 15 basis points and operating expenses increased approximately 10 basis points, resulting primarily due to higher debit and credit card fees and increased insurance costs comparable to Dollar Tree.
Corporate and support expenses increased 15 basis points, primarily related to higher incentive comp and stock compensation expense compared to the prior year quarter, based on timing of performance adjustments between Q3 and Q4 year-over-year. On a consolidated basis, excluding discrete charges from 2019 and 2018, adjusted operating income was $580.4 million compared with $632.6 million in the same period last year and adjusted operating margin was 9.2% of sales compared to 10.2% of sales in last year’s fourth quarter.
Non-operating expenses for the quarter totaled $39.9 million, which was comprised primarily of net interest expense. Our effective tax rate for the quarter was 41.3% compared to 5.1% in Q4 of 2018. These rates are affected by the non-cash goodwill impairment charges recorded in 2019 and 2018 that are not tax deductible. Without the goodwill impairment charges included in net profit before tax, the tax rates for Q4 2019 and Q4 2018 were 16.6% and 21.2%. The decrease in Q4 of 2019 rate is a result of a reduction in tax expense of $24.6 million for the reversal of a valuation allowance related to the Company’s foreign net operating loss carry-forwards.
For the fourth quarter on a GAAP basis, the Company had net income of $123 million or $0.52 per diluted share. This compared to a GAAP net loss of $2.3 billion or a loss of $9.69 per share in the prior year’s quarter. On an adjusted basis, diluted earnings per share for Q4 2019 were $1.79. Please refer to the reconciliation of non-GAAP financial measures in today’s press release.
Looking at the balance sheet, combined cash and cash equivalents at fiscal year-end totaled $539.2 million compared to $422.1 million at the end of fiscal 2018. Outstanding debt as of February 1, 2020 was approximately $3.8 billion. The Company paid $500 million in January 2020 on its $750 million floating rate note. The remaining $250 million is due April 2020.
Inventory for the Dollar Tree segment at quarter-end increased 8.4% from the same time last year, while selling square footage increased 7.1%. Inventory per selling square foot increased 1.2%. We view that current inventory levels are appropriate to support the scheduled new store openings and our sales initiatives for the first quarter.
Inventory for the Family Dollar segment at quarter-end decreased 7.7% from the same period last year and decreased 2.8% on a selling square foot basis. Based on store closures, the Family Dollar segment has 5.1% less square footage outstanding.
Capital expenditures were $252.5 million in the fourth quarter versus $194.4 million in the fourth quarter last year. For the year, capital expenditures totaled $1.035 billion. For fiscal 2020, we are planning for consolidated capital expenditures to be approximately $1.2 billion. Capital expenditures will be focused on 550 new stores and 1,250 Family Dollar H2 renovations, the addition of frozen and refrigerated capability to select existing Dollar Tree and Family Dollar stores, IT system enhancements and projects, development of our Chesapeake campus, installation of LED lighting as well as HVAC and flooring replacements in select stores, and the completion of construction of our new distribution center in Rosenberg, Texas, as well as the start of construction on Dollar Tree regional DC 17 and a high velocity DC.
Depreciation and amortization totaled $179.1 million for the fourth quarter and $166.7 million in the fourth quarter last year. For the year, depreciation expense totaled $645 million. For fiscal 2020, we expect consolidated depreciation and amortization to range from $680 million to $690 million.
Our initial outlook for fiscal 2020 includes the following assumptions. Our outlook does not include any potential impact related to the supply chain or other aspects of the Company’s business for the COVID-19 coronavirus. For same-store sales, we are forecasting low-single digit positive comps for the year. Calendar considerations for 2020 include the following. Easter will be one week earlier, which will have an estimated $10 million negative impact on sales in the first quarter, and there will be two additional selling days between Thanksgiving and Christmas compared to 2019, which should positively impact Q4 sales by an estimated $12 million.
On a GAAP basis, we expect to incur approximately $78 [Phonetic] million less in one-time costs in 2020 compared to 2019. This relates to costs in 2019 associated with store closings, markdowns and accelerated rents, as well as consolidating our store support centers. With regard to tariffs, our outlook includes an estimated $47 million of incremental costs in fiscal 2020 with nearly all of it to be incurred in the first half of the year.
