Dollar Tree Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
September 4, 2024

There are 9 speakers on the call.

Operator

Greetings. Welcome to the Dollar Tree Second Quarter 20 24 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

I would now turn the conference over to Robert LaFleur, Senior Vice President, Investor Relations. Thank you. You may begin.

Speaker 1

Good morning and thank you for joining us today to discuss Dollar Tree's Q2 fiscal 2024 results. Before we begin, I'd like to let everyone know that our CEO and Executive Chairman, Rick, has been under the weather for the past few days and his voice has not yet fully recovered. He's here listening to the call today and sends his regards, but has asked our Chief Operating Officer, Mike Creeden, to step in for him today. At the end of our prepared remarks, Mike will join our CFO, Jeff Davis for the Q and A session. We wish Rick a speedy recovery and I know he looks forward to chatting with you all again next quarter.

Speaker 1

So with that, 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 Condition and Results of Operations sections in our Annual Report on Form 10 ks filed on March 20, 2024, our most recent press release and Form 8 ks and other filings with the SEC. 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.

Speaker 1

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. Additionally, unless otherwise stated, all comparisons discussed today for the Q2 of fiscal 2024 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.

Speaker 1

Following our prepared remarks, Jeff and Mike 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. I'd now like to turn the call over

Speaker 2

to Mike. Thanks, Bob. Good morning, everyone. This is Mike Creed and I'm Dollar Tree's Chief Operating Officer and I'm happy to pinch hit for Rick this morning. When Rick first joined Dollar Tree as Executive Chairman and again last year when he became CEO, he told you that he came here to lead a transformation with the primary goal of helping this company realize its full potential.

Speaker 2

He's also said that transformations are rarely easy or linear. And that is especially true for a company as large as ours that is navigating through one of the most challenging macro environments we've ever seen. That said, Rick and all of us on the senior leadership team believe very deeply in this transformation and the positive impact we're having in the areas we control. We also believe very deeply in the importance of providing the high quality, low cost products to individuals and families need in a convenient and comfortable shopping environment. We are also committed to serving the communities where we operate.

Speaker 2

And most importantly, we are aware of the awesome responsibility we have each and every day serve our customers, associates and shareholders. Clearly, we are not pleased with our 2nd quarter results or having to revise our full year outlook. But this updated outlook reflects how the challenging macro environment continues to pressure our customers. It also reflects some revised financial estimates that we will discuss shortly. That said, we will also talk about several areas where we are performing well and where our transformation initiatives are taking hold.

Speaker 2

And I will share where we are heading as a company and why we are still so excited about our future. So let's get started. Sales came in towards the low end of our outlook range. Family Dollar's comp was in line, but Dollar Tree's comp, while positive, was lower than we expected. As we have seen for several quarters now, demand from Family Dollar's core lower income customer remains weak.

Speaker 2

Dollar Tree has a broader customer base that includes more middle and upper income households. And beginning this quarter, we started to see inflation, interest rates and other macro pressures have a more pronounced impact on the buying behavior of these customers. This impacted our 2nd quarter comp performance and is the primary driver of our revised full year outlook. Despite these near term pressures, we are confident in the Dollar Tree segment's ability to compete and win. Our offerings provide customers with exceptional values that are well matched to the current environment.

Speaker 2

We are strong believers in the inherent strength of Dollar Tree's differentiated business model and its long term strategy of multi price expansion and store growth acceleration. Today, we need to be sensitive and responsive to the needs of our customers and meet them where they are and how they are living. In this environment, retailers who can offer products to provide value and convenience to pressured consumers are the ones who will take market share and grow sales. We believe we are and will continue to be one of those winning retailers. Before getting into the rest of the details on the second quarter, let us acknowledge that Dollar Tree's comp store performance was just part of the lower than expected Q2 earnings.

Speaker 2

The most significant component, dollars 0.30 of EPS that wasn't in our June outlook was related to general liability claims. Predicting these claims is complex and we again increased our accrual for general liability this quarter after observing higher than expected costs to resolve certain claims. Jeff will give you the full details on this in a few minutes. Again, this evolving economic backdrop, our team remains focused on factors that are within our control, including the rollout of key transformation initiatives. Dollar Tree's multi price expansion continues to resonate with our customers and the 1600 stores that have been converted into our newest in line format are seeing an outsized sales lift.

Speaker 2

As we talked about last quarter, we are building new muscle memory with multi price. This rollout is a process and we are multi price. This rollout is a process and we are constantly making adjustments based on our learnings from earlier rounds of conversions. For example, we are now prioritizing ready to convert stores and moving them to the front of the line, ahead of stores that may need some additional prep work before they can realize the full range of conversion benefits. As we've taken the time to incorporate these learnings, we're a few 100 stores behind our original schedule.

Speaker 2

But we've learned it's better to get the conversions done right than to rush the process. The most important thing is that the customer response is validating our strategy, because our biggest challenge now is keeping up with the demand for the new assortment. To give you a sense of how these stores are performing, costs for the 1600 stores we've converted were up 4.6% in the 2nd quarter versus less than 0.5% at our other formats. Our Q1 conversions who had the benefit of the new multi price format and assortment for all of Q2 did a 5.1% comp. Importantly, these in line stores showed strength across the assortment with a 6.7% consumables comp and a 2.6% discretionary comp.

