Dollar Tree Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 29, 2023

There are 13 speakers on the call.

Operator

Hello, and welcome to the Dollar Tree Third Quarter 2023 Earnings Call and Webcast. As a reminder, this conference is being recorded. It's now my pleasure to turn the conference over to Bob LaFleur, Senior Vice President, Investor Relations. Please go ahead, sir.

Speaker 1

Good morning, and thank you for joining us today to discuss Dollar Tree's 3rd quarter results. With me today are Dollar Tree's Chairman and CEO, Rick Dreiling and CFO, Jeff Davis. Before we begin, I would like to remind everyone that some of the remarks that we will make today about the company's expectations, Plans and future prospects are considered forward looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward looking statements. For information on the risks and uncertainties that could affect our actual results, please see the Risk Factors, Business And Management's Discussion and Analysis of Financial Conditions and Results of Operations sections in our Annual Report on Form 10 ks Filed on March 10, 2023, our Form 10 Q for the most recently ended fiscal quarter, our most recent press release And Form 8 ks and other filings with the SEC.

Speaker 1

We caution against reliance on any forward looking statements made today, and we disclaim any obligation to update any forward looking statements except as required by law. Also during this call, we will discuss certain non GAAP financial measures. Reconciliations of these non GAAP items to the most directly comparable GAAP financial measures are provided in today's earnings release available on the IR section of our website. These non GAAP measures are not intended to be a substitute for GAAP results. Unless otherwise stated, we will refer to our financial results on a GAAP basis.

Speaker 1

Additionally, unless otherwise stated, all comparisons discussed today Are for the Q3 of fiscal 2023 and are against the same period a year ago. Please note that a supplemental slide deck Outlining selected operating metrics is available on the IR section of our website. Following our prepared remarks, Rick and Jeff will take your questions. Given the number of callers who would like to participate in today's session, we ask that you limit yourself to one question. And now I'd like to turn the call over to Rick.

Speaker 2

Thanks, Bob. I'd like to welcome everyone joining us on the call today. In brief, thanks to the dedication and hard work of our teams And continued execution towards our business transformation, 3rd quarter results were well within our expected range. In a challenging retail environment, where the accumulating pressures of inflation, reduced government benefits and depleted savings have negatively affected lower income consumers, our top line performance outpaced most of our peers. We accomplished this by taking market share in both segments, which we believe reflects the initial impact of our investments And transformation initiatives.

Speaker 2

Despite Family Dollar softer comps and $0.05 per share Of unexpected costs from the previously announced voluntary recall of OTC and other products, We delivered $0.97 of EPS. Our sales momentum continues to be mostly traffic driven As we attract new customers and gain both unit and dollar market share. In the last 12 months, we've added 4,300,000 new customers at Dollar Tree and 2,300,000 new customers at Family Dollar. Importantly, most of these first time customers come back to shop with us multiple times after their first visit. In fact, our loyal customers are now the 3rd largest retail customer base in the United States.

Speaker 2

As importantly, Dollar Tree is attracting customers from a broader range of income levels. Most of our new customers over the past year Have household incomes over $125,000 and this income demographic Our price value perception remains strong after last year's price investments, which we cycled in July. That said, Family Dollar fell short of our quarter 3 comp expectations. Similar to what other retailers have reported, We experienced softening trends throughout the quarter, particularly in October. As lower income consumers responded to the Cumulated impact of inflation and reduced government benefits, we saw a notable pullback in spending, particularly in higher margin discretionary categories.

Speaker 2

I will now review some of our Q3 highlights. For the Q3, on a consolidated basis, we delivered a 5.4% increase in our net sales to $7,300,000,000 This was driven by comp growth of 3.9% with traffic up 4.7% and average ticket down a little less than 1%. Operating income came in at $301,700,000 Which resulted in EPS of $0.97 including the negative $0.05 impact from the OTC recall. In the Dollar Tree segment, our comp was up 5.4% with traffic increasing by 7% And average ticket decreasing by 1.5%. We are especially pleased with these results as they come on top of an 8.6% comp last year.

Speaker 2

Our consumable comp was up 11.1% And discretionary was up 1.1%. We believe the consumable strength at Dollar Tree this quarter as well as our strong multi year discretionary comp shows customers are embracing our compelling value proposition In this strained economic environment, according to Nielsen, Dollar Tree gained an impressive 30 basis points of consumables market Share in the Q3 as our unit volume grew 6% while market unit volume declined. In the Family Dollar segment, our comp was up 2% with traffic increasing 1.4% and average ticket increasing 0.7%. Our consumable comp was especially strong at 6.2%, while discretionary was down meaningfully at 12.5%, Particularly in categories like home decor, electronics and toys. In our view, these trends underscore how lower income households are under increasing financial stress and directing their spending towards needs based goods.

