Bank of New York Mellon Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 25, 2023

There are 14 speakers on the call.

Operator

Good day, and welcome to Dollar3 Q1 2023 Earnings Call. Today's call is being recorded. At this time, I'll now turn the call over to Randy Gaylor. Please go ahead, sir.

Speaker 1

Time, I would like to

Speaker 2

turn the call over to our call to discuss results for Dollar Tree's Q1 fiscal 2023. With me on today's call are Chairman and CEO, Rick Dreiling and CFO, Jeff Davis. Before we begin, I would like to remind everyone that Various remarks that we will make about expectations, plans and prospects for the company constitute forward looking statements call for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, and our actual results may differ materially from those indicated in these forward looking statements. For information on the risks and uncertainties that could affect our actual results, please refer to the Risk Factors, Business and Management's discussion and analysis of financial condition and results of operations sections in our annual report on Form 10 ks filed March 10, 2023.

Speaker 2

Our Form 10 Q for the most recently ended fiscal quarter, our most recent press release and Form 8 ks and other filings we make from time to time with the Securities and Exchange Commission. We caution against reliance on these forward time, we disclaim any obligation to update or revise these statements, except as may be required by law. Also during this call, we will discuss non GAAP financial measures. Reconciliations of these non GAAP items to the most directly comparable GAAP financials are provided in today's earnings release and SEC filings. These non GAAP measures are not intended to be a substitute for GAAP results.

Speaker 2

Unless otherwise stated, we will refer to financials on a GAAP basis. Unless otherwise stated, all first quarter comparisons for fiscal 2023 or against the same period a year ago. Please note that a supplemental slide deck That outlines a number of the company's key operating metrics is available on the IR portion of our website. Following our prepared remarks, Rick and Jeff will take your questions. Given the large number of those that would like to participate, I ask that you please limit your questions to 1.

Speaker 2

I will now turn the call over to Rick.

Speaker 3

Thank you, Randy. Good morning, everyone, and thank you for joining our call. As many of you are aware, Dollar Tree will be hosting its investor conference in 4 weeks on June 21 in Norfolk, Virginia near our corporate headquarters. The conference will be webcast and I hope to see many of you at this important event. Our investor conference has been overdue time and we understand the level of anticipation from many investors.

Speaker 3

I hope next month's gathering will provide each of you time, a better understanding of the transformation taking shape and the speed with which we are making these changes To increase both our productivity and profitability at Dollar Tree and Family Dollar. We have been hard at work building the team we need to drive the transformation of this business. The more we dig in, The more starkly clear the opportunity becomes and we are on our way to most fully realize upon it. Our stores are of comparable size to those of our closest peers, but they generate far less revenue per store. We understand why and we know how to close the gap.

Speaker 3

There are no structural impediments With the operating leverage embedded in the retail model, accelerating growth in revenue per store will translate into higher margins. And higher margins will increase our return on capital and fueling accelerated store growth. We've gone down this road before and we know the way. Time, we have a tremendous opportunity to improve both of our segments and we are pursuing that with vigor. While our enterprise wide transformation is still in the early stages, we are already seeing results.

Speaker 3

Our early initiatives have begun to deliver growth and market share gains. We are driving this transformation in the most dynamic retail environment I have seen in my career. While this volatility is real and will generate time, we will not affect where this great adventure ends. In addition to the historic levels of inflation and labor market challenges, retailers have seen in just the past quarter elevated levels of shrink and even further pressure on the consumer's willingness to spend on discretionary goods. Shrink and the mix shift from discretionary goods have pressured margins throughout retail.

Speaker 3

We are no exception. Ultimately, shrink will either be resolved through defensive merchandising, store closures and or through government action at the local level. Regarding the near term unfavorable impact Of consumables mix, we believe consumer shopping behavior will normalize over time And the margin profile will rebalance. We are acutely attuned to each of these bumps. In the end, none will materially affect our delivering on the promise of this transformation, Unless we allow them to distract us from what we know we have to do.

Speaker 3

And we will not allow that to happen. We bench our top line sales performance primarily on 3 specific metrics: Sales per square foot growth, growth in transaction count and unit sales or volume growth. Based on these three metrics, I am pleased with our quarter one performance and the direction we are headed. Overall, the fundamentals of our business are strong. Most significantly, we continue to gain market share and our time, our earnings and earnings and earnings call and the ongoing improvements we have made in our merchandise assortment, service level and store standards.

Speaker 3

Time, we are time, we have no further questions from the macro factors impacting sales mix and elevated shrink. But the most important message that I want to convey today is that we remain completely focused time, we are now on delivering on our full potential and are executing on our transformation investments at full speed. I will now review the highlights for quarter 1. Following my remarks, Jeff will provide a detailed overview of our financial performance and our updated 2023 outlook.

