Mike Creedon
Chief Operating Officer at Dollar Tree
Thanks Bob, and good morning. I want to welcome everyone to today's call. This is my first time speaking to you as interim CEO following our recent leadership transition. I'm honored that the Board has named me to this role at a critical time in our transformation. To all our stakeholders, please know that I take this responsibility very seriously and with great humility. I also want to thank Rick Dreiling for his leadership and the support he provided to all our associates and leaders. From all of us at Dollar Tree, we wish him the very best.
As an organization, our top priorities remain accelerating the growth of Dollar Tree and finalizing the strategic review to identify the optimal ownership structure for Family Dollar. Executing against these objectives is the first priority for this leadership team and our Board. Throughout the strategic review process, we have maintained our operational focus and driven meaningful improvements in Family Dollar sales, productivity and profitability. Our ultimate goal remains positioning both banners for long-term success and unlocking value for Dollar Tree shareholders.
At the Dollar Tree banner, we're converting stores to our inline multi-price 3.0 format, opening new stores and improving the in-store experience through renovations and customer service enhancements. We believe there is ample runway ahead for Dollar Tree to meaningfully grow its square footage over a multi-year horizon.
Value always resonates with the customer, and that is why our business model has stood the test of time across decades and multiple economic cycles. We have made good progress on store conditions and operations, but there is more work to be done. At the end of the day, retail fundamentals are the key to unlocking value at Dollar Tree, and I am confident that we have the right team in place to deliver improved merchandising, execution and store standards.
One of the things that originally attracted me to Dollar Tree was its culture and clear understanding of what we do and who we serve. We offer unparalleled value and convenience for our customers and our scale provides us with a unique competitive advantage through our procurement power and distribution reach. We empower our associates and support their career aspirations, or as we like to say, this is a career, not a job, and it is my responsibility to ensure that every aspect of our culture supports this goal.
From the many stores and DCs that I've visited in my two plus years at Dollar Tree and from the time I've spent here at home in the store support center, it is clear to me that our leadership team and dedicated associates are aligned, and our objectives are in focus, position Dollar Tree for sustainable growth and create value for our fellow shareholders. While I've already talked to many of you in the investment community, I look forward to getting to know many more of you in the days and months ahead.
With that, I'd like to share our third quarter highlights and update you on several of our key initiatives. As a reminder, we said that third quarter results were in line with expectations when we announced our leadership transition in early November. In Q3, our Dollar Tree and Family Dollar merchandising efforts produced tangible results, and sales came in at the high end of our outlook range. Total net sales got a big boost from our non-comp stores, with Dollar Tree non-comp sales contributing over three times more revenue this year. This reflects the increased pace of Dollar Tree store openings overall, and the especially strong out of the gate performance of the $0.99 only portfolio.
Dollar Tree's comp improved sequentially over Q2, driven by market share gains and positive trends in both traffic and ticket. Family Dollar's comp also improved sequentially with its first positive discretionary comp since 2022.
Turning to the current environment and tone of business, customers continue to seek value, and many are focused on buying for need and buying closer to the time of that need. We continue to see evidence of belt tightening, particularly among lower income customers and to a lesser extent among middle and higher income families with young children. While this dynamic remains a discretionary headwind, it does create some opportunities across both banners in consumable as consumption data shows, lower and middle income households are increasingly shifting more of their spending toward food at home. Given these trends, it's worth reminding everyone of the strong value proposition we offer at Dollar Tree. A customer that walks in to a typical Dollar Tree store will find over 90% of the products in the store priced at $1.25. So, we offer a powerful solution for customers looking to stretch their dollar.
Moving on to Dollar Tree's multi-price rollout, we converted another 720 stores to the 3.0 format in the quarter, bringing the total number of converted stores to approximately 2,300. The converted stores produced approximately 30% of Dollar Tree's total net sales in Q3, and continue to produce comps nicely above our portfolio average. The multi-price 3.0 stores in aggregate produced a 3.3 comp in the quarter, with a strong 6.6 consumables comp and a modestly positive discretionary comp. Importantly, comps at these stores are being driven by traffic and ticket in roughly equal proportion.
Focusing in on some Q3 category highlights, at our 3.0 stores, we saw a 7 comp across our full seasonal assortment, including a 10 comp for Halloween specific products. Looking out to the balance of the year, we expect to convert an additional 300 stores to 400 stores to the 3.0 format by the end of Q4. This will put us a bit below the 2,800 figure we provided last quarter, but we are taking our time to ensure that each store is ready for conversion before we give it the final green light. To reiterate what I said last quarter, it's better to get the conversion done right than to get them done fast.