Speaker 2

Considering the vast majority of our new discretionary multi price items won't be in these stores until later this year, we are very pleased with these early results. We also believe that over time, our expanded discretionary multi price offerings will help us overcome some of the macro driven weakness we're seeing elsewhere in the portfolio. We believe the expansion of in line multi price across the Dollar Tree portfolio will be a major growth driver for many years to come. Today, less than 15% of our SKUs are multi price. In addition to driving comp, the higher gross profit dollars per item generated by this assortment should provide a meaningful lift to store economics over time.

Speaker 2

As excited as we are about these initial results, we believe we're still in the very early innings with many years of runway ahead of us. We're also happy to announce that as of today, we've reopened approximately 85 former $0.99 only locations as Dollar Tree's. In fact, another 20 stores are reopening tomorrow and the remaining 56 should reopen by the end of the year. Getting this done from scratch in less than 100 days required a massive effort across multiple teams. That's a real accomplishment.

Speaker 2

I would like to thank everyone involved for all their hard work. These 99 Cent Only locations are proven high quality stores in strong markets with great growth potential. We're very excited about expanding our footprint across California and the Southwest and we couldn't be more pleased with the reception we've received from the communities who welcomed us. This transaction was a rare opportunity to acquire a portfolio of assets under very favorable lease terms. We expect these stores will provide compelling unit level economics and positive synergies across our network.

Speaker 2

While we have to absorb some unanticipated upfront costs that Jeff will talk about in a minute, this is still a great deal. In supply chain, our DC in West Memphis, Arkansas has reopened and is now making deliveries. Recall that after we lost our DC in Marietta, Oklahoma, we decided to temporarily repurpose West Memphis to support the Dollar Tree banner. We're also making good progress on RotaCards. West Memphis is servicing over 600 Dollar Tree and combo stores with RotaCards and by next year it will be able to handle an additional 150 stores.

Speaker 2

Elsewhere, our DC in Matthews, North Carolina is delivering to Family Dollar Stars with rotocarts and we're serving approximately 300 Dollar Tree stores with rotocarts out of our DC here in Chesapeake, Virginia. By the end of the year, 4 DCs should be providing rotocart deliveries to over 2,000 stores. We're collecting lots of data from initial deployments and refining our rollout plans based on what we learn along the way. In IT, Bobby Appletuny and his team are making great progress across our modernization initiatives. Our new warehouse management system went live at its first two DCs with 2 more slated for early next year.

Speaker 2

Across both banners, we've transitioned over 9,000 stores to our network infrastructure, which supports business operations by improving Internet connectivity, security and in store Wi Fi access for associates. Additionally, we've created entirely new infrastructure to support the multi price rollout, including shelf tag label printers, in store price checkers and back office functionality. Our Family Dollar Private Brands program continues to gain momentum. Private Brands contributed 16% of consumable sales in the quarter, which puts us well ahead of schedule to hit our 70% year end target. Year to date, we've added 75 new SKUs across food, HBA and household products and private brands now represent 9% of Family Dollar SKUs.

Speaker 2

Among categories, we're seeing strong growth in food and we see great potential in HVA, where we remain under indexed. Shrink remains a major topic across retail. While shrink remains unacceptably high, it appears to be stabilizing. While it is too early to declare victory, I am pleased that our targeted actions and interventions helped our 2nd quarter shrink rate. We are running ahead of shrink expectations at Family Dollar and still have some additional work to do at Dollar Tree as we adjust to the new shrink challenges that arise when we introduce more high value multi price products into the assortment.

Speaker 2

Now let's move to the financial highlights from the quarter. On a consolidated basis, net sales increased 0.7 percent to $7,400,000,000 Enterprise comp increased 0.7% on a 1.1% traffic increase, partially offset by a 0.5 percent average ticket decline. Looking at performance by banner, Dollar Tree comps increased 1.3% on a 1.4% traffic increase, modestly offset by a 0.1% average ticket decline. While comps were positive in each month, they softened sequentially throughout the quarter. While discretionary products remain an integral part of Dollar Tree's retail mission, our sales mix has shifted towards consumables in recent years.

Speaker 2

For example, Dollar Tree's consumable mix increased 2 10 basis points in the 2nd quarter to 50.6%. Part of this shift reflects softer discretionary demand, but part of it is tied to some timing differences in our latest multi price rollout. Given their shorter lead times, many of the earliest items we introduced were consumables. In the back half of the year, our discretionary mix should improve as more longer lead time discretionary items, particularly in seasonal finally arrived in our stores. Dollar Tree's consumable comp was 4.7% against a very challenging 13.2% comp last year, while discretionary comp was down 1.9% on the unfavorable mix.

Speaker 2

This was a sequential improvement from the Easter related challenges we faced in Q1. Consumable categories like candy apparel, snacks and beverages were our best performing areas in Q2, while higher margin discretionary categories like crafts, floral and home decor underperformed. After several quarters of strong growth, Dollar Tree's unit and dollar market share gains moderated in the 2nd quarter. Dollar Tree attracted 2,800,000 net new shoppers over the past 12 months. In the Family Dollar segment, customer traffic in average ticket largely offset as comps declined 0.1%.

Speaker 2

Comps were positive in the middle month of the quarter and negative in the 1st and last months. Customer traffic increased 0.7%, while average decreased traffic 0.8%. Our consumables comp increased 0.3% on top of a strong 9.5% comp in Q2 last year. Discretionary comp declined 1.7%, a 300 basis point sequential improvement over Q1. The improving trend in discretionary comp reflects recent efforts to improve our assortment by emphasizing more relevant items with higher purchase frequency.