Speaker 2

While traffic and ticket were both positive for the quarter, results did soften substantially as we move through the quarter With average ticket turning negative in October as our customers pull back and we realize the adverse impact prices enable us to operate from a position of strength in consumables, our lower income customers at Family Dollar have been especially pressured by reductions in government SNAP benefits. Nationwide, 3rd quarter SNAP benefits We're down 23% on a year over year basis, which was much more than the 5% reduction in quarter 1 or the 16% reduction in quarter 2. Timing wise, the month by month deceleration in our quarter 3 comps match the progressive reductions in national SNAP payments throughout the quarter. In addition to pressure from lower SNAP payments, Family Dollar's comps were negatively affected by lower tax refunds this year. That said, I I believe that the wide range of growth initiatives we have in place will help us maintain our momentum relative to the competition.

Speaker 2

As a value retailer, we're uniquely positioned to meet customers' needs in a challenging economic environment. We remain focused on the factors that we can control and we'll continue to navigate as best we can around those that we don't. Now let me take a few minutes to update you on our transformation journey. Our merchandising, IT and supply chain initiatives are on time and on budget, and we are pleased with our progress to date. At Dollar Tree, We're ahead of schedule on our multi price journey.

Speaker 2

Our Dollar Tree Plus assortment is now available in 4,500 stores And we are on track to finish the year with more than 4,900. Our Dollar Tree frozen and refrigerated assortments Are now in 6,500 stores, significantly ahead of our original year end target of 5,500. Customers are clearly responding to our expanded multi price assortment as our research shows us that 17% of U. S. Households have purchased a multi price product from a Dollar Tree store at least once in the past 12 months.

Speaker 2

Importantly, these customers are adding multi price products on top of their traditional baskets. For example, in quarter 3, the average multi price basket included 2.3 multi priced items and $11.6 traditional $1.25 items. At Family Dollar, we completed our planogram resets by November as scheduled, improving and expanding our product assortment, while increasing our shelf profile and merchandising to 78 inches across the portfolio. We're on track to renovate more than 1,000 Family Dollar stores by year end. We have now upgraded 1600 Family Dollar stores to our H2.5 rural and extra small box formats.

Speaker 2

In quarter 3, private brand penetration at Family Dollar reached 14%, a quarter ahead of schedule And we are on pace to hit our 20% target by 2026. We are also on track to add over 70 new SKUs to our Family Wellness product line and more than 100 new private brand SKUs in total by the end of December. Within that same time frame, we also expect to complete our conversion of 300 control brands to private brands. In real estate, we opened 197 new stores in quarter 3 and we are on track to meet our target of 600 to 650 new stores this year. In supply chain, we are preparing to implement our streamlined delivery process for stores Serviced by our Matthews, North Carolina distribution center with rotocarts and liftgate trailers starting next month.

Speaker 2

We have been testing our rotor cards and the feedback has been extremely positive. We remain on schedule for all of our distribution centers to be using rotacarts by the end of 2027. Across our teams, the investments we've made in our people, including increased wages in key markets, simplified work at the store level, and increased communications throughout the company are driving meaningful improvements in store turnover and associate satisfaction. Additionally, as we prepared for our busiest season of the year, I'm proud to report that our annual National Hiring Day in mid October was a huge success. We hired nearly 14,000 part time associates to work in our stores for the current holiday season, an all time record for this event.

Speaker 2

While we still have a lot of work to do in this transformational journey, I am pleased with what we've accomplished to date. We are focused on our plans to accelerate sales and grow earnings, and I remain confident in our ability to execute this ambitious undertaking. That said, this journey also needs to be dynamic And adapt to changing market conditions and our learnings along the way. We believe being thoughtful about our store portfolio will help enhance our results. To maximize value creation, we need to periodically reevaluate our portfolio in terms of current market conditions, individual store performance and overall portfolio considerations.

Speaker 2

To this end, we have initiated a comprehensive review of our Family Dollar portfolio to address underperforming stores that are not aligned with our transformative vision for the company. This will involve among other things identifying stores as candidates for closure, Re bantering or relocation with the goal of assuring that each asset under the Family Dollar banner is delivering its full value for our shareholders on a sustainable basis. I am a strong believer in the Family Dollar brand and what it means to our customers and associates in thousands of communities across the country. Going forward, we need to ensure that the Family Dollar portfolio is well positioned for success and meets the financial and operating objectives of our organization and the expectations of our valued customers and associates. We believe that this action will fortify our base, Strengthen our brand and allow Family Dollar to achieve its full growth potential.

Speaker 2

Jeff will now review our financial results and outlook for the remainder of the year.

