Q3 2020 Dollar Tree Inc Earnings Call

Dollar Tree's president and chief

officer

thank you, Randy. Good morning. Everyone twenty-twenty has proven to be the most unpredictable and unique year in my forty years in retail.

Nearly every business family and person has had to adapt and React to what is currently a new normal.

My heart goes out to every family that has been impacted to some degree by the coronavirus. I would also like to give a shout out to all the medical professionals front-line workers and others who are working tirelessly to ensure that we stay safe and healthy an environment where individuals are concerned about their health and exposure off about their income and jobs and about there not knowing what is next. I firmly believe that Dollar Tree and Family Dollar are part of the solution all are fifteen thousand plus stores are close to home and easy to shop providing great convenience, and we offer a broad assortment of tremendous values to meet both needs and wants

I'm incredibly proud of our team's effort in the third quarter to continue serving customers effectively while driving operational improvements in both Banja through this extremely Dynamic retail environment.

The team delivered and earnings-per-share increase of 28.7% compared to the prior Year's quarter. These Enterprise results were comprised of a 5.1% same-store sales increase a hundred and fifty basis point Improvement and gross profit margin and 130 basis point increase in operating profit margin.

Our Dollar Tree segments delivered its strongest same-store sales performance in the past 10 quarters with a 4% increase.

Gross profit margin improved 70 basis points the 34.9% versus Q3 a year ago and operating margin increased fifty basis points to 12.7% which represents a 300 basis point improvement from Q2.

the quarter included twenty eight point six million in Cold Blood costs

Geographically comp sales were positive in all zones for the quarter discretionary delivered a positive 10.2% calm and consumables were down approximately 2.6. We did see sequential Improvement consumables throughout the quarter as inventory flow of high demand products improved.

categories performing well included crafts party celebrations household products kitchenware and even early Christmas seasonal

The performance of Crafters Square offering that was rolled out into approximately 2,400 stores in q1 of this year has been outstanding. We plan to add Kraft Square to the remainder of the Dollar Tree stores and early 2021.

Halloween seasonal sell-through was our best ever overall the fall Harvest and Halloween seasonal categories delivered a combined 9.4% for the quarter armor continue to hit a home run and identifying and sourcing great products that customers love at the dollar price point customers are continuing to shop early to celebrate events and holidays.

Our sales continue to be delivered by average ticket which increased 19% as consumers continue to consolidate trips.

Our 12.6% transaction count decline was a 300 basis point plus Improvement when compared to 15.9% drop off. We saw just a quarter ago. We believe this is directly related to shop for Mobility many people are working from home learning from home or simply not going out as often, but when they do visit the store, they are filling their baskets ticket was up 19% this quarter and 22.6% last quarter.

We continue to like the results. We are seeing with the Dollar Tree plus and we are pleased to announce. We are expanding the program to a total of approximately five hundred stores beginning in the spring.

Based on our learnings. We have continued to test refine and improve this initiative since the initial launch in mid 2019. The merchant and stored teams have done a tremendous job. Our customers are buying these products and sales of our multi price items continue to grow. In fact, we are seeing that when multi price items are included in the basket. The average transaction value is approximately twice the size.

Recently, we've been seeing phenomenal sell-through of Dollar Tree plus items and seasonal merchandise.

We are expanding our discretionary assortment to focus on sales and margins different categories that do not cannibalize current sales are accretive to the business and bring Great Value to our customers.

He's three and five dollar items will also be leveraged through our Family Dollar stores when it makes sense. This is an example of harnessing the power of two Brands by bringing Dollar Tree Home and Family Dollar together. We now have a new Merchant team dedicated to these multi price items that will benefit both banners.

Family Dollar sales highlights for the third quarter included the 6.4% same-store sales increase was on top of the 2.3% cop in Q3 a year ago. I thought this was comprised of a twenty 1.3% increase in average ticket partially offset by a 12.3% decline and transaction count the ticket and traffic Trends are relatively balanced throughout the quarter.

The sales strength was broad-based geographically with each Zone delivering positive comps ranging 4.7% or better.

Categories performing well are many of the discretionary categories that we've been focused on improving including home decor household products toys, electronic wage and apparel.

Both rural and urban Family Dollar stores delivered mid single-digit comp increases with rural slightly outpacing Urban.

Regarding the Cadence of cops. Each month increase was greater than 5.5% with September being the strongest month in October slightly better than August off the consumable side of the business delivered another positive quarterly cop at 4.1% and discretionary cop was strong at 14.6%

On March call I discussed the challenge and opportunity to enhance the discretionary performance at Family Dollar through improved product assortment sharper price points and greater value to customers are noticing and they are responding and discretionary is a percent of a net sales increased 140 basis points to 12 or 1.5% of sales.

