Dollar Tree, Inc. (NASDAQ:DLTR) Q1 2024 Earnings Call Transcript

Dollar Tree, Inc. (NASDAQ:DLTR) Q1 2024 Earnings Call Transcript June 5, 2024

Dollar Tree, Inc. reports earnings inline with expectations. Reported EPS is $1.43 EPS, expectations were $1.43.

Operator: Hello, and welcome to the Dollar Tree Q1 2024 Earnings Call. [Operator Instructions] A question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Bob LaFleur, Senior Vice President, Investor Relations. Please go ahead, sir.

Bob LaFleur: Good morning, and thank you for joining us today to discuss Dollar Tree’s First Quarter Fiscal 2024 Results. With me today are Dollar Tree’s Chairman and CEO, Rick Dreiling; and CFO, Jeff Davis. Before we begin, I would like to remind everyone that some of the remarks that we will make today about the company’s expectations, plans and future prospects are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward-looking statements. For information on the risks and uncertainties that could affect our actual results, please see the risk factors, business and management discussion and analysis of financial condition and results of operations sections in our Annual Report on Form 10-K filed on March 20, 2024, our most recent press release and Form 8-K, 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. 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 first quarter 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.

Following our prepared remarks, Rick and Jeff will take your questions. Given the number of callers who would like to participate in today’s session, we ask that you limit yourself to one question. I’d now like to turn the call over to Rick.

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Rick Dreiling: Thanks, Bob. Good morning, and thank you for joining us on our call today. I’d like to begin my remarks today by extending my heartfelt gratitude to members of our Dollar Tree community, following the devastating tornado in Marietta, Oklahoma. While the tornado destroyed our Dollar Tree distribution center there, I’m especially thankful that no one was injured in our facility. I am also extremely proud of the resilience displayed by our team members in the aftermath of this tragic event. Fortunately, our distribution network is flexible, and while we expect to absorb incremental operating cost, we believe we will keep store-level disruption to a minimum. The leadership team at Dollar Tree is also highly sensitive to the wider impact of this disaster on our associates, their families, and the broader Marietta community.

With this in mind, we set up a temporary site at a local hotel to help support our associates in their time of need. We brought in food and other essential supplies, such as batteries, chargers, diapers and toiletries. Our associates have access to over $200,000 in immediate response grants and mental health services. For everyone impacted by the recent situation in Marietta, I want to thank you for everything you’ve done during this difficult time. It’s during these periods of adversity that the strength and character of our organization shines through. Whether it’s dealing with natural disasters or important strategic decisions, our associates and the communities they serve are always top of mind. As I’m sure you saw in our announcement earlier today, we are initiating a formal review of strategic alternatives for the Family Dollar business.

The decision to explore strategic alternatives includes evaluating how each separate banner might appeal differently to different sets of owners. It also includes evaluating whether accelerating Dollar Tree’s growth and completing Family Dollar’s transformation might be best accomplished by separate, dedicated leadership teams. Separating the two businesses could enhance the performance of each one individually and allow them both to reach their true valuation potential. Let me provide some additional background and context. We have been on a multi-year journey to transform this organization and fully unlock its intrinsic value. An important step in this process was our portfolio review and the decision to close 970 underperforming Family Dollar stores.

Many of these stores had been underinvested in for years and the capital investment required to fix them could not deliver an acceptable rate of return. Moving forward with a streamlined portfolio should help accelerate Family Dollar’s transformation and improve the long-term returns of the business. While we are working to transform Family Dollar, we continue to aggressively grow the Dollar Tree banner by expanding our multi-price offering, accelerating our rate of new store openings, and pursuing accretive transactions like our recent acquisition of up to 170 stores out of the 99 Cents Only bankruptcy. These stores are highly complementary to the Dollar Tree banner and are expected to produce sales, profits, and returns that are well above our portfolio average.

We are pleased to bring these locations under the Dollar Tree banner and look forward to their openings later this year. Today, each banner is at a different stage of its respective journey and each has its own set of unique needs. This is why we believe now is the right time to conduct a thorough review of strategic alternatives for Family Dollar, so we can determine what is the proper operational and ownership structure to best support and enable its transformation. At the same time, that should allow us to fully unlock the value of the Dollar Tree banner. In the end, we want to ensure that both the Dollar Tree and Family Dollar banners have the right strategic, operational, and capital structures necessary to meet the evolving needs of their customers and to maximize value creation in each business.

As I said in my opening, our associates in the communities they serve are always top of mind for us. For 65 years, Family Dollar has played an incredibly important role in neighborhoods across America by helping families do more with less. This would not be possible without the dedication of our incredible Family Dollar associates. One of the priorities of this strategic review is to make sure that Family Dollar is properly positioned for long-term prosperity. All that said, we are still in the very early stages of this review. We have not made any prejudgments regarding the eventual outcome of this process, especially given the wide range of potential outcomes. As I’m sure you can appreciate, there is a lot of work to be done and we do not intend to provide any further updates unless and until the Board has approved a specific course of action or determined that further disclosures are appropriate or necessary.