Speaker 2

Standouts for best performing categories were evenly split across discretionary and consumables, including beverages, apparel, health OTC and personal care. Meanwhile, bottom performing categories like home decor, seasonal and beauty skewed towards discretionary. Family Dollar's unit and market share were essentially flat in the corner. In the quarter, Family Dollar attracted 1,800,000 net new shoppers over the past 12 months. Let's also update you on SNAP benefits.

Speaker 2

As you may know, over 40% of Family Dollar customers are eligible some form of government assistance, including SNAP and those benefits are a meaningful part of their household resources. We have cycled most of last year's benefit reductions and we believe the worst is now behind us. In the Q2, reduced SNAP benefits were a 60 basis point comp headwind for Family Dollar, significantly better than the 280 basis point impact we saw in Q1 and the 500 basis point impact in Q4 of last year. And one last point to share on Snap, Family Dollar customers can now buy Snap eligible products online through Instacart delivery. This collaboration reduces transportation dependency by giving customers access to same day delivery of Family Dollar products.

Speaker 2

This is a logical extension of our mission to help individuals and families do more with less by making essential goods more affordable and accessible. Now, let us share some thoughts on a few other top of mind issues. We know that tariffs have been a big topic recently. In the event of any meaningful change to the current tariff regime, we have long standing contingency plans to diversify our supply chain in a timely and cost effective manner. We also have the flexibility to adjust product specs and price points to address any changes in the market.

Speaker 2

Regarding ocean freight, our exposure to spot rates remains limited as the vast majority of our capacity is covered by annual or long term contracts. With limited near term exposure to container rate volatility, our outlook for ocean and domestic freight remains positive. Regarding changes to overtime thresholds for salaried workers under the Fair Labor Standards Act, we fully absorbed the first phase of this in early July. The next proposed phase, which raises the July salary threshold by an additional 34% is scheduled to go into effect on January 1 next year. However, there is significant uncertainty over when and if this change will be implemented.

Speaker 2

We are evaluating multiple mitigation strategies to address the proposed rules. And finally, we wanted to provide an update and let you know what we are making good progress on our strategic review at Family Dollar, which includes evaluating a full range of pathways to maximize shareholder value. As we discussed in June, our transformation includes operational and business improvements such as multi price at Dollar Tree as well as this more holistic evaluation of the best structure and pathway for our Family Dollar business. We understand that there are many questions on this topic and we reiterate our commitment to update you when we reached the conclusion of the review. The actions we took earlier this year at Family Dollar to close underperforming stores are having the intended impact and our remaining Family Dollar stores are focused on providing service and value to our customers across the country each and every day.

Speaker 2

Before wrapping up, we'd like to share a few thoughts about our revised outlook. We've adjusted our sales outlook to better reflect where the consumer is today as they continue to adapt to the evolving macro landscape. Regarding the $0.99 only portfolio, our revised outlook reflects a better estimate of the one time pre opening costs associated with these stores and better than what we had when the transaction first closed. Finally, it is also the adjustment to our general liability exposure and our latest D and A forecast, which Jeff will discuss in a moment. We are comfortable with this reset given where the customer and the business are today and we are confident in our ability to execute against our objectives.

Speaker 2

With that, I'll turn the call over to Jeff.

Speaker 1

Thank you, Mike, and good morning. I'll start off by discussing our Q2 results, after which I'll provide some comments on our Q3 and fiscal 2024 outlook. Where applicable, I will focus on our adjusted results. A reconciliation of our non GAAP adjusted results is provided in our earnings release. 2nd quarter results obviously fell short of our expectations.

Speaker 1

Our adjusted EPS of $0.67 was $0.38 below the midpoint of our June outlook. Of that $0.38 $0.30 was attributable to the general liability adjustment, while the remaining $0.08 was attributable to the flow through from the sales shortfall, mostly in the Dollar Tree segment. As Mike indicated, Dollar Tree's comp softness was primarily on the discretionary side of the business and reflected the increasing effect of macro pressures on the purchasing behavior of the Dollar Tree's middle and higher income customers. Our original second quarter outlook did not anticipate those pressures migrating to Dollar Tree's customer base to the degree that they did. Turning to the business results on a consolidated basis.

Speaker 1

Adjusted operating income was $218,000,000 a 24% decrease from last year. Adjusted operating margin decreased by approximately 90 basis points to 3%, reflecting an 80 basis point increase in gross margin offset by 180 basis point increase in adjusted SG and A rate. Gross margin improvement came primarily from lower freight costs, partially offset by unfavorable sales mix and higher occupancy costs. Adjusted SG and A increased primarily from the general liability adjustment, higher depreciation, temporary labor for Dollar Tree's multi price rollout, higher utility costs and sales deleverage, partially offset by lower incentive comp costs. Our adjusted effective tax rate was 24.2% compared to 24%.

Speaker 1

Adjusted net income was $143,000,000 and adjusted diluted EPS was $0.67 Let me take a step back and offer additional details around the general liability adjustment we made in the quarter. As we stated before, predicting the outcome of both existing and unreported claims is inherently complex, particularly as general liability claims have become more volatile in recent years. Due to the increase in estimated liabilities for these claims, we took an incremental $84,000,000 charge or $0.30 of EPS against our prior outlook, with about $0.21 of that pertaining to Dollar Tree and the balance to Family Dollar. So what's going on here and why are we talking about this again? Given the size and scale of our footprint, we manage thousands of general liability claims stemming from customer accidents and other incidents at our stores and surrounding areas.