Are discretionary two times faster than the total Market in Q3 during the quarter. We launched the ability to sell product directly on our website at facebook.com providing customers another way to access great values. Additionally. We are early in to test phases of the following initiatives buy online pickup at store and delivery options through instacart and shift. There will be more to come on future calls.

as I mentioned on a call three months ago it's a new day at Family Dollar I continue to be very pleased with the team's overall progress we are 3/4 in to 20000 with an operating margin of 5.1% compared to 2% 3/4 into 2019

the key elements of our Improvement plan include improved merchandising and marketing raising stock and reason store in stocks

Upgrading brand standards creating a selling culture and refining our format strategy.

I would also like to recognize Dollar Tree Canada are Canada president and Chief Operating Officer Neo current and his team are hitting on all cylinders

during Q3 Dollar Tree canopy open to new stores bringing the total to 230 stores north of the border Canada exceeded his plan of sales gross margin and operating income delivering low double-digit cops and both consumables and discretionary including very strong seasonal sales on Fall Harvest and Halloween month an they have improved on store manager turnover and internal promotion as a result of their continued focus on people's development

Regarding real estate the team completed more than 550 projects in the quarter including 143 new stores 34 relocations dead 371 Family Dollar each to Renovations. And we had 16 store closings. We ended the quarter with $15,600 and six stores. I'll I'll toss it to Kevin to provide more detail on the Q3 performance.

Thanks, Mike and good morning.

So the third quarter Consolidated net sales increased 7.5% to 6.18 billion dollars comprised to 3.3 billion dollars at Dollar Tree and two point eight seven billion dollars a dollar and a price seems our sales increased 5.1% on a segment basis, sir, dollar increase 6.4% and $4 to increase 4%. Representatives best quarterly same-store sales performance as q1 a 2018.

Overall gross profit for the Enterprise increased 12.9% to 1.92 billion dollars gross margin and 150 basis points to 31.2% compared to 29.7% in Q3 of 2019.

Those profit margin for the Dollar Tree segment increased 70 basis points the 34.9% when compared to the prior-year quarter factors impacting the segments gross margin performance included merchandising cost including Freight improved by approximately 95 basis points Dollar Tree saw an improvement merchandise mix and lower freight costs as a percentage of sales partially offset by reduced activity cost decreased approximately 20 basis points do to leverage on the top sales increase in the quarter.

trunk improved approximately 10 basis points

These improvements were partially offset by distribution costs had increased fifty basis points primarily due to higher payroll costs and depreciation. This includes the continued ramp up for the two new distribution centers as wage six million dollars or Twenty basis points of COVID-19 expenses primarily premium pay and bonuses.

Gross profit margin for the Family Dollar segment and 230 basis points to 26.8% of the third quarter year-over-year Improvement was due to the following shrink improved 270 basis points based on inventory results in the current year in cycling an increase in the accrual rate during the prior year.

Merchandising cost including Freight and proof sixty basis points primarily due to a to a balanced Improvement in merchandise mix and Market.

I could see cost decreased approximately 60 basis points and there's a lot of Leverage from the cop sales increase and mark down expense improved approximately 40 basis points to the lower promotional activity off of sell-through of seasonal merchandise and apparel.

As a percentage of net sales distribution costs are flat compared to the prior-year quarter the current year quarter included approximately 4.39 dollars for fifteen basis points of coping related expenses are Maryland. I'm paying bonuses.

Consolidated selling General administrative expenses increased twenty basis points to 23.7% of net sales compared to 23.5% in Q3 a year ago.

For the third quarter, the sg&a rate for the Dollar Tree segment is a percentage of net sales increased to 22.2% compared to 22% in Q3 of 2019.

Payroll costs increased approximately fifty basis points based on payroll expenses increasingly increasing 17.3 million dollars four fifty basis points for costs associated with COVID-19 pram paying bonuses.

Your facility costs decreased fifteen basis points primarily do to leverage of the stronger same-store sales and lower electricity costs other selling General and administrative expenses decreased approximate five basis points primarily from lower travel and legal costs.

Yes, DNA rate for the Family Dollar segment improved approximately 20 basis points to 22.2% because the 22.4% for third-quarter 2019 other selling General the minimum wage expenses decreased by approximately 20 basis points primarily do lower advertising and travel costs as a percentage of net sales.

