It’s the consumable side where that consumer is feeling that pressure. And I think you asked me a little bit about deflation. I would look at you and say deflation will put us in a position where I think the consumer would be able to afford more discretionary items. So we’ll take it as it comes and of course it should help us with our margin at the same time.
Jeff Davis: Just to add one final point. With respect to the work that Larry and his team is doing on private brands is something that’s really important for us. The ability to drive greater value for that customer, give her other options. This is something that we’re really just fully getting implemented here in the fourth quarter going into 2024. So we believe that as that customer is looking for greater value, they have more options within our private brands. It’s an opportunity for us to improve our margins. And to the extent that there is sort of price deflation, there’s an opportunity to actually provide even more value as we think about how we sort that particular product line.
Operator: Thank you. Next question today is coming from Chuck Grom from Gordon Haskett. Your line is now live.
Rick Dreiling: Good morning, Chuck.
Chuck Grom: Hey, morning, Rick. Morning, Jeff. On the Family Dollar store optimization, I’m just curious how wide a comp and profitability gap exists today across the fleet? And then I guess it’s question more for Jeff, on the gross margin line for the fourth quarter, how should we think about that between each banner FDO and the tree and into 2024? What are biggest puts and takes to think about? Thank you.
Rick Dreiling: Yeah. Chuck, the first question, I would rather not comment at this stage of the game as the process is underway and we have started it and I will disclose more of that as we get — when we get into the March call. But let’s say this, obviously it’s an opportunity for us that we intend to address head on.
Jeff Davis: And then, Chuck, as — I think your question is around Q4 and as we think about gross margins. Let me take it Dollar Tree first. We would expect our margins to continue to expand in gross margins in the fourth quarter, largely driven by additional freight. The mix shift, a stronger mix of discretionary as you would normally have more seasonally. The other impact there is that, as we had mentioned, we’ve taken approximately 90% of our inventories. We have the remaining 10%. While we don’t expect that remaining 10% to have any different outcomes than we had in the past, the impact on the quarter is much less because we’re only talking about a small portion of your inventories on a much larger portion of your overall performance.
So our expectation is for further gross margin expansion for Dollar Tree in the fourth quarter. We also believe that that opportunity is there for Family Dollar also for many of the same reasons as it relates to freight, less of an impact of shrink on the quarter, as well as some opportunities that we have within distribution. So we’d expect margin expansion — gross margin expansion in the fourth quarter also for Family Dollar.
Operator: Thank you. Next question is coming from Scot Ciccarelli from Truist Securities. Your line is now live.
Rick Dreiling: Hey, Scott.
Josh Young: Hey, good morning. This is actually Josh Young on for Scott. On the shrink issue, obviously [we’ve seen] (ph) a big margin headwind this year. As we think about 2024, where do you guys think you are in terms of dealing with it? You’ve talked about some of the mitigation efforts there, but curious if you think we’re still in the early innings, or do you think you’re starting to make some substantial progress on dealing with the problem?
Rick Dreiling: Yeah, I would say we’re in the early innings, but I do feel we’re making headway. The deal is that we take a physical inventory once a year. So if you make these improvements, these adjustments, you still have to wait in order to see them see the fruits of your labor. Now, I can tell you we’ve eliminated certain SKUs in certain stores, we’ve put items behind the check stand counter, we’ve moved certain items up front so they have a line of sight to the cashier and the important thing is we haven’t affected our sales. And I might also say we put in, and I forgot to mention this, an anti-sweep OTC panel that’s basically like sliding doors. And you move — it doesn’t lock the counter up, but you move that little door over, and you could only pull one item out at a time, which prevents a thief from coming in and cleaning out the whole shelf.
So we think we’re going to make progress, and I don’t think we’re going to have to cycle through everything. So it’s not like it’s going to be an overnight change, but I do believe we’re moving in the right direction without having to lock product up.
Operator: Thank you. Our final question today is coming from Peter Keith from Piper Sandler. Your line is now live.
Rick Dreiling: Good morning, Peter.
Peter Keith: Hey, good morning. Thanks for squeezing me in. I just want to circle back on the deflation theme because that seems to be something that’s percolating out for 2024. Rick, you mentioned your customers have a bit more money, but is it possible that deflation could be negative for the banners, thinking about maybe less fill-in trips and maybe more competition?
Rick Dreiling: So on the Dollar Tree side, all it will do is enhance the margin because you have basically a fixed price point. So we end up getting the goods cheaper. So I can say that it could be a benefit. It might have fixed the top line a little, but it should be a benefit. The Family Dollar side, I would look and say it might affect the top line. But again, I can make an argument it should enhance the gross margin line.
Jeff Davis: I think it also gives the opportunity for that customer to take those dollars. And our customer today is limiting their purchases maybe more in consumables, less in discretionary. The additional disposable income that they would have would allow them to pick up an additional discretionary item they didn’t have before.
Rick Dreiling: Yeah, and again, I’d add if we do have deflation, it allows us to invest more in value of the product and actually give the consumer something a little bit additional.
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 very much for taking the time and look forward to talking to you soon.
Operator: Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
