Dollar Tree, Inc. (NASDAQ:DLTR) Q3 2022 Earnings Call Transcript

Dollar Tree, Inc. (NASDAQ:DLTR) Q3 2022 Earnings Call Transcript November 22, 2022

Dollar Tree, Inc. beats earnings expectations. Reported EPS is $1.2, expectations were $1.18.

Operator: Good day, and welcome to the Dollar Tree Third Quarter Earnings Call. Today’s call is being recorded. At this time, I’d like to turn the call over to Randy Guiler, VP of Investor Relations. Please go ahead.

Randy Guiler: Thank you, operator. Good morning, and welcome to our call to discuss results for Dollar Tree’s third fiscal quarter 2022. With me on today’s call are Executive Chairman, Rick Dreiling; President and CEO, Mike Witynski; and CFO, Jeff Davis. Before we begin, I would like to remind everyone that various remarks that we will make about our 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. These statements are subject to risks and uncertainties and our actual results may differ materially from those included in 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 report on Form 10-Q filed March 15 2022.

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 SEC. 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. Following our prepared remarks, Mike 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, and good morning, everyone. In my short time here, I have been incredibly impressed with the team’s overall enthusiasm and willingness to accept and embrace much needed change. As I stated last quarter, we are making change happen to create long-term shareholder value and enable the next waves of profitable growth for Family Dollar and Dollar Tree. The company is moving at a rapid pace. We have done a remarkable job of rebuilding our executive team and with retail thought leaders that are subject matter experts and eager to be part of this transformational journey that we have embarked on. In a short period of time, all of our C-suite positions have been filled, as well as new leadership roles dedicated to a number of key areas, including diversity, sustainability, compliance and communication.

Last quarter, we shared news of the material price investments made at Family Dollar. These actions got on price parity with key competitors and widen our spread to grocery and drug stores. Customers are recognizing this commitment to value, which contributed to a 4% comp sales increase and the segment’s first quarterly traffic increase in three years. The teams are focused on improving store standards. They are committed to clean them up, straighten them up and fill them up. Improving sales productivity is a vital component of the Family Dollar turnaround and we are extremely focused on driving sales per square foot, unit sales growth and transaction count growth. We are a company with more than 16,200 stores, but the way I prefer to look at this is that we are really two growth companies with 8,100 plus stores each.

Both Dollar Tree and Family Dollar are unique businesses with two different go-to-market strategies. Having two distinct large segments provides us flexibility like none other in value retail. And both Dollar Tree and Family Dollar have extraordinary opportunity for growth and improvement over time. We are prioritizing our areas of growth and we are moving with urgency. The new management team is in-house. We’ve taken aggressive action on price. The advertising and marketing cadence has been enhanced. We are in the midst of a cultural transformation throughout the organization designed to enhance our associate and customer experience. Store standards are improving. Years of sales productivity opportunities are ahead of us and work on supply chain and technology initiatives will enhance us to achieve our ultimate goals.

I know many are eager to learn more about all of our plans, including the timing, the magnitude and the expected returns. These details will be shared at our spring Investor Day in a more structured format as our new leadership team has assembled more time together. We are entirely committed on taking the right steps to transform this organization for the long-term. On behalf of our directors, I want to thank each of our associates for their commitment, dedication and effort, especially for their willingness to embrace much needed change. This is a journey that I am thrilled to be part of. I’ll now turn the call over to Mike.

Mike Witynski: Thank you, Rick and good morning everyone. Thank you for joining us today. As you have seen in recent months, we’ve announced a number of executives have joined Dollar Tree. I’m excited about the caliber and quality of the leadership team we now have in place. This team will lead our company through the next evolution of growth. We are committed to transforming our culture, meeting our shoppers and associates’ needs, improving store productivity and efficiencies and delivering improved long-term operating results. I am pleased with the team’s efforts to deliver solid results for the quarter. Our third quarter sales performance reflects the timely execution of merchandising initiatives to drive our consumables business in this uncertain and inflationary environment.

