Dollar Tree, Inc. (NASDAQ:DLTR) Q1 2023 Earnings Call Transcript

Dollar Tree, Inc. (NASDAQ:DLTR) Q1 2023 Earnings Call Transcript May 25, 2023

Dollar Tree, Inc. beats earnings expectations. Reported EPS is $2.37, expectations were $1.52.

Operator: Good day and welcome to Dollar Tree’s Q1 2023 earnings call. Today’s call is being recorded. At this time, I’ll now turn the call over to Randy Guiler. Please go ahead, sir.

Randy Guiler: Good morning and welcome to our call to discuss Dollar Tree’s first quarter fiscal 2023. With me on today’s call are Chairman and CEO Rick Dreiling and CFO Jeff Davis. Before we begin, I would like to remind everyone that various remarks that we will make about expectations, plans and prospects for the company constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. The statements are subject to risks and uncertainties and our actual results may differ materially from those indicated by these forward-looking statements. For information on the risks and uncertainties that could affect our actual results, please refer to the Risk Factors, Business, and Management’s Discussion and Analysis of Financial Condition and Results of Operations sections in our annual reports on Form 10-K filed March 10, 2023, our Form 10-Q for the most recently ended fiscal quarter, our most recent press release and Form 8-K, and other filings we make from time to time with the Securities and Exchange Commission.

We caution against reliance on these forward-looking statements made today and we disclaim any obligation to update or revise these statements except as may be required by law. Also during this call, we will discuss non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financials are provided in today’s earnings release and SEC filings. These non-GAAP measures are not intended to be a substitute for GAAP results. Unless otherwise stated, we will refer to financials on a GAAP basis. Unless otherwise stated, all first quarter comparisons for fiscal 2023 are against the same period a year ago. Please note that a supplemental slide deck that outlines a number of the company’s key operating metrics is available on the IR portion of our website.

Following our prepared remarks, Rick and Jeff will take your questions. Given the large number of those that would like to participate, I ask that you please limit your questions to one. I will now turn the call over to Rick.

Rick Dreiling: Thank you Randy. Good morning everyone and thank you for joining our call. As many of you are aware, Dollar Tree will be hosting its investor conference in four weeks on June 21 in Norfolk, Virginia near our corporate headquarters. The conference will be webcast and I hope to see many of you at this important event. Our investor conference has been overdue and we understand the level of anticipation for many investors. I hope next month’s gathering will provide each of you a better understanding of the transformation taking shape and the speed with which we are making these changes to increase both our productivity and profitability at Dollar Tree and Family Dollar. We have been hard at work building the team we need to drive the transformation of this business.

The more we dig in, the more starkly clear the opportunity becomes, and we are on our way to most fully realize upon it. Our stores are of comparable size to those of our closest peers but they generate far less revenue per store. We understand why, and we know how to close the gap. There are no structural impediments to our progressing towards this goal. As we do, we will drive growth and gain market share. With the operating leverage embedded in the retail model, accelerating growth in revenue per store will translate into higher margins, and higher margins will increase our return on capital and fueling accelerated store growth. We have gone down this road before and we know the way. We have a tremendous opportunity to improve both of our segments, and we are pursuing that with vigor.

While our enterprise-wide transformation is still in the early stages, we are already seeing results. Our early initiatives have begun to deliver growth and market share gains. We are driving this transformation in the most dynamic retail environment I have seen in my career. While this volatility is real and will generate bumps along the way, it will not affect where this great adventure ends. In addition to the historic levels of inflation and labor market challenges, retailers have seen in just the past quarter elevated levels of shrink and even further pressure on the consumer’s willingness to spend on discretionary goods. Shrink and the mix shift from discretionary goods have pressured margins throughout retail. We are no exception. Ultimately shrink will either be resolved through defensive merchandising, store closures, and/or through government action at the local level.

Regarding the near term unfavorable impact of consumables mix, we believe consumer shopping behavior will normalize over time and the margin profile will rebound. We are acutely attuned to each of these bumps. In the end, none will materially affect our delivering on the promise of this transformation unless we allow them to distract us from what we know we have to do, and we will not allow that to happen. We bench our top line sales performance primarily on three specific metrics: sales per square foot growth, growth in transaction count, and unit sales or volume growth. Based on these three metrics, I am pleased with our quarter one performance and the direction we are headed. Overall, the fundamentals of our business are strong. Most significantly, we continue to gain market share and our traffic and unit volume growth are driving strong top line momentum.

The market share gains are a clear validation of the actions that we have taken on pricing and wages and the ongoing improvements we have made in our merchandise assortment, service level and store standards. Now despite our commercial success and building momentum, we are experiencing near term margin pressures from the macro factors impacting sales mix and elevated shrink, but the most important message that I want to convey today is that we remain completely focused on delivering on our full potential and are executing on our transformation investments at full speed. I will now review the highlights for quarter one. Following my remarks, Jeff will provide a detailed overview of our financial performance and our updated 2023 outlook. For the quarter, we delivered $7.32 billion in sales, an increase of 6.1% with enterprise comp growth of 4.8% and operating income of $419.7 million, leading to EPS of $1.35 and adjusted EPS of $1.47 when adjusting for a $30 million accrual related to pending legal matters regarding our West Memphis distribution center.