From a GAAP EPS standpoint, we believe our toughest year-over-year compare will be Q1, as we are incurring incremental tariff costs of approximately $25 million compared to Q1 of 2019. Additionally, we are planning on increased promotional activity for our Family Dollar banner as we rebuild our discretionary merchandise assortment. While our first quarter outlook includes the expected pressure from these tariffs and increased promotional activity, we believe we are well positioned to deliver improved sales, operating margin and earnings in the following three quarters and for full year 2020.
We expect continued pressure on store payroll based on competitive markets, states increasing minimum wages, unemployment levels and completing the Company’s initiatives plans, including H2 renovations, Snack Zones and Crafter’s Square projects. We continue to partially offset these average hourly rate increases through productivity initiatives in our stores.
We estimate year-over-year domestic freight cost to be slightly lower in 2020. Import freight rates will be higher as we annualize our April 2019 rate increases. In addition, we expect the new clean fuel regulations for ocean vessels to contribute to higher import rates in 2020.
We expect distribution costs to be a headwind during the year from wage pressures created from the tight labor market for both banners and depreciation cost pressures specific to the Dollar Tree segment. We do expect the distribution cost headwinds to dissipate as we go through the year as productivity initiatives positively affect the network.
Net interest expense is expected to be approximately $38 million in Q1 and approximately $145 million for fiscal 2020. We cannot predict future currency fluctuations. We have not adjusted our outlook for currency rate changes. Our outlook assumes a tax rate of 23% for the first quarter and 22.8% for fiscal 2020. Weighted average diluted share counts are assumed to be 238.1 million shares for Q1 and the full fiscal year. Our outlook does not include any share repurchases. The Company has $800 million remaining under the Board repurchase authorization.
For the first quarter, we are forecasting total sales to range from $5.89 billion to $5.99 billion and diluted earnings per share in the range of $1.00 to $1.09. These estimates are based on a low-single digit increase in same-store sales and year-over-year square footage growth of 1.5%. For fiscal 2020, we are forecasting total sales to range between $24.21 billion and $24.66 billion based on a low-single digit same-store sales increase and approximately 3.1% selling square footage growth. The Company anticipates GAAP net income per diluted share for fiscal 2020 will range between $4.80 and $5.15.
And looking at our 2020 outlook when compared to 2019 performance, the upper end of our 2020 guidance is $5.15. Adding back the impact of $47 million or $0.15 per share in incremental tariffs in 2020 and $28.6 million or $0.12 per share for the equalization of tax rates for both years brings the adjusted EPS for 2020 at the high-end to $5.42. When compared to the 2019 adjusted earnings per share of $4.76, 2020 adjusted earnings of $5.42 would be a 14% increase year-over-year.
I’ll now turn the call back over to Gary.
Gary M. Philbin — Chief Executive Officer
Thanks Kevin. The work from our teams in 2019 set the stage for us to be able to grow and improve our businesses in 2020. Our teams were able to achieve several important milestones through 2019 and mitigate some of the challenges. The time, effort, resource and focus on bringing more than 500 jobs to Chesapeake, Virginia by consolidating our store support centers, the Family Dollar store optimization effort to close more than 400 stores and re-banner another 200, the doubling of H2 renovation projects from 518 to more than 1,119, all the tariff mitigation efforts regarding trade during the year and the impact last year to our balloon and party business from the helium shortage.
Here is the good news for 2020. Our management team is in one place with our senior leadership focusing on the priorities and initiatives to drive the business. Our management team is tasked to do the following: as always, drive our top line with exciting merchandising execution; improve on shrink; drive supply chain efficiencies, both in freight and distribution costs; improve the mix on the discretionary side of Family Dollar, creating more value; reinvent the ‘Wow’ of Dollar Tree as always with our new drive the business opportunities that you heard Mike described and Dollar TreePlus!; continue our tariff mitigation on each buying trip; and the continued refinements to drive the H2 format this year and next. Our customers are responding to this store layout and assortment and price impact.