Speaker 2

For the quarter, we delivered $7,320,000,000

Speaker 3

in sales, an increase of 6.1 percent With enterprise comp growth of 4.8 percent and operating income of $419,700,000 Leading to EPS of $1.35 and adjusted EPS of 1 $0.47 When adjusting for a $30,000,000 accrual related to pending legal matters regarding our West Memphis distribution center. Our merchandising and execution remains strong with comp increases of 3.4 percent at Dollar Tree and 6.6 percent at Family Dollar. The underlying sales strength time, was concentrated in consumables and driven by meaningful transaction growth across both segments. Time, results were even more impressive in the context of Dollar Tree's 11.2% comp increase from a year ago. After fully cycling the $1.25 price point in February, customer traffic remained very favorable at Dollar Tree as comparable traffic count increased by 5.5%.

Speaker 3

Notably, this was the 4th consecutive quarter of sequential improvement in comps at Family Dollar with comp traffic up 4.3%. For nearly all of 20 22, comp traffic counts trends in both segments were negative. So quarter 1 was an important inflection point for the company with traffic increasing both sequentially and year over year. The turnaround at Family Dollar is gaining meaningful traction. In addition to the improving traffic, Family Dollar's comp was driven by a 2.2% increase in average ticket.

Speaker 3

At Family Dollar, we increased our private brand penetration by approximately 80 basis points. Moving forward, we expect to continue growing Private Brands penetration as we further improve merchandise, presentation, packaging and quality control standards. For example, we recently opened a new test kitchen Here in Chesapeake and are excited about our growing pipeline of private brand products Across consumables, health and beauty and other high growth categories. Call, we are also encouraged by the margin opportunities associated with expanding our private brands business. Last year, we took pricing actions at Family Dollar to bring us more in line with our most direct competition.

Speaker 3

These price investments strengthened our value offering at Family Dollar and followed our transition point in time to the $1.25 price point at Dollar Tree. Along with investments in wages and store standards, The steps we have taken on pricing across both segments are critical to improving our long term financial and operating performance, as I mentioned earlier, the consumer continues to be under pressure. There are simply fewer dollars available to them and those dollars are not going as far as they did a year or 2 ago. We are past the multiple rounds of government stimulus, SNAP dollars have been reduced and tax refunds are running lower. These impacts combined with persistent inflation have more families prioritizing needs over wants.

Speaker 3

Both Dollar Tree and Family Dollar are part of the solution for shoppers buying for need and close to need as they look to stretch their pay stage. Our stores are nearby, easy to shop and provide tremendous value. While these factors are contributing to the mix shift and pressuring our gross margins, they are also driving more shoppers into our stores We will continue to respond to the needs of the consumer across both consumables in discretionary categories by offering tremendous value and a great selection. While this mix shift towards consumables is clearly a margin headwind, it is worth noting that the promotional environment remains rational stage and we remain on track to add $3 $5 plus items to another 1800 stores this year. In quarter 1, we added Dollar Tree Plus Assertments to more than 400 stores and anticipate accelerating the pace of this rollout over the balance of the year.

Speaker 3

Additionally, we have aggressively expanded our product assortment at Dollar Tree stores with $3 $4 $5 frozen and refrigerated products, adding 3,500 stores last year alone on this initiative. During the Q1, we added multi price frozen and these refrigerated doors and more than 400 Dollar Tree stores. Both our Dollar Tree Plus and our multi price frozen assortments Drive incremental sales with average ticket more than doubling its stores that we have added this expanded offering. Family Dollar, we are on track to add 16,000 new cooler doors in 2023. This is helping drive Family Dollar to its highest market share in close to 4 years as measured by quarter 1 dollar time, on a unit volume basis, Family Dollar's quarter 1 share of industry growth was the highest in more than 3 years.

Speaker 3

We continue to improve the in store experience at Family Dollar and completed more than 2 strategic rationale for increased SG and A spending in 2023. These investments should be pursued as rapidly as our management bandwidth will allow. The sooner each is implemented, the sooner we will enjoy the benefits And the greater impact of our other investments. All of this is ultimately connected and interdependent. Many of our investments will be ongoing, including those on our associates and store conditions.

Speaker 3

And again, the results are starting to come in. We have already seen meaningful improvements in sales momentum and reduced associate turnover. In closing, we have a plan. I'm confident this plan will drive meaningful top line growth, increased productivity and improved profitability. We are vigorously executing on it.

Speaker 3

Time, we will not allow bumps in the road to distract us or slow us down. And it's clear it's starting to work. Our investments in price, our stores, our merchandise and our associates have already begun delivering results. We will get to where we're going, but how we get there matters as well. I firmly believe that investments in people in the communities we serve are the cornerstones of a successful retailer.

Speaker 3

We've taken a comprehensive approach To improve wages and benefits for our people and to increase associate engagement to make Dollar Tree and Family Dollar great places to work and grow. It is vital for the continued success of our organization to have a strong culture. While there is work to be done, we are pleased that our culture efforts are taking root and building the foundation for a thriving future. Time, finally, I am so very proud of the tremendous efforts of our 200,000 plus associates,

Speaker 4

Each

Speaker 3

of whom has contributed to the great progress we are making and each of whom deserves our collective thanks. While Jeff will cover our outlook in more detail, I want to emphasize that we remain confident in the outlook for our business and our continued sales momentum. Our go to market strategies at Dollar Tree and Family Dollar are working time and clearly resonating with consumers. I look forward to sharing more detail on our long term vision conference call and our multi year outlook next month at our Investor Conference. I will now turn the call over to Jeff.

