Michael A. Witynski
President and Chief Executive Officer at Dollar Tree
Thank you, Randy, and good morning everyone. On this morning's call, we're going to discuss our strong operating performance, talk through some of the headwinds facing our industry, and share details on the robust and accelerated strategic initiatives we have underway to drive short and long-term value creation.
I am proud of our team's continuing efforts, especially in our stores and distribution centers to adapt and react in this dynamic environment, to serve customers and deliver improvements in both operating margin and earnings. Our second quarter earnings per share of $1.23 represented a year-over-year quarterly increase of 12% and 62% when compared to Q2 of 2019.
We continue to see strong performance in discretionary side of the business, and our key initiatives including H2, Dollar Tree Plus and the new Combo Stores are delivering compelling results. All three concepts have performed very well, and we are significantly accelerating these initiatives in 2022 and beyond.
Regarding the continuing and well publicized challenges in the global supply chain, as well as higher freight costs and other inflationary pressures, our teams are working hard to navigate these issues while staying focused, as always on delivering the value and convenience our shoppers expect. I want to share more details on these challenges, how they affect our business and the actions we are taking to best manage and mitigate the impacts.
In recent quarters, we have spoken about the freight cost environment, both international and domestic. As you have certainly seen in the media and elsewhere, freight costs have reached unprecedented levels as a result of increased demand, limited capacity and shipping delays. For context, three months ago, the Shanghai Containerized Freight Index, which reflect spot rates on ocean freight from China was already at an all-time high, up more than 280% year-over-year and more than 400% since 2019.
Now, these rates have continued to rise, and have increased more than 20% since we last reported on May 27th. According to the recent Journal of Commerce, annual ranking of the top 100 importers, Dollar Tree ranked as the fifth largest among retailers. Dollar Tree brings in nearly 90,000, 40-foot containers per year, predominantly for the Dollar Tree banner. As you can see in the slide deck on the Investor Relations portion of our website, at dollartreeinfo.com, we believe the Dollar Tree banner imports more containers per $100 million in sales, than other large retailers. And combined with our low $1 price point, we have an outsized impact from freight cost.
After the first quarter of 2021, our updated freight outlook assumed that our regular ocean carriers would fulfill only 85% of their contractual commitments and assumed -- we also assume the higher spot -- the spot market rates. However, we are now -- project that our regular carriers will fulfill only 60% to 65% of their commitments, and the spot market rates will be much higher than previously estimated.
This shortfall is caused by a variety of factors such as equipment shortages, equipment situated in wrong location, significant backlogs and delays in both China and US ports, outbreaks of COVID causing labor shortages or closure of entire terminals, and the lingering effects of the Suez Canal blockage. To give you a real life example of the kinds of challenges we're seeing, one of our dedicated charters was recently denied entry into China because a crew member tested positive for COVID, forcing the vessel to return to Indonesia to change the entire crew before continuing. Overall, the voyage was delayed by two months. With the current pressure on carriers, once disruptions in the supply chain occur, there is not enough capacity to make it up.
During a recent transportation webinar, a San Francisco-based freight forwarder stated the transit times from Shanghai to Chicago have more than doubled to 73 days from 35 days. Another transportation executive from a carrier recently estimated that voyages are now taking 30 days longer than in previous years due to port congestion, container handling delays and other factors.
The Dollar Tree banner is more sensitive to freight costs than others in the industry. Our products have lower price points than other retail importers. And, as a result, our freight costs are a higher percentage of our gross merchandise margin. The good news is, our initial product margin, which exclude freight have been improving as evidenced by our most recent overseas product purchases, included for manufacturers in more than two dozen countries.
Even in this inflationary environment, we continue to meet or exceed our desired initial product margins at values attractive to our customers. As freight cost moderate in the future, we are confident when paired with our team's significant efforts to enhance our supply chain, this will become a material tailwind contributing to a better product margins.
Industry experts expect the ocean shipping capacity will normalize no later than 2023 when many new ships come online. We are not counting on material improvements in 2022, especially in the first portion of the year.
As a result, we are working proactively to reduce the freight cost impact and otherwise improve gross margin merchandise. Examples of steps we are taking include, using dedicated space on chartered vessels for the first time, including one large vessel contracted for three-year term, which is scheduled to make its first voyage within weeks.