Our merchandising and execution remain strong with comp increases of 3.4% at Dollar Tree and 6.6% at Family Dollar. The underlying sales strength was concentrated in consumables and driven by meaningful transaction growth across both segments. Results were even more impressive in the context of Dollar Tree’s 11.2% comp increase from a year ago. After fully cycling the $1.25 price point in February, customer traffic remained very favorable at Dollar Tree as comparable traffic count increased by 5.5%. Notably this was the fourth consecutive quarter of sequential improvement in comps at Family Dollar with comp traffic up 4.3%. For nearly all of 2022, comp traffic count trends in both segments were negative, so quarter one was an important inflection point for the company with traffic increasing both sequentially and year-over-year.

The turnaround at Family Dollar is gaining meaningful traction. In addition to the improving traffic, Family Dollar’s comp was driven by a 2.2% increase in average ticket. At Family Dollar, we increased our private brand penetration by approximately 80 basis points. Moving forward, we expect to continue growing private brands penetration as we further improve merchandise presentation, packaging, and quality control standards. For example, we recently opened a new test kitchen here in Chesapeake and are excited about our growing pipeline of private brand products across consumables, health and beauty, and other high growth categories. We are also encouraged by the margin opportunities associated with expanding our private brands business. Last year, we took pricing actions at Family Dollar to bring us more in line with our most direct competition.

These price investments strengthened our value offering at Family Dollar and followed our transition to the $1.25 price point at Dollar Tree. Along with investments in wages and store standards, the steps we have taken on pricing across both segments are critical to improving our long term financial and operating performance. As I mentioned earlier, the consumer continues to be under pressure. There are simply fewer dollars available to them, and those dollars are not going as far as they did a year or two ago. We are past the multiple rounds of government stimulus, SNAP dollars have been reduced, and tax refunds are running lower. These impacts combined with persistent inflation have more families prioritizing needs over wants. Both Dollar Tree and Family Dollar are part of the solution for shoppers buying for need and close to need as they look to stretch their paychecks.

Our stores are nearby, easy to shop, and provide tremendous value. While these factors are contributing to the mix shift and pressuring our gross margins, they are also driving more shoppers into our stores with increased frequency. We will continue to respond to the needs of the consumer across both consumables and discretionary categories by offering tremendous value and a great selection. While this mix shift towards consumables is clearly a margin headwind, it is worth noting that the promotional environment remains rational and is not driving any additional margin pressure. At Dollar Tree, we made great strides with our multi-price strategy and we remain on track to add $3 and $5-plus items to another 1,800 stores this year. In quarter one, we added Dollar Tree Plus assortments to more than 400 stores and anticipate accelerating the pace of this roll-out over the balance of the year.

Additionally, we have aggressively expanded our product assortment at Dollar Tree stores with $3, $4 and $5 frozen and refrigerated products, adding 3,500 stores last year alone on this initiative. During the first quarter, we added multi-price frozen and refrigerated doors at more than 400 Dollar Tree stores. Both our Dollar Tree Plus and our multi-price frozen assortments drive incremental sales with average ticket more than doubling at stores that we have added this expanded offering. Consumers are clearly responding and these sales driving initiatives are already having a measurable impact on our results. At Family Dollar, we are on track to add 16,000 new cooler doors in 2023. This is helping drive Family Dollar to its highest market share in close to four years, as measured by quarter one dollar volume.

On a unit volume basis, Family Dollar’s quarter one share of industry growth was the highest in more than three years. We continued to improve the in-store experience at Family Dollar and completed more than 250 store renovations in the quarter. On last quarter’s call, I shared the strategic rationale for our increased SG&A spending 2023. These investments should be pursued as rapidly as our management bandwidth will allow. The sooner each is implemented, the sooner we will enjoy the benefits and the greater impact of our other investments. All of this is ultimately connected and interdependent. Many of our investments will be ongoing, including those on our associates and store conditions, and again the results are starting to come in.

We have already seen meaningful improvements in sales momentum and reduced associate turnover. In closing, we have a plan. I am confident this plan will drive meaningful top line growth, increase productivity, and improve profitability. We are vigorously executing on it. We will not allow bumps in the road to distract us or slow us down, and it’s clear it’s starting to work. Our investments in price, our stores, our merchandise, and our associates have already begun delivering results. We will get to where we’re going, but how we get there matters as well. I firmly believe that investments in our people in the communities we serve are the cornerstones of the successful retailer. We have taken a comprehensive approach to improve wages and benefits for our people and to increase associate engagement to make Dollar Tree and Family Dollar great places to work and grow.

It is vital for the continued success of our organization to have a strong culture. While there is work to be done, we are pleased that our culture efforts are taking root and building the foundation for a thriving future. Finally, I am so very proud of the tremendous efforts of our 200,000-plus associates, each of whom has contributed to the great progress we are making and each of whom deserves our collective thanks. While Jeff will cover our outlook in more detail, I want to emphasize that we remain confident in the outlook for our business and our continued sales momentum. Our go-to-market strategies at Dollar Tree and Family Dollar are working and clearly resonating with consumers. I look forward to sharing more detail on our long term vision and our multi-year outlook next month at our investor conference.