Speaker 4

Thank you, Rick, and good morning, everyone. As Rick mentioned, our top line performance was strong in both the Dollar Tree and Family Dollar segments. Time, it was driven by meaningful growth in customer traffic, continued market share gains and an increase in underlying unit growth. Total sales increased 6.1 percent to $7,300,000,000 based on comp store sales growth of 4.8 percent. Traffic increased 5% on a consolidated basis and average ticket was down slightly.

Speaker 4

Across the enterprise, our sales mix of consumables increased approximately 200 basis points Our service levels were particularly strong in Q1. In stock positions improved by 400 basis points in the Dollar Tree segment and by 200 basis points at Family Dollar. Our DC service levels also improved for both segments by nearly 1600 basis points at Dollar Tree and approximately 500 basis points at Family Dollar. Operating income decreased by 43 percent to $419,100,000 Adjusted operating income decreased by 39% to $449,700,000 Recall that in Q1, we cycled the 1st full quarter of the $1.25 price point transition at Dollar Tree, which resulted in unfavorable margin comparisons given the outsized benefit we saw in Q1 last year. The variance between operating income and adjusted operating income came from a $30,000,000 accrual related to previously disclosed legal proceedings Gross profit decreased by 4.7 percent to $2,230,000,000 as gross margin contracted by 3.40 basis points.

Speaker 4

The biggest driver of the gross margin decline was merchandise cost. In Q1 last year, we benefited from the rollout of $1.25 price point at $1.3 In the current period, our sales mix shifted approximately 200 basis points towards lower margin consumable merchandise. The impact of higher cost of goods and unfavorable sales mix were partially offset by lower freight costs and markdowns as we cycled the impact of our West Memphis DC closure last year. Time, as Rick noted, elevated levels of shrink represent a persistent challenge. In Q1, Shrink negatively impacted gross margin by 60 basis points and EPS by an incremental $0.14 per share compared to last year.

Speaker 4

On a business segment basis, Dollar Tree gross margin declined by approximately 5.30 basis points, primarily from lower merchandise margin time, based on the higher consumable mix and cycling the initial transition to the $1.25 price point, elevated shrink expense and increased distribution costs. We benefited modestly from lower spot rates for ocean freight relative to last year. But to date, this is only impacting a small portion of our shipments With the larger impact of savings from freight rate declines to come in the second half and into the years ahead. Family Dollar's gross margin decreased by approximately 100 basis points with largely the same factors contributing to the decline as Dollar Tree. Specifically, gross margin was negatively impacted by mix, product cost increases, higher shrink and higher distribution costs, partially offset by lower markdowns and lower freight expenses.

Speaker 4

SG and A as a percentage of revenue increased 150 basis points to 24.8%. The biggest driver was wage investments for store and distribution center associates. We also experienced higher store facility costs as we continue to focus on improving store conditions as well as higher professional and marketing expenses. Corporate support and other expenses were 1.7 percent of revenue, down approximately 10 basis points from last year. Time, net income was $299,000,000 and EPS was $1.35 in comparison to $2.37 a year ago.

Speaker 4

Adjusted net income was $325,100,000 and adjusted EPS $1.47 The $0.12 adjustment was related to the West Memphis Legal Accrual. Time, our effective tax rate was 24.1% versus 23.1% last year, reflecting lower stock based compensation deductions and higher non deductible expenses, partially offset by higher work opportunity tax credits. Adjusted for the impact of the West Memphis Accrual, the Q1 implied tax rate for this year was 23.3% or 20 basis points higher than Q1 last year. Moving to the balance sheet and cash flow. Call, my comments will reflect balance sheet comparisons at the end of Q1 2023 versus Q1 2022.

Speaker 4

Inventory increased 6.5%, primarily from an increase in merchandise costs, DC unit volume growth, The continued rollout of our Dollar Tree multi price inventory and new store growth. The quality of our inventory remains high and manageable. Q1 capital expenditures were $350,400,000 $2,000,000,000 with approximately 40% dedicated to business continuity and the balance directed towards growth, optimization and productivity improvement. In Q1, we repurchased approximately 1,000,000 shares for $151,100,000 of which $7,700,000 did not settle until after quarter end. Time, cash and cash equivalents totaled $872,800,000 compared to $1,200,000,000 Our cash position increased $230,000,000 in Q1 from the end of fiscal 2022, Led by working capital improvements, partially offset by capital expenditures and share repurchases.

Speaker 4

Free cash flow improved to $402,000,000 from $285,000,000 last year. Moving to our sales and EPS outlook. The company expects consolidated net sales for the 2nd quarter will range from $7,000,000,000 $7,200,000,000 based on a mid single digit increase in comp store sales for the enterprise and for Dollar Tree and Family Dollar segments. Diluted EPS for the 2nd quarter is expected to be in the range of $0.79 to $0.89 As a reminder, the bulk of our ocean freight savings call, the year will fall in the second half as previously mentioned. With respect to full year fiscal 2023 guidance, call, that fiscal 2023 has a 53rd week.

