Q1 2021 Dollar Tree Inc Earnings Call
Good day and welcome to the dollar Tree, Inc. First quarter earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Mr. Mr. Randy Giler VP Investor Relations. Please go ahead.
Thank you Stephanie good morning, and welcome to our call to discuss dollar tree first fiscal quarter of 2021.
With me on today's call will be our president and CEO, Mike <unk>, and our CFO Kevin Wampler.
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 1095.
<unk> may differ materially from those indicated by these forward looking statements as a result of various important factors included in our most recent press release. Most recent 8-K 10-Q and annual report, which are 1 filed with the SEC. We have no obligation to update forward looking statements and you should not expect it.
To do so.
Following our prepared remarks, we will open the call to your questions. Please limit your questions to 1 and 1 related follow up I will now turn the call over to Mike with Ft dollar tree, President and Chief Executive Officer.
Thank you Randy good morning, everyone.
Our record first quarter performance reflects the progress we continue to make numerous initiatives to provide even greater value and convenience to our shoppers.
Dollar tree delivered its strongest quarterly same store sales since 2017, while improving its operating margin by 290 basis points.
Family dollar effectively cycle of 15 year, and a half percent comp sales increase from the prior year.
By driving its best post merger quarterly operating profit combined.
Combined the enterprise produce positive same store sales I guess of tough 2020 comparison, and a 220 basis point improvement in operating margin driven by higher gross margins and better expense leverage overall, a very solid start to the year.
During the initial post merger years much of the company's energy and focus was dedicated to integration related projects, such as stabilizing and restructuring the organization improving store maintenance.
Harmonizing our technology.
Designing and testing store formats, optimizing our real estate portfolio.
Elevating the operational execution in our stores.
<unk> improved assortments and value and ultimately consolidating our store support centers.
These priorities are critical as we prepare the combined business for long term profitable growth.
Now over the last 18 months, we have transitioned to an aggressive approach under 1 aligned leadership team dedicating our major efforts to customer focus initiatives.
With clarity focus and speed.
Examples of the innovation efforts are a brick and mortar initiatives include refining of growing our dollar tree plus multi price initiative, continuing to evolve and improve the HQ store format with expanded home seasonal and other discretionary categories.
Introducing the new combo stores for rural markets testing.
Testing fresh produce and frozen meat products in select stores.
<unk> self checkout and smaller number of stores.
And on our digital and omni channel initiatives. They include launching family dollar Dot com is of selling site partnering with instant card per same store delivery, which expands our customer reach and creating our new retail media network the Chesapeake Media group.
I'm enthusiastic about the long term impact of these actions designed to drive shopper satisfaction and loyalty.
Most of the ability to meet the evolving needs of our shoppers better than any other company can.
Especially inside the beltway and in Rural America.
I will share more details.
More detailed update on these exciting initiatives later on in the call.
But for now for the quarter, our dollar tree segment delivered its best quarterly same store sales since Q3 of 2017.
The 4.7% comp increase was comprised of of 9.5% increase of ticket.
Partially offset by a $4.4 per cent decline of traffic.
Notably we saw a double digit increase in traffic in April which represented our best monthly comp traffic increase in years.
From a cadence perspective.
<unk> was the strongest comp month with stronger pre Easter sales compared to the prior year followed by April.
February was slightly negative as we lost more than 2500 store days due to closures related to storms through Texas and Central U S.
Gross margin improved 180 basis points from the prior year as we saw record sell through on seasonal merchandise, including Valentine's day, Easter and Easter Candy.
Compared to the prior year's quarter, the discretionary mix as a percentage of net sales increased 710 basis points to 52.3 per cent.
Categories, performing well, including Crafts party or Easter seasonal toys and Florida.
Our inventory turn improved 22 basis points for the quarter.
Our merchant team continues to source great products that provide wonderful value at the margins we need.
With a product already purchased for the back half of the year I am thrilled with of discretionary back to school crafts holiday and seasonal assortments that will be hitting store shelves within the next few months.
As COVID-19 restrictions ease and customers continue to gather with friends and family for celebrations.
We plan to fulfill that need with our compelling mix with even more exciting discretionary items at the dollar price point that our shoppers of law.
Family dollar highlights for the quarter include its best post merger quarterly operating profit at $211.4 million.
Let me repeat that.
Dollar achieved its best post merger quarterly operating profit at $211.4 million.
Cycling, a very strong 15 year and a half per cent.
Comp from the prior year same store sales came in at a decline of 2.8 per se.
Equating to a positive 12, 7% on a 2 year stack.
Average ticket was up over 11% and traffic cycling of the initial pandemic related demand for the consumables from a year ago was down nearly 13% for the caller.
The family dollar merchants continue to do a terrific job refining the assortment to deliver meaningful value that is resonating with our shoppers.
Does the discretionary side of the business saw a 14, 7% comp increase.
Consumable comp again cycling unprecedented man from last year, It was down 7.7 per cent.
Regarding family dollar comp cadence through the quarter February was the strongest comp followed by April March or cycling of 20, plus comp from the prior year.
From a category perspective of the strong performers were prevalent primarily on the discretionary side of the business, including party apparel home decor beauty care and flow.
We continue to see encouraging results for stores that added fresh produce and frozen meats to their assortment in late 2020.