Speaker 1

While some claims are current, many relate to prior years. Over time, the ultimate outcome of claims, particularly older claims during the pandemic and post pandemic timeframe, has become increasingly challenged to predict, given the higher settlement and litigation costs that have resulted from a more volatile insurance environment. For these reasons, twice a year, we rely on 3rd party actuarial assessments and assumptions to evaluate accruals for open claims as well as incurred but not yet reported claims. The claims have continued to develop unfavorably due to the rising cost to reimburse, settle and litigate these claims, which impacted our actuarially determined liabilities. While exposure to general liability claims remain difficult to forecast, we believe the adjustment we took in Q2 captures the current range of potential outcomes based on what we have experienced in recent years.

Speaker 1

Now let's move on to our business segment results. At Dollar Tree, adjusted operating income decreased 13% to $344,000,000 Adjusted operating margin decreased 190 basis points, driven by a 80 basis point increase in gross margin, offset by 2 70 basis point increase in adjusted SG and A rate. Gross margin improved primarily from lower freight costs. This was partially offset by unfavorable sales mix and occupancy cost. Adjusted SG and A expenses increased primarily due to the general liability adjustment, higher depreciation, temporary labor for the multi price rollout, higher utility costs and sales deleverage.

Speaker 1

At Family Dollar, adjusted operating loss was $3,600,000 compared to adjusted operating income of $11,800,000 last year. Adjusted operating margin decreased 40 basis points on a 50 basis point increase in gross margin, offset by a 100 basis point increase in adjusted SG and A rate. Gross margin increased primarily from lower freight and occupancy costs, partially offset by unfavorable sales mix, higher distribution costs and markdowns. Adjusted SG and A rate increased primarily from higher depreciation and amortization, the general liability charge and sales deleverage. Moving on to the balance sheet and cash flow.

Speaker 1

Inventory decreased by 4% or $228,000,000 Average inventory per store decreased 3.6%. On a related note, to date, we have received $70,800,000 of insurance proceeds related to the inventory loss and property damage at our Marietta, Oklahoma, BC. We expect the remaining $46,000,000 of outstanding losses will be fully recovered under our existing insurance policies in due course. With cash and cash equivalents of $570,000,000 and long term debt of $3,400,000,000 our balance sheet remains strong. Our bank defined leverage at quarter end stood at approximately 2.5 times, which continues to underpin our investment grade creditworthiness.

Speaker 1

On the cash flow statement, we generated $307,000,000 from operating activities compared to $172,000,000 last year. Capital expenditures were $501,000,000 in the quarter versus $425,000,000 last year, reflecting the accelerated new store openings and ongoing investments in growth and other initiatives. Our free cash flow in the quarter improved $60,000,000 over last year. Consistent with our disciplined approach to capital allocation, after investing in the growth of our business this quarter, we returned $91,000,000 to our shareholders by repurchasing 750,000 shares at an average price of $120 per share. At quarter end, we had approximately $952,000,000 remaining under our existing share repurchase program.

Speaker 1

Now let me provide some perspective on our Q3 and full year expectations. Our current revised outlook reflects the following. We are taking a more conservative view towards comp sales in the back half of the year, particularly in the Dollar Tree segment, as macro factors continue to weigh on customer sentiment and adversely affect discretionary demand and buying behavior. It also reflects one time integration costs related to the $0.99 only lease acquisitions. Because time was of the essence in acquiring these leases and in a competitive bidding process, the time between when we took physical possession of these properties and when we and when they opened was longer than expected.

Speaker 1

As a result, we are incurring upfront occupancy costs like rent, insurance and security for an extended period before the stores open. We announced this transaction a week before or prior to our last earnings call and these additional upfront costs were not anticipated in the outlook we gave at that time. All in, the estimate we estimate these incremental upfront costs will negatively impact 3rd quarter EPS by approximately $0.07 and 4th quarter EPS by approximately $0.05 On a positive note, the initial sales performance of the converted and reopened stores is exceeding our initial expectations and we are increasingly bullish regarding the long term prospect for this portfolio. We are also expecting higher D and A expense in the back half of the year after reforecasting our capital projects to reflect higher anticipated costs for projects such as new stores, renovations and our IT transformation, as well as the timing of receipt for vendor invoices. This is expected to be an incremental EPS headwind of approximately $0.12 split evenly between Q3 and Q4.

Speaker 1

On the positive side of the ledger, we saw some green shoots and discretionary mix at Family Dollar in Q2, which is so far carried into Q3. We are assuming this trend continues for the balance of the year and are now expecting a modest mix headwind for Family Dollar in the back half. The better initial performance at the converted $0.99 only stores is also reflected in our revised sales outlook. From a modeling perspective, it's also worth reminding everyone that sales from these and all new stores won't show up in our comp store net sales until after they've been open for 15 months. And finally, payroll should come in lower than previously forecast as we align incentive comp and hours with our revised business outlook.

Speaker 1

With that background, for the Q3, we expect net sales will be in the range of $7,400,000,000 to $7,600,000,000 based on low single digit comp net sales growth for the enterprise and both Dollar Tree and Family Dollar segments. Adjusting for the stores that were closed as part of the portfolio optimization, we expect 3rd quarter net sales for the Family Dollar segment to decline by 1% to 3% on a year over year basis. We expect adjusted EPS will be in the range of $1.05 to $1.15 which reflects a more conservative sales outlook, the incremental upfront cost of the $0.99 only stores and the D and A reforecast. For the full year, we expect net sales to be in the range of 30.6 $1,000,000,000 to $30,900,000,000 based on low single digit comp net sales growth for the enterprise and both the Dollar Tree and Family Dollar segments. Adjusting for stores closed as part of the portfolio optimization in the extra week in fiscal 2023, we expect full year net sales for Family Dollar to decline by 3% to 5% on a year over year basis.