Speaker 4

Consolidated sales for the full fiscal year are now expected to range from $30,000,000,000 to $30,500,000,000 The company expects to deliver a low to mid single digit comparable store sales increase for the year, comprised of a low to mid single digit increase in the Dollar Tree segment and a mid single digit increase in the Family Dollar segment. Selling square footage is expected to grow by 3% to 3.5% for the year with new store growth back end weighted. While we modestly raised the midpoint of our top line guidance, we are incrementally more cautious on our margin outlook, given the growing industry wide challenges of accelerating shrink, the unfavorable shift in sales mix time, we expect that over time, our mix of discretionary will normalize And that we will also improve our performance on shrink through defensive merchandising efforts, real estate optimization and perhaps higher prices to compensate for areas a systematically higher shrink. We expect time, the combined and continuing full year earnings impact of unfavorable consumables mix and higher shrink is expected to be approximately $0.55 per share in 2023. Our modeling considerations for 2023 outlook include the following.

Speaker 4

We expect consolidated depreciation and amortization to range from $845,000,000 to $850,000,000 Net interest expense is expected to $28,000,000 in Q2 $110,000,000 for the year. Time, our outlook assumes a tax rate of 24.1 percent to 24.3% for the Q2 and 23.9 percent to 24.1 percent for fiscal 2023. Time, while our share repurchases are not included in our outlook, we had $1,700,000,000 remaining under our share repurchase authorization as of April 29. Weighted average diluted share counts are assumed to be 221,400,000 shares for Q2 and 221,600,000 shares for the full year. For the balance of 2023, we will work diligently To offset potential margin pressures that could come from elevated levels of discretionary inventory, we are taking actions to mitigate the potential impact Identifying opportunities to further reduce inbound freight costs and managing repairs and maintenance costs.

Speaker 4

We continue to see full year earnings benefit of $1 per share from lower ocean freight costs this year, Which could be significantly weighted towards the back half of the year and an additional $1 per share benefit in 2024 and beyond. As a result of the factors I just outlined, we are revising our diluted GAAP EPS outlook for fiscal 2023 to a range of $5.73 to 6.13 expected contribution from the 53rd week and the $0.12 legal reserve taken in Q1. I will now turn the call back over to Rick for closing remarks.

Speaker 3

Thank you, Jeff. We are continuing To execute at a high level and acting with urgency around our business transformation, And I am pleased with our solid start to 2023. We are looking forward to our investor conference next month

Speaker 5

conference call

Speaker 3

where we expect to provide our investors and analysts with a multiyear outlook for the business, time, including a substantive and comprehensive overview of the key elements of our business. Our team has identified multiple levers to unlock value and we have strong underlying business momentum We see a path to greater earnings power over the next 3 years and look forward to sharing our plans in more detail next month. I also want to take this opportunity to welcome our new Supply Chain Officer, Mike Kendi. I have worked with Mike in previous organizations and he is a proven subject matter expert time and thought leader in supply chain and logistics. I am very confident that Mike will demonstrate continued success Dollar Tree based on his past record.

Speaker 3

I also want to thank John Flanagan for his contributions, which helped let us get to where we are today. While John communicated to us at the outset his desire to serve only for a short period Over the past year, John has led our supply chain strategy and has overseen the early stages of the process to optimize our distribution network and he's had a tremendous impact. We are moving at a fast pace in our journey to fundamentally reposition our combined retailing operations for sustainable long term growth. Our efforts are already paying off in the form of significant market share gains at both segments. Both formats have a clear runway for accelerated growth in productivity and profitability.

Speaker 3

Our leaders have complete ownership over the factors that will shape our outlook for the next 3 to 5 years. We have a winning team of more than 200,000 associates who are highly motivated and eager to succeed. I look forward to sharing more next month at our conference. And one last note, before we go to Q and A, time, I want to share some IR news with you. Several months ago, Randy Guiler communicated with us his retirement plans.

Speaker 3

This advanced notification provided us with ample opportunity to seek Randy's replacement. I want to thank Randy for his 9 years of dedicated service, leading the IR function at Dollar Tree. I am pleased to share that Bob LaFleur joined Dollar Tree on Monday of this week as our new SVP of Investor Relations. Randy will be with us at our upcoming investor conference and is continuing in his current role with the company through the month of June to help facilitate a smooth transition. Please join me in congratulating Randy on his impending retirement And Bob on his new role at Dollar Tree.

Speaker 3

Operator, Jeff and I are now ready to take questions.

Speaker 5

Time, thank you.

Operator

Time, we will take our first question from John Heinbockel from Guggenheim. Your line is open. Please go ahead.

Speaker 6

Thanks. So Rick, it's more of a strategic question, right? If I think about your initiatives and then the consumer, Do you think that consumable penetration, right, that mix, not only will remain elevated, maybe the consumables mix goes higher Over time, what's your thought on that? And then mitigating the impact of mix on margin, private label will help, but maybe talk about Where you think that goes and the opportunity to do sort of ultimately a DG Fresh like distribution initiative, right, to bring down

Speaker 5

Thank you, John. Great question. There's a a lot of meat answering that question. The first thing I'd like to say is, the strength that we are experiencing consumables has nothing to do with weakness in our discretionary. The fact that we are responding to the needs of the consumer, which is the shift towards consumables, is a really significant step forward for us And that we're introducing consumable products, especially on the Dollar Tree side that the consumer is responding to.