Speaker 1

Thank you, Rick, and good morning, everyone. In the Q3, our Dollar Tree and Family Dollar segments both generated higher levels of customer traffic, Unit volume and increased market share. Overall, we generated 5% more gross profit dollars in the 3rd quarter than we did last year as consumers continue to respond positively to our growth initiatives. Assistant with prior quarter trends, sales mix continued to shift toward consumables. This trend was more pronounced at Family Dollar, Where our 3rd quarter consumables mix reached an all time high of 82%.

Speaker 1

Looking at the business on a consolidated basis, Net sales increased 5.4 percent to $7,300,000,000 Operating income declined 20.9 percent to $301,700,000 Operating margin compressed 140 basis points, Which was a substantial trend improvement versus the 1st 2 quarters of the year. The contraction in Q3 operating margin was driven by a 15 basis point decrease in gross margin and a 125 basis point increase in SG and A rate. Gross margin contracted primarily from higher shrink, unfavorable product mix, increased distribution costs and markdowns from the OTC recall. This was partially offset by lower freight costs. While still elevated Across both banners, shrink results were mostly in line with our expectations.

Speaker 1

We have now completed physical inventory checks across more than 90% of our stores, with the balance set for completion in January. SG and A expenses Expanded primarily from ongoing labor investments in our stores, IT costs, depreciation and facility costs. Our effective tax rate was 21.8% versus 23.4%. Our tax rate was favorable versus expectations As higher work opportunity tax credits and lower net state taxes were partially offset by higher non deductible expenses. Net income was $212,000,000 and diluted EPS was $0.97 versus 1.20 The net impact of the OTC recall was approximately $0.05 per share.

Speaker 1

At the business segment level, Dollar Tree's net sales increased by 6.6 percent to $4,000,000,000 Operating income declined 3.4% to $482,700,000 and operating margin compressed approximately 125 basis points, driven by a 55 basis point decrease in gross margin and a 70 basis point increase in SG and A rate. Gross margin contracted primarily from higher product costs, distribution center costs and shrink. These were partially offset by lower freight and sales leverage and occupancy costs. SG and A expenses expanded principally From store labor investments, minimum wage increases and facility costs. These were partially offset by sales leverage.

Speaker 1

Family Dollar's net sales increased by 3.9 percent to $3,300,000,000 Operating income Declined $47,900,000 to a loss of $66,300,000 Operating margin compressed 140 basis points on a 20 basis point increase in gross margin and a 160 basis point increase in SG and A rate. Gross margin increased primarily from lower freight, Partially offset by higher shrink, markdowns related to the OTC recall and sales mix. SG and A expenses increased primarily from store labor investments, minimum wage increases, facility costs, Costs related to the OTC recall and depreciation. Moving on to the balance sheet and free cash flow. As a reminder, my comments reflect balance sheet comparisons between Q3 2023 and Q3 2022.

Speaker 1

Inventory decreased by 2.5%. As we work through our shipments of seasonal imports, we expect a meaningful improvement And our inventory position by year end. 3rd quarter capital expenditures were $541,400,000 versus $391,200,000 reflecting elevated investments in new store openings, renovations, Supply Chain and IT. Free cash flow improved $142,100,000 versus the 3rd ordered last year. This improvement comes despite a challenging macro environment and the accelerated investments to support our multi year growth strategy.

Speaker 1

For the 9 months of 2023, free cash flow improved 200 and $99,100,000 versus the same period last year, led largely by lower merchandise inventories And the timing of accounts payable. In the 3rd quarter, we repurchased approximately 2,200,000 shares for $252,300,000 including applicable excise tax. At quarter end, we had $1,350,000,000 remaining under our share repurchase authorization. Cash and cash equivalents totaled $444,600,000 compared to $439,000,000 You'll recall last quarter, we announced our new commercial paper program as an additional source of liquidity to manage our working capital needs. At quarter end, we had 2 $30,000,000 outstanding under this program.

Speaker 1

During the Q3, we also implemented a new supply chain finance program. Participation in this program is voluntary for our suppliers and provides them with additional flexibility to finance payments due from Dollar Tree. This process will be managed by a third party financial institution. At quarter end, our leverage as defined under our revolving credit agreement was 2.53 times. Now let me provide some perspective into our sales and EPS expectations for the Q4 and its impact on our full year outlook.

Speaker 1

Our outlook takes into consideration the following factors and expectations. Consistent with our prior expectations And the patterns we have seen throughout the year, we expect shrink trends will remain unfavorable in the Q4. Family Dollar comps Are expected to remain soft, reflecting the unfavorable macro environment for low income households, continued discretionary weakness and elevated promotional activity in the market. On the plus side, we expect continued strength at the Dollar Tree banner as consumers embrace our compelling value proposition and multi price strategy in addition to incremental freight savings. With that background, we expect net sales for the Q4 will be in the range of $8,600,000,000 to $8,800,000,000 based on low single digit increase in comp store sales for the enterprise, supported by a mid Single digit increase at Dollar Tree and a minus 1% to plus 1% comp at Family Dollar.