I thank you in advance for your understanding on this matter. With that, let’s move on to our first quarter results. First quarter adjusted diluted EPS of $1.43 was at the higher end of our outlook range. These results reflect favorable freight costs and careful expense management during the quarter. You’ve heard me say many times that the three key fundamentals in retail, our growth in transactions, sales per square foot, and units. And I’m pleased to report, all three of these metrics continue to move in the right direction. Let me now cover some key financial highlights from the quarter. On a consolidated basis, net sales increased 4.2% to $7.6 billion. Enterprise comp was 1% as a 2.1% increase in traffic was partially offset by a 1.1% decline in average ticket.

In both segments, comp growth was driven by traffic gains that were partially offset by lower average tickets. The average ticket declines reflected weaker discretionary demand, particularly in the Dollar Tree segment. Looking at performance by banner, Dollar Tree comps increased 1.7% on a 2.8% increase in customer traffic, partially offset by a 1.1% decrease in average ticket. Dollar Tree’s consumable comp was 7.4% and its discretionary comp declined 3.2%. While a 7.4% consumables comp is respectable in its own right, it is worth noting that this came on top of a 6.9% consumables comp last year. On the other hand, this was the first discretionary comp decline we’ve seen at Dollar Tree since the first quarter of 2020 at the outset of the pandemic.

Dollar Tree’s quarter one comp came in below expectations, because Easter was especially challenging for us this year. Easter is historically a major driver of discretionary demand. In fact, to put things in perspective, Easter discretionary sales represent about 1% of our annual sales. For the largest retailers, that figure is closer to 0.1%. Looked at another way, Easter is 10 times more important to Dollar Tree than it is for other retailers. This year, an early Easter, combined with the extra week in our fourth quarter last year, left us with a much shorter selling season. Also, unusually cold and wet weather throughout much of the country negatively impacted the way many families celebrate this traditionally spring-oriented outdoor-centric holiday.

In fact, recent consumer research showed that Easter gatherings were down 20% this year and that 6 million fewer American households purchased Easter products in 2024. This dampened consumer demand across our seasonal discretionary assortment, which caters heavily to these types of celebrations. We also saw related softness in non-Easter discretionary categories, like garden supplies, outdoor, toys, and other seasonal items. While the calendar shift was contemplated in our first quarter comp guidance, the unusual weather was not. Overall, the soft Easter highly influenced the monthly cadence of our quarter one comp. It’s also important to note that this softness was Dollar Tree-specific and concentrated in the eight days to 10 days prior to Easter.

Comps before and after that were essentially in line with our quarterly expectations. All in, we believe Easter was a 150 basis point drag on Dollar Tree’s first quarter comp. Despite this, Dollar Tree took meaningful consumable market share in the quarter with our dollar growth exceeding the market by 660 basis points and our unit growth exceeding the market by 520 basis points. Last quarter, I announced the next phase of our multi-price strategy called More Choices. As part of this program, we are expanding our multi-price assortment by over 300 items at price points above $1.25 in approximately 3,000 Dollar Tree stores by year-end. Importantly, these multi-price items are being fully integrated into aisles throughout the store rather than concentrated in a single center store aisle.

Before I expand on this program, let me take a moment to reiterate what multi-price is and what it is not. Multi-price has never been about raising prices on existing items. It’s about adding new items at new price points that are incremental to our core assortment. Multi-price offers our customers the high quality products that they’ve come to expect at price points that represent a compelling value proposition in the categories that are most relevant to them. Multi-price is designed to complement our core $1.25 strategy, not replace it. Even as we expand our multi-price assortment, we expect that at least 80% of the items in any Dollar Tree store will remain at that entry-level price point. Now, back to the rollout. By the end of the quarter, we had converted roughly 10% of Dollar Tree stores to the new in-line multi-price configuration.

To-date, we are pleased with the performance of this latest group of stores, which are out-comping our $1.25 only in Dollar Tree Plus stores. As we roll out our latest concept to 2,000 more stores over the balance of this year, we are proactively taking steps to minimize any operational disruption by using teams of dedicated third-party specialists to complete the conversions. I’m excited about our multi-price journey. Post conversion comps are running at or above expectations at the vast majority of stores that we’ve transitioned. That said, there is a bit of a learning curve with multi-price as we evolve from our fixed price legacy. This is a new discipline for us and it will take us a little bit of time to fully build out our core competencies.

But we’re off to a good start, and so far, I’m pleased with the customer response to our new offerings. Shifting over to Family Dollar. Topline performance in quarter one was in line with our expectations. Comps were up 0.1% as we cycled a 6.6% comp in quarter one of last year. Customer traffic increased 0.9%, which was partially offset by a 0.8% decrease in average ticket. Both traffic and ticket trends improved on a sequential basis as the multiple merchandising initiatives and growth strategies we’ve launched over the past several quarters continue to progress. Family Dollar’s consumable comp was up 1.4% and its discretionary comp was down 4.7%. While Family Dollar’s discretionary comp is still negative, it is worth pointing out that the underlying trend has gradually improved.

