Q3 2021 Dollar Tree Inc Earnings Call

November 23, 2021

Good day and welcome to the dollar tree third quarter 2021 earnings conference call.

Today's call is being recorded at this time I would like to turn the conference over to Randy Tyler. Please go ahead.

Thank you Katie good morning, and welcome to our call to discuss results for dollar Tree's third fiscal quarter 2021 with me on today's call are Mike with him ski and Kevin Wampler before we begin I would like to remind everyone that various remarks that we will make about our expectations plans and prospects for the company.

Constitute forward looking statements for the purposes of the Safe Harbor provision.

For information on the risks and uncertainties that could affect our actual results. Please see the risk factors business and managements discussion and analysis of financial condition and results of operation sections in our annual report on Form 10-K filed March 16, 2021, our Form 10-Q.

For the most recently ended fiscal quarter, our most recent press release and form 8-K, and other filings we will make from time to time with the Securities and Exchange Commission, we caution against reliance on these forward looking statements made today and we disclaim any obligation to update or revise these statements except as.

As required by law.

Following our prepared remarks, we will open the call to your questions. Please limit your questions to one and one related follow up if necessary I will now turn the call over to Mike with him ski dollar Tree's, President and Chief Executive Officer.

Thank you Randy.

Morning, Thank you for joining us on today's call.

I would first like to take a moment to recognize our store associates distribution Center staff are field field leadership and our world class merchants. Our teams are working around the clock to do everything they can to defend against the current inflationary environment.

Our shelf stock and provide customers with undeniable value and great service and easy to shop close to home store locations there.

Their hard work and dedication is critical to our company's success and I'd like to extend sincere thanks for their unwavering commitment to our customers.

We experienced a strong finish to the third quarter as shoppers are increasingly focused on value in this inflationary environment. We continue to see accelerated progress in our key strategic initiatives, including dollar tree plus combo stores and our <unk> format.

During the past quarter freight costs were significantly higher than expected, our fourth quarter outlook, which Kevin will provide later in the call reflects the higher cost structure, we experienced in the third quarter. However.

However, our EPS for the third quarter was at the higher end of the range as the performance of the rest of the business offset these higher freight costs.

Great and supply chain disruptions of course continue to be our biggest challenge in the near term by far and the impact will continue for a while but this challenge is transitory.

As we detailed last quarter. Our team continues to take robust action to mitigate the impact of freight costs and supply chain disruptions.

We believe that based on the steps we have taken we will benefit meaningfully at least challenges abate.

The dollar tree segment delivered a comp sales increase of 60 basis points against its toughest quarterly compare in nearly three years.

On a two year comp stack basis. This was a sequential improvement of 170 basis points from the prior quarter.

Discretionary continues to perform well with a three 2% comp for the quarter.

Super bowls were impacted by assortment constraints and past dues.

Our $3 $5 plus assortment continues to resonate well with our shoppers as we had tremendous sell through on our Halloween merchandize and followed the core and for the year, our multi price point merchandize will exceed our sales plan and we will end this fiscal year with dollar tree plus and nearly <unk>.

600 stores exceeding our previous target of 500 stores by the end of the year.

Family dollar delivered a positive two 7% comp against the six 4% increase a year ago.

This represented the third consecutive quarter that family Dollar's, two year comp stack has exceeded 9%.

The consumable side of the business Comped over 3%, while discretionary was slightly negative as we cycled stimulus dollars from the prior year.

We are extremely pleased with the family dollar brand as the business continues to gain share.

Comps at both banners were driven by an increase in average ticket, partially offset by a decline in transaction count.

The last month of the quarter October represented the strongest comp for both banners.

Our digital offerings continue to evolve while the file we are steadfastly focused on best meeting our customers' changing needs.

In October we announced our expanded partnership with instant card to now include same day delivery from nearly 7000 dollar tree stores.

Nearly 100 million U S households, now have delivery options from 13000 of our store locations.

We're very pleased with the initial results from the latest expansion.

Turning to the 125 price points.

Our leadership team has been planning for the expansion of this initiative since late summer.

As you know in September we announced our plans to add price points above a dollar to all dollar tree plus stores and on a test and learn basis to select legacy dollar tree stores.