We're seeing materially higher average tickets when a basket contains produce armies.
I am excited to share that we will continue to expand on this initiative in 2021 and beyond as we are focused on meeting the needs of shoppers in all markets.
On the previous earnings call I spoke to the fact of family dollar customer satisfaction survey scores had improved 3 consecutive quarters across each of the 4 key categories store cleanliness product assortment customer service and speed of checkout.
Credit to our field leadership, and our merchant and operations teams each of those scores improved again for the first quarter, making of 4 quarters and of rule.
Increasing store productivity of family dollar has been a critical component of the turnaround.
In addition to all of the sales and traffic driving initiatives that have been increasing average sales per store. We believe family dollar is squarely positioned to continue serving more customers and gaining market share with its compelling discretionary mix, especially as family dollar shoppers are benefiting from stimulus dollars Inc.
Kris snap participation child tax credits and earning higher wages.
Now regarding debt dollar tree, Canada. The team had a strong quarter 1 from an operating income standpoint, the Canada team exceeded their budget. Despite challenges to sales in April related to increased COVID-19 restrictions.
From a real estate perspective, we completed 575 projects, including 106, New stores 36 relocations of 414 family dollar H 2 renovations 19 store closures.
We ended the quarter with 15772 stores.
Before I hand, it over to Kevin I wanted to let you know that in April we released our updated corporate sustainability report.
The report is available on the homepage of our website dollar tree Dot com.
I am very proud of the team's progress related to our ESG program in fiscal 2020.
Accomplishments included that we conducted a detailed assessment of our impact on the environment and measure of our carbon footprint to establish an initial baseline.
We developed our first generation of climate goals aimed to reducing emissions and increase the use of renewable energy we participated in the chemical footprint chemical footprint project for the second consecutive year.
We partner with ADT commercial for comprehensive and innovative security solutions.
And we formed our diversity equity and inclusion Executive Council and lastly, we launched our inaugural choose to give workplace giving campaign.
We will remain steadfastly committed to improvement.
Especially as related to our ESG goals and initiatives designed to minimize corporate sustainability of risks, while reducing cost and driving efficiencies.
I will go into more detail on several of our initiatives after Kevin speaks to the Q1 performance and our outlook Kevin.
Thanks, Mike and good morning for the first quarter consolidated net sales increased 3% of $648 billion comprised of $3.32 billion of dollar tree of $3, $1.6 billion of family dollar.
Our enterprise same store sales increased <unk>, 8% per 0.9% when adjusted for Canadian currency fluctuations.
Comps for the dollar tree segment increased 4.7% for 4.8 per cent when adjusted for Canadian currency fluctuations.
Family dollar same store sales decreased 2.8% of cycling a very strong $15.5 per cent increase in the prior year's first quarter.
Overall gross profit for the enterprise increased 9.4% to $1.96 billion.
Gross margin improved 180 basis points to 33%.
Gross profit margin for the dollar tree segment improved 180 basis points to 33, 7% when compared to the prior year's quarter.
Factors impacting the segment's gross margin performance included merchandise costs, including freight improved 85 basis points improvements in merchandise mix were partially offset by increased freight cost of slightly lower mark on.
A 50 basis point of improvement in shrink, resulting from favorable of inventories and a decrease in the shrink accrual rate.
A 30 basis point improvement in markdowns related to improved sell through of Easter related products compared to the pandemic affected prior year.
And 25 basis points of leverage on occupancy costs from the stronger comp sales.
These improvements were partially offset by distribution costs, which increased 10 basis points, primarily due to higher payroll and depreciation costs.
Gross profit margin for the family dollar segment improved 140 basis points to 26, 8% in the first quarter.
The year over year improvement was due to the following.
Merchandise costs, including freight improved 85 basis points related to merchandise mix and initial mark on which were partially offset by higher freight costs shrink.
<unk> improved 60 basis points based on favorable inventory results disc.
Distribution costs improved 20 basis points compared to the prior year quarter ease.
Improvements were partially offset by deleverage on occupancy costs based on the comparable store sales decline in the first quarter.
Consolidated selling general and administrative expenses improved 40 basis points to 22, 3% of total revenue compared to 22.7% in Q1 last year.
For the first quarter yesterday of Navy rate for the dollar tree segment of a percentage of total revenue improved 110 basis points to 21.6 per cent when compared to the prior year's quarter.
Payroll costs improved 110 basis points, primarily due to decreased COVID-19 related store payroll costs.
Leverage related to 2 of the comp store sales increase.
Other SG&A decreased by 5 basis points, resulting from lower store supply expense, partially offset by increased inventory service expense.
Store facility costs increased 10 basis points due to higher repairs and maintenance costs.
Family dollar of the first quarter SG&A rate as a percentage of total revenue was 22% compared to 19, 9% in the prior year's quarter.
Store facility costs increased 25 basis points, driven mainly by higher snow removal costs.
Other SG&A expenses increased 20 basis points, and depreciation and amortization expense increased 5 basis points due to deleverage on the comp sales.
Payroll costs decreased 25 basis points, primarily due to decreased COVID-19 related store payroll costs, partially offset by deleverage related to the comp store sales decline.
Corporate and support expenses as a percentage of total revenue were essentially flat compared to the prior year's quarter.