Speaker 5

Now when I talk about our discretionary, I think it's also important for everyone in this call, to realize that our discretionary is a little bit different than what you'd see out in the marketplace. Our discretionary tends to be high value items that you can compare to another operator, another retailer and see a significant difference in the retail price point. So that's part of the reason I'm still very bullish on where we are with discretionary. Now, as this shift continues, the advantage for us is 2 fold. Number 1, private brands time and the amount of work that's being done on private brands.

Speaker 5

And what I'd like to say, it's not just on the consumable side. Our private brand effort concludes HVAC or HBC and all of the higher margin fiber label So that's another way for us to accelerate the margin on the consumable side. And let's not forget shrink. When you think about the pressure that we're experiencing, Shrink tends to be cyclical. And what happens with shrink is we all work to mitigate it.

Speaker 5

If you can't, all costs that can't be taken out get passed on to the consumer eventually. So we're keeping an eye on it. And I would say, John, again, as we talk about margin, the shrink issue, we have 4 classes of shrink stores with 4 being the highest. The shrink impact is pretty uniform through all four glasses, Which I've never seen that in my career, which is truly fascinating. So in regards to the fresh concept, Right now, we are committed to frozen food and refrigerated, which is one of the highest growing categories with our particular consumer.

Speaker 5

Next question please.

Operator

We will take our next question from Simon Gutman from Morgan Stanley. Your line is open. Please go ahead.

Speaker 7

Good morning, Rick. Good morning, Jeff. I wanted to ask about Dollar Tree Plus. I also wanted to ask about the $1.25 price point at Dollar Tree. Can you talk about, I guess, the trade off here of maybe accelerating a move to higher price points Given some of the higher cost pressures, given some of the margin headwinds, just the trade off given how the consumer is behaving, and then maybe speeding up Dollar Tree Plus rollout to more stores.

Speaker 7

Thank you.

Speaker 5

Yes. Two good questions there. We are very time, we're excited what we're seeing with Dollar Tree Plus and our intent is to move that along as fast as we can. The same thing with the $3 $4 $5 time, the change in the basket when those items goes in is significant. The price point thing, Rick McNealy, our Chief Merchant is actually experimenting with a couple more price points in certain stores and there has been no consumer resistance.

Speaker 5

I think once we broke the dollar, I think that any backlash on that is behind us. And what Rick is doing, Incrementally priced SKUs are not a repetition of what we already have. So we're creating a bigger basket time, any broader shopping experience?

Speaker 1

If I could just add to that, one of the things that the merchant team is really focus on all situations, it's always making sure that they're giving more value in relation to the market at every price. And while some of our prices in relation to where we were previously and breaking the dollar at a higher price point, continue to have that price separation and value separation

Operator

we will take our next question from Edward Kelly from Wells Fargo. Your line is open. Please go ahead.

Speaker 1

Good morning, Andy.

Speaker 8

Hi, guys. Good morning. So first on shrink, just quickly, could you just walk us through the surprise there? I would Think that shrink would be tied to like a year in inventory count. So I'm just curious as to what happened there.

Speaker 8

And then Rick for you, big picture, We all see the potential here and we hear you that nothing changes with all this. But the base that we're looking at as a starting point Has been going down. And I'm sure you joined because you saw potential for significantly higher earnings then you're going to be at $6 this year. But I guess the question is the timing around the inflection. And you mentioned sort of 3 years, but how quickly do you think we can begin to see that acceleration?

Speaker 1

This is Jeff. I'll take the first part of the question regarding shrink. When we gave our guidance for the year, we had approximately less than 10% of our stores have taken their inventories for the year. And while we did see some elevation in that shrink, That was embedded in our guidance for the year. As we move through the course of the quarter, we saw a pretty rapid increase

Speaker 5

end of the level

Speaker 1

of shrink that is being experienced by the stores. And as Rick had said, we were seeing that across all shrink classes, which was really out of the normal for us. That's the reason why we needed to make the adjustment. So through this period of time, we only have a little less than 40% of our stores that have taken their inventories. We are anticipating that what we're seeing today could accelerate even further because we still have a number of our higher shrink class stores still left and that's what's being reflected in the adjustments that we had for the year.

Speaker 1

But based upon what we know today, based upon some other leading indicators, we believe that the adjustment we make is most appropriate. This is not unlike what you're seeing in many other retailers across the industry. Some of this is societal, some of it is economic, some of it, of course, is particular to us. And we're taking all the appropriate steps that we can to control and mitigate this where we can.

Speaker 5

Then Ed on the second part of your question, the first thing I'd like to say is we intend to highlight a lot of that question at the Investor Day, Which will give you a little more clarity to how it's going to shake down and how quick it's going to come. Couple Comments though prior to that. Number 1, I'm very bullish on the opportunity here. And I do think if we are Realistic, this consumable shift and the shrink impact are transitory. I do not believe we're going to be Living with them forever and that is all accretive to what we're doing.