As a result of the positive customer feedback and store performance. During the initial phase we have introduced the initiative to nearly 200 additional legacy dollar tree stores.

In today's press release, we announced for the first time in <unk> 35 year history, we are lifting the $1 price point cabinet, all dollar tree stores and the majority of our assortment.

The $1 25 price point enhances our ability to materially expand assortments.

Produce new products and sizes and provide families with more of their daily Essentials, we will have greater flexibility to continue providing incredible value and help customers get the everyday items, they need and celebratory and seasonal products that dollar tree is best known for.

Additionally, we are now reintroducing many customer favorites in key traffic driving domestic and consumable products that dollar tree had previously discontinued due to the constraints of the $1 price point.

The new price point will also enable us to mitigate the historically high merchandising cost increases, including freight and distribution costs as well as higher operating costs such as wage increases.

Our teams are focused on speed execution and customer research and our shoppers are responding favorably.

When surveyed the majority of our customers indicated they were already aware of the previously announced new price point and not surprisingly. Many have also indicated they were seeing price increases across the market and that dollar tree is still providing the products they need at undeniable value.

We are extremely focused on flawless execution and are providing our leadership team out in the field with tools to support a seamless transition.

Actions include providing teams with a conversion checklist to ensure consistently see across markets and stores.

Dedicate adequate store hours to complete the preparation tasks, including removing the signage and display elements, referring to the everything's a dollar.

Implementing the new signage regarding that $1 25 price point on displays and caps and shelf strips throughout the store.

And clear communications to customers in Entryways and at the checkout and.

We are equipping our store teams with messaging for responding to customer inquiries.

We have closely monitored the performance of the test stores and sharper reaction through extensive customer intercepts and third party survey since our initial tests began.

We will continue to gather feedback throughout the process to ensure we remain fiercely committed to our brand promise I'll, providing customers with extreme value everyday along with more thrills more fun and more new items every week.

For 35 years, we've been able to manage through inflationary periods to maintain the everything for one dollar philosophy that distinguished dollar tree and made it one of the most successful retail concepts for three decades.

However, we strongly believe this is the appropriate time to shift away from the constraints of the $1 price point in order to continue offering extreme value to our customers.

The independent surveys of shoppers across the U S have indicated that 77% of the shoppers were almost immediately aware of the price point change and.

And of those 77%, 31% already knew before the visit at the store.

17% became immediately aware upon entering the store while 29.

29% were aware within minutes of entering the store.

Critically 91% of those surveyed indicated they would shop with the same or increased fleet frequency.

We will continue to monitor the success of these initiatives and we believe we will see improvement in the survey results. Since now we have the ability to further expand our product offering and we introduced key traffic driving items.

Time, validating our store execution customer reception and the performance results, whereas anticipated we expanded the program to nearly 200 additional stores across three major markets.

And we are pleased to say the results have been relatively consistent.

As expected we are seeing lifts in comp sales, partially offset by smaller decline in unit sales.

We are seeing an initial lift in product margins that will normalize over time as our merchant teams evolve our assortments.

Importantly, we expect this initiative will enable us to mitigate the higher freight other inflationary costs in order to return to our historical gross margin of 35% to 36% in fiscal 2022, while improving the merchandising we're providing for our customers.

All of the steps that I mentioned have set a solid foundation to streamline the execution of this important milestone in our company's history.

We have been working hard to prepare this for this key strategic initiative to ensure that we are providing customers with great products, while unlocking long term shareholder value.

We are focused on aggressively executing our plan to rollout a new price point across the entire footprint of legacy dollar tree stores.

Our teams will be introducing a new price point and more than 2000 additional legacy dollar tree stores in December and complete the rollout to all stores by the end of the first quarter and fiscal 2022.

Concurrently.

Our company's merchants are working to continually enhance the offerings to drive traffic and capture market share and further grow customer loyalty.

We are working with our suppliers and we have already begun introducing new items every week, including seasonal crafts party supplies food essentials and more.

Beyond the changes at our legacy dollar tree stores. We are also continuing to expand the availability of a $3 $5 plus assortment.

As I noted a few moments ago, we will exceed our previous goal of now adding the plus concept to nearly 600 stores by the end of the year.

We plan to add the plus assortment to another 500 stores in fiscal 2022 and complete at least 5000 stores in total by the end of fiscal 2024.