Speaker 1

As a reminder, last year's Family Dollar comps accelerated meaningfully throughout the year, most notably in the back half as we began our price and labor investments and launch our transformation initiatives. Our Family Dollar comp results for Q3 and outlook for Q4 reflect these tougher comparisons. We estimate 4th Quarter diluted EPS will be in the range of $2.58 to $2.78 For the fiscal year, which includes a 53rd week, we expect sales in the range of $30,500,000,000 to $30,700,000,000 Driven by a mid single digit increase in comp store sales at the enterprise level, supported by a mid single digit comp at Dollar Tree and a low single digit comp at Family Dollar. With respect to EPS, We believe that higher sales at Dollar Tree, incremental savings and freight and proactive expense controls will allow us to offset lower revenue expectations at Family Dollar. We are tightening our full year GAAP EPS outlook to a range of $5.81 to $6.01 including the $0.12 Legal reserve we took in the Q1.

Speaker 1

We still expect selling square footage to grow by 3% to 3.5% for the year and new store growth to be back end weighted. Other considerations in our 2023 outlook include the following: no incremental share repurchases depreciation Should be approximately $30,000,000 for the 4th quarter or approximately $110,000,000 for the full year. We are assuming an effective tax rate of approximately 24% for the 4th quarter and approximately 23.5% for the full year. We expect 218,400,000 diluted shares for the 4th quarter 220,000,000 diluted shares for the full year. We expect capital expenditures will total approximately $2,000,000,000 with approximately 40% allocated toward maintenance CapEx and the balance toward growth initiatives.

Speaker 1

Finally, our Q4 and full year outlook does not include any potential impact from the optimization review of the Family Dollar portfolio that Rick outlined in his remarks. We expect the review process will take several months, and we will update you on our progress no later than our Q4 call in March. Now I'll turn the call back over to Rick for closing remarks.

Speaker 2

Thank you, Jeff. Similar to other retailers, you've heard from this earnings season, we are seeing more macro pressures than we did earlier in the year, particularly among our lower income Nonetheless, I'm encouraged by our market share momentum and am confident in our outlook for the balance of the year. Across our enterprise, we are making good progress on our transformation initiatives. As I've said before, We benchmark our operating performance on growing traffic, units and sales per square foot. All three of these metrics are heading in the right direction.

Speaker 2

With the steps we're taking to optimize our Family Dollar portfolio, we want to be better positioned to meet the financial in operating objectives of our organization and the expectations of our valued customers and associates. Relative to our competition, we want to operate from a position of strength at both banners. I look forward to updating you on our continued progress in the months ahead. And since we're in the midst of the important holiday season, I also want to take this opportunity to thank our more than 200,000 associates for their dedication in support of our continued growth as an organization. Operator, with that, Jeff and I are now ready to take questions.

Operator

Thank you. We'll now be conducting a question and answer session. Our first question is coming from Michael Lasser from UBS. Your line is now live.

Speaker 3

Good morning. Thank you so much for taking my question. It's It's a 2 part question. Number 1 is, given the economic environment that you're facing seems to be different than what you expected When you offered your long term guidance earlier this summer, how is that influence your thinking about your ability to $10 of earnings by 2026 if the economic environment that is current today remains the case for the next few years? And the second point is, my second question is, there's a perception that you're going to earn, call it, around $6 this year, to get a dollar of freight benefit next year and that would generate $7 of earnings.

Speaker 3

What would stand in the way of you not realizing that? Thank you.

Speaker 2

I'm going to let Jeff handle that.

Speaker 4

Good morning, Michael, and I appreciate your question. The first part of your question regarding the longer term outlook. The economic Environment that we're in today, we believe that we're managing through. You see the Dollar Tree and Family Dollar continue to take market share. They're doing well across consumables.

Speaker 4

We believe that many of the actions that we're still Developing and will be put into action as we go through the Q4 into next year will help improve our top line, especially with a customer who is Looking for additional value opportunities. This we're early in the transformation. We believe that The actions we're taking that we feel strongly will continue to move us forward to our longer term outlook. There's a lot that's going to happen between now and 26 and there's really isn't a real crystal ball there, but remain resolute in our outlook. As it relates to 2024, I think that the way you're thinking about this from a standpoint on a sort of pro form a no growth, no incremental basis, Yes, dollars 7 of EPS when you take all the puts and takes between our forecast for this year.