Same-store sales for both segments improved from the prior quarter and delivered sequential monthly improvement throughout the quarter. Shoppers are responding to our new value proposition at Family Dollar and Dollar Tree as we focus on driving both traffic and store productivity. With the exception of Q1 and Q2 of 2020, at the initial onset of the pandemic, our 6.5% enterprise comp represents our best quarter, since the Family Dollar acquisition. By segment, the comp was comprised of an 8.6% increase for Dollar Tree and a 4.1% increase for Family Dollar. In recent quarters, we refined our strategies at both Dollar Tree and Family Dollar to focus on the traffic driving consumables side of the business. Our transition to the $1.25 price point has enabled our merchants to greatly enhance value for our shoppers.

For the second consecutive quarter, our consumables comp outpaced the discretionary comp at Dollar Tree. The team delivered a 9.3% comp on consumables with key contributors being in food and beverage, snack and cookies and candy. Family Dollar consumables increased 4.7% on a comp basis, despite the ticket headwinds related to our price actions in Q2. Shoppers are clearly recognizing the greater value and are responding to our enhanced advertising initiatives. Importantly, at both Dollar Tree and Family Dollar, we saw an acceleration in comp performance throughout the quarter with October being our strongest month. We have a number of key sales driving initiatives to drive productivity. For Dollar Tree stores, we are continue to exceed the customer’s expectation for value.

Our merchants do a tremendous job of effectively managing the ever changing assortment that wows our shoppers. Expanding our $3 and $5 offering into more stores, we ended the quarter with our plus assortment in nearly 30% of our Dollar Tree stores and will continue to aggressively expand this initiative and the years ahead. We are currently refining our $3 and $5 assortment as our team operates in an environment of continuous improvement based on learnings. We are developing our frozen assortment to meet our shoppers’ family needs as they are looking to save money by dining at home. We are aggressively expanding our offerings of protein, pizza, breakfast items and family sizes at price points that meet their budgets. We will continue to focus on winning the season.

Dollar Tree is a destination for shoppers looking to celebrate holidays, events and seasons. Our offering will be better than last year, but not as good as next year as we continue to improve our assortments. Family Dollar from a pricing perspective is in the best position in more than a decade. Now that we have taken action to reestablish price parity, we are committed to maintaining our competitiveness. Other Family Dollar initiatives designed to improve sales per square foot, unit sales and transaction count, include improving our store layouts through improved adjacency flow; adding linear square footage; expanding immediate consumption DSD categories; and optimizing the beverage and frozen food offering. Developing private brands, we are in the process of growing, improving our private brand performance by providing shoppers more choices and a broader offering of quality products at a greater value.

Over time, we believe this will enhance customer loyalty, as well as our margin profile. We are refining our marketing effectiveness to provide customers with convenience, value, variety and an improved shopping experience. We have evolved our print advertising calendar and format to be more relevant to our customers to drive their visit frequency. We are also in the process of relaunching our smart coupon program designed to improve quality, availability, clip rate and redemptions. In this changing and dynamic environment, we feel we are implementing the right plans to drive sales productivity, enhance margins and improve efficiencies to enhance the long-term benefits to each of our stakeholders. In October, Jeff Davis joined Dollar Tree as our new CFO.

Jeff brings more than 30-years of financial leadership to the organization with much of his experience coming from large retailers, including Walmart; JCPenney and Darden. Jeff is very much focused on value creation, through strategic growth and strategic decision support, as well as value preservation through governance and efficiency and operations. Jeff has been the company for nearly two months, but he is making a difference already. I’ll now hand the call over to Jeff to provide more color on Q3 and what’s ahead of us.

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Jeff Davis: Thank you, Mike, and good morning, everyone. I am delighted to join the Dollar Tree team at such a pivotal time. I’ve been in my seat for almost eight weeks and I’ve experienced tremendous energy and excitement across the entire organization as the team is an embracing change. While the company has been around for decades, I believe we are in the early phase of significantly improving our long-term operating performance. In October, I had an opportunity to meet several of you at store visits and I look forward to connecting with a larger group in the near future more details to come. Since Mike and Rick already covered our third quarter sales results, I will now move directly to the discussion of operating income.

Unless otherwise stated, all third quarter comparisons are against the same period last year. To supplement my comments, we are introducing a quarterly presentation on our website at corporate.dollartree.com/investors, which outlines several key operating metrics. We hope you will find this additional information helpful to better understand our business. Operating income increased 22.8% to $381.3 million or 5.5% of total revenue, a 70 basis point improvement in operating income margin. This was led by a 240 basis point improvement in gross profit margin, partially offset by 170 basis point increase in our SG&A expense rate. Gross profit increased 17.5%. The Dollar Tree segment gross margin improved 520 basis points, primarily from higher initial mark on related to the move to $25 price point, lower freight costs and sales leverage, partially offset by greater penetration of lower margin consumable merchandise and product cost inflation.