We are enthusiastic about the opportunity to improve performance of dollar tree by continuing to deliver extreme value to our customers at the new dollars 25 price point driving comp sales and improving store productivity.

Enhancing flexibility to better manage the overall business in an inflationary environment.

And as previously mentioned returning dollar tree gross margins back to the changed historical 35% to 36% annual range in fiscal 2022.

I will now hand, the call over to Kevin to provide details on Q3 performance and our outlook.

Thanks, Mike and good morning, our third quarter EPS of <unk> 96 per share was near the high end of our 88% to 98%.

<unk> range.

<unk> net sales increased three 9% to 642 billion comprised.

Comprised of $342 billion at dollar tree and $3 billion of family dollar.

Enterprise same store sales increased one 6% as we cycled a five 1% increase from a year ago.

Representing a six 7% increase on a two year stack basis.

Comps for the dollar tree segment increased 6%.

One dollar same store sales increased two 7% cycling a strong six 4% increase from last year.

On a two year stacked basis dollar tree comps increased four 6%, which was a 170 basis point improvement from Q2.

Family dollar increased nine 1%.

Dollar Tree's comp was comprised of a one 8% increase in average ticket, partially offset by one 1% decline in traffic.

Family dollar experienced a five 8% increase in average ticket, partially offset by a 3% decline in traffic.

Gross profit was $1 76 billion for the quarter gross margin was 27, 5% compared to 31, 2% in the prior year's quarter.

Gross profit margin for dollar tree segment declined 470 basis points to 32% when compared to the prior year's quarter.

Factors impacting the segment's gross margin performance included merchandise costs, including freight increased 475 basis points, driven by higher freight costs and lower initial mark on partially offset by favorable mix from increased sales of higher margin discretionary merchandise.

Occupancy costs increased 10 basis points as a result of loss of leverage due to a lower comparable store sales increase and higher real estate tax expense.

Distribution costs increased 10 basis points from higher depreciation costs related to two new distribution centers and higher hourly wages, partially offset by lower COVID-19 related expenses.

And shrink improved 25 basis points related to favorable inventory results in a decrease in the shrink accrual rate.

Gross profit margin for the family dollar segment declined 240 basis points to 24, 4% in the third quarter the.

The year over year Delta included the following.

Merchandise costs, including freight increased 220 basis points related to higher freight costs.

Distribution costs increased 20 basis points compared to the prior year quarter due to higher wages, partially offset by lower COVID-19 related expenses.

Markdown costs increased 20 basis points, primarily due to higher clearance markdowns.

Occupancy cost increased five basis points, primarily due to higher real estate taxes, and shrink improved 30 basis points related to favorable inventory. It results in a decrease in the shrink accrual rate.

Consolidated selling general and administrative expenses improved 100 basis points to 22, 7% of total revenue compared to 23, 7% in Q3 last year.

We cycled $35 $3 million in COVID-19 related costs of 57 basis points in the prior year's quarter.

For the third quarter, the SG&A rate for the dollar tree segment as a percentage of total revenue improved 50 basis points to 21, 7% when compared to the prior year's quarter.

Payroll costs improved 30 basis points, primarily due to lower COVID-19 related store payroll costs and lower incentive compensation expenses, partially offset by minimum wage increases and higher health insurance costs.

And other SG&A decreased by 25 basis points, resulting from the benefit associated with the settlement of a contractual dispute.

Realization of certain tax credits.

For family dollar for the third quarter SG&A rate as a percentage of total revenue improved 80 basis points to 21, 4% compared to 22, 2% in the prior year's quarter.

Payroll costs decreased 65 basis points, primarily due to lower COVID-19 related store payroll costs and lower incentive compensation expenses, partially offset by minimum wage increases.

So our facility costs decreased 30 basis points, primarily due to lower repair and maintenance expenses and lower telecommunication expenses.

Depreciation and amortization expense increased five basis points due to expenditures associated with the store optimization program.

And other SG&A expense increased 20 basis points, primarily due to increases in advertising and travel expenses and an increase in insurance costs related to general liability claims.

Corporate support and other expenses as a percentage of total revenue decreased approximately 30 basis points compared to the prior year quarter, primarily due to lower incentive compensation.