Speaker 4

You remember you got to back up the 53rd week, which is about $0.30 in that. But we feel If that's a good starting point as you think about our 2024 outlook, we remain Very confident in our ability to pick up the additional dollar in freight and EPS. There may be some additional upside to that based upon what we're currently trending and the actions that we're taking and the returns that we believe we will get from the initiatives that we've started this year and will continue to develop as we move forward that's a good starting point for you.

Speaker 2

And Michael, let me add a little More thoughts on getting to 2026's number. We remain very bullish on that. And I think as we look into 2024, what's important is the number of initiatives that we've gotten done in just 1 year are really starting to gain traction. And let's don't lose sight of the fact why The fact that discretionary sales are softer than we all want, our consumable sales are excellent and we're responding to the needs of the consumer. And when we have the items they want, they're going to come into the store and see the incremental items, the incremental price points on the Dollar Tree side, they're going to see the new shelf profile And they're going to see the fact that we're more relevant.

Speaker 2

And that's what gives me great confidence as we look into 'twenty four and beyond.

Operator

Thank you. Our next question today is coming from Simeon Gutman from Morgan Stanley. Your line is now live.

Speaker 5

Hey, good morning, everyone. Good morning. Good morning. It's a little follow-up to the prior question and then maybe a slight second part. If we take again the $1 in freight, should we think about next year again without talking about real guidance?

Speaker 5

The core business should grow plus we get freight or you're not endorsing that the core business necessarily grows, we get freight for sure? And then just the second part of it is on Family Dollar, can you remind us if the crux of generating Higher margins and sales productivity, then what's going to be the step change and when should that occur? Thanks.

Speaker 4

I'll take the first part. You take

Speaker 2

the freight and I'll take the second one.

Speaker 4

Very good. I think in the way I was trying to respond to Michael's point from a standpoint of what's Starting point for FY 'twenty four, as he was kind of putting together the components, If you assume once again, I think what he was looking at was assuming a no growth, no incremental investment year, you would be starting off with a point that would be $6.80 to $7 of EPS assuming where we believe we'll end this year plus the additional Dollar Freight and then once again the other puts and takes around the 53rd week which comes off as well as some of those Three items we had this year as it relates to West Memphis OTC and general liability. But we believe that we will have the opportunity to grow our business from there, we're not giving guidance for 2024 as of yet. But I think that people are focused on the right component to get you to a starting point and then What your assumptions are based upon how you think our initiatives will continue to take hold and grow from there.

Speaker 2

And then in regards to Family Dollar and when we should start to see the incremental margin, I think as I reflect on where we're at right now, you think about the incremental SKUs of which the bulk are OTC TC and HBA, which all carry higher margin rates. Now they tend to be a little more discretionary. You think about the fact that now private label, we've already reached our 14%, Which carries massive incremental margin. All of that stuff is going to be in place as we roll in to 2024, Which again gives me a lot of comfort on how Family Dollar is going to perform next year. There's no doubt there's Pressure on that consumer.

Speaker 2

But I've always said the lower income consumer has the ability to figure it out. And we are offering a better value proposition in Family Dollar than it has ever had. And I'm very, very comfortable with the way the box looks, the way it's presented and how the consumer is responding. And I would add That when we entered quarter 3, the 1st period of the quarter, our comps were very good in Family Dollar And we watched them erode through the period, through the quarter. So again, we entered it from a very strong position.

Operator

Thank you. Next question is coming from Paul Lejuez from Citi. Your line is now live.

Speaker 2

Hey, Paul. Hey, thanks, guys.

Speaker 4

Hi there. Can you talk about your Family Dollar comp assumption for Q, just How you're thinking about how it breaks down from a traffic versus ticket perspective and then within ticket AUR versus UPT? And I'm curious if you can make any comments about your inflation assumptions for 4Q and F24. Thanks. Paul, I guess the way we think about it, we really the balance of The comp has really been between ticket and traffic.

Speaker 4

It's been pretty consistent in its makeup. It's been around fifty-fifty. What we've seen here more recently is ticket has dropped off as that customer has been a little more Challenged. We're continuing to see that going into the Q4, thus our guidance of down 1 to plus 1. We're not prepared to start getting into AUR and other further bisection of it.

Speaker 4

But As we think about traffic and ticket, it's going to we think we're going to have traffic probably driving more of the comp offset by some ticket pressure.

Speaker 2

And Paul, I'd like to add to that, that I we look we are intently focused on 3 key metrics: Transactions, traffic, whether whatever you want to call it, unit growth and sales per square footage square foot. And those are the things that we want to report on because I believe that drives comp sales and ultimately growth in the chain.

Operator

Thank you. Next question is coming from Edward Kelly from Wells Fargo. Your line is now live.

Speaker 2

Good morning, Ed.