Family Dollar’s gross margin declined 100 basis points, largely due to a product mix shift and product cost inflation. We expect to see continued pressure across both segments related to the inflationary cost environment and merchandise mix as our consumable sales are expected to continue outpacing discretionary. SG&A as a percentage of total revenue increased 170 basis points to 24.4%. The increase is principally related to elevated repairs and maintenance as part of our commitment to improve store standards, investments in store hourly wages, and higher inflationary costs across a number of expense categories, including utilities. Corporate support and other expenses increased 30 basis points to 1.4%, primarily from increased stock compensation expense, higher incentive comp and professional fees.

From a bottom line basis, net income improved 23.1% to $266.9 million or $1.20 per diluted share, in comparison to $0.96 per diluted share last year. Moving to the balance sheet. My comments reflect balanced comparisons to the end of Q3 2022 versus Q3 2021. Combined cash and cash equivalents totaled $439 million, compared to $701 million. The reduction in cash is largely attributed to the repurchase of approximately 2.86 million shares for $397.5 million in Q3 of this year. Inventory increased 31.1%, primarily from inflationary product and freight costs, expansion of $1.25 and multi-price plus inventory and store growth. Also recall last year, shoppers pulled forward purchases well ahead of the holiday season concerned about product availability, while we were chasing trans-specific deliveries of discretionary products as our inventory levels dip well below normal operating levels.

This year shoppers purchasing behavior appears to be more closely timed to holiday dates. Finally, unit counts are at similar levels to October 2019. Our inventory is fresh, we have limited dated inventory well within manageable levels. Capital expenditures were $391.2 million in the third quarter versus $295.6 million last year. For fiscal 2022, we now expect capital expenditures to total approximately $1.2 billion. As we look to Q4, we see the following affecting our business. We will anniversary a significant number of Dollar Tree stores approximately 2,500 in December and 3,000 in January, the transition to the $1.25 price point a year ago. We previously experienced an outsized benefit to comps and margins associated to the transition. The economy continues to pressure middle and low household income customers, resulting in needs based purchasing.

We expect consumables to outperform discretionary, which negatively impacts gross margin. We are cycling advanced child tax credit payments, which were distributed mid-month from July to December in 2021. On a year-over-year basis, we are facing higher costs from suppliers related to this inflationary environment. While at Family Dollar, we do have the flexibility to adjust price. At Dollar Tree where we are at a fixed price point, it takes us time to adjust quantities and pack sizes for cost changes, which can lead to near-term pressure to margins. We will continue to invest in-store in DC standards and expect to have higher year-over-year expenses in repairs and maintenance. In addition to being right on price, we will be right on wage as it continues to be a competitive market for talent.

We are raising our sales outlook for the year. Consolidated net sales for the year are now expected to range from $28.14 billion to $28.28 billion, compared to our previous outlook range of $27.85 billion to $28.10 billion. We expect to deliver mid single-digit comp sales increase for the year, comprised of a high single-digit increase at Dollar Tree stores and a low single-digit increase in Family Dollar. Selling square footage is expected to grow by approximately 2.8% as we are experiencing supply chain delays related to procuring equipment and fixtures for store openings. For Q4, we estimate consolidated net sales will range from $7.54 billion to $7.68 billion based on a mid to high single-digit increase in same-store sales for the enterprise.

At the end of Q2, we expected fiscal 2022 diluted earnings per share to be in the range of $7.10 to $7.40. Due to several factors including, but not limited to, an acceleration of consumable product mix shift, and elevated product cost pressure, we expect to be in the lower half of the previous outlook range. Other considerations for our updated 2022 outlook include the following: we expect consolidated depreciation and amortization to be approximately $770 million. Net interest expense is expected to be $30 million in Q4 and $127 million for the year. Our outlook assumes a tax rate of 24.3% for the fourth quarter and 23.7% for fiscal 2022. Weighted average diluted share counts are assumed to be 222.3 million shares for Q4 and 224.2 shares for the full-year.