The pace of mix shift towards consumables at Family Dollar has definitely slowed and since quarter one of last year, our two-year stack discretionary comp has improved by 1,000 basis points. While our lower income consumers continue to deal with inflation, higher interest rates, and reduced government benefits, we are encouraged that the worst of the SNAP headwinds appear to be behind us. While lower SNAP benefits were a meaningful 280 basis point drag on Family Dollar’s first quarter comp, this was a 200 basis point sequential improvement over the quarter four SNAP headwinds. Similar to Dollar Tree, Family Dollar also continues to gain consumables market share, with our dollar growth exceeding the market by 180 basis points and our unit growth exceeding the market by 80 basis points.

Lastly, on Family Dollar, let me take a moment and update you on the portfolio optimization. We closed 506 underperforming Family Dollar stores in the first quarter. The remaining 90 or so stores we identified in the initial round of closures were closed in May. None of the stores that closed in quarter one are included in our comp results, although any revenues and expenses from the time they were open are included in our quarter one P&L. Before I turn things over to Jeff, I want to again emphasize that our operating performance in both segments remains strong. At Dollar Tree, we continue to acquire new customers and gain market share as our next generation of multi-price resonates with a broader base of consumers. And at Family Dollar, we believe the decisive actions we took to solidify the portfolio will have a positive impact on operations and returns.

As a more streamlined organization, I am confident that Family Dollar’s best days are ahead of it based on the wide range of growth initiatives that are in place. With that, I’ll turn the call over to Jeff.

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Jeff Davis: Thank you, Rick, and good morning. I will start by discussing our first quarter results, after which I’ll provide comments on our Q2 and fiscal 2024 outlook. Where applicable, I will focus on our adjusted results. A reconciliation of non-GAAP adjusted results is provided in our earnings release. Let’s begin by looking at the business on a consolidated basis. Net sales increased by 4.2% to $7.6 billion. Adjusted operating income was $436 million, a 3% decrease from last year. Adjusted operating margin decreased by 45 basis points, reflecting a 30 basis point increase in gross margin, offset by a 75 basis point increase in adjusted SG&A rate. Gross margin improvement came from lower freight costs, partially offset by unfavorable sales mix and elevated shrink.

Adjusted SG&A increased primarily from temporary labor for Dollar Tree’s multi-price rollout, higher depreciation and amortization and sales deleverage. Adjusted Q1 SG&A this year excludes $17.5 million of severance and other store closure costs and a $2.5 million reversal of a legal accrual. Q1 last year excluded a $30 million legal accrual. Our adjusted effective tax rate was 24.2%, compared to 23.3%. Adjusted net income was $312 million and adjusted diluted EPS was $1.43. Moving to our business segment results, Dollar Tree’s net sales increased 5.9% to $4.2 billion. Operating income decreased 3% to $522 million. Operating margin decreased 110 basis points, driven by a 10 basis point increase in gross margin, offset by a 120 basis point increase in SG&A rate.

Gross margin improved primarily from lower freight costs. This was partially offset by unfavorable sales mix and elevated shrink. SG&A expenses increased primarily due to temporary labor for the multi-price conversions, higher depreciation and amortization, and sales deleverage. Family Dollar’s net sales increased by 2% to $3.5 billion. Adjusted operating income was $51 million, a 32% increase from last year, and adjusted operating margin increased 30 basis points. The increase was all attributable to gross margin as the adjusted SG&A rate was flat at 23.7%. Gross margin increased primarily from lower freight, partially offset by product cost increases and an unfavorable sales mix. Moving on to the balance sheet and free cash flow. Inventory decreased by 2% or $103 million.

On a related note, in the quarter, we recorded a $70 million loss related to the book value of inventory destroyed at our Marietta distribution center and a $47 million loss related to property and equipment destruction. Given our expansive scale and breadth of operations, our insurance policies include significant property and inventory coverage above cost. Based on the catastrophic nature of this event, we expect these losses to be fully offset by insurance recoveries. As our recorded losses were fully offset by the insurance receivable, there was no net impact to the first quarter P&L. With cash and cash equivalents of $618 million and long-term debt of $3.4 billion, our balance sheet remains strong. Our bank-defined leverage at quarter-end stood at approximately 2.3 times, which continues to underpin our investment-grade creditworthiness.

Regarding cash flow, we generated $696 million from operating activities, compared to $752 million last year. Capital expenditures were $472 million in the quarter versus $350 million last year, reflecting accelerated new store openings and ongoing investments in growth and other initiatives. Notwithstanding the higher CapEx spending, we generated $224 million in free cash flow in the quarter, compared to $402 million last year. Consistent with our disciplined approach to capital allocation, after investing in the growth of our business, we returned $310 million to our shareholders by repurchasing 2.5 million shares at an average price of $122 per share. At quarter-end, we had approximately $1 billion remaining under our existing share repurchase authorization.