Our teams are focused and energized and well prepared for 2020. As we start Q1, we have seen our customers at Dollar Tree respond to our first big seasonal holiday, Valentine’s Day. Helium was in good supply and certainly not the issue we had last year. We had a terrific holiday with sales, traffic and positive comps in our party department. For Family Dollar, we have been focused on tax refund time to drive our business into departments that our customer spends on this time of the year. We have increased promotional activity during this important time, and we are at the peak of it right now and like the traffic we are seeing across those departments.
All this progress would not be possible without the contributions of each and every one of our associates. For them and more than 15,200 stores across the US and Canada, our network of 24 distribution centers and our store support center in Chesapeake, Virginia, I’d like to just add my thanks to all of them for their ongoing commitment, dedication and efforts to serve our customers every day. Our efforts in 2020 are focused on the urgency around our key initiatives to drive bottom line results in supply chain, our continued progress on H2 store renovations, shrink, elevating training at field and store level for increased customer engagement.
In summary, we are — we continue to focus and make meaningful progress to grow and improve our business for both brands. We are well positioned in the most attractive sector of retail to deliver continued growth and increased value for our shareholders. The combination of more than 15,200 Dollar Tree and Family Dollar stores provides us the opportunity to serve more customers in all types of markets. Our teams are excited about seizing the opportunities and tackling the challenges ahead of us in 2020.
Operator, we’re now ready for questions.
Questions and Answers:
Operator
Yes, sir. Thank you. [Operator Instructions] Our first question comes from Matthew Boss with J.P. Morgan.
Matthew Boss — J.P. Morgan — Analyst
Great, and thanks for all the color. So maybe just to start off at the Dollar Tree concept, what do you attribute, if we take a step back, the roughly 100 basis points of gross margin contraction in the last two years? And as I break it down, what I’m trying to figure out is, how much do you see as transitory or recapture opportunity? Do you feel comfortable that the consumable mix pressure is now in the rear view mirror? And I guess, to put it all together multi-year, what do you think is the sustainable gross margin at the Dollar Tree banner versus that 35% to 36% pretty consistent historical level?
Kevin S. Wampler — Chief Financial Officer
Sure, Matt. This is Kevin. Thank you for the question. Again, I think obviously, some moving pieces in the last couple of years and I think obviously most recently tariffs this year obviously have been a headwind, which obviously we will fully cycle as we go through the year. The team continues to work to mitigate and do everything we can to provide great value to our consumer through that process. I think the other thing is, if you look at our mix, our mix at Dollar Tree continues to be good. I think obviously, there’s been some things outside of the actual product cost at the end of the day. So if you look at distribution costs, you look at shrink, some items that traditionally we’ve been very good at controlling and we can be very good in the future as we go forward as well, I think those are the items that we have to work on. I think the — but overall, the consumables and discretionary business, we feel very good about where we’re at.
Gary M. Philbin — Chief Executive Officer
Hey, Matt, Gary. I would just say this: long term, we’ve always been between 35% and 36%, and that’s where we’re going to get back to and operate within those ranges. And you nailed it, the transitory issues have been tariff, distribution, freight, shrink, those are all the things that I think — the longer we are able to navigate around them that we’ll be able to see them go away, and some effort on each buying trip, if tariffs stay in place, we mitigate them. The mix, I’m pleased with. We’ve seen — despite the fact that we always drive traffic in that Snack Zone, our customers are really going to be excited about Crafter’s Square, and that’s the other side of the margin equation that we’ve always done at Dollar Tree. So it’s always one, two step with us, and I think we get back to the 35%, 36% for Dollar Tree.
Matthew Boss — J.P. Morgan — Analyst
Great. And then just to switch gears to Family Dollar. So as we think about the cadence of the year, do you see comps in the positive low-single digits in the first quarter? Or is it more a back-end loaded type of a trajectory this year? And what exactly is driving the elevated promotional activity to start the year at Family Dollar?
Kevin S. Wampler — Chief Financial Officer
Yeah, Matt, I think we do look for positive comps in each quarter of the year. We do look for the business to get stronger as we go. We will cycle some red tag sales from our stores that we were closing last year, so we have a little higher hurdle from that as we go. But I think that will be fine. So I think that’s — from that perspective, we would expect positive as we go through the year.