Operating income was $310 5 million or four 8% of total revenue in the third quarter.

Our non operating expenses totaled $33 $6 million comprised primarily of net interest expense.

Our effective tax rate was 21, 7% compared to 28%.

The prior year quarter.

Okay.

The company had net income of $216 8 million or <unk> 96 cents per diluted share. This compares to net earnings of $330 million or $1 39 per diluted share in the prior year's quarter.

Combined cash and cash equivalents at quarter end totaled $701 4 million compared to $1.

<unk> four 2 billion at the end of fiscal 2020 outstanding debt as of October 30, <unk> was $3 $2 5 billion.

The company did not repurchase shares during the quarter as it was preparing for the announcement and launch of its $1 $25 price point initiative across the dollar tree stores.

We currently have $2 5 billion remaining on our share repurchase authorization.

Inventory for dollar tree at quarter end increased 15, 2% from the same time last year, consisting primarily of a significant increase in goods on the water year over year.

Comp store inventories are down six 4% compared to a year ago, when they were down seven 4%.

Inventory for family dollar at quarter end increased 12, 4% from the same period last year comp store inventories are up seven 2% after being down 13, 2% in 2020.

Capital expenditures were $295 $6 million in the third quarter versus $238 7 million in Q3 last year.

For fiscal 2021, we expect the consolidated Capex will be approximately $1 1 billion.

Depreciation and amortization totaled $178 5 million for Q3 compared to $170 1 million in the third quarter last year for.

For fiscal 2021, we now expect consolidated depreciation and amortization to be approximately $715 million.

Our outlook for the remainder of 2021 includes the following assumptions.

We have forecasted continued pressure on wages due to the current shortage of workers available for our stores and distribution centers.

We expect shrink will continue to be a tailwind, but not at the same rate as we are cycling improved results from the prior year.

Higher sales lower store inventory levels technology, and better processes continue to drive better results.

Net interest expense is expected to be approximately $33 $6 million in Q4, and approximately $133 million for fiscal 2021.

We estimate.

Consolidated net sales for the fourth quarter will range from 7.02 billion to $7 $1 8 billion.

Based on a low single digit increase in same store sales for the combined enterprise.

Diluted earnings per share are estimated to be in the range of $1 69 to $1 79.

As Mike mentioned earlier freight costs were significantly higher than expected in the third quarter, our fourth quarter outlook reflects the expectation of higher transportation costs.

These costs will be offset by the benefit of the dollar tree stores that have transitioned to the $1 25 price point net of onetime cost to implement that change.

Consolidated net sales for full fiscal year 2021 are expected to range from $26 $25 billion to $26 four 1 billion.

Just on a low single digit increase in same store sales and three 3% square footage growth the.

The company now estimates diluted earnings per share will range from $5 48.

To $5 58.

The freight costs for fiscal 2021 are now expected to be approximately $2 higher than fiscal 2020 expressed in terms of the impact on diluted earnings per share.

While much of the focus has been on Trans Pacific Ocean container rates, we're being impacted by all aspects of freight including higher cost for inland transportation by truck and rail and higher diesel costs.

Additionally, in the third quarter, we moved more containers than originally planned which required utilizing the spot market at rates higher than forecasted.

To Echo Mike's comments freight continues to be our biggest challenge in the near term. We believe the majority of the freight challenges are transitory. The rest of the business is performing much better in the near term.

Our outlook assumes a tax rate of 22, 1% for the fourth quarter and 22, 7% for fiscal 2021.

Weighted average diluted share counts are assumed to be $225 9 million shares for Q4, and $228 9 million shares for the full year.

Our outlook does not include any share repurchases, we have $2 $5 billion remaining on our existing share repurchase authorization.

I will now turn the call back over to Mike.

Thanks, Kevin as I mentioned earlier on the call. We ended the third quarter with momentum in the business.

And that has certainly continued in both segments.

Through the end of last week quarter to date, our comps were running at a four 9% increase at family dollar and a 3% increase at dollar tree and we are seeing positive trends as customers are planning to gather in person with family and friends to celebrate the holidays. This year.

The combination of shopper seeking value and the inflationary environment.

Along with the acceleration of the company's initiatives, including combo stores and dollar tree plus bode well for the continued traction in store productivity.