Sort facility costs improved approximately 20 basis points problem primarily from Leverage on top sales and lower electricity costs and depreciation and prove ten basis points primarily from Leverage on wage increase.

These benefits were partially offset by payroll expenses which increased approximately 35 basis points driven by COVID-19 process of eleven point four million dollars or forty basis points for premium paying bonuses and increased incentive compensation based on performance.

Operating income increased 29.9% to 465.5 million dollars compared with three hundred fifty eight point four million in the same period last year and operating income margin improved 1700 5% compared to last year's third quarter.

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Included forty six point three million dollars and COVID-19 related expenses and total.

Don I'll bring his his total 38.2 dollars comprised primarily and that interest expense.

Our effective tax rate was 22.8% compared to 19.3% in the prior Year's third quarter.

Kurt quarter rate reflects higher state tax rates and higher income amounts taxed at the statutory rate higher rate reflected a larger benefit from the reconciliation of the tax revolt to the tax returns.

the company had net income of 330 million dollars or $1.39 per diluted share which included 46.3 million and fifteen cents per diluted share of incremental operating costs per COVID-19 expenses this compared to net earnings of 255.8 million dollars for $1.08 per share in the prior quarter

buy cash and cash equivalents at quarter-end total 1.1 to billion dollars compared to 539.2 million at the end of fiscal 2019 company paid down the remaining five five million on its revolving line of credit during the quarter outstanding debt as of October 31st 2020 was three point five billion dollars

During the quarter we purchased nearly two point two million shares for $200 at quarter end. We had $600 remaining in our share repurchase authorization will continue to provide post quarter updates wage activity.

Inventory for Dollar Tree headquarters and declined 1.8% from the same time last year while selling square footage increased 4.2%

inventory per square foot decreased 5.8% An inventory levels are well-positioned for the holiday selling season.

Inventory for family dollar quarter and decreased 2.9% from the same period last year while selling square footage increased 1.1% inventory for selling square foot decreased 4% our inventory levels Improvement Q3, and we continue to be more productive with lower inventory significantly increasing our inventory terms Capital expenditures were two hundred thirty eight point seven million dollars in the third quarter vs. 279.8 million in Q3 last year.

For fiscal 2020 we continue to expect Consolidated Capital expenditures to be approximately 1 billion dollars.

Depreciation and amortization total 170.1 million forty-three compared to $160 million in the third quarter last year and for fiscal 2020. We now expect Consolidated depreciation amortization to be approximately $680.

Or not providing sales and EPS guidance. I do want to provide a few data points for your modeling that interest expense is expected to be approximately $37 million in Q4 and 150000 million for fiscal 2020. The tax rate is expected to be 22.3% for the fourth quarter and 22.8% for fiscal 2020.

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Diluted share accounts are assumed to be 236.3 million shares for Q4 and 237.5 million shares for the full year. We have a strong balance sheet and continue to grow the comfort thing about new and renovated stores are Supply chains and Technology to improve the customer experience. We remain confident in our business and our ability to drive long-term Schererville shareholder value on that return the call back over to my thanks Kevin. We certainly have momentum in our business for Q3 and a challenging retail environment with government stimulus. Mostly dead end us. We delivered very solid Enterprise results, including a positive 5.1% comp a hundred fifty basis points of gross margin impact and 130 basis points of operating margin Improvement despite incurring more than $46 billion in COVID-19 costs.

Additionally, we completed more than 550 real real estate projects paid down the $500 million drawn and our revolving line of credit and we purchased two hundred million in stock are strong balance sheet provides us the flexibility to grow the business and create shareholder value.

It is still very early, but I am encouraged by our start to the current quarter. We are just over three weeks into our important fourth quarter and we are off to a very good start off with the same store sales at both banners currently tracking above reported third-quarter levels.

We are truly leveraging the power of both Brands actions taken in 2019, including the consolidation of store support centers and the alignment of organizational leadership phone number one team are paying off examples include we are experiencing improve accessibility to a broader base of Manufacturers and vendors by going to Mark as a $15,000 Plus store chain many vendors are willing to work with us to support both the dollar price points as well as price points above the dollar our Merchant team are harmonized to act with Clarity focus and speed.

when the first cold wave hitting March we took action to de-risk the Halloween season and actually saw the best cell through in company history this fall we modified five minutes away from the traditional cold and Allergy and two more focus on Health Products vitamins and face coverings we also made strategic buys on paper home and sanitizers to get ahead of the curve as cold cases were expected to pick up in the second wave

Our seasonal businesses both at Dollar Tree and Family Dollar are doing very well. We are able to be a convenient shopping trip to meet the needs of those staying at home eating at home working at home and or learning at home. We are seeing greater sales of seasonal product as it hits. Our store's customers are buying ahead and not waiting until the last minute off. This is a resulting in better sell-through and reduced markdown exposure.