I will now turn the call over to Jeff.

Jeff Davis: Thank you Rick, and good morning everyone. As Rick mentioned, our top line performance was strong in both the Dollar Tree and Family Dollar segments and was driven by meaningful growth in customer traffic, continued market share gains, and an increase in underlying unit growth. Total sales increased 6.1% to $7.3 billion based on comp store sales growth of 4.8%. Traffic increased 5% on a consolidated basis and average ticket was down slightly. Across the enterprise, our sales mix of consumables increased approximately 200 basis points as customer purchase behavior responded to deteriorating macro conditions. Our service levels were particularly strong in Q1. In-stock positions improved by 400 basis points in the Dollar Tree segment and by 200 basis points at Family Dollar.

Our DC service levels also improved for both segments by nearly 1,600 basis points at Dollar Tree and approximately 500 basis points at Family Dollar. Operating income decreased by 43% to $419.1 million. Adjusted operating income decreased by 39% to $449.7 million. Recall that in Q1, we cycled the first full quarter of the $1.25 price point transition at Dollar Tree, which resulted in unfavorable margin comparisons given the outsized benefit we saw in Q1 last year. The variance between operating income and adjusted operating income came from a $30 million accrual related to previously disclosed legal proceedings associated with our Family Dollar distribution center in West Memphis, Arkansas. Gross profit decreased by 4.7% to $2.23 billion as gross margin contracted by 340 basis points.

The biggest driver of the gross margin decline was merchandise cost. In Q1 last year, we benefited from the roll-out of $1.25 price point at Dollar Tree. In the current period, our sales mix shifted approximately 200 basis points towards lower margin consumable merchandise. The impact of higher cost of goods and unfavorable sales mix were partially offset by lower freight costs and markdowns as we cycled the impact of our West Memphis DC closure last year. As Rick noted, elevated levels of shrink represent a persistent challenge. In Q1, shrink negatively impacted gross margin by 60 basis points and EPS by an incremental $0.14 per share compared to last year. On a business segment basis, Dollar Tree gross margin declined by approximately 530 basis points primarily from lower merchandise margin based on the higher consumable mix and cycling the initial transition to the $1.25 price point, elevated shrink expense and increased distribution cost.

We benefited modestly from lower spot rates for ocean freight relative to last year, but to date this is only impacting a small portion of our shipments, with the larger impact of savings from freight rate declines to come in the second half and into the years ahead. Family Dollar’s gross margin decreased by approximately 100 basis points with largely the same factors contributing to the decline as Dollar Tree. Specifically, gross margin was negatively impacted by mix, product cost increases, higher shrink, and higher distribution costs partially offset by lower markdowns and lower freight expenses. SG&A as a percentage of revenue increased 150 basis points to 24.8%. The biggest driver was wage investments for store and distribution center associates.

We also experienced higher store facility costs as we continue to focus on improving store conditions, as well as higher professional and marketing expenses. Corporate support and other expenses were 1.7% of revenue, down approximately 10 basis points from last year. Net income was $299 million and EPS was $1.35 in comparison to $2.37 a year ago. Adjusted net income was $325.1 million and adjusted EPS was $1.47. The $0.12 adjustment was related to the West Memphis legal accrual. Our effective tax rate was 24.1% versus 23.1% last year, reflecting lower stock-based compensation deductions and higher non-deductible expenses, partially offset by higher work opportunity tax credits. Adjusted for the impact of the West Memphis accrual, the Q1 implied tax rate for this year was 23.3% or 20 basis points higher than Q1 last year.

Moving to the balance sheet and cash flow, my comments will reflect balance sheet comparisons at the end of Q1 2023 versus Q1 2022. Inventory increased 6.5% primarily from an increase in merchandise cost, DC unit volume growth, the continued roll-out of our Dollar Tree multi-price inventory, and new store growth. The quality of our inventory remains high and manageable. Q1 capital expenditures were $350.4 million versus $253.4 million. For fiscal 2023, we continue to expect capital expenditures to total approximately $2 billion with approximately 40% dedicated to business continuity and the balance directed towards growth, optimization and productivity improvement. In Q1, we repurchased approximately 1 million shares for $151.1 million, of which $7.7 million did not settle until after quarter end.

Cash and cash equivalents totaled $872.8 million compared to $1.2 billion. Our cash position increased $230 million in Q1 from the end of fiscal 2022 led by working capital improvements, partially offset by capital expenditures and share repurchases. Free cash flow improved to $402 million from $285 million last year. Moving to our sales and EPS outlook, the company expects consolidated net sales for the second quarter will range from $7 billion to $7.2 billion based on a mid single digit increase in comp store sales for the enterprise and for Dollar Tree and Family Dollar segments. Diluted EPS for the second quarter is expected to be in the range of $0.79 to $0.89. As a reminder, the bulk of our ocean freight savings for the year will fall in the second half, as previously mentioned.