And 2022, we planned implementing the three and $5 plus assortment and two 500 more dollar tree stores. We will also be adding 400 combo stores through new or renovated stores and we plan to renovate 800 legacy family dollar stores into the <unk> format.

Additionally, lifting the one dollar constrained represents a monumental step for our organization and we are enthusiastic about the opportunity to meaningfully improve our shoppers experience and unlock value for our stakeholders.

We will be relentless in our commitment to offer our customers the best value possible, albeit at a different price point, while guided by dollar Tree's same founding principles.

We are extremely excited and confident about the opportunities in 2022 and beyond we are very focused on the acceleration of the initiatives that are working for us and are operating with clarity focus and speed.

As I previously mentioned, we do expect dollar tree banner to return to its.

Historical annual range of $35 to 36% gross margin in fiscal 2022.

Before we go into Q&A I would like to make a brief statement.

We appreciate that many of you are focused on the form <unk> filed by mantle Ridge two Fridays ago. So we will make a short statement about that but we will not entertain any questions on the topic.

We believe mantle ridge has made a very smart investment as.

As we said dollar Tree's board of directors and management team are always open to listen to input and engaging with our shareholders and we evaluate any ideas for constructive value creation with the best interest of all shareholders and stakeholders in mind.

And keeping with our practice not to comment publicly on our private discussions with individual investors, we will not take any questions regarding main tell rich.

We appreciate your understanding and cooperation.

Operator, we're now ready to take questions.

Thank you Sir if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

That is star one to ask a question.

Again in interest of time, we do ask that you. Please limit yourself to one question and one related follow up we will now pause for just a moment to allow everyone the opportunity to signal for questions.

Thank you our first question will come from Matthew boss with JP Morgan.

Thanks.

So maybe first at the dollar tree banner.

Two year stacked comps back to mid single digits in the third quarter November holding the momentum despite supply supply side constraints still remaining I guess could you just help speak to drivers of the stabilization. What's your confidence also in that 35% to 36%.

Most margin for next year, meaning do we need a material reset in freight.

Is the driver of that.

Pricing change.

The fleet that you outlined today.

Yes, good morning, Matt. Thanks for the question I would say.

Main driver of that is as Kevin said inside that.

Forecast for next year, we are anticipating freight to pretty much look like it did this year. So the major change would be the $1 25 price point.

As a key enabler to mitigate that.

And it's also going to give us the opportunity to bring in new items in our new assortment that will drive traffic and dollar tree.

And that will help offset we've lost traffic this year historically.

And then Mike as a follow up on family dollar what do you believe the concept takes from this pandemic, meaning are you seeing new customers what initiatives do you have to retain some of the new footsteps that youre seeing.

And on the as we think about kind of where we go from here what do you think the sustainable comp for the family dollar concept multiyear is from here as we exit the pandemic.

Yeah. Thanks, Matt So on the family dollar side, we believe that based on the fundamental changes our merchants have made in our price points and in our assortment on discretionary side along with the continued growth we see on the consumables side, we believe we will sustain our growth.

The pandemic as we exited.

And it's evident in our three quarters in a row over a 9% two year stack of comp sales and we're seeing our customers.

Really gravitate to our so our assortment.

Heard us say, our consumable side is comping, well and they are buying more of the discretionary side as we get it in our stores and.

And we believe that long term, we can sustain that low single digit growth and it's really evident in our combo stores and our H two formats. So we're we're going to exceed our 250 H two renovations and we continue to see a 10% increase when we renovate those stores.

But more importantly, it's that combo store that bringing these two great companies together allow us to drive a great format in Rural America, and there is 3000 towns that we've identified and we're going to grow in net store count by more than 400 and.

And as we shared on the last quarter and I think we are are posted on our website.

Our combo stores deliver 17% more than our pro forma than our new store expected.

They grow 23% more when we renovate them and when we rollout relocate them, it's a 40% increase.

So those things are really driving not only top line, but our margin is stronger and it's translating into a more productive stores. So I think our initiatives I think the foundational things that we fixed at family dollar and then what are key initiatives going forward will enable us to continue to grow single store count.

That's great color best of luck.

Thank you. Our next question comes from John <unk> with Guggenheim.

So Mike let me start with.

You think the <unk> the 125 price point, you said majority.