We will continue.

To develop new strategic store formats. So we are able to better serve our customers while improving store productivity margins and returns. We want formats July's the best of both Brands to serve customers and all types of geographic markets. This will be a story of evolution change and Improvement.

Our gross margin return on investment or generally at Family Dollars. The highest it is being since we have owned the business. This is a combination of improved sales gross margin and inventory returns.

An example is our apparel category where we delivered a significant Improvement in sales and margin with material less inventory.

This is wild overall Market has been down for apparel. We are focused on delivering the basics at greater values sharp a price points.

The team has undergone a significant amount of work to get us to this stage with one Consolidated store support center a strong balance sheet and it aligned energized and focused leadership team and a full staff of talented retailers. We believe we have the ability to better serve customers across North America.

Our actions represent a transformational opportunity to Leverage The Power of both of our Brands to flexible store formats designed to drive operational results month and enhance shareholder value.

Before we go to your questions. I'd like to wish all of our stakeholders a safe and happy holiday season. I believe we are all looking forward to the arrival of 20 21. It's almost here off operator. We are now ready to take questions. Thank you. If you would like to ask a question about if you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please limit your question to one question and one follow-up question. If necessary again, press * 1 to ask a question will pause for just a few moments to allow everyone an opportunity to signal for questions.

We'll take our first question from Simeon Gutman with Morgan Stanley.

Thanks, good morning, everyone and and nice quarter. I'll ask one and a follow-up as well as one full question first the quarter-to-date acceleration at both. Banners. What do you attribute it to Thursday? Is there any stocking up going on at the Family Dollar banner and and you mentioned you know, maybe some like shopping earlier. Is there any signs of pull forward of holiday spending and then I just want to go back to the Dollar Tree Plus for a second. It sounds like you're excited. The initial results are good. I guess my question a little tongue-in-cheek is why did it take so long if it sounds like it's so successful. I didn't it come sooner and anything about the current backdrop that that could be unreliable as a test. Thank you.

Hey, thanks for the question, you know so quarter-to-date. We we are seeing some of the the stock up right now. It's not quite at the level as it was back in March and April were estimating at about 30% of the rate. It was earlier in the year, but we can see that they are stocking up now and the seasonal help to pull through this and pull forward sales. We do either buying earlier and decorating their homes and it's really helping us a lot in our sell-through. We have a less markdowns and and so there's less exposure. There may be to get more product out on our sales floor regarding Dollar Tree plus while I know it it seems like it takes long but this is really odd. It's similar to other tests that we have when we have our crafter Square we tested it in three or four stores then we put it out into $800.

Stores and then roll it out and now we're rolling out to the chain and and that took probably eighteen months to two years. It's just that we didn't show you all the backdrop of the early testing and we we took the same Pace as we were looking in our snacks zones at Dollar Tree, you know, we tested that for a year in stores and refined it and then rolled it down to a certain amount of stores and then began our process. So this is what we're doing the same process. We want to make sure it's right and aligned and we've even learned a lot from our process by shifting a lot from consumables into the discretionary items that the customer really wants that we can bring Great Value in and it also takes our buyers times to go these are both imported items and we actually manufacture and create these items to be a great value and a wow factor at the three and $5 price points. So we want to make sure it's the right thing.

That's adding value to our customers and to our company as well.

Thank you.

We'll take our next question from Edward Kelly with Wells Fargo.

Yeah, hi. Good morning. So like just a follow-up on on Dollar Tree plus I was hoping that you could provide a bit more color on the actual decision to expand the test, you know any more detail in terms of what you've seen from a sales lift or a margin impact in the stores where the product is currently why is 500 stores the right number and then you know, it's notable that you have a team that's focused on this product internally. So, what does that say about where we go from here?

Yeah, it's it's I think the first answer is you know, we're organizing around the strategy. So that tells you that there is commitment there that we want to find great Products off the three and $5 price points and it gives us the ability to also leverage that across both banners where it makes sense and the $500 is gibberish. We're actually rolling it out to more distribution stores. And we look at stores that are sized appropriate where we can bring this product into those stores. So 500 is walk-in estimate of stores around those distribution centers, and it also gives us enough stores to really see how it continues to grow and improve in our customers respond.

we like

The results, uh, we can tell that the sales are growing compared to when the sales of the consumable items. They're reacting more. So the overall sales of these items are growing that's challenge we have is in the backdrop of the COVID-19.