With respect to full year fiscal 2023 guidance, recall that fiscal 2023 has a 53rd week. Consolidated sales for the full fiscal year are now expected to range from $30 billion to $30.5 billion. The company expects to deliver a low to mid single digit comparable store sales increase for the year comprised of a low to mid single digit increase in the Dollar Tree segment and a mid single digit increase in the Family Dollar segment. Selling square footage is expected to grow by 3% to 3.5% for the year with new store growth back end-weighted. While we modestly raised the midpoint of our top line guidance, we are incrementally more cautious on our margin outlook given the growing industry-wide challenges of accelerating shrink, the unfavorable shift in sales mix and their impact on our near term profitability.

Since the beginning of the fiscal year, the impact of these two factors on our financial results has intensified. We expect that over time, our mix of discretionary will normalize and that we will also improve our performance on shrink through defensive merchandising efforts, real estate optimization, and perhaps higher prices to compensate for areas of systematically higher shrink. We expect the combined and continuing full year earnings impact of unfavorable consumables mix and higher shrink is expected to be approximately $0.55 per share in 2023. Our modeling considerations for 2023 outlook include the following. We expect consolidated depreciation and amortization to range from $845 million to $850 million. Net interest expense is expected to be approximately $28 million in Q2 and $110 million for the year.

Our outlook assumes a tax rate of 24.1% to 24.3% for the second quarter and 23.9% to 24.1% for fiscal 2023. While our share repurchases are not included in our outlook, we had $1.7 billion remaining under our share repurchase authorization as of April 29. Weighted average diluted share counts are assumed to be 221.4 million shares for Q2 and 221.6 million shares for the full year. For the balance of 2023, we will work diligently to offset potential margin pressures that could come from elevated levels of discretionary inventory. We are taking actions to mitigate the potential impact of these cost pressures such as further optimizing our promotional spending and vendor allowances, identifying opportunities to further reduce inbound freight costs, and managing repairs and maintenance cost.

We continue to see full year earnings benefits of $1 per share from lower ocean freight costs this year which could be significantly weighted towards the back half of the year, and an additional $1 per share benefit in 2024 and beyond. As a result of the factors I just outlined, we are revising our diluted GAAP EPS outlook for fiscal 2023 to a range of $5.73 to $6.13, which includes the expected contribution from the 53rd week and the $0.12 legal reserve taken in Q1. I will now turn the call back over to Rick for closing remarks.

Rick Dreiling: Thank you Jeff. We are continuing to execute at a high level and acting with urgency around our business transformation, and I am pleased with our solid start to 2023. We are looking forward to our investor conference next month where we expect to provide our investors and analysts with a multi-year outlook for the business, including a substantive and comprehensive overview of the key elements of our business. Our team has identified multiple levers to unlock value and we have strong underlying business momentum that positions us favorably in the current retail and economic environment. We see a path to greater earnings power over the next three years and look forward to sharing our plans in more detail next month.

I also want to take this opportunity to welcome our new supply chain officer, Mike Kindy. I have worked with Mike in previous organizations and he is a proven subject matter expert and thought leader in supply chain and logistics. I am very confident that Mike will demonstrate continued success at Dollar Tree based on his past record. I also want to thank John Flanigan for his contributions which helped us get to where we are today. While John communicated to us at the outset his desire to serve only for a short period, over the past year John has led our supply chain strategy and has overseen the early stages of the process to optimize our distribution network, and he’s had a tremendous impact. We are moving at a fast pace in our journey to fundamentally reposition our combined retailing operations for sustainable long term growth.

Our efforts are already paying off in the form of significant market share gains at both segments. Both formats have a clear runway for accelerated growth in productivity and profitability. Our leaders have complete ownership over the factors that will shape our outlook for the next three to five years. We have a winning team of more than 200,000 associates who are highly motivated and eager to succeed. I look forward to sharing more next month at our conference. One last note before we go to Q&A. I want to share some IR news with you. Several months ago, Randy Guiler communicated with us his retirement plans. This advanced notification provided us with ample opportunity to seek Randy’s replacement. I want to thank Randy for his nine years of dedicated service leading the IR function at Dollar Tree.

I am pleased to share that Bob LaFleur joined Dollar Tree on Monday of this week as our new SVP of Investor Relations. Randy will be with us at our upcoming investor conference and is continuing in his current role with the company through the month of June to help facilitate a smooth transition. Please join me in congratulating Randy on his pending retirement and Bob on his new role at Dollar Tree. Operator, Jeff and I are now ready to take questions.

Q&A Session

Operator: Thank you. We will take our first question from John Heinbockel from Guggenheim. Your line is open, please go ahead.

John Heinbockel: Thanks. Rick, more of a strategic question. If I think about your initiatives and then the consumer, do you think that consumable penetration, that mix, not only will it remain elevated, maybe the consumables mix goes higher over time? What’s your thought on that, and then mitigating the impact of mix on margin, private label will help, but maybe talk about where you think that goes and the opportunity to do ultimately a DG Fresh-like distribution initiative to bring down COGS in that area?