But.

What do you think that will apply to in terms of the assortment.

One number one and then number two tied to that.

I know youre.

Youre getting a lift on price.

Is there any way to what you've seen an impact to volume.

Those items, specifically and then also.

The store as a whole.

Are there other than they are down.

You must have a sense of how much they're down.

Yeah. Thanks, so on the.

The majority of the stores will be at the 125 price point.

Like asked today, where dollar tree has everything's for one dollar, but there are categories in food and Candy bar is up at the front Register in our greeting cards and in some poster board, where there are lower than a dollar. So if you can imagine.

Everything is just bringing in reset and that same footprint at $1 25, and then those categories and items will be at the dock remain at the dollar price point.

So it's the majority of the footprint inside of our store.

And and we will share as we continue to roll. This out we will share more details about the comp lift in the margin, but we see enough evidence.

But the comp between the comp lift in the margin expansion.

Will help mitigate this burdened the freight that we're experiencing this year and get us back to that historic 35% to 36% gross profit range.

And then maybe just as a follow up to that how do you guys think about.

Marketing the 125.

Right.

You want people to experience it naturally right I don't think you want to call attention to it.

Unduly so.

It's basically just.

When I come in the store otherwise youre not going to really do a lot of TV radio print around the strategy or how do you attack that.

Yes, historically dollar tree did not do a lot of external marketing.

Everything was.

In the store and the excitement and the value of the product in and it is really driven because our assortment is always moving and ever flowing. So we want to we want to talk more about the great value that we can bring at that $1 25 price point and they'll see that assortment that they they see when they are in our store and our customers gave us.

They gave us credit for that when we get our customer research and customer intercepts.

They were telling us that even at $1 25, there is still great value and Theyre going to continue shopping here and then we can tell and some of the unit decline in some of the categories, where our intuition, we knew that we needed to improve some of our assortment and value in certain categories. So our merchants are working extremely.

Really hard at identifying those and getting those products flowing in that let's say new products and new product mix will be flowing through certainly the first half of the year.

As they change their mix.

And get everything aligned to the new dollars 25 price point.

Thank you.

Thank you. Our next question comes from Michael Lasser with UBS.

Good morning, Thanks, a lot for taking my question. So you had tested dollar tree plus for a couple of years you have been planning process for the move to 120 by price point.

The end of the summer and the move to the full rollout.

Is faster than the move to dollar tree plus.

So you're seeing a lot of inflation.

Probably pushing the issue how do you manage the risk that consumers are going to push back a bit.

<unk> cut and you expect the dollar to dollar price point, and so youre going to have to manage.

Managed around that the cannibalization at Athene time, you do have a lot of going on into next year.

How do you ensure that youre going to get.

Your execution and your.

Implementing more initiatives that you have had in quite some time.

Yeah, well the $1 25.

Our team has been very focused to bring clarity to it and we've got a very detailed plan for our operation teams.

The key to it is going in and cleansing. The store. So we've got a team that are doing that then we come in and we clearly sign it and we're putting signage throughout the entire store so the customer understands the $1 25.

And then at the same time, our merchants are working hard today than they have been working actually on their last by trip. It was with the intent of the $1 25 price point. So our assortment is better than ever and we are we're still excited on the hard work that our merchant team is doing.

In fact, they've already looked at and reviewed over 7000 of our core items, it's almost 7500 of our core items.

Put them on a table they've done a comp shop, so they bring in product from other competitors to make sure that at $1 25. This product still has unbelievable value for our customers and it resonates well with them and then the ones that don't we're working hard on and we're attacking and we're bringing in those new items.

And most of those items are in your consumable side of the business, where we've seen softness over this year, where we've been limited to the dollar price point.

Some items.

And we'll be able to bring meaningful value of $1 25, and our frozen section and in our foods section. So we're really excited about our plan.

And then the.

In our dollar tree plus.

The way, we think about it.

That's sitting in about.

Over 600 of our stores and it's.

<unk>.

About 10% to 12% of the space in our stores 200 linear feet and the team is very good they have been delivering that all year.

So next year, we are just going to deliver an expansion of that so just grow same exact product assortment different seasonal items of course, but at the same categories. The same square footage that we've done to 600 stores. This year. So it's something we've already done we already know what it takes to get it done and our stores.