Operating income increased 42, 1% to 500 of $19.9 million compared with $365.9 million in the same period last year.
And operating income margin was 8% in the first quarter compared to 5.8% in the prior year's quarter.
The first quarter of of 2021 included total incremental operating cost of $7.4 million dollar for COVID-19 related expenses.
Fair to $73.2 million in the first quarter of 2020.
Non operating expenses totaled $33 million, which was comprised of net interest expense.
Our effective tax rate was $23.1 per cent compared to 23, 9% in the prior year's first quarter.
Company of net income of $374.5 million of $1.60 per diluted share as compared to net earnings of $247.6 million of $1.04 per share in the prior year's quarter.
Our combined cash and cash equivalents at quarter end totaled 1.4 dollars $7 billion compared to $1.42 billion at the end of fiscal 2020 of.
Outstanding debt as of May 1st was $3 to $5 billion.
In Q1, we repurchased approximately $2, $1.5 million shares for $250 million. We currently have 2 <unk>, $1.5 billion remaining on our share repurchase authorization.
Inventory per dollar tree of quarter and increased $13.5 per cent from the same time last year, while selling square footage increased 4.1%.
Tori per selling square foot increased 9% this.
This includes a significant increase and goods in transit year over year, excluding this increase inventory per selling square per square foot would be down 1.7%.
Inventory of her family dollar of quarter end increased 11, 9% from the same period last year, while selling square footage increased 1.9% inventory.
Inventory per selling square foot increased 9.8%.
Capital expenditures were $224.9 million in the first quarter versus $235.8 million in Q1 of last year.
For fiscal 2021, we expect that consolidated capital expenditures will be approximately $1.2 billion consistent with our initial 2000 of 'twenty 1 outlook.
Depreciation and amortization total $172.7 million for Q1 compared to $165.5 million in the first quarter of last year.
For fiscal 2021, we continue to expect consolidated depreciation and amortization to range from $720 million to $730 million.
Our outlook for the remainder of 2000 of 21 includes the following assumptions.
We are forecasting a low single digit consolidated comparable sales increase for the year.
We expect the Covid expense run rate for Q2 through Q4 to be consistent with Q1, net approximately $7.5 million per quarter.
As noted in our March earnings call minimum wage increases in states and localities will increased store payroll by $45 million to $50 million for the year.
Additionally, we expect pressure on wages due to the current shortage of workers available for our stores and distribution centers.
With regards to freight the market conditions of conditions of continued to deteriorate since our update in March.
Now expecting costs to be significantly higher than originally projected by our led by import freight due to the continued disruption in the global supply chain from equipment shortages and capacity issues.
Freight costs in the remaining 3 quarters of fiscal 2021 are projected to be 70 to 80 cents per diluted share higher than the comparable period in 2020.
These additional costs will have the biggest effect on Q2 and Q3.
These disruptions affect the timing of inventory receipts of could affect sales of mix.
We expect shrink will continue to be of tailwind as we go through the year higher sales lower store inventory levels and better processes continue to drive better results.
Net interest expenses expected to be approximately $34 million in Q2, approximately 137 million for fiscal 2021.
For fiscal 'twenty, 1 we expect net income per diluted share will range between $5.80 and $6.05.
Our outlook assumes a tax rate of $23.7 per cent for the second quarter and $23.4 per cent for fiscal 2000 of 'twenty 1.
And weighted average diluted share counts are assumed to be $232.9 million shares for Q2, and $233.3 million shares for the full year. Our outlook does not include any additional share repurchases.
Now I'll turn the call back over to Mike.
Thanks, Kevin through 'twenty, 'twenty and into 'twenty 'twenty, 1 we have demonstrated great momentum in our business I believe this is attributed to all of the work in developing great strategic store formats.
Finding our assortments and accelerating many key sales and traffic driving initiatives we.
We have a resilient business model.
And we are in what I believe is the most attractive sector in retail value and convenience is more important to the customer now than ever before.
And like most retailers. We are currently faced with higher freight costs, both international and domestic worker shortages and uncertainty related to inflation. These are issues.
These issues are rising as cold it abates and they are not systemic day dollar tree and not expected to be permanent in fact, we believe we have increased our long term earnings potential for both banners as always we are working hard to adapt and react and navigate the business based on the curtains.
Firemen.
I have great confidence in our team and I'm extremely proud of their commitment dedication and focus.
Now I'd like to provide an update on several of our key initiatives.
We incorporated the dollar tree plus multi price assortment into an additional 128 dollar tree stores in Q1, bringing the total to more than 240 store locations by quarter end.
And the offering is currently in just over 280 stores.
Feedback from shoppers on a compelling offering has been extremely well received and very favorable.
The dollar tree plus assortment has expanded into select stores in Colorado.
As well as states in the southeast such as Georgia, Alabama, Louisiana and the Carolinas.
The newest generation is seeing sales lift of more than double prior versions, which is why it's been so important for us to evolve and refine before of larger rollout.
We are committed to reaching our 500 store target all of the timing may shift beyond August due to the stronger than forecast and sell through and inventory availability.
We will definitely continue to expand dollar tree plus in fiscal 2022.
More details about the expansion will be provided later this year.
Last quarter, we introduced our newest strategic store format or a combination or combo store.