Now, let me provide some perspective on our second quarter and full year expectations. Our current outlook reflects the following. We expect to incur additional operating expenses related to the loss of our Marietta DC. The EPS impact of incremental transportation and other costs is estimated to be approximately $0.10 in Q2 and approximately $0.20 to $0.30 on a full-year basis. As more information on the costs associated with this disruption becomes available, we may revisit this outlook in subsequent quarters. The expected impact of freight, shrink, mix, and SNAP on our full-year adjusted EPS outlook remains consistent with the expectations we outlined last quarter. Additionally, given the relatively low level of our freight volume that is subject to spot rates, we believe our exposure to recently observed volatility in the global shipping markets is limited and may be partially offset by favorable domestic carrier cost.

With that as a background, for the second quarter, we expect net sales will be in the range of $7.3 billion to $7.6 billion based on a comparable net sales growth in the low-single-digits for the enterprise, 2% to 4% for Dollar Tree segment, and approximately flat for the Family Dollar segment. Adjusting for the stores that were closed as part of the portfolio optimization, we expect second 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 to $1.10, which reflects the incremental operating expense associated with the loss of the Marietta DC. For the full year, we still expect net sales to be in the range of $31 billion to $32 billion, although at this point in time, we think we are more likely to be in the lower half of that range.

We still expect comparable net sales growth in the low-to-mid single digits for the enterprise, the mid-single digits for Dollar Tree segment, and the low-single digits for the Family Dollar segment. Adjusting for stores closed as part of the portfolio optimization, we expect full year net sales for Family Dollar to decline by 1% to 3% on a year-over-year basis. Adjusted EPS for the full year is now expected to be in the range of $6.50 to $7, again, reflecting the incremental operating expenses associated with the loss of Marietta. Our outlook for Q2 and the fiscal year does not include any severance or additional incremental costs related to the portfolio review or related workforce reductions. It also excludes any future share repurchases.

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 guidance. With that, I’ll turn the call back over to Rick.

Rick Dreiling: Thanks, Jeff. We are pleased that we delivered first quarter adjusted EPS results towards the high end of our outlook range. At Dollar Tree, we overcame some Easter softness and remain focused on rapidly rolling out our next generation of multi-price stores. At Family Dollar, we are taking the difficult but necessary steps to position the business for long-term prosperity. Change is never easy, and I couldn’t be prouder of our 200,000 associates across Dollar Tree and Family Dollar for their ongoing commitment to their communities and the customers that they serve. I am truly honored to lead and be part of one of the best teams in retail. Operator, with that, Jeff and I are ready to take your questions.

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Q&A Session

Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from the line of Edward Kelly from Wells Fargo. Your line is now live.

Edward Kelly: Hi, good morning, everyone.

Rick Dreiling: Good morning.

Edward Kelly: So I wanted to start with Dollar Tree. You’ve maintained the mid-single digit comp guidance for the year. Q1 was obviously a little bit softer. Can you just help us, what underpins the confidence around that? And then, Rick, as it relates to this concept, obviously, there’s a lot going on with multiple price point, you’re accelerating growth. Can you give us a little bit more perspective on how you see the future of this business, what you think the earnings growth profile is here over a multi-year, basis and the real opportunity? Thank you.

Rick Dreiling: Yes, sir. I’ll take the first part and you can add the second part. The confidence I have in Dollar Tree as we move through the year is the impact of multi-price point. We continue to see trade-down customers into that brand. I love the traffic and the multi-price stores, Ed, are out-comping the stores that have no multi-price in them and they’re out-comping the stores that have the valley of multi-price. We continue to be pleased with where we’re going with consumables and we also see nothing but upside in regards to the basket as we introduce these new items. So I’m very, very bullish on the Dollar Tree side. And by the way, just for a reference point, the basket, when there’s a multi-price item in it, is 2 times larger than our normal basket. And they — also, multi-price is driving more trips into the stores. And you’ve heard me repeatedly talk about transactions are one of the key drivers of the future.

Jeff Davis: And just let me add a couple more points on the multi-price before going into longer-term profitability. On multi-price, we mentioned that we had roughly 10% of the stores that have been converted to the in-line conversion. That happened over the course of the first quarter. Those stores are still ramping up. We will still continue to roll that out for another 2,000 stores in the rest of the year. That ramp-up will give us some additional sort of tailwind, if you will. On top of that, our comps — I don’t know if you’ve noticed and you probably have by looking at some of the things that we’ve published before, but our comps actually get to be a little softer in comparison in the back half of the year versus the first half of the year, with the second quarter being our most stringent sort of compare.