Speaker 5

Then you throw in And all of this Ed is in motion now. The move to the 78 inches profile, We're going to add almost 1,000 new SKUs. The work on Dollar Tree Plus, the expanded Coolers, The expanded frozen food, the improvement in the physical store facilities. We're reducing our turnover. There's already proof of that by the wage investments we've made, which is going to help us in so many other areas.

Speaker 5

So what I'd like to say, there's a lot in motion. I am incredibly confident and optimistic and we'll lay this out for you in more

Operator

time, we'll take our next question from Scott Ciccarelli from Trust Securities. Your line is open. Please go ahead.

Speaker 1

Good morning, Matt. Good morning, guys.

Speaker 9

Scott Ciccarelli, good morning.

Speaker 5

I'm sorry. All good. A lot

Speaker 9

of your initiatives like expanding cooler doors and frozen foods have been focused on driving consumable sales and that's obviously the driver to transaction growth as you've highlighted. But Rick, like as the consumer behavior starts to stabilize, how do you shift consumers back to buying more discretionary goods? Because in theory, your consumable sales gains should be sustainable. And if we look at Dollar General as an example, like their consumables sales spiked during the Great Recession, Bank consumables continue to become a bigger part of their sales pie every year up until the pandemic. So like how do you actually change that trend once the consumer starts to normalize?

Speaker 5

Another great question. And I would say this, and no offense to anybody prior to me, Somewhere along the line, we have confused value and cheap. Our consumer is looking for value. And value means that the classic story I can remember years ago, people somebody bought a rake And one of our stores took it home used it one day and it was broken. Well that was cheap, but that's not value.

Speaker 5

And How we are going to manage this? We're doing a better job of procuring product and bringing the right selection in. The people at Dollar Tree are making their first trip to China in over 3 years. Time. And we're really excited now to be able to stand face to face with the manufacturer and the vendor and be able to See and hold and feel what they're going to bring into the store.

Speaker 5

And then the other thing, Scott, to be frank, The consumer is going to make that choice. If we have the right products, the right selection and we promote value, The consumer is going to gravitate there anyway.

Speaker 9

Got it. Understood. Thank you.

Operator

We'll take our next question from Peter Cate from Piper Sandler. Your line is open. Please go ahead.

Speaker 2

Good morning, Peter. Hey, good morning, everyone. So the transaction comps are pretty impressive and nice to see. I'm curious with the economic backdrop, what type of trade intradrade down benefit you're seeing? Obviously, you're getting more customers at stores.

Speaker 2

Is this Repeat behavior or are you starting to see new customers that you can track behavior on?

Speaker 5

We're actually seeing new customers. Our core customer is coming more frequently. Now when they come they don't spend anymore, but they come more often. And what I was seeing is the trade down in that $80,000 income range And we're actually beginning to target that consumer. And that consumer is more wrapped

Speaker 3

up in the consumable business.

Speaker 5

Time. And one of the things that Jeff highlighted, I hope that everybody caught was the improvement in our service level to the stores, Which is significant. And that service level improvement is become comes from giving the stores what they want When they order it and they're drawing consumables at a much higher rate now. And then what happens when that higher income Consumer comes in, they're used to a certain in stock level and we're now able to do a better job of satisfying that, Which is why we're seeing that trade down.

Speaker 1

And Peter, just to give you a little more dimensionalization, Across both banners, they are averaging about 3,000,000 net new customers over a trailing 12 month period. So you are seeing that customer new customer coming to us. We're seeing that customer shop across the entire store across consumables and discretionary. And as Rick has mentioned, our ability to make Our store standards and delivery and service to those stores.

Speaker 2

Okay, very helpful. Thanks so much.

Speaker 5

Thank you.

Operator

We will take our next question from Karen Short from Credit Suisse. Your line is open. Please go ahead.

Speaker 5

Good morning, Karen.

Speaker 10

Hey, morning. Thanks very much and look forward to seeing you in a few weeks. I just time, I wanted to ask a couple of things. So on overall margin structure within the Dollar Tree banner, So is it fair to say, as we get through the year, you'll have more benefit from freight. So what we're looking at right now is not necessarily the run rate, but there is a mix shift and then that will be offset a little more impactfully in the second half of the year on trade.

Speaker 10

But then the second bigger thing I wanted to ask is I know you're doing test on consolidating a distribution center and wondering if you could give some updates on that as it relates what that could look like as a much bigger rollout as we go forward?

Speaker 5

I'll take the second.

Speaker 1

Yes. So on the first portion of the question with respect to margins at Dollar Tree, we had stated earlier that our expectations, we'd time, we'd be able to manage that business over the course of the year to a 36% to 37% gross margin rate. And there's lots that goes into that, of course, not only product cost, but shrink markdowns and some other elements. Today, as we look in our guidance, I would say that we would be at At the lower end of that range, but we feel comfortably that we will be able to continue managing the business based upon our product offering and how the customer behaviors have been in that Our behaviors have been in that 36%, 37% range, so it's the lower end of that. There's just a number of elements we believe that we still have to work to from a product offering basis.