We continue to be extremely pleased with the performance of these stores at quarter end, we had 61 combo stores in rural communities of which 34 are new stores 19 of renovated stores and 8 are relocations or expansions.
We continue to experience of 20% comp lift and renovated combo stores, the new stores are exceeding their pro forma the combo store Leverages, both dollar tree and family dollar brands to serve small towns across the country.
The store combined family dollar has great value and assortment with dollar trees thriller behind it of dollar price point.
Creating a new store format targeted for populations ranging from 3 to 4000 people.
Remember these are markets, where we would have traditionally not opened of dollar tree store alone.
We will open more than 100 combo stores. This year and are in the process of building a strong pipeline for fiscal 'twenty 'twenty 2 and beyond.
You can get more information at family dollar Dotcom forward Slash combo stores.
We continue to be very pleased with our partnership with instead of car.
We are offering in CCAR of more than 6000 family dollar stores across 47 markets during.
During the quarter approximately 5500 of these stores had at least 1 order and 96% of those stores had multiple orders.
We are seeing a materially higher average ticket as well of higher gross margin on these transactions.
With sales continued at a healthy pace on a weekly basis as expected we've seen a softening in the growth trajectory as vaccinations are on the rise of more shoppers are comfortable visiting all of our retail store locations.
Last month, we introduced our new retail network, the Chesapeake Media group.
This new platform provides our shoppers with compelling content never seen before on family dollar digital space.
We serve 95 million weekly digital impressions and have approximately 14 million subscribers to our digital smart coupon program.
We currently have commitments from our largest CPG brands for more than 40 campaigns. These.
These engagements engagements are coming to life through AD placement on the family dollar App family dollar Dot com email and social media influencing purchase decisions in real time.
We believe the Chesapeake media, who will enhance the opportunity to further drive loyalty and store traffic for family dollar, while increasing by an partner of awareness and product sales ultimately driving market share gains for family dollar.
These are just a few examples of our ability to act with more speed clarity and focus on initiatives since many of the integration priorities are now behind us.
I could not be more excited about the opportunities ahead of us, especially the H 2 combo store formats, and our dollar tree plus initiative.
As an organization, we are certainly in a much better position to be aggressive and drive innovation.
Looking forward, we believe our strategic store formats, our store growth plans dollar tree, plus and many key sales and traffic driving initiatives of.
Along with our robust balance sheet will enable us to drive long term value for our stakeholders.
Operator, we are now ready to take questions.
Thank you have you like to ask a question. Please signal by pressing star 1 on your telephone keypad, if you're using a speaker phone. Please make sure of immune function is youre knocked a lot of you said Mr. <unk> appointment.
A lot of time for all questions. We ask you limit yourself to 1 question with 1 follow up question.
You May press star 1 to ask a question.
First question comes from Matthew Boss with J P. Morgan.
Great. Thanks, so much.
To start off Mike could you just speak to the cadence of performance of the dollar tree concept, maybe particularly around events such as the Easter and how its performance continued in May and then just with that as we think about the remainder of the year. How are you planning receipts around event as we think about.
Question, Harry side and of party opportunity for the remainder of the year.
Yeah, Thanks, Matt So we.
Our dollar tree cadence of sales, we had a great Easter.
With record sell through our receipts came in on time to the plan and our sell through was the strongest we've ever seen.
The challenge that dollar tree had their com.
<unk> was in February when we had that huge snowstorm of net that equated to well over 1%. So if you think about of dollar tree 4.7 of them. If it wasn't for that storm could it came in at a 5.7% plus comp may.
<unk> has been on plan and to your point, we are seeing strong sales in party is people are having gatherings again in our receipts are flowing.
To meet our needs for graduation.
Our graduation receipts are in place and through into the stores and then we are you know.
Of course, prioritizing any of the seasonal events and and we believe that the receipts will come in according to our plan throughout the summer and then certainly as we approach the back to school and Halloween and fall selling time.
Great and then maybe a follow up for Kevin could you just help us break down the drivers of second quarter and back half gross margins at the core dollar tree banner clearly there is an impact from freight but does this change your margin profile multi year in Europe in your view and I think in the prepared remarks, you mentioned com.
Regarding higher long term operating margin targets than maybe you initially would have thought I brand. If you could just elaborate on that I think that'd be really really helpful.
Sure. Thanks, Matt.
Look at it obviously.
1 significant headwind this year in the sense of freight, which we've tried to lay out.
For everybody to help them understand that obviously, we don't believe it's permanent.
But obviously the global supply chain issues that are out there that everybody is working through and go through that I would tell you. This is Matt I think of you know obviously the big question that.
You and others continue out ask because you know as we've said we do believe dollar tree can return to that 35% to 36 per cent range.
From a gross profit standpoint, which is an important aspect if we take the freight out of the picture of this year I think we would be right. There on the cusp of that so I think that just gives you an indication that obviously our mix of product continues to be good as.
Mike spoke to and many of the discretionary categories.
We've seen some great progress in our shrink and obviously, we have more work to do but we've made some great progress and do expect that to continue to be a tailwind as we go through the year and I think you know then is as we go down the look at the rest of things.