The second part of your question, I believe, was with respect to how we’re thinking about the long-term profitability of the enterprise and the brand. And we continue to be very encouraged by what — excuse me, what we’re seeing across both the banners. The multi-price offering is allowing us to drive sales, allowing us to drive greater profitability. We continue to deliver from a standpoint of our freight cost. We believe that there is opportunity across the Family Dollar brand to continue to drive greater gross margins as we continue to drive continued improvement in private label, as well as the OTC and HBA. The combination of these things will allow us to drive greater gross profit dollars in the organization as we continue to drive greater discipline in our expenses along the way.

So the outlook that we have for the year, we feel very confident in. There’s the opportunity to manage through some of this. So, at this point, we really don’t have any additional outlook considerations to provide other than the fact we continue to remain on the numbers that we’ve given you so far.

Operator: Thank you. Our next question is coming from Michael Lasser from UBS. Your line is now live.

Michael Lasser: Good morning. Thank you so much for taking my question. My question is a two-parter on the strategic process. If you are not able to sell Family Dollar, what is the plan B? And as a way to help us frame what the ongoing earnings power of the business could look like, can you give us a sense of how much the corporate overhead is allocated to Family Dollar and what the dis-synergies might be if you were to divest the Family Dollar business? Thank you so much.

Rick Dreiling: Hey, Michael. Thank you for the question. It’s too soon in the process for me to say what’s going to happen or exactly what all the alternatives are. So, I’d like to stay away from that and come back to my original comment that I promise to keep you all updated. In terms of how the corporate overhead is, basically, I think in terms of 50-50. I would also look at you and say that the business, the supply chain, merchandising, and retail are all pretty much separate. There is some legal, HR, the basic functions are a little intertwined, but the most important pieces are not. Jeff, I don’t know if you have anything you want to add to that.

Jeff Davis: I think that covers it.

Operator: Thank you. Our next question today is coming from Matthew Boss from JPMorgan. Your line is now live.

Matthew Boss: Great.

Rick Dreiling: Good morning, Matt.

Matthew Boss: Good morning, Rick. So, a couple of questions, one near term, one multi-year. So at the Dollar Tree banner, near term, just thinking about the 2% to 4% comp guidance for the second quarter, what trends have you seen post Easter? Maybe if you can comment on quarter-to-date just to provide some confidence around the 2% to 4% relative to the first quarter? And then multi-year, Rick, could you just elaborate on the acceleration strategy at Dollar Tree? Maybe speak to the acquisition. Is there any ceiling to consider in terms of annual unit growth and just how you’re thinking about long-term saturation for that concept?

Rick Dreiling: Yes, a couple of great questions there.

Jeff Davis: So, let me take the first part…

Rick Dreiling: Yes, I’ll let you handle the first one. I’ll take the second one.

Jeff Davis: So, Matt, the guidance we gave of 2% to 4% comp for the Dollar Tree banner, coming out of Q1, we’re in line with that guidance. That’s the reason why we’ve provided it. As we came out of that Easter period and we had mentioned in our prepared remarks that in the absence of eight-day to 10-day period, we actually pretty much through the course of the quarter had a comp that was pretty reflective of a mid-single digit comp — I’m sorry, a low-to-mid single digit comp. So I think we’re still in line with that as we move into Q2.

Rick Dreiling: And in regards to the long-term future of the company, you look at 99 Cents, the acquisition there totally reflects, Matt, our commitment to the Dollar Tree franchise and the fact that we think that there are opportunities there to grow the business even more. The acquisition in California, to be very frank, is going to generate returns above our average in the overall chain. And we are very excited about these stores in terms of the real estate that we were able to acquire and the term we have on them. And as we’ve said on many occasions, a well-run Dollar Tree is an exceptionally powerful retail format. And we are committed and I actually think, I’m going to say this, multi-price is attracting a higher income consumer into that box. And I think we have a lot of really good things moving together right now.

Operator: Thank you. Next question is coming from John Heinbockel from Guggenheim Securities. Your line is now live.

Rick Dreiling: Good morning, John.

Anders Myhre: Good morning. This is actually Anders Myhre on for John. Thank you for taking our question. So I just wanted to touch on the cooler resets. So, overall, how have they been progressing? What has been the overall impact to comps? And upon completion, how do you size the sales opportunity with this product? Thank you.

Rick Dreiling: Yes. I mean, the cooler work we’re doing is basically on both franchises. Incredibly pleased with what’s going on in the Family Dollar banner. We’re pulling the number of cooler doors up to approximately 30 and it is driving incremental sales into the store overall. And the consumer is moving more to refrigerated and frozen product. Now, on the Dollar Tree side, we now have 5,700 stores that have multi-priced frozen food in them. We’ve expanded the assortment in 1,900 stores. And to be very frank, one of the big surprises for us is frozen and refrigerated in the Dollar Tree banner. The multi-price unlocked that category. And you have to think about it. You go into a Dollar Tree, you can buy a pizza for $4 or $5 that feeds a family of four. And that is a very powerful statement. So, very pleased, continuing to push it. It’s where the consumer is going, and both banners are chasing it.

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

Rick Dreiling: Good morning.