They're executing it very well and our customers understand it in a store it will be a 125 now up 3% and five dollar base clearly marked and they're responding very very well to the $3 $5 items.

And then if you think about that as in 2022, and then in 2023 for our dollar tree plus.

The growth will be two fold, we will grow more store count, but then also our merchants next year, while we're rolling out the same footprint to 500 stores next year behind the scenes at the same time the merchants are going to be working really hard at more categories more assortment can you go from it.

10% of your store to 20% of your store what kind of items can we really bring in at that three and $5 that will really drive more business to the stores.

So our lift of 6% as we've and it's still hovering around that 6%. We think it can be more as we grow this going forward. So the $1 25, we've got a great answer on where we're going to go.

With a clarity and focus and speed from a marketing and in store execution and in our merchants are working hard at analyzing every item to make sure. It's got that great value and then we're going to grow the dollar tree plus as we did the 600 stores with focus.

Understood. My follow up question is on your expectation to get to a 35% to 36% gross margin and your dollar tree business banner next year it.

It seems like that will drive a mid teen increase at least in your gross profit dollars.

Based on that.

What type of EBIT improvement would you be looking for because you're probably going to see significant cost leverage.

<unk>.

If youre going to rollout dollars 25 price point and the freight.

<unk> potentially rolled over would you actually let you work roofs.

<unk> margin for the dollar tree banner ranked the <unk>, 36% if all that comes together at the same time or would you look to reinvest the upside back into the business.

Yes, Michael I think the way, we think about it obviously as we are investing back into that product was always going to live by.

The rule that was.

Was the mainstay of dollar tree, which is the product has to be an unbelievable value in the marketplace and thats. What the company was built upon and Thats. What it will continue to be built upon just the price point has changed.

So to your question about the margin.

Obviously, it's a little early at this point to talk about next year and obviously, we'll have a lot more information to share when we talk again on March 3rd for end of the year and we'll be able to give a better direction a lot of moving pieces right now we want to make sure we capture them all and give everybody.

The true picture of all of those moving pieces, but we do obviously see a clear path to the 35% to 36% margin gross margin for dollar tree next year. So I think that's the most important thing that we can we can give you today, obviously with more details to come.

All of those moving pieces.

Yeah, and I'd, just reiterate what hit.

Unlocking and moving to the $1 25 gives us the flexibility that we need to be able to manage and mitigate the high cost of as you saw the 400 basis points in margin at dollar tree.

And at the same time really bring more value greater items, and a better assortment that will drive traffic and top line sales for our customers that they are still used to one dollar tree.

So as Kevin stated, we're going to be more focused on getting the assortment right and driving traffic and long term growth.

And we can do that and confidently think we can get to the 35% to 36% range.

Thank you very much.

Thank you as a reminder, in the interest of time, we do ask to please limit yourself to one question and one related follow up. Our next question comes from Edward Kelly with Wells Fargo.

Hi, good morning, guys.

I was hoping you could talk a little bit more about the <unk>.

Testing process on.

The <unk> five price points, so far the initial release that you put out.

At $1 25, and $1 50 in the release I was curious as to what that was about.

When you did the test for all of the test just taking most of the assortment to a $1 25.

<unk>.

<unk> is on the volumes are looking like.

Yes. Thanks.

So yes.

Closely monitored at the majority of the stores are at the $1 25, and Thats, what our focus is because thats really the price.

That we need to really bring great value and a meaningful differentiation in our assortment and the consumable side of the business that will drive traffic.

So we were very focused on that and we've been watching the sensitivity.

And the sales and the units and the response from the customer every week and every store in every market and as we shared that's been consistent across stores and markets and where we see the unit decline.

It's where we expected it to be and Thats, where the merchants are working really really hard on bringing in that new assortment and that new assortment will be layering in as I said over time, so it's going to be in over the next six months to bring in the assortment on those side to drive the traffic.

And then while we have work in the results of the stores and monitoring units in margin and comp at the same time, we were doing in depth consumer research and listening to our customers and doing customer incept intercepts.

One on one <unk>.

Surveys with the customers and hearing their response.