I think as the sales go up it helps leverage things I don't think our leverage point as it relates to SG&A has really changed all that much of its traditionally been to that 2% range, but I don't think that's really changed so like all of those things go into it I think we have a great Foundation.
<unk>.
And as the Oh this unusual event in the supply chain of base I think that will give us the ability to flow that through.
Yeah, Matt I think some of the key components just as just to reiterate what Kevin is saying is we can control our margin through the product we carry.
Our our teams just finished in April by trip, we're getting great value at the margins, we need and that discretionary mix we're driving in.
Just like with our core of our Crafters square, we last year, we finished rolling it out to all stores and now this year, we're actually expanding it and.
And expanding the seasonal part of our craft. So we can manage our mix of weekend, we're controlling our shrink which is of a component of margin and if you think about you know we.
What I really like about the first quarter of course, we beat last year by 710 basis points and hit a hit of 52, 3%, but if you go back to 2019 for the first quarter, our discretionary mix was $49.4 and we liked our mix back of that and we grew at above.
The normal baseline of 2019. So those are of levers we can pull so that we can hit that 35 per cent to 36 margin.
That's great color best of luck guys.
Thank you. Our next question comes from Scot Ciccarelli with RBC capital markets.
Good morning, guys. Thanks for the time.
I want to ask about the sales performance for dollar tree and I know you guys had out of 4.7% comp but to be fair. We are seen at the scene are extremely strong results across so many retailers selling on a stack basis.
And yet dollar tree, saying, Eric just under 4%, which is well below even your own family dollar of operation. So I guess the question is do you think there's any headwinds impacting that business now is it.
To be a function of the trip consolidation bursts of low price point model or any other colors of your thoughts would be great. Thanks.
Yes, Scott Thanks for the question as I said, no. We don't we don't see anything structurally.
Wrong with the dollar tree's capability of delivering that low single digit comp store growth quarter after quarter.
And we agree with of $4.7 if it wasn't for that snowstorm, we'd be sitting at a 5.7% to 6% and we probably wouldn't be having the conversation.
Dollar tree is doing great customers are responding and of responding to the categories of party and seasonal and crafts.
So no I don't see anything structurally in the way of dollar tree continuing to grow the economy.
That was just more of a you know what we're hoping to get on a steady kind of low single digit kind of comp cadence and regardless of what the economic environment is.
Absolutely.
Got it okay. Thanks, a lot of that.
Thank you. Our next question comes from John <unk> with Guggenheim.
So a quick follow up on freight right. So it looks like of full year impact might be 80, or 90 bps. When you think about trying.
Trying to gauge how much of that might be structural lose it.
Euro percent in your mind.
How long do you think.
Your best guess is kind of takes to play out.
And then what are you doing.
To mitigate.
Some of the numbers you gave us or you arent.
Net of mitigation to mitigate that right.
On any on any level of including pricing.
So let me start John and I'll, let Mike.
Add anything that he would like to add just kind of try to give you some better color I guess in general around trade to begin with so.
Obviously as we've as we are you know what.
Through Q1, and again, we finalize our important contracts in late April.
Well known that we've talked about that in the past, but you.
I think what we've seen out there is a capacity constraint.
And we've seen a dislocation between what we'd call the contract contracted rates and the spot market.
And so really where we're seeing.
From where we were at the beginning of the year to where we are now the biggest drivers of the increased freight is really import freight and really.
I'm, just seeing higher rates to move product.
Due to the capacity constraints as well as I'm looking at the spot market, because we will use of spot market some of them as well based upon all of things. So that's by far the biggest category.
I think the you know the the next thing we have seen that as a tightened as we went through the Q1 is related to our.
Domestic freight inbound and outbound of just the pressure from.
Lack of drivers as well as just try and everybody is trying to move freight across across the country right now and so it's.
Putting pressure on drivers as well as you may have to be paying surge rates to get goods moved.
And then the third thing I would tell you that's up from the beginning of the year is of the fuel prices have come up above where our assumptions were at the beginning of the year. Obviously, we saw that spike during the quarter.
With a couple of events that took place out there. So those are some of the things just in general that are driving the rate itself.
And again.
As we work through the year of.
Our expectation right now is that the global supply chain will.
Take pretty much of the full year to work through this.
And it's you know it.
And that's really within our assumptions as to what those costs related to that or if for some reason it breaks loose earlier that could be of benefit to us, but that will be yet to be seen.
You know structurally.
I don't know that we believe that there's anything structurally there of specifically.
Specifically for our business.
I think we obviously have to look at the capacity and of.
Try to think through that and how we continue to get sort of ahead of that in our planning.
Yes, John I'd, just a tail of Kevin I don't believe it's structural at all I believe it's you know the downstream implications of Covid and then the huge demands in the industry right now is upside down where the equipment is and the delays still at the ports out on the West coast and the East Coast.
The time that it takes to unload the shifts the amount of ships that are backed up.
And the equipment is in the wrong place and then just of high demand as stores open up that were closed last year and are bringing product in so.
Clearly this is a bubble.
It's not structural for us and and you know what.
We're looking at like every other retailer looking at all other SG&A items and as you heard Kevin speak to our shrink as a tailwind and that's offsetting all of these high cost we don't have the $289 million in COVID-19 costs from last year. So that's kind of offset some of this cost and then.
Our teams are navigating the challenge of this of the inflationary.