Things that we do like is even in a seasonal items were the three and five dollar items are really responding well and seasonal.

Thank you and just a quick follow-up related to that. So, you know, I think it was about a year ago that you know, when asked about this initiative you guys had talked about how you know customer that maybe like a third of customers liked it a third. We're a different a third didn't like it and I think it had people sort of thinking like, you know, maybe this is not something that would make sense. How has that customer response change?

Well, I think the number one thing that we can see is the sales are up over David the program and it was consumable. So we think that they're responding favorably cuz the products that we are buying are selling through the wait we expect and it's continuing to grow.

Thank you.

Thank you. We'll take our next question from Matthew with JPMorgan great. Thanks and congrats on the performance guys suck. Thanks Matt off in modeling fourth-quarter gross. Margin. It's all our tree and I know we've talked in the past about the return to 35 to 36% gross. Margin. Is there any impediment to getting their potential next year at the Dollar Tree Banner?

Hey Matt, this is Kevin. So obviously as we went through the quarter mix was a important component of driving the approved merchandise. Margin that and Freight so which Again mix moved about three hundred basis points, a year-over-year towards destruction area, and that really speaks to obviously things like Halloween Mike spoke to had a great sell-through speaks to craft or Square which is just Thursday and dynamic element in our stores. So I think those are important things as we've seen that mix shift a little bit and it may be a little counterintuitive the fact that we saw Improvement in Freight, but you have to remember a year ago from a compare standpoint. We saw a pretty big increase a year ago from a surge wage.

Ian point and so are

Comparisons were maybe a little bit different than some people so we actually saw a little bit there. So I think that's important at the end of the day so, you know, and and again, I think we thought we saw some leverage with the comp on occupancy which again obviously with a 4, we would expect leverage there. But as far as the 35 or 36, this was our best offer prophet and the Q3 since I believe 2017, it gets us on track to basically, you know, if we continue these this type of trend where we would be able to be in that $35 to $36 range. And again nothing there is no barrier stopping us. So we just have to continue to build the business as we always have faith and you know, I think the discretionary side is very strong right now, and I think that's a big benefit as well.

That's great. And then as a follow-up on the Family Dollar side, what have you seen from new customers relative to spending from existing customers more recently in the in the improved performance out how to think about retaining some of these new customers and maybe larger picture. How do you envision my the Family Dollar, story as we think about relative to the low single-digit historical account profile at Dollar Tree? Do you see a similar? You see it lagging? What's the best way to think about Family Dollar multi-year relative to constant Dollar Tree in your opinion?

Yeah, and in my opinion, I see it similar to The Dollar Tree low single-digit continued growth year after year in comp store sales growth. I think both banners should be settled into that with no problem.

Regarding the the new customers we what we're seeing is just overall. It's very similar to new and old as I shared in the prepared remarks that when the customer are coming into the store. They are shopping with intent and what we do like to see is there a shopping the entire store in the discretionary side that we are working so hard on Monday to fill that basket. We're we're seeing our discretionary side grow with both new and old customers.

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We'll take our next question from Brad Thomas with keybanc capital markets. Hi. Thanks for taking my question. Nice quarter here. I was hoping you could color on how you all are starting to think about twenty Twenty-One at this point, you know, clearly 2020 is shaping up to be a good year for you all but there are also some Dynamics like track that have been some challenges for you. I guess. How are you thinking about some of the puts and takes at a high level at this point for next year?

Hey Matt, we're all looking forward to twenty Twenty-One. I I think you know the way I think about it. I do think the customers the dynamic and their shopping patterns have changed and I think it's going to be slow to change. I don't think there's going to be a light switch that's going to turn on and all of a sudden they'll go back to their old shopping patterns and activity. I think I think we will, you know, keep going after driving that basket size and when they're in our stores drive it with intent.

I think the other thing brand is obviously, you know as Mike laid out early this year focus on discretionary business in the Family Dollar Store off and obviously we've had the pandemic this year which is obviously, you know money into the water a little bit obviously an area that we feel where we can drive off new business and you know convert more customers at the end of the day the team continues to work cross-functionally to build out those assortments and you know, we saw our best Halloween sell-through in the time. We've owned Family Dollar this year. So that tells us that we can sell seasonal it can be a bigger part of the overall business and it needs to be a part of our overall business a bigger part as we go forward. So it's going to be a continued Focus just like we talked about earlier this year.

