Mike Creedon
Chief Operating Officer at Dollar Tree
Thanks, Bob. Good morning, everyone. This is Mike Creedon. 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. He has 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 that individuals and families need in a convenient and comfortable shopping environment. We are also committed to serving the communities where we operate. And most importantly, we are aware of the awesome responsibility we have each and every day to serve our customers, associates and shareholders.
Clearly, we are not pleased with our second quarter results or having to revise our full-year outlook. But this updated outlook reflects how the challenging macroenvironment 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. 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. 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 second 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. We are strong believers in the inherent strength of Dollar Tree's differentiated business model and its long-term strategy of multiprice 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. The most significant component, $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, in 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 multiprice expansion continues to resonate with our customers and the 1,600 stores that have been converted into our newest in-line format are seeing an outsized sales lift. As we talked about last quarter, we are building new muscle memory with multiprice. 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, but we've learned that 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, comps for the 1,600 stores we've converted were up 4.6% in the second quarter versus less than 0.5% at our other formats. Our Q1 conversions, who had the benefit of the new multiprice 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. Considering the vast majority of our new discretionary multiprice 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 multiprice 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 multiprice across the Dollar Tree portfolio will be a major growth driver for many years to come. Today, less than 15% of our SKUs are multiprice. In addition to driving comp, the higher gross profit dollars per item generated by this assortment should provide a meaningful lift to store economics overtime. As excited as we are about these initial results, we believe we are 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 99 Cents Only locations as Dollar Trees. 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. I would like to thank everyone involved for all their hard work. These 99 Cents Only locations are proven high-quality stores in strong markets with great growth potential.
We are 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've 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. 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 and 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 Rotacarts. West Memphis is servicing over 600 Dollar Tree and Combo stores with Rotacarts and by next year, it will be able to handle an additional 150 stores. Elsewhere, our DC and Matthews, North Carolina is delivering to Family Dollar stores with Rotacarts and we're serving approximately 300 Dollar Tree stores with Rotacart out of our DC here in Chesapeake, Virginia. By the end-of-the year, four DC should be providing Rotacart 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 Aflatooni and his team are making great progress across our modernization initiatives. Our new warehouse management system went live at its first two DCs with two more slated for early next year. 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 WiFi access for associates. Additionally, we've created an entirely new infrastructure to support the multiprice 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 17% 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. Among categories, we're seeing strong growth in food and we see great potential in HBA, 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 second 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 multiprice products into the assortment.
Now let's move to the financial highlights from the quarter. On a consolidated basis, net sales increased 0.7% to $7.4 billion. Enterprise comp increased 0.7% on a 1.1% traffic increase, partially offset by a 0.5% 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 SIC -- sales mix has shifted towards consumables in recent years.
For example, Dollar Tree's consumable mix increased 210 basis points in the second 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 multiprice 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, 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 second quarter. Dollar Tree attracted 2.8 million 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%. Comps were positive in the middle month of the quarter and negative in the first 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.
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 Dollars unit and market share were essentially flat in the corner -- in the quarter, Family Dollar attracted 1.8 million net new shoppers over the past 12 months.
Let's also update you on SNAP benefits. As you may know, over 40% of Family Dollar customers are eligible for 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 second quarter, 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. 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.
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 salary workers under the Fair Labored 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 of next year. However, there is significant uncertainty over when and if this change will be implemented. 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 multiprice 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 reach 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.
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 99 Cents 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&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.
With that, I'll turn the call over to Jeff.