Rick Dreiling: Thank you John, great question. There’s a lot of meat in answering that question. The first thing I’d like to say is the strength that we are experiencing in consumables has nothing to do with weakness in our discretionary. The fact that we are responding to the needs of the consumer, which is the shift towards consumables, is a really significant step forward for us in that we’re introducing consumable products, especially on the Dollar Tree side, that the consumer is responding to. Now, when I talk about our discretionary, I think it’s also important for everyone on this call to realize that our discretionary is a little bit different than what you’d see out in the marketplace. Our discretionary tends to be high value items that you can compare to another operator, another retailer and see a significant difference in the retail price point, so that’s part of the reason I’m still very bullish on where we are with discretionary.

Now as this shift continues, the advantage for us twofold: number one, private brands and the amount of work that’s being done on private brands, and what I’d like to say, it’s not just on the consumables side. Our private brand effort includes HBC and all of the higher margin private label products, so that’s another way for us to accelerate the margin on the consumables side. Let’s not forget shrink. When you think about the pressure that we’re experiencing, shrink tends to be cyclical, and what happens with shrink is we all work to mitigate it if you can. All costs that can’t be taken out get passed onto the consumer eventually, so we’re keeping an eye on it, and I would say, John, again as we talked about margin, the shrink issue, we have four classes of shrink at stores, with four being the highest.

The shrink impact is pretty uniform through all four classes, which I’ve never seen that in my career, which is truly fascinating. In regards to the Fresh concept, right now we are committed to frozen food and refrigerated, which is one of the highest growing categories with our particular consumer. Thank you.

John Heinbockel: Thank you.

Randy Guiler: Next question, please.

Operator: We will take our next question from Simeon Gutman from Morgan Stanley. Your line is open, please go ahead.

Simeon Gutman : Good morning Rick, good morning Jeff. I wanted to ask about Dollar Tree Plus. I also wanted to ask about the $1.25 price point at Dollar Tree. Can you talk about, I guess, the trade-off here of maybe accelerating a move to higher price points given some of the higher cost pressures, given some of the margin headwinds, just the trade-off given how the consumer is behaving and then maybe speeding up Dollar Tree Plus roll-out to more stores? Thank you.

Rick Dreiling: Yes, two good questions there. We are very excited what we’re seeing with Dollar Tree Plus, and our intent is to move that along as fast as we can. The same thing with the $3, $4, $5 frozen food – the change in the basket when those items go in is significant. The price point thing, Rick McNeely, our Chief Merchant is actually experimenting with a couple more price points in certain stores, and there has been no consumer resistance. I think once we broke the dollar, I think that any backlash on that is behind us, and what Rick is doing, incrementally priced SKUs, are not a repetition of what we already have, so we’re creating a bigger basket and a broader shopping experience.

Jeff Davis: If I could just add to that, one of the things that the merchant team is really focused on in all situations is always making sure they’re giving more value in relation to the market at every price, and while some of our prices in relation to where we were previously in breaking a dollar at a higher price point, we continue to have that price separation and value separation against other competitors in the marketplace.

Simeon Gutman: Thank you.

Operator: We will take our next question from Edward Kelly from Wells Fargo. Your line is open, please go ahead.

Rick Dreiling: Good morning Ed.

Edward Kelly: Hi guys, good morning. First on shrink, just quickly, could you just walk us through the surprise there? I would think that shrink would be tied to the year-end inventory count, so I’m just curious as to what happened there. Then Rick, for you, big picture, we all see the potential here and we hear you that nothing changes with all this, but the base that we’re looking at as a starting point has been going down, and I’m sure you joined because you saw potential for significantly higher earnings than, you know, you’re going to be at $6 this year. But I guess the question is the timing around the inflection, and you mentioned sort of three years, but how quickly do you think we can begin to see that acceleration?

Jeff Davis: This is Jeff. I’ll take the first part of the question regarding shrink. When we gave our guidance for the year, we had approximately less than 10% of our stores had taken their inventories for the year, and while we did see some elevation in that shrink, that was embedded in our guidance for the year. As we moved through the course of the quarter, we saw a pretty rapid increase in the level of shrink that was being experienced by the stores, and as Rick had said, we were seeing that across all shrink classes, which was really out of the normal for us. That’s the reason why we needed to make the adjustment. Through this period of time, we only have a little less than 40% of our stores that have taken their inventories.

We are anticipating that what we’re seeing today could accelerate even further because we still have a number of our higher shrink class stores still left, and that’s what’s being reflected in the adjustment that we had for the year. But based upon what we know today, based upon some other leading indicators, we believe that the adjustment we made is most appropriate. This is not unlike what you’re seeing in many other retailers across the industry. Some of this is societal, some of it is economic, some of it of course is particular to us, and we’re taking all the appropriate steps that we can to control and mitigate this where we can.

Rick Dreiling: Then Ed, on the second part of your question, the first thing I’d like to say is we intend to highlight a lot of that question at the investor day, which will give you a little more clarity to how it’s going to shake down and how quick it’s going to come. A couple comments, though, prior to that. Number one, I am very bullish on the opportunity here, and I do think if we are realistic, this consumable shift and this shrink impact are transitory. I do not believe we’re going to be living with them forever, and that is all accretive to what we’re doing. Then you throw in–and all of this, Ed, is in motion now. The move to the 78-inch , we’re going to add almost 1,000 new SKUs, the work on Dollar Tree Plus, the expanded cooler, the expanded frozen food, the improvement in the physical store facilities.