Gary M. Philbin — Chief Executive Officer
The other piece, Matt, is we’ll be building up on H2s as we go through the year as well. Regarding the promotional activity, I would just tell you, we knew there was a shortened holiday season for the Christmas season and we just went into this year knowing that while we’re going to be cycling some of the red tag event. We also really got to get after the discretionary side of our business at Family Dollar. And tax time last year, I think, we just had an opportunity to build on. It’s when our customer has money in her pocket. It’s when she is shopping the store for things that she doesn’t always have money for. And it shows up in bedroom, bathroom, kitchen items that are basically the capital expenses for her for the beginning of the year. So we want to go into this season with — really loaded with the right items, what we think is the appropriate promotional activity in Q1 during this important tax time.
Matthew Boss — J.P. Morgan — Analyst
Great, best of luck.
Operator
[Operator Instructions] Our next question comes from Robbie Ohmes with BofA Global Research.
Robert Ohmes — Bank of America Merrill Lynch — Analyst
Good morning, thanks for taking my question. I guess, I wanted to just follow up a little bit on the Family Dollar strategy. It sounds great with Rick McNeely very focused on getting the discretionary going. But can you give us — how should we think about the long-term outlook for Family Dollar if discretionary does continue to underperform? Can you still get the gross margin up or the profit contribution up? And also, the weakness at Family Dollar from a same-store sales perspective, is there any pressure you’re seeing from all those Dollar General stores that have opened over the last couple of years as well? Thanks.
Gary M. Philbin — Chief Executive Officer
Hey, Robbie, this is Gary. Listen, I don’t think it’s either or. The same way that at Dollar Tree, we’ve always gone after what you do to drive the business that tends to be on the consumable side of the store, and then what you have to do that is on the customer maybe want list instead of the needs list. So what Rick brings to it is that process, and our strategy is very clear. We’re speaking with one voice, not just to our people, but also to the trade, which goes a long way. And a lot of the discretionary business is things that we can import, the things that we can drive the business on because we invent the product. Yes, our customers need basics. But when you get to the seasons, when you get to cookout time, when you get to celebrations — we’re introducing Hallmark cards into Family Dollar this year. You heard us talk awful lot about that over the last 18 months at Dollar Tree, and the same kind of card assortment, slightly different, will be into Family Dollar stores as well.
And even if it’s in consumables, I think it’s important to just point out maybe what’s different at Family Dollar is our private brand business. And while it’s “a consumable,” it’s a higher margin category across all of our own private brands. So that’s something that we drive as well. Our immediate consumption is also a consumable, a snack, a drink. Those also are above average margin. So those are the things that Rick is going to bring to the party. And then, like all good retailers, we have competitors out there. And what we like about H2 is the lift we’ve been getting with the format has typically been in places where we don’t see because we have that kind of competition out there. So that’s why we’re happy with H2 lift as we go into 2020.
Robert Ohmes — Bank of America Merrill Lynch — Analyst
That’s helpful. And just a quick follow-up. Kevin, thanks for getting us to that $5.42 base sort of number for this year when you have everything [Phonetic] back. What algorithm should we use for that $5.42 sort of adjusted number for this fiscal year?
Kevin S. Wampler — Chief Financial Officer
Yeah, I think when we think about it long-term, Robbie, is, obviously, we’ve got a lot of noise in the number over the last couple of years with various charges and one-time discrete costs and so forth. But on a general basis, my viewpoint would always be, we’re going to look to grow our bottom line faster than top line. And I think we’re always looking to say, can — we want to grow 10% plus on our EPS. That’s always where we’re going to look at it. And I think historically, we’ve been able to do that. I think we’re going to get back to that as we go forward. And while we don’t traditionally use an algorithm per se, that’s just how I think about it from a metric standpoint.
Robert Ohmes — Bank of America Merrill Lynch — Analyst
That’s helpful. Thanks so much.
Operator
[Operator Instructions] Our next question comes from Simeon Gutman with Morgan Stanley.