Simeon Gutman: Hey, good morning, everyone. Good morning, Rick. I want to be — I want to ask about Family Dollar, but be respectful if you can’t answer. I’ll put a second question about Dollar Tree in as well. I wanted to ask if the EBIT that we see in the P&L, I think it’s going to get a little bit better. You’re going to run rate a little bit better from what the leftover stores look like. Can you tell us if there’s a big distribution, call it, among the 7,000 remaining Family Dollar stores, a wide range of profit outcomes or if they’re relatively concentrated? And then are you able to share what the average life of the leases are in that portfolio? And then have you talked about or can you share what the lease break cost could be — could look like? Let’s see if I can take a few pieces of — and there’s…

Rick Dreiling: And I’ll take a couple, yes.

Jeff Davis: Some of this, of course, we aren’t in a position to share. But I can tell you that as you look at the remaining portfolio of stores, you still have a sort of a distribution of profitability across those stores at a much higher level than what you would have had when we — before we closed the non-performing stores. You — we had already indicated also that for the year, you should expect about $0.15 of additional profitability or increased profitability coming from those closed stores and $0.30 of EPS on an annualized basis. Our leases that we enter into are normally somewhere between five years to 10 years on average. At any one point in time, approximately 10% to 12% of those leases are being renewed on an annual basis. And that’s about what I can really share with you at this point with respect to the lease obligations.

Rick Dreiling: And the one thing I would say, as you reflect on this announcement, is the fact that we have not lost faith in Family Dollar and the progress its making. The team has done a great job of implementing many initiatives that are designed to drive the long-term growth. What we’re wrestling with and trying to figure out is we have two different brands at two different stages of where they’re at in their development. And while we want to accelerate Dollar Tree, we want to position Family Dollars transformation where it has the chance to grow. And by looking at them differently, that might provide more acceleration for both brands long term.

Operator: Thank you. Next question today is coming from Rupesh Parikh from Oppenheimer. Your line is now live.

Rick Dreiling: Good morning.

Rupesh Parikh: Good morning, and thanks for taking my question. So just going back to the — your commentary on multi-price point expansion, we’ve been to some of your newer locations with the new product. Just any surprises in consumer behavior that you’re seeing in-store? What type of consumer feedback are you guys seeing with those — with that expansion? And then just wanted to get a sense how the consumables versus discretionary mix is playing out versus expectations within those locations?

Rick Dreiling: Yes, a couple of great questions. Our biggest problem with multi-price right now is we can’t keep it on the shelf. The consumer is responding to it. The consumer likes it. And I think it’s going to be — I don’t think, I believe — truly believe it is going to be a very powerful piece in our ongoing future. You will see, as we move through the calendar year, as you guys know, we have to buy multi-price products, seasonal product more than a year in advance. As we get into the holidays, you’re going to see more multi-price show up on the discretionary side. I’m pretty positive for the first time, we’ll have an inexpensive Christmas tree in our stores that — they will probably have Christmas lights that will go with all the Christmas decorations we sell.

In regards to consumables, multi-price points, again, are driving what’s going on with our consumables share. And what — we are committed that we are not raising the price or introducing like items, we are bringing in different SKUs, which broadens the appeal of the assortment to the consumer.

Jeff Davis: I had just one other point. With multi-price, as we’re looking at those stores that have had this in-line conversion, the mix of discretionary and consumables is more in line with what we would have seen historically with a heavier balance on discretionary than consumables. So we like that balance in that the multi-price is not only driving consumables, but it’s also lifting the discretionary basket also.

Operator: Thank you. Our next question today is coming from Paul Lejuez from Citigroup. Your line is now live.

Rick Dreiling: Good morning.

Paul Lejuez: Hey, thanks. Good morning. Thanks. Just a follow-up on that last comment. What is the change that you see in terms of traffic versus ticket in the multi-price converted stores? That’s just my first follow-up. And second, I’m curious what you’re seeing in the promotional landscape, what you see in 1Q versus your expectations, but also curious what you assume for the rest of the year and what you’ve seen — based on what you’ve seen year-to-date on the promotional landscape out there?

Rick Dreiling: So, with the first part of the question is, we see traffic increase in the multi-price stores to the tune of about approximately 3%. And we also see the ticket goes up about 55 bps. And again, it’s soon. And again, I want to come back to we’re building a new muscle. I would look at you and say, off the top of my head, and I’m guessing, the old retailer in me, 50% of the stores are probably outperforming our expectation, maybe 25% are right on it, and 25% have opportunities.

Jeff Davis: And we’re definitely seeing the customer right now buying a little bit more on promotion. And it’s not that there is more promotional activity, but what the customer is actually buying is items on promotion.

Rick Dreiling: And I think what’s on — important on the promotion thing is that Jeff is in my office every Monday asking me, what’s going on in the promotional landscape? We have seen nothing irrational at this time. And I think that’s really important. And what we are seeing is maybe incremental movements on CSD, soda pop, and two-liter pop. And that is a very easy traffic driver. But I always remind everybody I talk to, we have to not confuse marking down stale inventory with promotional activity. And I think that’s really, really important. So, stable environment, I would say it’s not irrational and maybe CSD.