Our challenges and pressures that we have and the teams to look at the cost of goods and negotiate that.
As you mentioned on the prices, we will absolutely we're going to monitor and maintain the needed price gaps.
By market like you know and we will keep in mind, our customers and our shareholders.
And then just lastly quick you talked about dollar tree plus revenue the new iteration driving 2 X. The sales lift is that more items.
That your merchandising is it more.
Customers actually buying that product.
What's the driver of the <unk>.
Yeah, it's a little bit of both it's the.
We organized around it as I shared we've got a team dedicated to this.
Great value of an exciting products and it is a.
And a few more expanded categories.
And we're bringing it all together, we're just bringing all of the things that we've learned through the iterations as we roll it out sort of sales are strong the basket still twice the size.
And we've done a lot of customer intercepts and it is all very very favorable and positive. So we like what we're seeing in the family dollar plus our dollar tree plus.
Thank you.
Thank you Mr. Kirk of minor you May press Star 1 to ask a question. We ask you limit yourself to 1 question with 1 follow up to allow for time. Our next question comes from Chuck Grom with Gordon Haskett.
Hey, Thanks can you guys talk about rising input costs outside of rate.
Clearly concern with rising inflationary pressures out there in the market over the past 15 years, you guys have done a really good job managing through those periods. Just wondering if if today's different in any way.
Yeah, No I mean, it's we see inflationary costs 8 years of more than 15.35 years dollar trees held of 1 dollar retail price point over 35 years of inflation.
And they've been able to manage it we've seen oil at $185 a barrel and our model gives us great flexibility to changes out of you don't change the mix dropping item.
I would say after 35 years.
Being the only retailer in 35 years of inflation that hasnt raised of price.
And in those 35 years, you walk our store now we've got a better product mix, we've got a better value for our customers and better margins. So yeah, well, we're used to managing through these inflations that we got all kinds of different levers that we can pull to do that effectively and I'm confident in our team and and again, we just finished of.
Bye.
And were getting the margins, we need and then you pull the other leverages of markdowns and shrink in and manage it all together.
Okay. Good answer and then on family dollar margin rate.
With $6.7 per cent of I think thats the best since you've acquired the company just when we look ahead.
Sustainable do you think those margin rates could be given that you seem to have.
Your arms around the business.
Yeah, I'll, let Kevin speak to that for this but I you know Directionally. We absolutely believe we can continue to expand that that bottom line margin at family dollar.
And it's these initiatives its debt great strategic format that we have.
We've got the H 2 that continues to drive of 10% lift we got that combo store that drives of 20% lift.
Getting more sales per square foot in these stores is important.
Our merchant team is going to keep refining that assortment better price points more value and expanding that discretionary business is key for us and that's why.
So exciting about family dollar.
<unk> been able to do it. It's now of family dollar is now a top 10 retailer and discretionary in the United States and we've doubled our discretionary share of market in the U S. So.
And the team is going to continue to refine this and yet we still have a lot of growth on the seasonal part of it. So yes, we just had a record Valentine's and a record Easter sales at family dollar and the best self whoever put we've got tons of upside. So we absolutely believe that drying our sales per square foot.
Driving our store count and our and our renovations of the H twos will keep the top line growing our merchants are absolutely going to keep this mix and margin improvement and then with of Chesapeake Media group that we have gone will be able to have stickiness, making real time offerings to our customers. So yeah, we've got a lot.
Great initiatives aligned to keep that top line going.
And then leveraging it to a better bottom line.
And Chuck of it just it just from the I guess, the absolute numbers side of it.
We do believe that these numbers are sticky right and that's our expectation. So it is our expectation to continue to improve overtime of.
You know we have the headwind of the freight this year, but I mean, all of the things are going in a very positive direction.
Which gives us the confidence that we can continue.
Continue to grow our family dollar business and a very profitable way and with the the way we've been moving the discretionary business, which is an important piece of it.
That's what gives us gives us that confidence.
Thank you and good luck.
Thank you. Our next question comes from Michael Lasser with UBS.
Good morning, Thanks, a lot of for taking my question.
Number 1 piece of feedback that we've heard this morning.
Your transportation costs from kidney went from $80 million 90 days ago.
Something in the range of 210 to 240 million dollar now essentially tripled recognizing that.
It's gone up.
The markets remain tight.
What is the change of what caught you off guard.
Okay.
Impact on your profitability.
These non anticipate 90 days ago, Inc.
And as you mentioned.
Kind of contract in April they kick in in May and now is the debt you have to wait until the following day.
Call come all in.
Your profitability to be impacted by Covid.
While I think what investors want of here is whether or not 2022 profitability can get can be substantially higher.
The imbalance between the demand for transportation.
5 of the transportation come back.
More imbalanced.
Yeah, Michael it's Kevin.
You know from the standpoint, I gave some color would tell you that.
From a contractual basis, we do sign hanging of contracts, we do have the multiyear contracts as well.
And then the other piece to your point, you know what what's different compared.
Compared to where we were 3 months ago and as I said by far the biggest component of the import.
Piece of this.
And it's really related to capacity.
Well, then how much of the spot market, we will need to move product and the spot market is very dislocated from what contractual rates are at this point in time.
Upon demand out there so that is where we really probably got.