Speaker 1

Adjusted EPS for the full year is now expected to be in the range of $5.20 to $5.60 reflecting our 2nd quarter results, our revised sales forecast, the $0.99 only cost and D and A. In the interest of time, I will direct you to our supplemental financial presentation, which is available on our IR website for the remaining details that support our current outlook. So to recap, we're revising the midpoint of our full year 2024 outlook from $5.40 from 5 point $6.75 Of that $1.35 delta, dollars 0.38 came from Q2 shortfall, the vast majority of which came from the general liability adjustment. Then in the back half of the year, dollars 0.12 is from the higher upfront cost in the $0.99 only portfolio, another $0.12 is from the D and A adjustment and the remaining $0.73 is primarily from the flow through on the lowered sales outlook, which is mostly due to our more conservative outlook for discretionary sales at Dollar Tree. With that, I'll turn the call back over to Mark.

Speaker 2

Thanks, Jeff. On behalf of Rick and the entire senior management team, I want to thank our teams for their continued hard work in a very challenging macro environment and for supporting our strategic review of Family Dollar. Our strategic review is looking at the full range of alternatives for Family Dollar with a focus on clearly demonstrating the full value of our 2 distinct franchises. Despite significant headwinds, our Dollar Tree banners comp remains positive even as they lap 2 years of extremely strong performance. Our non multi price stores were modestly positive this quarter and our newly converted multi price stores produced a 4.6% comp.

Speaker 2

This is one of the best multi year comp performances in all of retail. Most importantly, we have just begun to roll out our expanded multi price SKUs and we still have thousands of stores to convert to our new format. On top of that, we're opening hundreds of brand new in line multi price stores this year and plan to do so for many years to come. In light of all this, we continue to believe that Dollar Tree is one of the strongest platforms in all of retail with many years of strong comp and store growth still ahead of us. Operator, with that, Jeff and I are ready to take questions.

Speaker 2

Thank you.

Operator

We will now be conducting a question and answer Our first question comes from the line of Michael Lasser with UBS. Please proceed with your question.

Speaker 1

Good morning. Thank you so much for taking my question. So putting aside what has been happening at Family Dollar, the core Dollar Tree banner has a number of tailwinds such as multi price point, freight improvements and others, yet a series of unexpected items that have indicated to be one time the one time in nature item and be on a the one time in nature item and be on a consistent glide path forward? And as part of that, what is an updated realistic operating margin for core Dollar Tree if it is a long term low single digit comp grower? Thank you very much.

Speaker 1

Yes. Good morning, Michael. This is Jeff. I'll take a portion of that question regarding general liability and some of the other elements. You point out, I think, a very valid point.

Speaker 1

The general liability adjustments we had to take is one that we're not happy with. It's one in which, as I mentioned in my remarks, it is very complex as a result of how these claims develop over time and having new information around that. We believe that the adjustment that we've taken today reflects not only that historic performance, our current outcomes as it relates to how these claims are developing, but we're also making sure that we're not anticipating any improvement in these claims experience on a go forward basis. Thus, we feel more confident around the adjustment that we've taken reflects the current liability that is sitting out there for once again not only these existing claims, but the claims that have yet to be reported. That's the best way I can respond to that to you, to Michael, that we believe we now have this behind us.

Speaker 1

The second portion of your question, I believe, was around where do we think the operating margins of the long term operating margins of the business would be. As we continue to drive multi price and we're going to continue to drive higher gross profit dollars per transaction, We believe that as we move forward and we get beyond some of the higher transformation costs that we're experiencing right now as it relates to some of the IT investments that we're making, supply chain investments, that we'll be able to achieve the outlook that we have provided previously on a longer term basis for the business. I don't want to give any longer term view of the business other than what we've already given. In our outlook for the quarter, we said that once again, Family Dollar I'm sorry, Dollar Tree is going to be low single digits. We said that the one second here.

Speaker 1

In our financial If I can find it real quick.

Speaker 2

And Jeff, I'll just do that. Michael, the mix we see too on the multi price, remember it comes in heavy consumable first, because that's what we could get in the short order. As you look to enter the back half of the year with the holidays, you get that discretionary benefit from the multi price rollout.

Speaker 1

Yes. I found it here, Michael. I just want to make sure that I quoted this appropriately. As it relates to 2024 outlook, we still believe that the gross margins on the Dollar Tree business will be in the range of 36%. And the flow throughs that we've had previously, we said on a consolidated basis, the SG and A will be approximately 26%.

Speaker 1

And the SG and A outlook on the Dollar Tree segment already reflects the additional costs that we've had as it relates to the approximately 2,800 stores that we're going to convert to multi price. That's the other headwind that we have currently in the business as we're using third party labor for that.

Operator

Thank you. Our next question comes from the line of Edward Kelly with Wells Fargo. Please proceed with your question.

Speaker 3

Yes. Hi, guys. Good morning. So I want to just take a step back given the I guess the overhangs and the questions that investors really have at this point. As you think about multi price point at Dollar Tree,

Speaker 1

how confident are you that

Speaker 3

some of the weakness we've seen recently is just macro as opposed to pushback on the multi price point strategy? I know you have the conversions that are doing well, but I think $3 $5 are in many more stores. Just curious as to what you think consumers are really saying there? And then you had optimism around Q4. So when do you think you can start to turn the corner?