Operator: Thank you. Next question today is coming from Chuck Grom from Gordon Haskett. Your line is now live.

Jeff Davis: Good morning, Chuck.

Chuck Grom: Good morning. Hey, good morning, guys. Thanks very much. So, Rick, on the new multi-price rollout, can you talk about the transition once the third-party specialists have actually done the reset? In other words, what’s the risk — and you talked about the new discipline that store managers and employees are going to need to acquire post those specialists doing the initial reset. And then for Jeff, how much of the SG&A deleverage in the first quarter was from the resets? And I think you guys have outlined $23 million of expenses this year. Can you just talk about the phasing of that? Thank you.

Rick Dreiling: Yes. Chuck, again, a couple of great questions. First one, I’ll take. We have grown up in an environment in this company where everything is the same price point. So it doesn’t matter where it goes and it doesn’t matter what the customer does with the product if they decide they don’t want it. Now what we have to do is — and what we’re doing is we’re introducing the multi-price SKUs into the category that they belong in. We’re not just putting them in the center of the store. So, you have to create a section quite frankly that bears prices so the consumer knows how much they are and when the consumer changes their mind, that product has to get back into the right spot on the shelf. And that’s all about teaching our associates how to handle that product in regards to stocking it and then what to do with it when they condition the store.

Now, it’s a very conquerable discipline, but it’s not something that we’ve had over the years. We’re doing all kinds of things to manage that. We put a shelf label literally on the outside of the case that allows the associate to put the product on the shelf, put the shelf tag on the shelf. But believe it or not, we also have to teach the people in the warehouse, when they pull the item, they have to pull the right item, because they’re used to pulling one item that has the same price. And in regards to the store’s inventory, it stays true. But now, the difference is, if they’re pulling a multi-price point item, it has to get there as it was supposed to be selected.

Jeff Davis: And then, Chuck, with respect to the SG&A margin deleverage, if you will, there’s really three components. You called out, the temporary labor was absolutely the largest component. And the second component was higher depreciation and the third component was just sort of deleverage as a result of the lower comp. The one thing to recognize with the temp labor, in the first stores that we opened up, there’s a learning curve as to the — how to go about it, the number of crews that were actually allocated, how working with the store leadership teams. We continue to make progress on that in the subsequent stores that we’re rolling out. So, sort of the initial headwind that we had in the first quarter here, we would expect that to moderate over time. But as we had mentioned earlier, we definitely thought that the impact of using this third-party labor to do the in-line convergence was going to cost us approximately $0.23 of EPS for the year.

Operator: Thank you. Our next question today is coming from Seth Sigman from Barclays. Your line is now live.

Rick Dreiling: Good morning.

Seth Sigman: Thanks. Good morning. Hey, I want to talk about shrink. It hasn’t come up a ton. It was a headwind this quarter, but I think that was expected. Just curious how that played out. With some of the mitigation efforts, any signs of stabilization, given that you didn’t change the guidance for that? And then, I guess, a question on gross margin overall. The improvement was a little bit more limited this quarter. I’m just curious, was that mix or something else, if you could just help us with that? Thanks so much.

Rick Dreiling: Yes, I’ll take the shrink question, if that’s okay.

Jeff Davis: Sure.

Rick Dreiling: I think the efforts we’ve put in place, for the first time I can honestly say the shrink trends that we have, while they still are not good, they’re not getting away from us anymore. We’re definitely tracking in the right direction. But I want to reinforce, shrink is still a problem, but it’s not deteriorating like it was last year. We feel very good with the initiatives we put in place. I also think it’s fair to say that we were ahead on the shrink curve that we were calling it out and we were taking steps that people now are taking around us. Our self-checkout exposure is basically nothing. So we don’t have to revisit that. We have started eliminating high shrink SKUs. We started that about a year ago. And we’ve also placed things behind the checks — check stand counters where we can control them. So I’m pleased. We are not out of the woods, but at least I can tell you that it has stabilized.

Jeff Davis: Yes, I — just to put a — maybe a little bit of finer point on it, our expectation for the first half of the year was that we were going to have about $0.30 to $0.35 of headwind across shrink and mix. And that was predominantly going to be on mix. The — what we’re seeing is that our performance is in line with that. We’re actually seeing some slight improvement against it, but we’re still early in the year. So, as Rick has said, the investments that we were making — and we did a lot of that on the Family Dollar side, first as a proof-of-concept and now rolling some of those self-help opportunities across the Dollar Tree banner also. As it relates to gross margin, the gross margin pressure really from Dollar Tree was really more as a result of consumable mix, by not having that discretionary Easter complement in our overall performance for the quarter is what really put pressure on the gross margin.

On the Family Dollar side, very healthy improvement in gross margins overall of 40 basis points. So, notwithstanding the impact of Easter, we’re very happy with where we’re trending as it relates to our gross margins.