We’re reducing our turnover – there’s already proof of that by the wage investments we’ve made, which is going to help us in so many other areas, so what I’d like to say, there’s a lot in motion. I am incredibly confident and optimistic, and we’ll lay this out for you in more detail at the investor day.

Edward Kelly: Thank you.

Rick Dreiling: Thank you Ed.

Operator: We’ll take our next question from Scot Ciccarelli from Truist Securities. Your line is open, please go ahead.

Scot Ciccarelli: Good morning guys. It’s Scot Ciccarelli, good morning. A lot of your initiatives, like expanding cooler doors and frozen foods, have been focused on driving consumable sales, and that’s obviously the driver to the transaction growth as you’ve highlighted. But Rick, as the consumer behavior starts to stabilize, how do you shift consumers back to buying more discretionary goods, because in theory your consumable sales gains should be sustainable, and if we look at Dollar General as an example, their consumables sales spiked during the Great Recession but then consumables continued to become a bigger part of their sales pie every year up until the pandemic, so how do you actually change that trend once the consumer starts to normalize?

Rick Dreiling: Another great question. I would say this – no offence to anybody prior to me, somewhere along the line we have confused value and cheap. Our consumer is looking for value, and value means that–the classic story I can remember years ago, somebody bought a rake in one of our stores, took it home, used it one day and it was broken. Well, that was cheap, but that’s not value. How we are going to manage this, we’re doing a better job of procuring product and bringing the right selection in. The people at Dollar Tree are making their first trip to China in over three years, and we’re really excited now they’ll be able to stand face to face with the manufacturer and the vendor and be able to see and to hold and feel what they’re going to bring into the store.

Then the other thing, Scot, to be frank, the consumer is going to make that choice. If we have the right products, the right selection and we promote value, the consumer is going to gravitate there anyway.

Scot Ciccarelli: Got it, understood. Thank you.

Operator: We’ll take our next question from Peter Keith from Piper Sandler. Your line is open, please go ahead.

Rick Dreiling: Good morning Peter.

Peter Keith: Hey, good morning everyone. The transaction comps were pretty impressive and nice to see. I’m curious with the economic backdrop, what type of trade-in/trade down benefit you’re seeing. Obviously you’re getting more customers in stores. Is this repeat behavior or are you starting to see new customers that you can track behavior on?

Rick Dreiling: We’re actually seeing new customers. Our core customer is coming more frequently. Now, when they come, they don’t spend any more but they come more often, and now what we’re seeing is the trade down in that $80,000 income range and we’re actually beginning to target that consumer. That consumer is more wrapped up in the consumable business. One of the things that Jeff highlighted and I hope that everybody caught was the improvement in our service level to the stores, which is significant. That service level improvement comes from giving the stores what they want when they order it, and they’re drawing consumables at a much higher rate now. Then what happens when that higher income consumer comes in, they’re used to a certain in-stock level and we’re now able to do a better job of satisfying that, which is why we’re seeing that trade down.

Jeff Davis: Now Peter, just to give you a little more dimensionalization across both banners, they are averaging about 3 million net new customers over a trailing 12-month period, so you are seeing that customer, new customer coming to us. We’re seeing that customer shop across the entire store, across consumables and discretionary, and as Rick has mentioned, our ability to make sure that we have the right store environment such that they will want to come back is an important element for us, thus the reason why we want to continue improving our store standards and delivery and service to their stores.

Scot Ciccarelli: Okay, very helpful. Thank you so much.

Rick Dreiling: Thank you.

Operator: We will take our next question from Karen Short from Credit Suisse. Your line is open, please go ahead.

Rick Dreiling: Good morning Karen.

Karen Short: Hey, morning. Thanks very much, and looking forward to seeing you in a few weeks. I just wanted to ask a couple of things. On overall margin structure within the Dollar Tree banner, is it fair to say as we get through the year, you’ll have more benefit from freight, so what we’re looking at right now is not necessarily the run rate but there is a mix shift, and then that will be offset a little more impactfully in the second half of the year on trade? But then the second bigger thing I wanted to ask is I know you’re doing a test on consolidating a distribution center, and wondering if you could give some update on that as it relates to what that could look like as a much bigger roll-out as we go forward.

Rick Dreiling: I’ll take the second one.

Jeff Davis: Yes, so on the first portion of the question with respect to margins at Dollar Tree, we had stated earlier that our expectation was we’d be able to manage that business over the course of the year to a 36% to 37% gross margin rate. There’s a lot that goes into that, of course, not only product cost but shrink, markdowns, and some other elements. Today as we look at our guidance, I would say that we would be at the lower end of that range, but we feel comfortable that we will be able to continue managing the business based upon our product offering and how the customer behaviors have been in that 36%, 37% range, the lower end of that. There’s just a number of elements that we believe we still have to work to from a product offering basis as we look at the introduction of new price points and able to capture a little bit more margin where previously we weren’t able to do so at some of the lower price points.