A little more surprises than maybe we expected obviously, but again, it's that will take care of itself over time, our contracts our contracts. They do go through April of next year.
But that of so that is the way to think about it. So this will continue a little bit in the first quarter, but we had higher costs already in Q1. This year. So we'll see.
You know, that's a long ways away and a lot of things will change between now and then.
Okay.
My follow up question is on.
Dollar tree, plus and the combo stores the combo stores.
The way you'd spoken about them it was a lot of enthusiasm.
And also <unk>.
The net.
2 of parameters around the store.
Or are you seeing big lift to sales and profit from store.
Whereas you're alluding to.
More unique financial characteristics.
Around the dollar tree plus test.
We're just providing a little bit of of lift or.
Seemingly a bit of a list of those dollar.
Our tree items and providing the delay of a lift.
Well be talking less about relates to the entire store. So can you can you characterize why youre talking about E. Indifferent. We ended that suggest anything about the long term potential of dollar tree plus.
Because it could presumably be in all of the dollar tree.
Dollar tree store, whereas you might only have.
A few hundred combo store of overtime.
Yeah. So the difference is they're 2 totally different strategic formats, we will start with the combo store is going after small town Rural America. We've identified these are towns of about 3 to 4000 people that family dollar would go.
In 2 and we would do okay.
And what we thought is these are talented at family dollar wouldn't normally go in so here, we have 2 powerful brands, what if we brought them together into a small town to meet that customer needs and by doing so we absolutely are getting customers are very enthusiastic about it our sales are higher.
Here then if it was just of family dollar. So now we're in a small town, there's 3000 of them, where we're going to get to over 100. This year and we're going to continue to grow this and we have the seed points identified on a map and we're going to keep growing this real format and yes, it's got a better sales per square foot.
More productive store, it's a better margin because you've got dollar tree items in there of leading off with what they are known for on the seasonal of the party of the celebration of the greeting cards and the home and then offset by the everyday needs of the customer needs of the live their life and Rural America with the discretion.
Jerry Tsai decorating their home.
Dressing up their children and their kids and feeding the family. So it's a great format and we're going to continue to grow of that in Rural America.
Now separate that from D T plus which is a dollar tree format and what we're trying to do is we will always defend that 1 dollar price point. It's the most defensible retail strategy in America, Nobody has been able to hold of dollar price point for 35 years overall of those Inflations and we've.
Got a great assortment and great excitement and there's great brand recognition.
What we're trying to do is bring in now what if we take that same passion and value at a dollar.
And give the offering of of 3 and 5 dollar item to those customers in home in pardee and seasonal and certainly in the crafting area and we're bringing those items of the customer and they're responding wildly they enjoy it. They appreciate the value they recognize it and is live.
Sting our sales so they are 2 totally different strategies.
And they're getting great responses from the customer for different reasons.
And we will continue to growth.
The dollar tree plus as we refine and roll this out.
Great. Thank you so much and good luck.
Thank you. Our next question comes from Karen short with Barclays.
Hi, Thanks, very much for taking my question.
And to clarify 1 thing and then I had a bigger picture question. When you sort of May was on plan can you just clarify what you mean by that at each of us.
Respect of banner.
And then I had a bigger picture question.
Yeah.
May is on plan.
Okay from from.
From how we look at our our sales in.
And everything happening in the in the marketplace.
And out of consolidated basis, where we're hitting of where we're expecting.
Okay.
And then what was it.
Okay go ahead, I'm, sorry, I didn't know it was there of 2 questions in there Karen well I mean, I guess I'm wondering if you could just give us what plan was specifically in each banner.
Yeah, No we don't in the middle of the quarter, we don't share.
Where we're at.
Thank you Kevin we gave obviously our outlook for the consolidated comp sales for the full year, we don't break it down by quarter.
Point.
Okay, and then I guess I'm wondering is in terms of the dollar tree plus.
It sounds like maybe you're pushing out.
There may be a little bit of delay of reaching that 500, probably I'm, assuming that's more of a permitting issue, but I guess the question is.
What would it take to accelerate dollar shave club.
Necessarily this year.
The number of meaningfully in 2022.
Well, there's nothing structurally that's going to hold of it yes.
There's nothing structurally that would hold us back rolling out of D. T plus what we're going to continue to manage it against as all of the projects. We have we got 600, new stores 250, H 2 renovations.
Dollar tree, plus and our other various initiatives.
So we will look at this imbalance of but current there's there's nothing that.
There's nothing structurally that kind of hold us back at rolling this out at that at the pace that we want.
This year you know of.
Really the the delay is more than just a great pull through it as selling double our expectations. So.
As I shared on much March 3rd.
We had already in January of our bike trip, we had already bought for this year.
Where potentially we potentially could sell what we bought in 300 stores instead of rolling out to the 500. So we're just managing that and our buyers. Our merchants are working hard at chasing product and bring it in in and we're going to open. These of right I don't want to keep opening stores and not have the great inventory to satisfy.
Of that customer demand. So that's the thing that's that's kind of driving our cadence right now, but we are absolutely committed to getting rid of 500, we're going to keep buying of chasing the product of feed these correctly, but we're going to make sure that when we opened 1 we have the inventory to keep feeding it and meet that great demand from the customer.