Speaker 6

Hi, guys. Good morning. Rick, I wanted to ask you, I guess, the 2 part question around Dollar Tree, the core Dollar Tree you continue to roll out new price points. Maybe just an update on where you think the evolution of that is going over time And how we should think about the timing of rollout of those price points. And then that concept generally, It does look like it's developing into a very formidable traditional dollar store competitor.

Speaker 6

I'm curious as to where you think you're gaining the share from. Is there any impact in Family Dollar, given what's happening there? And how is the evolution of concept impacting the way you think about growth, both number of units and where those units may go?

Speaker 2

Great question. Let's start with the price points. We have Rick McNealy and his team have done an outstanding job of introducing new price points. And you have to remember, Ed, we have to buy these things almost a year in advance in order to get them into the stores. And we're starting to see them arrive.

Speaker 2

We've actually done a test on Halloween in a number of stores with multi price candy And we're really, really excited with what happened with that. Now it's really important that and I've said this frequently, I don't want anyone to think there's going to be 100 different price points in that store. We're going to our core price point is still $1.25 and what we're working on, what is the right amount And right number of price points. And what I can tell you is the consumer is When we broke the $1.25 a year ago, I have to tell you that that barrier was broken And now the consumer is very receptive to what's going on. And when we add an incremental price point, Rick and his team, We're not adding a $1.25 item that's a little bit bigger or a little different at $2 We're adding a different item that has even more value.

Speaker 2

So there's no SKU overlap, which makes this a little more harder to get executed. Now we've already done the work. I know what it's going to take to get the items into the store, get them marked, priced properly. 40% of our SKUs are coming from overseas and they're going to add the price point right on the product. So a lot of great work has been done.

Speaker 2

And I think that some of what we're seeing as the with the multi price point, We've been able to make the brand more relevant to more people. And I know it's hard, but the consumable side And the way the team reacted to that, I think is also proof positive that we're attracting a different customer segment. Now in regards to future store growth, we are weighing right now what is the proper mix between Family Dollar and Dollar Tree. Obviously, the Dollar Tree's become very profitable very fast and it appears that we broaden The demographic appeal of that brand, and I've said this, a well run Dollar Tree is a pretty powerful retail format. And it's a format that a lot of people would shop in.

Speaker 2

And the fact that we're getting our arms around the price points, the fact that we're getting our arms around our store standards is putting us in a position where that brand might be we might be able to go to different areas that we've historically stayed away from. In regards to is it affecting Family Dollar, I would look at you and say those are 2 different customer segments. The first thing we did when we got together as a team is realized that the go to market strategies for both brands are totally different. 1 is the thrill of the treasure hunt, in and out, if you run out, I should have bought more versus Family Dollar, which is traditional consumable retailing, Where there's an expectation of what has to be in that store and it's got to be there every time I come in to get it.

Speaker 4

And Ed, just to add, in our prepared comments, we had mentioned the fact that a lot of the growth that's happening in Dollar Tree is actually coming from that higher income customer. We're attracting 4,300,000 new customers on a year over year basis. A lot of those customers are in that income demographic of $125,000 or greater, and we're capturing that basket.

Operator

Thank you. Next question today is coming from John Hambickel from Guggenheim. Your line is now live.

Speaker 2

Good morning, John.

Speaker 7

Good morning. Two quick things or maybe the first one is not as quick, but on your FDO review, can you talk philosophically, Right. Now you're going to attack that, because on the one hand, you'd want to dedicate more resources to the stores that have the most potential, But you also don't want to cut back too far from a descaling or deleverage perspective. So maybe talk about that, the opportunity to convert a lot of those to Dollar Tree, does that exist? And then my small follow-up is just remind us When you think you'll get to 8 cooler doors at $3 to $5 price point at Dollar Tree, is that 2 years out, a year out, 3 years out, When is that?

Speaker 2

Well, let's go with the easy one. The Dollar Tree cooler doors we should have done within the next couple of years. Now the FTO review, we started off with all of our initiatives And the idea being that we get everything in place and see what stores responded and what don't. And what I do want on this exercise, John, It is not everyone to get ahead of me, because I do think this is a very healthy thing to do and it's a timely thing to do. There will be some stores will relocate, maybe some stores will close, maybe some stores will re banner.

Speaker 2

But I do not have any of that information at this stage of the game. I've always prided myself on being transparent. And all I'm trying to do is tell the world we're taking a look at it. And I do think it's prudent. And I do think I don't want anyone to misconstrue That I'm not totally behind Family Dollar because I am.

Speaker 2

And I don't want anyone to think that that doesn't mean we're not going to grow Family Dollar because I'm not saying that at all. It's simply a matter of reallocating assets to where we think we can be more productive.

Operator

Thank you. Next question is coming from Matthew Boss from JPMorgan. Your line is now live.