Simeon Gutman — Morgan Stanley — Analyst
Hey, good morning. It’s Simeon Gutman. My first question is, improving discretionary at Family Dollar, can you talk about what hasn’t been working? And I think on the call, you mentioned that the food and consumables were growing or were positive. Does that mean that two-thirds of the business is comping positive? And yeah, any other color on that please.
Gary M. Philbin — Chief Executive Officer
Good morning, Simeon. Well, I think you’ve teed it up. The priority for us is to go after the discretionary business at Family Dollar. We’ve been happy with the consumables because it’s been driving the traffic, but like I said before, you got do both. So what’s not working? We can spend a lot of time on that, but I think it’s more about our process. It’s about the value we bring to our customers. It’s being in stock on the right items in the right store. It’s inventing what’s new. I think sometimes, we fall into the trap that this is a customer that counts on Family Dollar for basics without a doubt. You’ve got to be right on that. You got to be ready on 1st of months.
You’ve heard me say, we got 13 holidays at Family Dollar, 12 first of the months and the extra one is the tax refund time. But that also means we got foot traffic in the store. And the ability for us to find the right items in apparel, on seasonal, on electronics, on toys, those are the type of things that need value, the marketing behind it, the price-value equation, promotional activity, and really those are the things that I think between Mike and Rick and the team at Family Dollar are very focused on right now to build this up. And I don’t know another way of doing it, Simeon, other than going four feet by four feet across the store or when we’re over in Asia, going through our items, we go through a SKU at a time and say, what are we buying, what’s the value equation, what’s in the marketplace? And that’s always been our process. So it’s about that as much as it’s about the item.
Simeon Gutman — Morgan Stanley — Analyst
And I assume it’s iterative. But is there a point in 2020 in which you have your best foot forward for some of the buying that you mentioned in Asia, some of the new items, new resets? When do you have that offering in place to be able to judge if some of the new stuff is working?
Gary M. Philbin — Chief Executive Officer
Well, on a seasonal basis, we get a grade at the end of every season, so that part is sort of easy. Now, as many [Indecipherable] sort of go back and rebuild [Phonetic] for the next year on what I would consider some of the basics on imports. So we — what we can accomplish, if you’ve been into an H2, on the impulse tables, on our queuing line, on some of the basics there every day, there we have a chance, either to do resets in some of the categories, which might need a major reset, or to put in some impulse items that we can tap. So it’ll be iterative as we go through the year, both on — both of those parallel paths, what are we doing across the categories and what are we doing on an in-and-out basis on some of the impulse categories. It’s not unlike what we do at Dollar Tree, but different from the standpoint that it will be items some at $1 but we have an opportunity to sell the customer here the things that she — maybe, at the end, that was on here list that’s something cool at $5.
Simeon Gutman — Morgan Stanley — Analyst
Great, thank you.
Operator
Our next question comes from John Heinbockel with Guggenheim Securities.
John Heinbockel — Guggenheim Securities — Analyst
So, Gary, let me start, in the H2 remodels, what type of discretionary comp lift you’re getting? Number one. And then number two, when you think about Family Dollar Real Estate, what are the thoughts right now in additional store closings and/or conversions? Where you think you want to be right now?
Gary M. Philbin — Chief Executive Officer
Well, for the H2, the lift that we’re getting, which we’ve called out, around 10%. It’s basically going up with the same way the fleet is, so — which I think is a pretty good effort because, keep in mind, what we’ve added in our additional frozen food doors, which is a consumable line and expands that offering. We’re also putting a queuing line that is a bit more of a mix of both discretionary. But the fact that we’ve sort of — if you go back to last year, we were talking about a slightly negative impact from the discretionary. As we’ve gone through the year, we basically have gotten it to the fleet average. The issue is, we would need to improve the fleet average. And so, part of that is, what we’re going to do across the entire chain, not just H2. But H2 is built to expand margins. We have put in the Wow tables. We have the opportunity with a queuing line. We have private label primarily displayed in the H2s in a bigger way. We got immediate consumption out there, like I said before, that’s at a higher margin. So those are the things that over time I’m counting on H2 to continue to drive the expansion as we go through our continued refinements of H2.
And the second question, John?