That being said, including converted and newly opened stores, we will have approximately 3,000 multi-price 3.0 stores open and operating by year end, including most of the former 99 Cents Only Stores. And speaking of the former 99 Cents Only Stores, we are just about done with the integration of this portfolio. To date we've converted and reopened 158 stores as Dollar Trees and should finish up the remaining handful of stores by the end of this month. The strong initial sales performance of these stores confirms our original optimism about the quality of these assets and their locations across California and the Southwest.
Stepping back and looking at our real estate efforts more broadly, we are well on our way towards meeting our full year goal of opening 600 to 650 new stores. Through the end of Q3, we've opened 567 new stores with over 85% of those coming under the Dollar Tree banner. Year-over-year, we have increased our Dollar Tree store base by over 7% and still see a long growth runway ahead of us, given the growing market resonance of multi-price.
In supply chain, our team continues to do outstanding work in the face of challenges related to our D.C. in Marietta, Oklahoma that was destroyed by a tornado. The biggest challenge is elevated stem miles across our network. On top of that, absorbing 158 new 99 Cents Only Stores within a relatively concentrated geography required additional resource allocation. While our newly reopened D.C. and West Memphis has helped to relieve some of the network pressure, additional measures are needed to restore the network to peak efficiency. To this end, we are working to add new capacity to our network, including replacing the capacity we lost to Marietta. Unload times continue to improve at the stores using roto carts out of our DCs in West Memphis, Matthews, North Carolina and here in Chesapeake.
In Q3, our proactive steps to reduce shrink delivered year-over-year improvements at both banners, particularly Family Dollar. While the expansion of multi-price at Dollar Tree has necessitated some stepped up shrink mitigation efforts, we still saw modest reduction in shrink during the quarter.
Now let me recap some of the operational highlights from the quarter. On a consolidated basis, net sales increased 3.5% to $7.6 billion and adjusted diluted EPS was $1.12. Looking at performance by Banner, Dollar Tree segment comp increased 1.8% on a 1.5% increase in traffic and a 0.3% increase in average ticket. This was Dollar Tree's first positive ticket comp since Q4 of 2022. Dollar Tree's Q3 consumable mix was 49.9%, a year-over-year increase of 150 basis points. Mix had been shifting towards consumables by over 200 basis points in each of the previous four quarters, so this is clearly a step in the right direction. Consumable comp was 6.2% which came on top of an 11.1% comp. Snacks, beverages and candy were the best performing categories.
Discretionary comp declined 1.8% reflecting consumers' ongoing focus on needs-based purchases. Discretionary comp was modestly positive at the multi-price 3.0 stores in the quarter. Hardware, electronics, healthcare and personal care were our best performing discretionary categories with additional strength seen in Halloween and textiles at the 3.0 stores. Our soft discretionary demand was consistent with trends we saw across the broader retail industry during the quarter. Based on Nielsen data, Dollar Tree's consumables market share gain accelerated in the quarter with growth in dollar volume outpacing the industry by 480 basis points, and unit volume outpacing by 280 basis points.
Before moving on to Family Dollar, let me take a moment to comment on Dollar Tree's recent performance in the context of broader market trends. Given Dollar Tree's particular consumer product and price point mix, its comps are running below our long-term run rate expectations. We attribute this to the unique challenges our customers are facing at this point in the economic cycle, which might not necessarily be aligned with the cycle timing at other retailers. Whether looking at comps or store growth, we believe our multi-year results stack up well against any retailer in the country. With a two-year comp stack of 17%, our consumable business is as strong as ever. But that is only half of Dollar Tree's business. The other half is discretionary, and these are the categories where shoppers have pulled back the most given the cumulative impact of the economic pressures they feel.
Moving on to the Family Dollar segment, comp increased 1.9% with the gain driven almost entirely by traffic. Average ticket was flat after three consecutive quarters of declines. Consumables comp increased 1.3% which came on top of a 6.2% comp increase last year. Discretionary comp increased 3.7% which was a 540-basis point sequential improvement over Q2. More importantly, Q3 was Family Dollar's first positive discretionary comp since Q4 2022. Children's apparel, electronics and hardware were the best performing discretionary categories.
We believe Family Dollar's positive discretionary results are the direct result of our targeted merchandising efforts. In recent quarters, we adjusted our pricing strategy with more emphasis on value and higher frequency purchase items like everyday home essentials. As part of this strategy, we increased the number of items priced at or below $5. We updated our in-store signage and shelf strips to better communicate our price value image, and we identified additional ways to optimize our planograms to drive sales and space productivity. These initiatives are clearly resonating with our core Family Dollar customer, and we are seeing the positive results at the cash register.