Speaker 1

As we look at the introduction of new price points, and able to capture a little more margin where previously We weren't able to do so at some of the lower price points.

Speaker 5

Then in regards to the question concerning combined warehouses, we're opening on the process of building 1 in Florida. We had 1 in Utah And we actually converted it to Family Dollar only. It's one of those propositions that sounds easy,

Speaker 10

makes sense,

Speaker 5

but it tends to be a little more difficult to execute. And what John and Mike have done for us, if they've gone which we'll share at the Investor Day, we've done a total analysis of the system. And at the end of the day, this really boils down to semiels and how far away the distribution center is So that we don't need to do it, but we need to spend a little more time with it. And we're going to give you our thoughts on a more broader base at the Investor Conference. And then we'll probably have an answer in the next 6 or 7 months

Speaker 1

Where we

Speaker 5

put a goal ultimately on a combined warehouse.

Speaker 10

Okay, great. Thank you very much.

Operator

We will take our next question from Matthew Boss. Your line is open. Please go ahead.

Speaker 5

Great, thanks. There you are, Matt. Good morning. Good morning, Rick. So Rick, at the Dollar Tree banner, could you speak to the dichotomy that you're seeing between the traffic improvement, which obviously is a nice positive relative to the average ticket decline that you're experiencing.

Speaker 5

And then just what are you seeing with recent trends to support the sequential comp acceleration that you embedded in your quarter, I don't want to give mid quarter guidance here. It's we're only 3 weeks, 3.5 weeks into the quarter. But I will tell you I am very pleased with the trends And the transaction counts have not changed. Matt, when I look at this, we always want to look at the basket And I've always believed that footsteps ultimately drive the basket. And I am very pleased with what we're seeing with transactions.

Speaker 5

And I think the transaction growth we have is time, we're going to be in the comp sales that we're driving at Dollar Tree. So, I remain very, very bullish on both banners at this stage of the Next question please.

Operator

Time, we will take our next question from Joe Feldman. Your line is open. Please go ahead.

Speaker 1

Good morning, Joe.

Speaker 11

Hi, good morning, guys. Thanks for taking the question. Really appreciate that. I guess, Wanted to go back on the consumables mix. I guess,

Speaker 1

we all

Speaker 11

I guess I'm a little curious as to what is was different in the quarter than you expected. It seems like it did accelerate the mix pressure. And you also made reference to an earlier question that you were still the discretionary business It sounded like it wasn't that bad from your perspective and I wanted a little more color on performance of discretionary, I guess, if you could share.

Speaker 5

Yes, maybe we'll tag team that if that's okay and I'll start. If you go back to the last earnings call, we did call out that we were starting to see a shift in shrink and to drive time. Now there's absolutely no doubt over the last 12, 15 weeks that call out has accelerated. And I think the consumer is feeling the real pressure now of a lot of things that have taken place. We've had change in SNAP benefits, tax returns are smaller than this time last year, all the stimulus is out of the system And all of that is taking root and the consumer now is more focused on needs And buying to those needs as close as they can versus wants.

Speaker 5

And that's the shift we've seen. Now we think that shift is going to continue for a while. We don't particularly believe it's going to get any worse. I can't remember the second part of the question.

Speaker 11

I was just asking discretionary.

Speaker 5

Yes. The reason I bring up discretionary, I think it's really important, really important. Our discretionary business is still good. And the fact is we've strengthened the consumable side. So we shouldn't be making the assumption That are low cost, pertinent discretionary items are no longer wanted or needed by the customer.

Speaker 5

It's that they're buying more consumables. Jeffrey, I don't know if you have anything to add. Yes.

Speaker 1

I was just going to add a little probably a little dimension on the acceleration of consumables. So in the Q4, you may recall For Dollar Tree on a year over year basis, they were flat in their mix and Family Dollar was about 20 basis points shift into consumables. If you fast forward to the Q1 of this year, Dollar Tree is now 180 basis points shift into consumables and Family Dollar was 200 basis points. So you saw a pretty significant, on a year over year basis shift more into the consumables. And that's what our financials have reflected.

Speaker 1

But that should hopefully give you an indication of just the quantum of what that shift is. And if you think on a margin basis, what that does for you is that there's about a full 20 point differential in your gross in your initial margins between discretionary and consumables. So when that dollar shifts from discretionary end to consumables on average, you're losing 20 points of initial margin.

Speaker 11

Got it. That's really helpful. Thanks for clarifying that. Appreciate it. Good luck this quarter, guys.

Speaker 5

Thank you.

Operator

We'll take our next question from Michael Lasser from UBS. Your line is open. Please go ahead.

Speaker 1

Good morning, Michael.

Speaker 12

Good morning, Rick. One of the hallmarks of your and your team's tenure in the previous retail situations You would consistently under promise and over deliver and generate consistent and reliable performance. This experience has been colored by surprises due to factors like reinvestment and unanticipated costs such as shrink and mix. At what point do you think Dollar Tree is going to get into the cycle of greater consistency? Is it realistic that that could happen in the second half of this year?