If I could ask a follow-up on the h two stores you talk about your plans for the the multi price expansion on the Dollar Tree Side. Do you have the target at this point for how many H to renovations to do next year? I know you paired back a little bit this year in the code back drop. How are you thinking about those models next year?

Yeah, Brad. You're right this year, you know this year about 750 H2S. We we entered the year expecting to about twelve hundred and fifty but obviously COVID-19 got in the way of that we do expect 1250 additional H2S in 2021 to continue that process forward. It's continues to be something that we can build upon our customers really like it. I really like the layout and the offering and the assortment and you know, it's an important part of the growth as we go forward.

Great. Thank you so much.

We'll take our next question from Peter Keith with Piper Sandler. Hi, good morning. Everyone. Maybe just to touch base quickly on some of the the gross margin and this looks like the the first time in a while we're shrink is now a Tailwind. So have you gotten over the hump where you think you've controlled shrink and to continue to see some benefit there and similarly on gross margin afraid as a nice Tailwind 4 to 3, but we have seen Freight rates jump rather dramatically. How should we think like that impact in the fourth quarter?

Yeah to really good questions. Thanks for the question Peter. Yeah, I think as we look at it shrink we did see some nice Improvement again as as it was a a headwind for much longer than it should and and look stated before it's been front-and-center on many people's desk. You know, I would tell you, you know a good call out for our operators and our asset protection team. We've made no progress. We've got some momentum I would tell you we are not where we need to be overall yet. You know, our goal is to be not just good but to be, you know, leading as it relates to this and we have more work to do but the good news is we have some momentum which is very very positive. Do I expect it to be a benefit? I think it could be a benefit as we go forward or I'll be not to the same rate on the Family Dollar side because we were cycling a fairly big increase in the accrual rate in Q3 a year ago dead.

But I do believe there can be some improvement there.

Great, I would tell you while you know, it was a a a good a good guy for us in Q3. I expect that to be somewhat tempered in Q4 to your point. Again, as I stated earlier on the call Q3 last year. Our freight was significantly high do the Surge, and just moving trailers. We have seen some of that increase that you just spoke to in the in the rates the team the transportation team is working hard to mitigate every every dollar they can but I don't expect it to be the same type of benefit in Q4 that that it was in Q3 and we saw more of that on the Dollar Tree Side wage than we did on the Family Dollar side just from a from a banner specific site think way to think of it. So that's kind of how those two items looked to play out as we go forward dead.

Okay. Thanks Kevin. Maybe a separate question for Mike. You've got some omni-channel initiatives. Looks like you were looking at both is for Family Dollar off. Maybe give us a little bit of sense in what your what you guys are playing around with their and is it only on the Family Dollar business where you're looking at that or or would you think about more omni-channel investment needed $4 down as well?

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No that yeah, thanks for the question. It's a great question. We think it's critical and especially after this year as you've seen by others and how the customer is really moving into the club Channel and using that so we definitely are going to build that capability at both Family Dollar and Dollar Tree in like we organized around with our Dollar Tree plus we are organizing around our omni-channel business as well. We've got a new leader there who's got great experience and we will accelerate our capabilities.

Okay, thanks much guys. Good luck with the holiday.

Thank you.

We'll take our next question from Chandni Lutheran with Goldman Sachs.

Hi, this is Johnny looked at Goldman. Thank you for taking my question. Just filling up on that last question and I'll meet you also talked about introducing divorced Family Dollar. If you could provide any color on what early reads our what sort of customer is buying back what what the delivery basket is looking like and finally how do you feel about economics with Family Dollar, you know economics to ship to home with family daughter.

Yeah, it's really early. We we launched it mid-to-late quarter. I would say we really liked the basket size. We liked the public that they are buying inside the basket and and we're excited about offering that opportunity to our customers as they shift into some of their behaviors. The beautiful thing is we've got you know, we are 15,000 store chains and we're conveniently located in their neighborhoods and close to their stores. And then when we combine that with their ability, should they want to buy online or pick up in store or get it delivered at home. We're going to have that capability as well.

but it's it's it's

The early for us but we do like the basket we're see and in the mix of the product.

Got it. And I guess my follow-up is a little bit long-term, you know, as we sort of think about twenty Twenty-One and Beyond there is a lot of talk about raising the federal minimum wage threshold. Could you perhaps give a scholar in terms of what percentage of your employees are minimum wage? How do you think about if if that headwind would like to come about how should we think about that?