Operator: Thank you. Our next question today is coming from Krisztina Katai from Deutsche Bank. Your line is now live.

Rick Dreiling: Good morning.

Krisztina Katai: Hi, good morning. Good morning, Rick and Jeff. Thanks for taking the question. So I wanted to ask you about the supply chain. You’ve been making a lot of investments there and you have RotaCarts that are making store deliveries now as part of your fleet. So, can you talk about what are some of the early benefits that you’re seeing so far regarding in-stock availability, inventory turns? Is it helping reduce shrink in transportation damages? And just how best to think about the overall labor hour savings that you’re able to take from the supply chain investments and then reallocate it to store hours? Thank you.

Jeff Davis: Yes, there’s a lot there. Let me see if I can distill it down to just a couple of elements. The first DC that we rolled out was Matthews, North Carolina, was a Family Dollar DC. It’s one in which previously they were delivering to the store off of pallets. So now we’re doing it off of RotaCarts. What we’re actually seeing is improved delivery time, unload time, which is what we were anticipating. We’re also seeing a level of reduced damages, as you had mentioned, the way that this product is being handled. And we’re also seeing a higher level of associate sort of engagement and satisfaction, recognizing that it is helping to improve the way that they do their jobs. The next DC that we just really kicked off is here in Chesapeake.

It’s a Dollar Tree DC. We’re seeing a nice, once again, reduction in unload times. It’s allowing us now to get product to the shelf quicker and to basically fulfill some of the outs that we have on the shelf. But overall, the in-store in-stocks are improving, as well as the DC service levels to these stores.

Operator: Thank you. Our next question is coming from Michael Montani from Evercore ISI. Your line is now live.

Rick Dreiling: Good morning.

Michael Montani: Thanks for taking the question, and good morning. I just wanted to ask kind of two-part thing. One was, there is an improvement implied in the back half for EBIT margin of 100 bps plus versus potentially flattish in the front half. So just wanted to see the top couple of drivers of that, that gives you the conviction for that. And then as a follow-up, you all did the incremental acquisition for the 99 Cents stores, as you’ve mentioned. So, is it feasible to see kind of $10-plus of EPS power just from core Dollar Tree now as you think out?

Rick Dreiling: So, I’ll let you handle the first part of the question.

Jeff Davis: Sure.

Rick Dreiling: The second part of the question, it’s too soon to know that. I’d like to stay away from that for now, if that’s appropriate. Go ahead.

Jeff Davis: And Michael, as we think about sort of the phasing of our overall EPS for the year — I appreciate your question, it’s really kind of can get bucketed into a couple of areas. From a topline perspective, we talked about multi-price and the acceleration of that as we continue to roll out the in-line conversions. You also have — shrink in mix is, for us, we believe will be more neutralized in the back half of the year than in the front half. And we — once again, that $0.30 to $0.35 of EPS headwind was really on the first-half. We also believe that from a SNAP perspective, while SNAP is still within our expectations, in the back half, we think that we may have some tailwinds as a result of the October COLA adjustment that may be available — will be available, the question is how much.

And then the last component is, if you remember, last year in the back half of the year, we had a couple of footfalls, if you will. We had an OTC recall that was about $0.05 of EPS. We had an accrual adjustment that we needed to make on general liability, very specifically around some of the claims that we’re going back to pre-pandemic. That was around $0.17. And then last but not least, as we had mentioned, with the portfolio optimization, we are expecting a $0.15 EPS improvement. That is predominantly going to be in the back half of the year. So, on balance, as a result of topline acceleration of revenue growth and then some of the softer compares against some of these elements with respect to shrink and SNAP, and then the last components are those footfalls, which we believe were one-time in nature.

Operator: Thank you. Our final question today is coming from Priya Ohri-Gupta from Barclays. Your line is now live.

Priya Ohri-Gupta: Hi, good morning.

Rick Dreiling: Good morning.

Priya Ohri-Gupta: Thank you so much for taking the question. I know it’s a bit early in the process, but I was just hoping that perhaps you could talk to us a little bit about how you’re thinking about sort of your credit rating with regards to possible considerations for Family Dollar. Would the expectation be to try to maintain your existing rating as you consider these various alternatives, or would it be to at least maintain investment grade? Thank you.

Jeff Davis: Yes. So, our investment-grade rating is an important element of our overall sort of financial policy, if you will. We believe that — and it’s too early to get out ahead of ourselves as to what a structure may be or the ultimate outcome of the strategic review, but we believe that given the underlying business, the power of the cash flows generated by this business, the growth and, quite honestly, how we basically execute our capital allocation is all in line with keeping us in an investment-grade level.

Operator: Thank you. We’ve reached the end of our question-and-answer session. I’d like to turn the floor back over to management for any further closing comments.

Rick Dreiling: Hey, thank you all for taking your time to talk to us today, and I look forward to catching up down the road.

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