Rick Dreiling: Then in regards to the question concerning combined warehouses, we’re in the process of building one in Florida. We had one in Utah and we actually converted it to Family Dollar only. It’s one of those propositions that sounds easy, makes sense, but it tends to be a little more difficult to execute. What John and Mike have done for us is they’ve gone–and which we’ll share at the investor day, we’ve done a total analysis of the system and at the end of the day, this really boils down to and how far away the distribution center is from the stores. I have no opinion, I’m not sold that we need to do it but I’m not sold that we don’t need to do it, but we need to spend a little more time with it. We’re going to give you our thoughts on a more broad basis at the investor conference, and then we’ll probably have an answer in the next six or seven months where we want to go ultimately on a combined warehouse.

Karen Short: Okay, great. Thank you very much.

Operator: We will take our next question from Matthew Boss. Your line is open, please go ahead.

Matthew Boss: Great, thanks.

Rick Dreiling: There you are, Matt, good morning.

Matthew Boss: Good morning Rick. Rick, at the Dollar Tree banner, could you speak to the dichotomy that you’re seeing between the traffic improvement, which obviously is a nice positive, relative to the average ticket decline that you’re experiencing, and then just what are you seeing with recent trends to support the sequential comp acceleration that you embedded in your second quarter guidance at the Dollar Tree banner?

Rick Dreiling: Yes, I don’t want to give mid-quarter guidance here – we’re only three and a half weeks into the quarter, but I will tell you I am very pleased with the trends, and the transaction counts have not changed. Matt, when I look at this, we always want to look at the basket, and I’ve always believed that footsteps ultimately drive the basket. I am very pleased with what we’re seeing with transactions, and I think the transaction growth we have is leading to the comp sales that we’re driving at Dollar Tree. I remain very, very bullish on both banners at this stage of the game.

Operator: We will take our next question from Joe Feldman. Your line is open, please go ahead.

Rick Dreiling: Good morning Joe.

Joe Feldman: Hi, good morning guys. Thanks for taking the question, really appreciate that. I guess I wanted to go back on the consumables mix. We all understand the environment we’re in, and I guess I’m a little curious as to what was different in the quarter than you expected. It seems like it did accelerate the mix pressure. You also made reference to an earlier question that you were still–the discretionary business sounded like it wasn’t that bad from your perspective, and I wanted a little more color on performance of discretionary, I guess, if you could share it.

Rick Dreiling: Yes, maybe we’ll tag team that, if that’s okay. I’ll start. If you go back to the last earnings call, we did call out that we were starting to see a shift in shrink and the drive towards consumables. Now, there is absolutely no doubt over the last 12, 15 weeks that that call-out has accelerated, and I think the consumer is feeling the real pressure now of a lot of things that have taken place. We’ve had change in SNAP benefits, tax returns are smaller than this time last year, all the stimulus is out of the system, and all of that is taking root, and the consumer now is more focused on needs and buying to those needs as close as they can versus wants. That’s the shift we’ve seen. Now, we think that shift is going to continue for a while. We don’t particularly believe it’s going to get any worse. I can’t remember the second part of the question.

Joe Feldman: I was just asking about discretionary, yes.

Rick Dreiling: Yes. The reason I bring up discretionary, I think it’s really important – really important. Our discretionary business is still good, and the fact is we have strengthened the consumables side so we shouldn’t be making the assumption that our low cost, pertinent discretionary items are no longer wanted or needed by the customer. It’s that they’re buying more consumables. Jeff, I don’t know if you have anything to add?

Jeff Davis: Yes, I was just going to add a little–provide a little dimension on the acceleration of consumables. In the fourth quarter, you may recall that for Dollar Tree on a year-over-year basis, they were flat in their mix, and Family Dollar was about 120 basis points shift into consumables. You fast forward to the first quarter of this year, Dollar Tree is now 180 basis point shift into consumables and Family Dollar was 200 basis points, so you saw a pretty significant on a year-over-year basis shift more into consumables, and that’s what our financials have reflected. That should hopefully give you an indication of just the quantum of what that shift is. If you think on a margin basis what that does for you, it’s that there’s about a full 20-point differential in your initial margins between discretionary and consumables, so when that dollar shifts from discretionary into consumables, on average you’re losing 20 points of initial margin.

Joe Feldman: That’s really helpful. Thanks for clarifying that. Appreciate it. Good luck this quarter, guys.

Rick Dreiling: Thank you.

Operator: We will take our next question from Michael Lasser from UBS. Your line is open, please go ahead.

Rick Dreiling: Good morning Michael.

Michael Lasser: Morning Rick. One of the hallmarks of your and your team’s tenure in the previous retail situation is that you would consistently under-promise and over-deliver and generate consistent, reliable performance. This experience has been colored by surprises due to factors like reinvestment and unanticipated costs, such as shrink and mix. At what point do you think Dollar Tree is going to get into the cycle of greater consistency? Is it realistic that that could happen in the second half of this year? Also as part of this question, I’m going to put in a second one. The market was focused on Dollar Tree’s ability to earn $8 in ’24 and potentially $10 in ’25. Given these factors that you’ve outlined today, is it realistic that the market should push off those expectations in light of everything you know?