Yeah, that's a good question because we think about that a lot and and and the minimum wage as you can imagine the state minimum wages are all over the board wage and it's hard for me to it would be a different number by by state in geography. But there are there are probably six to seven states already on their pass $15 an hour minimum wage that they've announced several years ago and they're on their path to that. So our operating teams is that are absolutely working on driving first and foremost off, you know in store efficiencies you look at if you can bring in technology and self-scanning to help leverage some of your resources of that way armored continue to look at merchandising methods Michelle Friday. Q's and then distribution methods. I mean, those are our three levers that we can pull our operators in the store technology.

G distribution and the product our Merchants are buying are all the things that we actively are going to be working on.

That's great. Thank you for taking my question and congratulations on a great quarter. Thank you.

As a reminder. If you would like to ask a question, please press * 1. Please limit your question to one question and one follow-up again. That is star one to ask a question. We'll take our next question for Michael Montana with evercore.

Hey, good morning. Thanks for taking the question. Just wanted to ask first off on flow through rates. If I could for the fourth quarter third quarter was quite healthy in the mid 20% range. Just wanted to see if there's any puts it takes that you would call out to think about, you know at the Enterprise level if that is sustainable. And then I just had a follow-up on Dollar Tree Plus.

As it relates to flow through, you know, it was a it was a very a very good month or very good quarter issued say in regards to flow through obviously, we've got significant leverage across both businesses and we saw also help on the on the mix in particular from from both gross gross profit in general is you going to 4 I would tell you in where I I do expect gross profit to improve your over a year, but not at the same rate as on a Consolidated basis as it did you three, you know just based on some of the things that we we won't necessarily repeat which we talked about today. So shrink may not be as big a help and and wage rate may not be as big of a help and things like that. So the flow-through probably won't be the quite the same on total gross profit, but in general Q4 does tend to be a higher

discretionary

. For Dollar Tree in particular and we saw see some of our traditional sort of our highest margin out of all of our foreign workers. So simple and takes their I think, you know, obviously we expect some improvement. It just won't be the same probably as much as what we saw in queue in Q3.

Okay, it's helpful. And then if I could just around Dollar Tree plus I want to see if there's any incremental color that you could share in terms of you know, how the stores performing, you know relative to the overall chain from a perspective when you roll out Dollar Tree plus and if there's any incremental color, perhaps related to that on in criminality either in terms of Shoppers or kind of baskets just any incremental color there.

Yeah might thanks. We for your question on the d t plus the you know, as I shared earlier right now, when when you look at relative performance to other stores or prior to the challenge we have is when we changed to the AR 2.0 and brought in all our discretionary it landed right in March. So there was so much Choice around other stores and or themselves that is really hard for us to determine the lift. It was Associated specifically to these products. And remember it's you know down here footage. It's still a ten to 11% of the total store. So it's hard to see what this is doing. But the two things we do see we like the sales that these are a product that we're putting in there at the three and $5 price point are selling.

It's also selling it a much higher margin because it's discretionary product and were able to manufacture these products and bring value to the customer. And then the third thing we can see is the the baskets eyes. When one of these items are in the basket, it is twice the basket size when they're not in there. Those are the things that we can see and gives us courage to keep moving forward and keep improving it.

Thank you for taking the questions.

We'll take our next question from Scott ciccarelli with RBC Capital markets.

Good morning, guys got chiccarelli. I I know you guys made a really concerted effort to improve your discretionary mix. But have you been surprised by the magnitude of change in discretionary versus consumable and then relate to that are there any supply issues with consumables or is that just not where your what your customer is looking for in today's environment?

Hey Scott, thanks. Thanks for the questions. I'll end up the first the consumable that we are chasing the product and the the national branding is the products that that are related and manufacturers are still trying to build up capacity. It's and it's in the paper the hand sanitizers this the wipes and some consumable related products. So we the inventory levels are improving from April but they are still not caught up with the demand. So yes, we're still chasing a little bit of that and there's still it's still rock girls.

I think is your question around discretionary and the strength there. I mean, obviously I think one it does speak a little bit to the pattern of the consumer. They are buying closer to home and so it's definitely part of it but it's really the categories that they're buying itself. Right? So people obviously as we talk about seasonal particular has been good life as people try to you know, stay somewhat normal and what's been an unusual period of time decorate their homes or you know a supplement their you know, soft Home and Office is at our Family Dollar stores is done. Well, you know you think about that as a, you know, kind of resupply their home and things like that and Decor so a lot of things like that is done very, well. Those are things we think we can provide on a on a regular basis and I think you know gives us the opportunity to show folks. What we what we have in those in that Arena dead.