Sorry can I just follow up on that but presumably by the end of this year you will have had for buying Chad. So as you look to 2022, so I guess, what I'm asking is if youre looking at 2022.
What would internally be even decision factor Tonight reallocate resources to opening more of the dollar we're expanding the dollar tree plus as opposed to some of the other projects.
Yeah again, just looking at the return and then what return we get on it what the lift is what the resources take so.
As we manage through this year.
We will look at all of those things.
Okay. Thanks very much.
Thank you again as a quick reminder, in the interest of time. Please limit yourself to 1 question. Our next question comes from Peter Keith with Piper Sandler.
Oh, Hey, good morning, guys. Thanks for taking the question I guess I'll just ask a quick follow up on the last comment would be the dollar tree plus stores seeing double of the sales lift what is what's the total comp lift today versus non dollar tree plus stores and of comparable market.
Yeah, Peter Thanks for the question clarification, it's not double the lift it's double the sales we thought it would do in the 3 and 5 dollar items.
That's why that's why this cadence thing is is it selling it at 3 and 5 dollar multi price items faster than what we expected.
So that's that's the clarity and we still see the double of the double the basket size. When this is in there.
Other thing I would share that what we are able to do is now that we've got a broader geographic view, we're seeing the results from customers.
Every household economic.
Sector, So we measure our stores and what the demographics and household.
The salary as in the household income in those stores.
It is it is getting the same response and 30000 under 50000 of 60070 to 80 and even of 100 and over we're seeing the same results. So our customers recognize that great value at 3 and $5 and it's working across all geographies right. Now. So that's that's really what we can sure.
Share of.
Basket size has great assets working across all geographies.
It's doing better than what we thought in the 3 and 5 dollar items.
Okay. Thank you.
Thank you. Our next question comes from Edward Kelly with Wells Fargo.
Hey, guys.
I just wanted to follow up on freight just 1 more time so.
Can you just talk a bit more about.
How much of the freight impact you think may ultimately be transitory assets. It should be this question because you know it looks like you expect to earn $6.50 to 680 this year in EPS excluding freight.
If you normalize.
And this is normalized and you see some growth on top of that I mean, you obviously have share repo as well I mean, it's not hard to get your earnings well into the $7 range in 'twenty 2.
So maybe a better way he said has your internal.
Thinking on 2022 changed at all on the freight headwind that you've seen to date.
And what's the variable like the key variable to 2 there.
Being a flaw in the logic that I just laid out.
Thanks for the question that I think.
It's a good question you know 1 of the reasons.
Obviously, we returned to give giving guidance for the full year.
With this release today and we also obviously gave the information on what we believe the freight costs R. R.
What that will be this year and really that's to dimensionalize. It.
For you and all of our shareholders basically.
In the sense of helping them understand again, we don't think of structural.
Again will there be a piece of it that sticks through next year as well, we don't know that yet obviously, we'll come to those conclusions as we work but.
The point being is we do believe debt.
Set this great Foundation and that the earnings power of both banners in the company in total is significantly better than what we'll be able to post this year, giving this you know what we can.
Call it temporary.
Headwind of this free.
So again that was really the way we wanted to frame it for you all.
Give you that kind of a viewpoint.
And to your point.
If it if it all went away next year.
I would not foresee a reason why we couldnt get to $7 as I sit here day.
Obviously, knowing that a lot of things will change between now and next March.
Yeah, that's the way, we think about it and Thats the way, we kind of wanted to frame it up yeah and I'd just reiterate what Kevin said, that's why we are very excited about the initiatives that we have gone we are driving our top line, we're getting great margins and that's why I stated I absolutely believe we've increased the long term earnings potential for both of these banners.
To drive that EPS growth and that this debt that freight is it's temporary not permanent and it's due to the tailwind of Covid and just the world in container.
Ocean freight is just upside down right now, but it will not last forever.
Mike can I just ask 1 follow up then so as it pertains to your store growth you have a lot of irons in the fire here multiple formats opportunities a lot going on between combo. Each 2 plots of core Canada et cetera.
Why couldn't you grow stores faster over time and is that something thats possible when things settle down and you have more confidence in.
And the outlook of all of this.
Yeah, absolutely and remember that the combo store is store growth I mean, when we opened a new store that will be of combo store in Rural America.
And as I've shared on March 3rd that we have 250 H 2 remodels. This year. We believe next year, we have about another 250, and then we will pretty much be done with remodeling. The current fleet of family dollar and then we will take that capital and all of that energy in all of our resources to top line total <unk>.
Store growth.
This year at 600, it could go to 700.758, I mean, absolutely, but right now we have it's there's only there's over 5000 projects, we have gone, but youre right, we move our resources, where we need them, but ultimately when when the Remodels get done we will absolutely point of that to total.
Store new store growth.
And the Great thing is our balance sheet allows us to do that.
Excellent. Thank you.
Thank you. This concludes today's Q&A session I would like to now turn the conference back to Mr. Randy Gary Lee for closing remarks.
Thank you Stephanie and thank you for joining us for today's call. Our next earnings conference call to discuss Q2 results is tentatively scheduled for Thursday August 26, Thank you and have a good day.
Great.
Thank you ladies and gentlemen. This concludes today's presentation you may now disconnect.
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