John Heinbockel — Guggenheim Securities — Analyst
Yeah, real estate at Family Dollar, right? Do you need to do more closures beyond what you’ve done this year? And would it be helpful to do more re-bannerings?
Gary M. Philbin — Chief Executive Officer
Well, we’ve always taken a look at what does it take to stay within the fleet in terms of top line sales, cash contribution. I think last year, what we were able to accomplish with the 400 closings was just get the stores that weren’t going to get a lift because in some cases too small or the town had shifted, all the various reasons that we called out at the time. I think we take a look at the end of — basically at lease term and we take a look at the future of the store, our guidance calls out something — I would say, history says, between 75 and 90. I think we’ve put in over 100 this year on closings, and I think that reflects the continued really taking a look at all the stores and what it takes to stay within our store base as we continue to do and get better lifts on our remodels. Our fleet will change. We will have more and more stores be five years less — five years or less since they’ve been touched last through the new stores, H2 renovations, what we’ve closed, what we’ve re-bannered. So our customer at Family Dollar is going to see a different fleet of stores.
John Heinbockel — Guggenheim Securities — Analyst
Okay, thank you.
Operator
Our next question comes from Chuck Grom with Gordon Haskett.
Chuck Grom — Gordon Haskett Research — Analyst
Hey, thanks. Good morning. Kevin, just wondering if you could amplify on the complexion of the operating margins in 2020, both at the Tree and at Family, just kind of what you’re expecting by banner. I know there is obviously the tariff and the ocean freight, which looks like it’s going to impact the annual number by about 20 basis points for the total Company. I’m just wondering if you could just sort of walk through each of the segments for us.
Kevin S. Wampler — Chief Financial Officer
Yeah, Chuck, as we look out to your point, in total, we are looking for improvement in our gross profit line for the year. Again, it is a little more back half-oriented where we see that improvement as we cycle the tariffs we called out for Q1 and Q2. And to your point, the tariffs affect the Dollar Tree banner — probably about 80% of the tariffs are related to Dollar Tree. There are some Family Dollar effect out of those tariffs as well.
So I think if you look at that, I think the other point that we have going on in gross profit is distribution. And I think, we’ve seen a little more pressure on the Dollar Tree side than the Family Dollar side. But in general, I think we’ll see — we’re going to see improvement in both and — as we go through the year. So I think that’s kind of how we’re thinking about it.
SG&A, on the other side of the equation, the SG&A side, I think, is flat to slightly better. And again, obviously, top line helps dictate that, as well as us controlling our costs. And obviously, the pressure point has been store labor with the average hourly rate increases. And again, we always have initiatives to help reduce that, and the team continues to do that. But that’s the one point of pressure really on the SG&A side.
Chuck Grom — Gordon Haskett Research — Analyst
Okay, that’s helpful. And then Gary, just one for you, just the thoughts — the pivot on the multi-price points, can you maybe just speak to the number of SKUs you’re going to be testing, number of stores? In 2020, how it’s going to roll out and I guess relative to the performance that you saw last year? Thanks.
Gary M. Philbin — Chief Executive Officer
I’m going to hand it over to Mike, if you don’t mind, just because he has been leading the charge on this one.
Michael A. Witynski — Enterprise President
Yeah, thanks for the question. We look forward to the new categories. There is going to be about 20 new categories across the store in four-foot sections and the variety of categories, as you said. We’re excited about them. They’ll start landing at — I would say, two-thirds of them in this month and then some in late April, early May, and then cleaning up just a few in October. But we’re excited about them. They’re going to be more the general merchandise and the excitement and the Wow. We’ve looked at the marketplace. We know what’s out there, those price points of $5 and below. And we’re going to bring some nice products with some good margins for the Company.
Chuck Grom — Gordon Haskett Research — Analyst
Okay. And just one more, if I could just sneak in, just the decision not to do more consumables. I guess, the question is like, why? Did it not work? Or you feel you can just show greater value on the discretionary? Thanks.
Michael A. Witynski — Enterprise President
We believe we can show the second part of your thought is the better value. It’s — what Dollar Tree is known for is bringing that excitement and Wow. We know the manufacturers that can help us produce those products, and we think we can bring more value to the customer in those categories.