We are also pleased to report that Family Dollar's renovation and store conversion program is generating positive results. Since the beginning of the program in 2022, we have completed over 1500 projects, and year-to-date comps are up by high single digits at our H2.5 format stores and by double digits at our urban extra small box format stores. As a reminder, these formats feature customized product assortments that better meet the needs of our diverse customer base. For example, H2.5 stores include additional coolers, expanded seasonal offerings and an enhanced shopping experience with customized end caps and space optimization that drive better unit economics.
Lastly, on Family Dollar, we estimate reduced SNAP benefits were a 30-basis point comp headwind in the quarter. While overall SNAP payments were down by 5% nationally in Q3, we think the comp headwinds from SNAP will continue to moderate over the balance of the year.
Shifting Gears, we have received questions about the potential impact of tariffs in the new administration. While the situation remains fluid and the exact nature, scope and eventual timing of any new tariffs is not yet clear, we are prepared to act on multiple fronts. Rick McNeely and his team of merchants have many years of experience successfully navigating a variety of tariff landscapes.
Back in 2018 and 2019, when we last dealt with this issue, we were able to mitigate the majority of the potential impact by negotiating lower costs with our suppliers, changing product specs or pack sizes, or dropping non-economical items. Today, all three of those options are still at our disposal. On top of those, we now have detailed plans in place to shift supply sources for most of our products to alternate countries, and multi-price gives us additional flexibility on our product assortment. Based on our scale and our past history of navigating through similar challenges, we believe there is a wide range of potential actions that we can take to help mitigate additional tariffs if and when they materialize.
With respect to freight, markets continue to be relatively stable, particularly in relation to domestic freight. On ocean freight, we continue to manage through a fluid environment despite disruptions over the past year in the Red Sea and Panama Canal, as well as the strikes at North American ports. Regarding potential strikes, we're proactively managing our seasonal imports in the event that the east and Gulf coast port workers don't approve their tentative contract by the current January deadline.
I also want to comment briefly on the proposed Department of Labor overtime rule. Last month, a U.S. District Court in Texas struck down the proposed rule in a decision that applied nationwide. The court invalidated both phases of the threshold increase, the one from this past July and the pending one for next month. We absorbed the first increase back in July and won't reverse that change. It remains to be seen whether the current administration will appeal the ruling in its waning days or if the incoming administration will revisit the issue, but we are prepared for various scenarios.
We remain committed to completing the formal review of strategic alternatives for Family Dollar, which could include a potential sale, spinoff or other disposition of the business, among others. The process is moving forward as planned. While good progress is being made by the team, there remains no set deadline or definitive timeline for completion, and at this time we can't comment on any specific outcome. We will continue to share updates when we have new public information.
The guideposts of the review remain, as always, to maximize shareholder value through finding the optimal structure for each banner. We have made solid operational progress at Family Dollar over the past few years, even as our core customer was navigating their way through an extremely challenging macro landscape. We're proud of the work we've accomplished to date, and we look forward to the next steps in the review and for the business.
Before I turn the call over to Jeff, I'd like to offer a few high-level comments about the current tone of business and our outlook for the balance of the year. Jeff will cover this in greater detail in his remarks. Our merchandising teams have laid the foundation for a successful year-end holiday season. We're especially excited by our expanded Christmas assortment at Dollar Tree, and our ability to deliver exceptional value to consumers at a wider range of price points. While the response to our expanding multi-price assortment continues to be positive, the fourth quarter got off to a softer start given the election and later than usual Thanksgiving timing. That said, we remain optimistic about December. While there are five fewer selling days in total between Thanksgiving and Christmas this year, we should get some extra help from Christmas falling in the middle of the week.
Our merchant and operation teams have done an excellent job preparing for the holidays. The stores look great, and our merchandise assortment is more compelling than it's ever been. Even with these moving pieces, we are confident in our ability to deliver low single digit comps in the fourth quarter at both the Dollar Tree and Family Dollar banners.
Before I wrap up, I am sure you saw our announcement earlier this morning that Jeff Davis will be stepping down as Chief Financial Officer. The company has launched an external search, and to facilitate a smooth transition, Jeff has agreed to remain on board through the filing of our 10-K. Ideally, we plan to announce a successor prior to his departure. We thank Jeff for his service, and appreciate the contributions he has made to the business during his time with Dollar Tree. With that, I'll turn the call over to Jeff.