Speaker 3

And then the other thing is Family Dollar. And I don't know what you can say, but is there anything you can tell us around your confidence and your ability to come to some resolution in that business that is accretive to shareholder value? Thank you.

Speaker 2

Yes, Ed, it's Mike. I'll take the first one. One. We said we're still in the early innings of multi price. And I'll tell you that we like what the customer is telling us with multi price.

Speaker 2

So we're surveying our customers. We're listening to them. They're telling us with their comps. I highlighted how strong our multi price stores are performing compared to stores that just have the $1.25 And we're really growing traffic. We're adding new customers and our customers are letting us know that they like the product.

Speaker 2

And then when you look to the second half, we really think they're going to like the discretionary product. So we've seen it as our stores have set, our associates are our customers and our associates are telling us they love this multi price product. They're excited about the holiday season and all that. So we'll continue to learn as we go. We've made changes.

Speaker 2

As I mentioned in my prepared remarks, we're a couple of 100 stores behind where we are. That's because we want to be better. We want to get it right when we roll them out. And so we took the approach. We added some, call it, milestones or stop gates to say we're not going to convert a store unless that store is ready to be converted.

Speaker 2

So we can improve what the customer sees when they come in and the overall performance of the multi price stores. And then Jeff, I'll let you talk to the FD strategic.

Speaker 1

Yes, just a couple of things to add to that. If you think about the Dollar Tree segment, last year this time we added over 2,000,000 new customers. We're now lapping that and we continue to add beyond that. So it is absolutely resonating with the customer. If you think about the fact that we continue to maintain our market share in this environment at a time when we're actually seeing customers contract their spend, it's not that we are seeing a combination of things.

Speaker 1

So we're seeing contraction of spend. We're not seeing necessarily a loss from a competitive standpoint. So we continue to add new customers, maintain market share, continue to resonate with the customer. When Mike had spoken about the new in line conversion stores, that multi price delivering 6% plus comps in consumables and even positive of almost a 3% comp in discretionary. So very favorable for us.

Speaker 1

As it relates to Family Dollar, we're excited about what we're seeing in Family Dollar also. From a standpoint of we're starting to actually see some discretionary improvement. We believe we're beyond the biggest headwinds that we've had with respect to the customer with Snap. We're continuing to see improvement and shrink. We've invested in people, time, technology and systems on the Family Dollar side and this proof points are really starting to deliver and improve shrink results there.

Speaker 1

The customers is resonating with a number of the resets that we've had. It's just that customer right now is under some of the more significant budget pressures and they're working through it. And when we're seeing that customer use all tenders not only that may be government assistance, but also using credit where it makes sense.

Operator

Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Speaker 3

Hi, good morning everyone. Mike, I wanted to start with Dollar Tree. Thinking about multi price rollout, can you remind us what's the timing of the rollout? Why can you go quicker and if labor is a constraint, does it make sense to hire your own? And then was there any rhyme or reason to the first 1600 stores?

Speaker 3

So thinking about what the results could look like further downstream as you get further along the way?

Speaker 2

Sure, Simeon. So there's 2 pieces to this. 1 is the bandwidth of our own internal team to get these stores done with both the new store openings we're doing, renovations we're doing and the multi place rollout. That's why we really leaned on 3rd party to take off as much as we could and go as quickly as we could. The other gating process is as we turn our distribution network on with multi price, that then feeds the stores that we convert.

Speaker 2

So there is a little bit of a gating factor in terms of the product coming in, the DC being set for multi price and being able to service those stores. So we'll do when you look at it, we set a couple of 100 behind this year. So instead of 3,000, that's 2,800 or more. But then there's another 300 new stores that open up multi price as well. And you'll see a similar cadence each year as we go through to all stores that we can put multi price in.

Speaker 2

So it's really a question of our own bandwidth to process it and then our ability to work with vendors to get it into our DCs and get it out to the stores. I'll tell you, Simeon, when we do the execution right, the only challenge we have is keeping up with the product because the customers love it.

Operator

Thank you. Our next question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question.

Speaker 4

Great, thanks. So Mike, at the Dollar Tree banner, could you elaborate on the softening progression of same store sales in the Q2 and any change in trends that you've seen so far in the Q3? And then just larger picture, I guess maybe could you speak to performance versus plan in the roughly 80% of your doors at Dollar Tree outside of the 1600 converted stores? I think you cited these as flattish comps this quarter, but pre pandemic 2017 to 2019 Dollar Tree banner comps were pretty consistently in that 3% run rate. Just how best to think about the difference in the core doors relative to pre pandemic performance?

Speaker 2

Sure, Mac. Good morning. So first, in terms of the trends, I think it's a little bit of the I call it the who, the how and the what. The who is the income level. While we saw in Family Dollar early that the low income pressured shopper, we saw that drift up and materially drift up in the second quarter as the middle income, the greater than $125,000 that person started feeling the pressure as well from the macro environment.

Speaker 2

And then the how, they shifted to buying for need versus buying for want. And so really that showed in our discretionary mix leaning towards consumables. And then finally, the what, this started with sensitivity on big ticket items and has come all the way now to us as people have maybe changed how they celebrate a party this summer, fewer guests, fewer parties. They're really tightening their belts and the macro economy is driving them to behave a bit differently. And so when we look at all those things together, that really pressured us.