Chuck Grom — Gordon Haskett Research — Analyst
Okay, thank you.
Operator
Our next question comes from Scot Ciccarelli with RBC Capital.
Scot Ciccarelli — RBC Capital Markets — Analyst
Good morning, guys. Scot Ciccarelli. Question, did you guys pick up the extra $19 million that you called out as a tariff headwind in 4Q? Because I think there were some delays on those — on that tariff implementation. And then related to that, does the threat of tariffs, which can obviously be implemented very quickly, potentially influence how you might be viewing the Dollar TreePlus! tests? Thanks.
Kevin S. Wampler — Chief Financial Officer
Scot, as it relates to the Q4 tariffs, again, we did see those flow through as we guided to. And again, in the prepared remarks, I called out the fact that within the Dollar Tree banner itself, it was basically about 65 basis points of headwind. So those did flow through. And as you — and really, the change in tariffs that happened since we last spoke was the 4A going to — from 15% to 7.5% but that it actually didn’t happen until February 14 after quarter-end. So really, everything we talked about when we talked to you last at the end of Q3 was in place, and we did see it flow through our P&L.
Scot Ciccarelli — RBC Capital Markets — Analyst
Got it. And then…
Gary M. Philbin — Chief Executive Officer
[Speech Overlap] Dollar TreePlus! 2.0, I think the way we’re thinking about it, here’s a chance to expand the circle for Dollar Tree. That’s why we’re doing it as much as anything to do that and expand margin because we think we have the opportunity here to really manufacture the type of items that we’ve done at $1 price point. So let’s do some of the same things that create value, create that wow effect, and that’s why we’re doing it. So listen, I’d like to think that we’re in a stable environment here for tariffs. That gives our team a chance to go over and continue to mitigate on each buying trip and find value and add items and drop items. It’s what we do. It’s easier when we obviously know the rules that we’re playing with when we go over. So I think Dollar TreePlus! is about expanding who comes into a Dollar Tree. That’s our primary purchase and have them buy more.
Scot Ciccarelli — RBC Capital Markets — Analyst
Got it. Thank you.
Operator
Our next question comes from Kelly Bania with BMO Capital.
Kelly Bania — BMO Capital Markets — Analyst
Hi, good morning. Thanks for taking my questions. I guess, just another one on mix. As you think about your guidance for this year, what are you planning in terms of mix, particularly at Family Dollar? Obviously, you’ve a focus to improve that. But just curious, what level of success you’re baking in, in terms of that mix improvement?
Kevin S. Wampler — Chief Financial Officer
Yeah, Kelly, I think as you think about it, our consumable mix were approximately 77% consumables at this point in time. So to move it takes a lot, as you might imagine. The plan would be to obviously perform better in discretionary this year as we go through. Obviously, we were disappointed in Q4 in that arena. As we go through the year, we think we can positively affect that it. We will have moved it a lot in the first year, maybe not a lot, but I think it builds the foundation to continue that improvement going forward is the way we would think about it.
Gary M. Philbin — Chief Executive Officer
Kelly, I would be disappointed if we don’t get to the fourth quarter and have a much better season. Part of it will be we got a better calendar for sure. Part of it will be some of the efforts we made in January on the buying trip. So I think by the time we get to the holiday season at Family Dollar, my expectation is we ought to see improvement year-over-year, and that’s what we’re tasking ourselves with. So as we go through the year, we all pick up steam but don’t lose sight. The other piece of this on the consumables is, we want to get after the great offers on private brands, which our customer sees great value versus national brands. That’s the same kind of effort we need there as much as we need on discretionary consumables. Within consumables, we can drive private brands.
Kelly Bania — BMO Capital Markets — Analyst
Okay, that’s very helpful. And then maybe just a follow-up. Can you just provide a general update on turnover and how that’s trending at both banners and the DCs and just how you feel about the compensation structures across the organization?
Michael A. Witynski — Enterprise President
Yeah, thanks for your question. This is Mike. Our turnover at our retail stores is actually trending to be — we just finished up the best year we’ve had in the last several years at both banners, Family Dollar and Dollar Tree, at the store manager ranks. And at our DC, we do have turnover. And as we look at the competitive environment and the average hourly rate by markets, we are adjusting accordingly to mitigate that as much as possible.