Speaker 2

Good morning, Matt.

Speaker 8

Good morning, Rick. So couple of questions from my side. Maybe first, Rick, on mid single digit comps at the Dollar Tree banner, what do you think is the best breakdown beyond this year to think about between traffic and ticket. At Family Dollar, Rick, what was the comp in October? Have you seen any change in November?

Speaker 8

And then Jeff, could you just elaborate on what you've seen change in the promotional landscape?

Speaker 2

Yes. I mean, let me let's start with the promotional landscape. And I'll take that, Jeff, if that's okay, and let you Put the color around it. I think the promotional landscape, I have not seen anything irrational at this stage of the game. I would look at you and tell you that we are seeing discretionary items being promoted, which I think is more a reflex against People worried about the inventory they have on hand.

Speaker 2

I will tell you Thanksgiving being an old time grocer, Historically, you get the right price on turkey, then you make your money on all the grocery items around it. We saw a lot of incredibly well priced grocery items this year, coming out of the big box in the grocery channel, which is a little contrary. And there has been elevated activity on CSD, basically 12 packs. But other than that, there hasn't been a lot out there. And then on the first question?

Speaker 4

There's a question regarding the Family Dollar comps. The Family Dollar comps during the course of the The most challenged month of the quarter, and I think you'll see that that was across all retail. We were essentially flat in that Particular month and our guidance for Q4 was reflecting the fact that that has Continue to soften for us and give us the guidance of down 1% to plus 1% for the entire quarter.

Speaker 2

And one thing I'd add to that, Matt, while we think we saw things soften in October, I'm knocking on wood here, thank God we had our initiatives in place, because why it softened, it could have been a lot worse. And I'm very pleased how we got ourselves through that quarter.

Operator

Thank you. Next question is coming from Kate McShane from Goldman Sachs. Your line is now live.

Speaker 9

Good Good

Speaker 10

morning. Thanks for taking our question. We wanted to ask specifically about Dollar Tree. We know you noted that You saw a broader range of income shopping at Dollar Tree and it contributed to your Q3 comp growth at the higher end. We wondered with regards to the lower end, Just what you were seeing specific to the Dollar Tree banner?

Speaker 2

I would say, I mean, I would look at you and say Dollar Tree has always had a broad appeal. And I think what we're seeing, what we're really focused on is the fact that we're seeing a trade down in the Dollar Tree. I would say the customer base is essentially the same. There's been a no erosion in the lower income strata, but the growth Undoubtedly is coming from the higher income, dollars 125,000 a year.

Speaker 4

I reflect back on this, for Dollar Tree And still showing growth on a sizable growth on a year over year basis in discretionary. The lower end Customer, lower income customer, we're probably seeing more of their dollar in consumables, which is good because we're continuing to as well as consumable areas with respect to the multi price also. So it's a combination of both those customers, I think, has given us a strong performance across the Dollar Tree banner.

Operator

Thank you. Next question is coming from Christina Hi from Deutsche Bank. Your line is now live.

Speaker 2

Good morning, Christina.

Speaker 11

Hi. Good morning, Rick and Jeff. So my question is on Family Dollar. Understandably there was Some weakness with the low end consumer, but how are you planning to address the softer than planned top line at Family Dollar to get it back on track towards mid single digits, as that is a big part of the profitability inflection. So how do you think about your current pricing position relative to your peers?

Speaker 11

And then within the second part of that, I know you're not guiding to next year, but philosophically, How best to think about the ability of the banner to drive positive units to offset any potential deflation next year in consumables? Thank you.

Speaker 2

Yes. In regards to the top line, in regards to our pricing position, So first thing I would say, our pricing in Family Dollar is as good as it's ever been. And we measure our pricing on a full book basis and what we call key value items. And key value items are the most sensitive items out there. And we do these checks every month and we do them across multiple channels.

Speaker 2

So big box as well as small box as well as drug as well as grocery. And we're very, very comfortable where we're at. We're right around right on the market 100% in both, which means we have price parity. And I believe While we've been in this for a year now, I do believe the consumer is starting to respond to that. And remember, we had very Powerful consumable growth in quarter 3 in the Family Dollar brand.

Speaker 2

It's the consumable side Where that consumer is feeling that pressure. And I think you asked me a little bit about deflation. I would look at you and say deflation We'll put us in a position where I think the consumer would be able to afford more discretionary items. So we'll take it as it comes. And of course, it should help us with our margin at the same time.

Speaker 4

Just to add one final point. With respect to the work that Larry and his team is doing on private brands is something that's really important for us. The ability to drive greater value for that customer, give her other options, This is something that we're really just fully getting implemented here in the Q4 going into 2024. So we believe that as that customer is looking for greater value, they have more options within our private brands. It's an opportunity for us to improve our margins.