Our outlook does not include any share repurchases. As of October 29, we had $1.85 billion remaining on our existing share repurchase authorization. I’ll now turn the call back to Mike.

Mike Witynski: Thanks, Jeff, I am proud of our team’s efforts. During a period of material organizational change, a disruptive hurricane through the Southeast and macro uncertainty contributing to the highest inflation in 40-years, we delivered increases of 8.1% in sales, 17.5% in gross profit, 22.8% in operating profit and an increase of 25% in EPS. Our results continue to reinforce the relevance of Dollar Tree and Family Dollar to millions of households across North America. As you know, in late June, we announced that a number of executive positions would be changed. I am proud to share that by mid-November all seats are filled and we are very confident in the outstanding team we have built. All additions have been successful leaders throughout their careers and bring new fresh perspectives and will enhance our progress.

In addition to the executive changes, last week we announced new leaders for several key areas of the business, including diversity, sustainability, compliance and communications. I am very confident in the team we have developed and that it will enable us to accelerate progress on our transformational journey. In the months ahead, we will be refining and prioritizing our plans to ultimately deliver improved operating performance across both segments. At our Spring Investor Day, we will provide you with more transparent and comprehensive view into the opportunity ahead us and the path to get there. Before we transition to Q&A, I want to sincerely share my gratitude to our associates, especially in Florida and the Carolinas, for their efforts during Hurricane Ian at the end of September, their efforts through the preparation for and the recovery from this devastating storm was critical to countless families and communities we serve.

In many cases, our Dollar Tree and Family Dollar stores were among the first to reopen to assist customers with products they needed most. Thank you to each of you. Operator we are now ready to take questions.

Q&A Session

Operator: Thank you. We will take the first question from line Matthew Boss from JPMorgan. The line is open now. Please go ahead.

Matthew Boss: Great, thanks. So maybe first question, at Family Dollar, could you elaborate on the drivers of sequential improvement as the quarter progressed? How much do you think more so of this is tied to the macro? Or the value trade down behavior versus what inning do you think that your company specific initiatives are in today at Family Dollar?

Mike Witynski: Yes. Thanks for the question. I think it’s a combination of everything that you’re seeing going on, the pressure on the customer and then our merchandising team invested the investment we made in getting our prices right to be at parity in the marketplace. And then as well as writing more impactful ads and more frequency of our ads, so I think stronger promotion, stronger base pricing and then the work on the assortment in our H.25, I think is meeting the overall macro impact that the customer seeing on the pressure that they have to try and meet the budget each and every day. I think that as a customer, we’re seeing continued pressure. We’re — as I’ve shared we’re seeing more customers come into our segment.

And once they’re in our segment, these are the majority of the customers are at 80,000 and higher household income. But even once they’re inside the store, we’re seeing shifts in their behavior where they’re very consumable and needs based focused to try and make that budget work and stretch it over the month. We’re seeing private brands now for 39-weeks in a row have outpaced national brands, 39-weeks in a row. We have not seen that the prior five to seven years where private brands are outpacing national brands, but it’s now been 39-years in a row — 39-weeks in a row, I’m sorry. And then we’re seeing first in a month business is getting stronger, we’re seeing our snap and foodstamp business is growing and we continue to see credit is outpacing debit.

So we do see that shift in the customer coming into our segment. And then when they’re in our store, they are shifting into the consumables and needs based to make their budget happen. And I think the work that our merchants are doing are absolutely aligned in helping drive meeting their needs when they’re in our store.

Matthew Boss: Great, and then just at the Dollar Tree banner, what’s your overall assessment to-date on breaking the box overall? And can you speak to sequential trends with traffic to the banner that you’re seeing? Or what’s been the reception to Dollar Tree plus or the rollout of the $3 and $5 SKUs across the assortment?

Mike Witynski: Yes. And I’ll start with $1.25, I think overall, our traffic has been very stable and we saw slight improvement in Q3 in traffic. But what was more important is throughout 2020 and 2021, our consumable sales continued to decline quarter-after-quarter, because of the product availability and the assortment we just couldn’t provide for the customer at that dollar price point. Once we move to the $1.25 throughout this year, our merchant teams have worked hard at bringing in that new assortment and we have absolutely changed that trend instead of declining business in consumables, it’s now accelerating and leading the growth and I believe over time that will continue to drive traffic into our stores on Dollar Tree.