Speaker 2

As you look then at how we exit and where we go, I'll tell you Q2 is always one of those quarters where there's really no holiday. All you have is 4th July, whereas Q3, we get back to school and Halloween. And then when you look at Q4, you get that harvest, you get Christmas, and really that demands you go to Dollar Tree. It's we help people celebrate their lives. And so that gets our people coming in.

Speaker 2

So those were the trends. And as we look out, I think Jeff would say our current trends reflect our overall forecast right now. And then finally on the core doors, I mean, I would tell you, I still think, yes, they were in that 0.5%. But you look at some of the 2 year stacks, when you really look at the multi year performance of these stores, I think it's some of the best in retail. And as we roll out the multi price, we really feed that thrill of the hunt and we get it to more doors.

Speaker 2

They come in for the thrill of the hunt on the multi price and we get to sell the rest of the store. So I really think we end up getting that boost to the core from the rest from the rollout of multi price.

Operator

Thank you. Our next question comes from the line of John Heinbockel with Guggenheim Partners. Please proceed with your question.

Speaker 5

Hey, Mike. A couple of quick things. The when you look at those 1600 stores, can you touch on volume, right, in that comp, right, the unit throughput, the multi price point penetration? And then when you think about consumable, right, so at Dollar Tree, the consumable share gains, right, kind of flattened out a little bit. Do you think that's more it's more you?

Speaker 5

Do you think it's the competition? And what's the plan for I know you want to get to 8 of 10 doors multi price point. I think you're at 3 today. What's the plan now to get there? Go faster, go slower, what's the thought?

Speaker 2

Yes. So the first one, as we roll out the 1600, right now, you get that mix where early on it's consumable. And then we go into the full kind of set for this year that gets into the discretionary. And we'll get to like 15% penetration in the store in terms of the multi price penetration in the store. And then, John, on share gains, I mean, we're growing.

Speaker 2

Our unit market is growing. Our dollar market is growing. We are taking share in a belt tightening environment. But we continue to be incredibly relevant to the customer. And I would say we continue to be needed by the customer as they adapt to the macro conditions.

Speaker 2

And then in terms of where this could go, you have a steady rollout. We continue to learn from the rollout and a big part of why we're behind 200 stores on the rollout was we simply won't convert a store that's not ready to convert. It's something we learned from the early rollout. There was this tendency to kind of, hey, we can muscle through this. And when we saw, remember Rick talked about 50 apps would love, 25% are in line and 25% are behind.

Speaker 2

In order to try to influence that, we changed our process to say we're not going to muscle through, we're going to make sure a store is ready to convert and ready to realize the full potential of the multi price when we execute it. And we'll continue to learn from the rollout and make changes as we go.

Speaker 1

And then John, on the Family Dollar side, while the consumable comp did flatten out a little bit, I would say in contrast on the discretionary side, we also saw some flattening out of the decline in discretionary, continue to see the resets that we're doing in that the highest comps that we had for the last year. Okay. And then, I'll just add on the the highest comps that we had for the last year.

Operator

Thank you. Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Speaker 6

Thanks. Good morning. On the stores that have been converted, Jeff and Mike, can you unpack that 4.6% comp lift between traffic and ticket? And then can you also talk about the 4 wall profitability of those stores as you've progressed on the rollout? If you pull out the SG and A dollar growth for the entire Dollar Tree banner ex the general liability is up 10% year to date.

Speaker 6

Curious how the 4 wall profits are looking with the higher cost to roll that multi price point effort out? Thank you.

Speaker 1

Yes. So, great questions there, Chuck. As we if I unpack some of these, as it relates to the stores that have converted and you mentioned the 4.6 percent comp there, we haven't given the detail between traffic and ticket. We as we look at it overall, it's really being driven by traffic. Ticket here right now is flat at best with the Dollar Tree and it is in those particular stores also ticket.

Speaker 1

If you can imagine that when you have a multi price item in the basket, you also still have a number of $1.25 items and it's the increased traffic that's coming in that basket is staying relatively flat overall, but we're really being driven by traffic. As it relates to the SG and A, I think you very appropriately pointed out the headwinds in SG and A other than the general liability has been as a result of the what we call other payrolls at 3rd party labor that we're using to implement the stores. We're going to have that this year. We'll have it next year. We had called it out previously as a headwind of 0.20 plus dollars plus this year as a headwind to our overall EPS.

Speaker 1

The other area that's impacting our SG and A is absolutely on the depreciation side. And it's the cumulative investments that we've been making not only in new stores, but in other initiatives as it relates to supply chain and IT. Those investments are starting to level off as we've climbed that much further in the overall transformation. And as we move forward, we'll be giving you other estimates as we look forward to subsequent years, but we're not updating any forecast at this point in time.

Operator

Thank you. Our next question comes from the line of Paul Lejuez with Citi. Please proceed with your question.

Speaker 7

Thanks, guys. On the macro pressures when you cited Dollar Tree's middle higher income consumers, do you think that customers shopping less overall or you think they're going somewhere else? And wondering if you think you need to change anything on the pricing side or how fast you roll out multi price? And then second, I'm curious if you can talk about whether you're taking any actions behind the scenes to separate aspects of the Dollar Tree and Family Dollar business that might have some sort of P and L impact, but if you plan to do that over the course of the year as you think about the strategic review of Family Dollar? Thanks.