Then lastly, you’ve alluded to this incremental price point above $1.25 – presumably that’s above $1.25 but below $3. Can you give us more detail on that? It’s sparked a lot of interest so far this morning. Thank you so much.

Rick Dreiling: I’ll take the first part and let Jeff handle the second. Under-promise, over-deliver, I think has been the mantra of my career. I cannot deny that, but I will make a couple comments. Number one, when we started the journey at my previous employer, we were private. We did not do it in the public arena, and what you’re seeing is a lot of the maturations we went through a long, long time ago. I do believe we are on the right path. I do believe all of the things we are doing are right, and I do believe there’s a payoff coming. What we will do at the investor day is we’re going to show you that path, and what I’d like to do is hold on until that time, Michael, so we can stand up there with charts and graphs and show you the journey.

I think we are getting this level set now. Every day we find something new we didn’t know about, where you have to go out and get it fixed, and this is a journey. I’ve got the right people around me, I’ve got 200,000 people that are excited, that are dying to be led, and we just need a little bit of time and we’re going to lay it all out for you in about four weeks. Jeffrey, I’ll let you handle the–

Jeff Davis: The only thing I would add to that is that we are very confident that we will be able to deliver double-digit EPS. The actions to get there, we are embarking upon currently. As Rick has said, we are confident in what we’re doing, you’re starting to see some of the results from a top line perspective. The components of how we get there and the time frame that we get there will be best illustrated when we get to the investor day, and we don’t want to take anything away from that period of time. But we are confident that double-digit EPS is in our near term horizon.

Michael Lasser: Okay, and on the price point, Jeff?

Jeff Davis: I’m sorry, the specific question on multi-price?

Rick Dreiling: Yes, could you say it again?

Michael Lasser: Yes, so you have alluded to testing several times on this call incremental price points. The interpretation is that those are above $1.25 but below the Dollar Tree Plus price point of $3 and $5 items, so if you could elaborate on that test, it would be super helpful.

Rick Dreiling: Yes, to answer your question, at this stage of the game, north of $1.25 and less than $5, that is a correct assumption. That doesn’t mean that’s where we’re going to land when this is all said and done, but yes, we are–that’s very fair. Between $1.25 and $5 is where we’re at right now, with no duplication of the SKU.

Michael Lasser: Understood, thank you very much.

Operator: We will take our next question from Krisztina Katai from Deutsche Bank. Your line is open, please go ahead.

Rick Dreiling: Good morning Krisztina.

Krisztina Katai: Hi, good morning Jeff and Rick. Thank you for taking my question. Just wanted to quickly follow up on some of the increased pressure points on margin. Could you just talk about how you see the promotional environment evolve from here? I know you said that currently it’s still very rational, but in case some of the larger players do take up price investment, can you just talk about how much you can potentially lean onto your vendors, better source? I think, Rick, you said that you view shrink as something that is cyclical, but can you just talk about some of the steps that you can take right now to mitigate it? Thank you.

Rick Dreiling: Yes, I’ll talk about the promotional environment. I’ll reinforce that it’s very stable right now, and I will also tell you this. We are generating on the Family Dollar side vendor relationships we have not had in a very, very long time in this banner. Those vendor relationships are driven by our ability to execute on the commitments we make to the vendor and the manufacturer, and that’s how you get the incremental support for incremental markdowns in case you have to go to battle in print. However, I do not see that. I think the market is as rational as I’ve ever seen it. Do you want to take the–

Jeff Davis: Yes, on shrink, it’s a multi-faceted approach. You definitely start off with the kinds of merchandising where there’s opportunities for us in some situations, to how you display items, what restrictions you have and how that then is displayed. Those are the types of things that we don’t particularly care for because we know that it impacts sales, but it’s an inevitable portion. We introduced some new technologies within the store of how we monitor and alert. We take such steps, quite honestly, in working more closely with local law enforcement to the extent that there is elevated levels within the communities, but also as we have been really focused on our turnover and getting key positions filled and continue to be in position, that also helps us from a turnover perspective, which also helps support some of the internal elements of our shrink.

Once again, very multi-faceted and we will work all across that. In the eventuality that this is something that we have at elevated levels and we’re going to have to pass some element of this onto our consumer, we’ll ultimately have to think about how we will price this into some of our merchandise.

Rick Dreiling: Krisztina, I’d add one last thing, too. Shrink tends to fall into certain categories, and in our higher shrink stores we’re actually exploring do we need the same assortment as a low shrink category store. Those are the kinds of things we’re looking–to Jeff’s point, we’re looking at everything right now to mitigate the problem.

Krisztina Katai: Great, thank you so much.

Operator: Now I will hand over back to Randy Guiler. Please go ahead, sir.

Randy Guiler: Thank you for joining us today, and we hope to see you at our investor conference on June 21. Have a good day.

Operator: Thank you for joining today’s call. You may now disconnect.