And hopefully convert them to continue choppers with us as we go forward. So it's a good opportunity as we continue to build out that assortment. Yeah, just a little bit more color on just a little bit more color of our Merchants are worked really hard at providing a much better value at sharper price points and it met the need the last several months as cash just described. So that is going to be going forward our Merchants are going to continue to buy better by Basics and buy Great Value and Supply that to the customer from this point.

Okay. Thanks a lot guys. Appreciate it.

We do have time for one or two more questions. We'll take our next question from Paul with City.

Hey guys, thanks, you know in response to an earlier question. I think it was Ed's on a Dollar Tree plus you mentioned something about doing it in stores that are close to the home. I think just want to make sure I understood that and whether the Dollar Tree plus rollout would be in certain geographies. Also, if you're happy with the test, you know, are there any limits off these stores could get this assortment either because of store size or proximity to DC and then just follow it may be a silly question. But why don't you like the even numbers $2 and $4 when you think about that Ultra Plus business thing?

Yeah, so the first one the the reason we're rolling it out know. We're not limited by proximity to the DC's at all. It's really about bringing in these products into a wage d c so you're bringing in and creating slots for the difference items and we're we're going to do our due diligence and roll this out and test off and the store size was really more related to we do not want to impact our single price point assortment that the customers used to in our stores. So we're looking for south of stores right now during the test that doesn't adversely impact that assortment. So that's the only reason we're doing that.

And the and then yeah and your question on the two and four we're looking for Great Value at Great products and the three and $5 price point May resonate more with our customers and it differentiates itself from the dollar price point and we don't want to muddy the water with those in between products. We need to really focus on step changing items that were selling for 3 and $5 that are really seven and ten dollar items anywhere else in retail. So I wanted Dead or trying to bring Clarity to ourselves to our merchants and for our customers on the value.

God thanks. It just did stop on the source side what percent of the the fleet, you know are are large enough to handle that Dollar Tree plus assortment at this point.

You know, I do not have that right now with me. Well we can Randy can get back for you.

Okay. Thank you. Goodbye.

We'll take our last question from Michael Lasser with UBS.

Good morning. Thanks for taking my question. You don't mind to deal with you and discipline process that you typically go through when you're rolling out initiatives from Pilot to 10 a.m. Throughout. Could you see any conditions under which you would roll back this test or this expansion of the test of Five Hundred Dollar Tree Palm location, particularly, even some of the opacity that you you spoke about in determining the the results of of the initial 100 in the last six months, and I'm following month.

Yes, I mean so the obvious ones if it impacts if we had adverse implications the cops store sales in the stores and or margin dollars and it's not a creative creative to the business. I mean, that's what we're really looking for is that it's this program has to be accretive to sales margin and operating income and that's what our expectations off.

Have you gotten to a point like this was expanded a test and then subsequently, I've had to roll back to the success.

I'm sorry. What was the question? Have you gotten to a point like this where you taken a test to the next level and then subsequently has had to roll back.

I can't remember one to this level know we've got certainly a lot of tests out there that never went forward with but no not pretty sure in. My phone number is on framing the the Family Dollar consumable business which you know increase, you know, 4% range in the most recent quarter. If we if we compared to a lot of the results from the other consumable retailers, it was a bit slower and perhaps suggest that that Sammy dollars market share in those categories was laughing behind others. How do you think about that in in? How do you see the ability to improve share from this point for Family Dollar?

Yeah.

It's a great question. But first and foremost, it was a positive low single-digit. So we continue to grow our consumable sales and you know, nine months ago in March month. We were talking about how consumable has always been healthy for the Family Dollar business and I foresee that continuing to grow and we're going to keep doing the same thing as we are on the discretionary side. We're bringing great values. We have the right assortment. We're going to sharpen our price points to be competitive in the marketplace and we are chasing the inventory. I would say in the consumable side. We are not happy with our everyday in store stocks on consumable. So we believe that we can build that business going forward.

Okay. Thank you very much, and have a good holiday. Thank you. Thanks for your interest.

That concludes today's question-and-answer session at this time. I will turn the conference back over to Randy Geisler for closing remarks.

Thank you, Shelby, and thank you for joining us for today's call and for your interest in Dollar Tree. We would like to wish best wishes to all of you for a happy and safe holiday season. Our next earnings conference call to discuss Q4 and full-year results is tentatively scheduled for Wednesday, March 3 2021. Have a good day with today's call. Thank you for your participation. You may now disconnect.

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