Speaker 2

Yes, Paul, I'll take the first one. I'll let Jeff tackle the separation of business. So this is macro belt tightening. I mean, we see it. We see we're growing traffic.

Speaker 2

We see the 2,800,000 new customers we've added. We hear the feedback on multi price and that they love that they can get more, we get more share of their wallet, they can not have to drive somewhere else to fill in the shop. But they're really changing as you look at some of the discretionary. In Q2, we saw some changes in terms of how they celebrate. And that is just belt tightening by our consumer and one that we feel they need us more now than ever.

Speaker 2

And so we'll be there to help them celebrate as they do need the discretionary and go back to a little more celebration and invite more people to a party and doing all the things that really the kind of the holidays demand. Jeff? Yes. Just to

Speaker 1

add to that, one of the things that we do, we try and double click on the number of different things we're seeing from our overall customer base based on customer insights. And we continue to see customers buy more. So they're expanding their consumption and we see individuals who are contracting their spend. Right now because of this macro belt tightening, you see more people contracting than actually expanding. But that is more of the issue as Micah said, it's around belt tightening.

Speaker 1

It's not from a competitive standpoint those individuals net shopping elsewhere. As it relates to Family Dollar and the strategic review, we continue to operate both businesses with the intent of continuing to maximize shareholder value in order to grow both. As we had mentioned earlier even last quarter, we had decided that we were going to shift some of the investments as it relates to new store openings and some of the renovations, tilting a little more towards Dollar Tree versus Family Dollar. But other than that, we continue to operate the 2 businesses with the expectation that once again we are bullish on both. The question probably didn't go this far, but I think it's probably easiest to address this at this point in time on the strategic review.

Speaker 1

We are looking at a wide range of operations including those that would include outside parties and those that would we should be able to execute by ourselves and we're very pleased at progress we're making on that strategic review at this point in time.

Operator

Thank you. Our next question comes from the line of Christina Khitai with Deutsche Bank. Please proceed with your question.

Speaker 8

Hi, good morning and thanks for taking the question. Jeff, I wanted to ask if this challenged consumer backdrop that we've been seeing is just changing the way that you view, if any incremental investments might be needed in the business, just thinking about the overall value engineering, labor, store standards? And as you see the belt tightening, as you noted, just how do you think about CoreDollar Tree's value proposition? And how do you see the evolution in the back half, just given peers' greater markdown activity? Thank you.

Speaker 1

Yes, Kristina. As we think about this, we want to manage the business for the long term. And these are different in this period of time where we're seeing some belt tightening doesn't mean that this is not this has some impact on the sector of this business longer term. The investments that we're making around store standards, the investments that we're making with respect to our rollout of the multi price, we believe is all core to providing a great experience for the customer, a convenient opportunity and delivering value. So we feel as if as we work through this, we have a we're mindful of what the current macroeconomic environment is, but we also understand that we need to remain true to our transformation and how this will deliver value over time.

Operator

Thank you. Our last question will come from the line of Scot Ciccarelli with Truist Securities. Please proceed with your question.

Speaker 4

Good morning, everyone. So you guys took some tougher medicine at Family Dollar over the last couple of quarters and seems like the profit performance at Family Dollar actually has started to improve a bit once you get through the adjustments. But Dollar Tree seems to keep suffering from additional issues and expenses quarter after quarter. Would it make sense to do a harder reset at Dollar Tree and Dollar Tree expectations, whether that's through store closures, fully or permanently resetting labor costs, etcetera? Because I think investors tend to despise the death of 1,000 cuts.

Speaker 4

Thanks.

Speaker 1

I think the best way we think about this is, this quarter, we saw a pullback in a higher income customer. We believe that we are positioned appropriately to meet that customer's needs over time as they're looking for value. We believe our multi price offering is what's going to give us that support. The investments that we're making, as it relates to once again store standards and other things that we're doing is part and parcel to making sure that we deliver the experience of the higher income customers looking for. We will continue to be diligent and disciplined as we think about those investments on a go forward basis, but we believe that is in line with what we need to deliver over the long term.

Speaker 2

Yes. And as I look at just the new stores we opened, the renovations we're doing and then when you talk about more than 3,000 stores that will touch this year, that is an investment in our store standards. That is making our stores better for our customers. And so we look and we like what that future looks like. We like the ability to kind of touch the chain every year and get back on a track of really showing our customer that we care by bringing in new things that excite them, new things that wow them and really true to who Dollar Tree is.

Speaker 2

So I mean, I look at it and say, our customer needs our business more than ever and we're continuing to evolve the business to meet them where they are. And then the

Speaker 1

last thing I'll add is if you think about the $0.99 store acquisition that we did with leases, yes, we've had some higher than expected upfront costs, but we are really excited about this 161 stores that we've been able to acquire. They're in the markets that we believe we need to be in at very attractive overall lease rates. We believe that we have the credibility and latitude to grow very aggressively in these particular areas. These stores are of the size and scale that other stores that we've had in this type of situation have been able to outperform against the broader portfolio. So while there is some short term pain here as we kind of work through this, we'll be very excited about what this is going to deliver for us once again over the long term.

Operator

Thank you. We have reached the end of our question and answer session. I would now like to hand the call back over to management for any closing comments.

Speaker 2

Thank you everyone for your time this morning and thank you for all our Dollar Tree and Family Dollar Associates out there serving our customers and we look forward to speaking to you again next quarter.

Operator

Thank you. That does conclude today's teleconference. We appreciate

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Earnings Conference Call
Dollar Tree Q2 2025
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