We are expecting to add more charters this year. We're adding alternative sources of supply, both domestic and international that do not rely on Transpacific shipping. We expect some of this shift could become permanent. As an example, Dollar Tree and Family Dollar were well prepared for back-to-school season which alternatively sourced domestic product. We're taking a fresh look at which SKU should be prioritized for import and which should be alternatively sourced; prioritizing containers based on seasonality, the margin impact and our overall inventory needs.
We'll be continuing to pull forward seasonal purchases by 30 days. We're optimizing which China and US ports we use to take advantage of the shipping availability, and our operations team is delivering shrink improvements through technology, enhanced processes and disciplined execution. We are confident that our teams will allow us to navigate through this period of global supply chain challenges.
In addition to the supply chain channel news, we are also being impacted by labor shortages in our distribution centers and stores. Steps we are taking to combat these trends include: Hosting national hiring events; Paying sign on bonuses; Offering enhanced wages in select markets; Paying tuition reimbursement and, more. All designed to be more competitive and a tight market for talent.
We're continuing to optimize our DC network by reducing stem miles, partnering with suppliers to optimize and minimize the length of haul for inbound freight, testing, validating and expanding self checkout in our stores, and developing and utilizing more efficient processes, both in our stores and DCs.
Despite these challenges affecting our industry, I'm very pleased with the team's performance to deliver a 62% improvement in EPS in Q2 when compared to 2019. Now, let's talk about the exciting path forward. I'd like to highlight some of the key initiatives we have in place, especially Dollar Tree Plus in our combo stores, which are helping to position our Company for the future.
We are incredibly excited about the results we are seeing. As we have discussed in the past, we are well positioned to serve customers across all types of markets, urban, suburban and rural. The Family Dollar H2 continues to perform very well. In Q2, we renovated 435 stores into the H2 format, and now have a total of approximately 3,300 H2 stores.
Importantly, we are accelerating the expansion of Dollar Tree Plus initiative and the rollout of Combo Stores to better serve customer's needs and drive sustainable long-term value. We have been carefully improving and calibrating our Dollar Tree Plus initiative with a better understanding of the multi-priced offerings and greater values. Customers are increasingly embracing the Dollar Tree Plus concept, which provides extraordinary value in the discretionary categories they most desire while enhancing store productivity.
As we have refined the Dollar Tree Plus concept, the operating metrics have achieved strong results and have provided us valuable insights that are enabling accelerated expansion. On average, stores with Dollar Tree Plus are experiencing an overall sales lift of approximately 6% with a similar lift in gross profit, improved contribution of approximately 13%, and a payback on investment of less than a year. For obvious reasons, we are focused first on large stores, and we are already seeing similar positive results as we are now implementing into smaller stores. We currently have the multi price assortment in about 340 stores, and we expect to be at 500 stores by year-end.
Building on this continued success, we are planning to add Dollar Tree Plus to an additional 1,500 stores in fiscal 2022. And, we aim to have at least 5,000 Dollar Tree Plus stores by the end of fiscal 2024. Many of our new stores will also be opening up as Dollar Tree Plus stores. This past March, we announced that our newest store format, the Combo Store, leveraging the strengths of both banners under one roof, to provide shoppers with extreme value and merchandise excitement. These stores represent another way to introduce the multi price assortment to Dollar Tree shoppers, and the $1 assortment to Family Dollar shoppers, a major benefit from the Dollar Tree and Family Dollar combination.
We currently have 105 Combo Stores, and I believe we can reach 3,000 of these stores in rural markets alone. Demonstrating our great confidence in Combo Stores as a strategic format, more than 85% of our new Family Dollar stores will be Combo Stores in fiscal 2022. We anticipate 400 new, renovated or relocated Combo Stores next year. We are also in the process of validating the combo store concept and other demographic markets and are excited about the possibilities.
Our larger Combo Stores on average are delivering 23% more sales, 31% more gross margin dollars, approximately 120% more cash contribution dollars, and are reducing payback time by approximately 30%. New Combo Stores compared to similar size stores are showing sales increases of 17%, and even more encouraging, our renovated or relocated Combo Stores are delivering greater than 40% more sales when compared to Family Dollar stores that have not been renovated or relocated. Details about our Combo Stores are available at www.familydollar.com/combostores.
I will now hand the call over to Kevin to provide details on Q2 performance and our outlook.