Speaker 12

Also part of this question, I'm going to put in a second one. The market was focused on Dollar Tree's ability to earn $8.24 potentially $10.25 Given these factors that you've outlined today, is it realistic that the market should push off those expectations in light of everything you know. And then lastly, you've alluded to this incremental price point above $1.25 Presumably that's above $1.25 but below $3 Can you give us more detail on that? It sparked a lot of interest so far this morning. Thank you so much.

Speaker 1

So I'll take the

Speaker 5

first part, let Jeff handle the second. Under promise over deliver, I think has been the mantra of my career. And I cannot deny that. But I will make a couple of comments. Number 1, When we started the journey at my previous employer, we were private.

Speaker 5

We did not do it in the public arena. And what you're seeing is a lot of the maturations we went through a long, long time ago. I do believe we are on the right path. I do believe all of the things we are doing are right. And I do believe there's a payoff coming.

Speaker 5

And what we will do at the Investor Day is we're going to show you that path. And what I'd like to do is hold on to that time, Michael, so I can So we can stand up there with charts and graphs and show you the journey. But I think we are getting this level set now. Every day We find something new we didn't know about and where you have to go out and get it fixed. And this is a journey time.

Speaker 5

And I've got the right people around me. I've got 200,000 people that are excited, that are dying to be led. And as we just need a little bit of time And we're going to lay it all out for you in about 4 weeks. Jeffrey, I'll let you handle that.

Speaker 1

The only thing I would add to that Is that we are very confident that we will be able to deliver double digit EPS. And the actions to get there, we are embark upon currently. As Rick has said, we are confident in what we're doing. You're starting to see time, the results from a top line perspective, the components of how we get there and the timeframe that we get there would be best illustrated when we get to the Investor Day, and we don't want to take anything away from that period of time. But we are confident that double digit EPS time, our near term horizon.

Speaker 12

Okay. On the price point,

Speaker 1

I'm sorry, the specific question on multi price? Yes.

Speaker 5

Could you say it again, sir?

Speaker 12

Yes. So you have alluded to testing several times on this call, incremental price points. The interpretation is that those are above $1.25 but below the Dollar Tree plus price points of $3 $5 items. If you could elaborate on that test, it would be super helpful.

Speaker 5

Yes. To answer your question, at this stage of the game, North of $1.25 less than $5 That is a correct assumption. Now that doesn't mean that's where we're going to land When this is all said and done. But yes, we are that's very fair. Between $1.25 $5 is where we're at right now.

Speaker 5

With no duplication of the SKU.

Speaker 12

Understood. Thank you very much.

Operator

We'll take our next question from Kristina Kette from Dutch Bank. Your line is open. Please go ahead.

Speaker 5

Good morning, Kristina.

Speaker 13

Good morning, Jeff and Rick. Thank you for taking the question. Just wanted to quickly follow-up on some of the increased pressure points on margins. Could you just talk about how you see promotional environment evolve from here. I know you said that currently it's still very rational, but in case some of the larger players do pick up price time, can you just talk about how much you can potentially lean on to your vendors, better source?

Speaker 13

And I think, Rick, you said that you view shrink as something that is cyclical, but can you just talk about some of the steps that you can take right now to mitigate it? Thank you.

Speaker 5

Yes. I'll talk about the promotional environment. I'll reinforce that it's very stable right now. And I will also tell you this, we are generating on the Family Dollar side vendor relationships we have not had on the commitments we make to the vendor and the manufacturer. And it is and that's how you get the incremental support for incremental markdowns in case you have to go to battle in print.

Speaker 5

However, I do not see that. I think the market is as rational as I've ever seen. Ben, Andy, you want to take that?

Speaker 1

Yes. On shrink, it's a multifaceted sort of approach. You can definitely start off with defensive merchandising, where there's opportunities for us in some to how you display items, what restrictions you have and how that is displayed. And those are the types of things that we don't particularly care for because we know that, that impacts sales, but it's an inevitable portion. We introduced new technologies within the store, how we monitor and alerts.

Speaker 1

We take such steps quite honestly and working more closely with local law enforcement to the extent that there is elevated levels within the communities. But also as we have been really focused on Our turnover and getting certain key positions filled and continue to be in position that also helps us from a turnover perspective, which is also helps support some of the internal elements of our shrink. So Once again, very multifaceted and we will work all across that. In the eventuality that This is something that we it's at elevated levels and we're going to have to pass some element of this on to our consumer. We'll ultimately have to think about how we will price this into some of our merchandise.

Speaker 5

Christine, I'd add one last thing too. Shrink tends to fall into certain categories. And in our higher shrink stores, we're actually exploring, do we need the same assortment as a low shrink category store. So those are the kinds of things we're look we're to Jeff's point, we're looking at everything right now to mitigate the problem.

Speaker 13

Great. Thank you so much.

Operator

Now I will hand over back to Randy Gaynor. Please go ahead, sir.

Speaker 5

Thank you for joining us today, and we hope to see you at our Investor Conference on June 21. Have a good day.

Operator

Thank you for joining today's call. You may now disconnect.

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Earnings Conference Call
Bank of New York Mellon Q1 2024
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