Randy Guiler — Vice President, Investor Relations
Britney, I think we’ve got time for one more.
Operator
Yes, sir. Our final question will come from Judah Frommer with Credit Suisse.
Judah Frommer — Credit Suisse — Analyst
Thanks for squeezing me in. First, I just wanted to circle back on the tariffs and the $47 million impact in the first half of this year. I think we kind of felt like we were done once we got the $19 million disclosure for Q4. So what’s changed? Is there more timing impact or have mitigation efforts? Are they not seeing the same results that they saw last year? And do you feel like the $47 million should be the end of it if tariffs stay in place as they are today?
Kevin S. Wampler — Chief Financial Officer
As it relates to the $47 million, to your — last part of your statement, yes, we do believe that if tariffs stay as they currently are that the incremental piece we’re seeing is the last major incremental piece. It’s always going to change based on the mix of products we select and bring to the marketplace. I don’t –from an overall standpoint, the standpoint of $47 million additional this year, we have to remember a couple of things. One, at this point in time a year ago, List 1 through 3 were at 10%. They’re now at 25%. List 4A at 7.5% did not exist. So basically, that’s what you’re — we’re cycling against. And then in some instances, we’ve decided not to mitigate some of these, just based upon the value perception of the product that we bring to the marketplace. So I think those are some of the things that play into that. But to your point, this should be, assuming that things — the tariff rules stay as they are, as we get through the first half, then it becomes more of an even playing field going forward.
Gary M. Philbin — Chief Executive Officer
And Judah, I would just — for up to [Phonetic], we continue to work on supply chain. It’s not the easiest thing to lift up a supply chain from China to move somewhere else, but we have done it. And we’ve moved it to other Southeast Asian countries. We’ve move some back domestically. We’ve moved some to Mexico. So that’s part of what we do on every trip. So it is something that we have — as long as we have visibility to it, we can make better choices on what we want to buy to. So, stability will go a long way, but the $47 million is what we see because we still got inventory flowing through in Q1 at the higher 15% on 4A. The 7.5% then go into effect till Valentine. So that’s going to take a while to unwind, and then we’ll have that product [Phonetic] going through that wasn’t in place last year. So hope that gives you some color on it.
Judah Frommer — Credit Suisse — Analyst
Yeah, that’s really helpful. And then lastly, I was just hoping, maybe you could help us with some color on top line trajectory kind of early in Q1. I think some other retailers that saw that squeeze during the shortened holiday period have given some color around kind of the bounce back in February. It seems like maybe that should be easier in Dollar Tree, given potentially promotions weighing down price in Family Dollar. And then, anything you could call out on coronavirus-related demand or stock-up at either banner in the last week or two?
Gary M. Philbin — Chief Executive Officer
Well, I called out — really, I’ve always thought the efforts around our seasons are so important at Dollar Tree, which is why I called out Valentine’s Day and much better holiday this year and we gotten out of the gates quickly and lots of love in the air. We sold over 10 million plus balloons and cards, and so that all felt pretty darn good to us for Dollar Tree and been [Phonetic] a good Valentine’s at Family Dollar, which is a smaller department. But the bigger opportunity there was tax time, which I called out, and some of the promotional activity. We certainly are seeing a spike on anything that’s related to hand sanitizers and cleaning surfaces. But I would say we’re also in first month right now in tax refund time. So, right now, there is money in the market for all those reasons, plus a heightened effort for everyone to wash their hands and use hands sanitizers. So we’re seeing that in the stores as well.
Judah Frommer — Credit Suisse — Analyst
Great, thank you.
Operator
Thank you. This concludes today’s question-and-answer session. I will now turn the conference back over to Mr. Randy Guiler for closing remarks.
Randy Guiler — Vice President, Investor Relations
Thank you, Britney. Thank you for joining us for today’s call and for your continued interest in Dollar Tree. Our next quarterly earnings conference call to discuss Q1 results is tentatively scheduled for Thursday, May 28, 2020. Thank you. Have a good day.
Operator
[Operator Instructions]
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