Speaker 4

And to the extent that there is sort of price Deflation, there's opportunity to actually provide even more value as we think about how we sort that particular product line.

Operator

Your next question today is coming from Chuck Grom from Gordon Haskett. Your line is now live.

Speaker 2

Good morning, Chuck.

Speaker 9

Good morning Rick, morning Jeff. On the Family Dollar store optimization, I'm just curious how wide a comp and profitability gap exists today And then I guess this question is more for Jeff. On the gross margin line for the Q4, how should we think about that between each banner FBO and the 3 and into 2024. What are the biggest puts and takes to think about? Thank you.

Speaker 2

Yes. Chuck, the first question, I would rather not comment at this stage of the game as the process is underway and we have started it. And I will disclose more of that as we get when we get into the March call. But let's say this, obviously, it's an opportunity for us that we intend to address head on.

Speaker 4

And then Chuck, as I think your question is around Q4 and as we think about gross margins, let me take it Dollar Tree first. We would expect our margins to continue to expand in gross margins in the 4th quarter, largely driven by Additional freight, the mix shift, a stronger mix of discretionary as you would normally have more seasonally. The other impact there is that, as we had mentioned, we've taken approximately 90% of our inventories. We have the remaining 10%. While we don't expect that remaining 10% to have any different outcomes than we had in the past, the impact on the quarter is much less Because we're only talking about a small portion of your inventories on a much larger portion of your overall performance.

Speaker 4

So our Expectation is for further gross margin expansion for Dollar Tree in the 4th quarter. We also believe that, that opportunity is there for Family Dollar also, for many

Speaker 2

of the same reasons as it relates to freight,

Speaker 4

less of an impact of Strength on the quarter, as well as some opportunities that we have within distribution. So, we'd expect margin expansion gross margin Expansion in the 4th quarter also for Family Dollar.

Operator

Thank you. Next question is coming from Scott Grelli from Truist Securities. Your line is now live.

Speaker 2

Hey, Scott.

Speaker 9

Hey, good morning. This is actually Josh Young on for Scott. On the shrink issue, obviously, we've spent a big margin headwind this year. As we think about 2024, where do you

Speaker 4

guys think you are in terms

Speaker 9

of dealing with it? You've You've talked about some of the mitigation efforts there, but curious if you think we're still in the early innings, do you think you're starting to make some substantial progress on dealing with the problem?

Speaker 2

Yes, I would say we're in the early innings, but I do feel we're making headway. The deal is that we take a physical inventory once a year. So if you make these improvements, these adjustments, you still have to wait in order to see them to see the fruits of your labor. Now I can tell you, we've eliminated certain SKUs in certain stores. We've put items behind the check stand counter.

Speaker 2

We've moved certain items upfront, so they have a line of sight to the cashier. And the important thing, is we haven't affected our sales. And I might also say we put in, and I forgot to mention this, An anti sweep OTC panel that's basically like sliding doors and you move it doesn't lock the counter up, but you move that little door over and you could only pull one item out at a time, which prevents a thief from Coming in and cleaning out the whole shelf. So, we think we're going to make progress. And I don't think it's we're going to have to cycle through everything.

Speaker 2

So it's not like it's going to be an overnight change. But I do believe we're moving in the right direction without having to lock product up.

Operator

Thank you. Our final question today is coming from Peter Keith from Piper Sandler. Your line is now live.

Speaker 4

Good morning, Peter.

Speaker 12

Hey, good morning. Thanks for squeezing me in. I just want to circle back on the deflation theme because that seems to be something that's percolating out for 2024. Rick, you mentioned your customers have a little bit more money. But is it possible that deflation could be negative for the banners, thinking about Maybe less still in trips and maybe more competition.

Speaker 2

So on the Dollar Tree side, all it will do is enhance the margin because you have basically Price point. So we end up getting the goods cheaper. So, I can say that it could be a benefit. It might have fixed the top line a little, but it should be a benefit. The Family Dollar side, I would look and say it might affect the top line.

Speaker 2

But again, I can make an argument it should enhance the gross margin line.

Speaker 4

It also gives you the opportunity for that customer to take those dollars. And our customer today is limiting our purchases, Maybe more in consumables, less in discretionary. The additional disposable income that they would have would allow them to pick up an additional

Speaker 2

Yes. And again, I'd add it, if we do have deflation, it allows us to invest more in value of the product and actually give the consumer something a little bit additional.

Operator

Thank you. We've reached the end of our question and answer session.

Speaker 2

Hey, thank you all very much for taking the time and look forward to talking to you soon.

Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

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Earnings Conference Call
Bank of New York Mellon Q3 2024
00:00 / 00:00
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