They have a lot of trust in dollar tree and they believe that at $1 25, it's still going to be an undeniable value because of what they're seeing out in the marketplace and they know the dollar tree hasn't raised its price in 35 years. So they have given us credit and now that our buyers are going to take that trust and make sure they deliver undeniable and Ah.

Great assortment at that new price point, and we will monitor that as we do our as we did at a dollar.

And help drive the business bring new items in discontinue items and manage the business accordingly.

And just a quick follow up on that.

How powerful is it to be able to bring items back these discontinued over time or to be able to introduce new items and then just getting back to the $1 50, because it was in your press release is that a price point that might make sense as you start introducing new items next year.

Well right now we can bring in very meaningful items that we discontinued at $1 25, and they are on the food and consumable side, where you get a repeat customer and more frequency. So it's important to us.

And when we announced.

We just wanted to have we have flexibility out there that we gave examples of $1 25, and $1 50, and our three and five we didn't say specifically that we would use those so right. Now we are we feel confident in the $1 25, the three and five and as we've said that on our dollar tree plus.

We're accelerating the 1500, but by 2024 will have 5000 stores that will be at a $1 25, three and five that will be able to deliver a meaningful assortment and it gives us the flexibility that we need to manage and mitigate these costs and deliver great products and drive our business.

Great. Thank you for taking my question.

Okay.

Thank you. Our next question comes from Kate Mcshane with Goldman Sachs.

Hi, good morning, Thanks for taking our question.

Just a question with regards to any kind of activity from.

Hi.

Inflationary headwinds and customers trading down and how you anticipate that to look in the fourth quarter relative to what you saw in the third quarter.

Yes, we will definitely the customers are feeling the inflation, it's twofold right now I mean, our customers are benefiting from child tax credit stimulus.

In October they had a huge increase of snap benefits.

And they're experiencing increase in hourly wages that youre seeing across.

The industry.

So I think our customers are in a pretty good position, but they are also feeling a lot of pressure on other cost of gas and fuel prices and energy for their homes. So I think right now more than ever theyre going to be relying on great value and that's why I think dollar tree and family dollar in a great position to be able to offer that.

And 15000 locations that are conveniently located.

As far as trading down we're still not seeing a lot of trade down there is not a lot of promotion out there in national brands private brands. There is about a steady as they were throughout the <unk>.

First half of the year.

So we haven't seen a big shift right now from the customer.

Yeah.

Thank you.

Thank you. Our next question comes from Brad Thomas with Keybanc capital markets.

Hi, good morning, Thanks for taking my question.

I was hoping to ask about labor, a little bit more and helping Mike you could talk a little bit about how you are dealing with getting good people now and any seasonal staff you brought onboard and then just.

To continue to talk about the dollar tree side of the business.

You all are planning for some of that incremental complexity as you roll out the 125 price point.

On the labor perspective thanks.

Thanks, Brad So yes, there are still pressures.

It's market driven both in our distribution centers, we've had to increase our hourly wages.

Outlook.

And we've made movements there.

We're seeing the same thing in our stores and markets, we've followed where we had to to increase our labor rates to attract.

Associates in our stores and as you've seen across the retail people are still sitting on the sidelines.

And not working so we are working hard at driving benefits in <unk>.

Raising our hourly wage where we need to and being a convenient place to work through other things.

Having their schedule on their phones.

Having a program called daily pay where they can get their pay they don't have to wait for their paycheck.

Our associates are liking that a lot and there is a high use of that so we're doing a lot of things to attract.

Hourly workers are out there in our stores to operate our stores effectively but yet it still is a tough environment out there and we have seen a little bit of a slip in our store manager turnover last year during the pandemic, we hit our lowest turnover ever in store manager and now there's I think there's a little bit of fatigue.

And it has creeped up a little bit on us.

Our teams are working hard.

Filling those roles in attracting the talent we need.

Regarding managing the $1 25.

There is as Kevin said in our fourth quarter, there will be onetime costs of cleansing the store and then remarketing and re signing the store, but once that is set aside it's really running the same play they unload the truck they put it on the shelf. It's clearly marked already so there really isn't any additional.

Labor hours needed.

And then on our dollar tree plus.

We've rolled that out to 600 stores, we have not had to add any additional labor in those stores because the majority of those products that are coming in <unk>.

The sections in the store are clearly marked three and $5 items and now there'll be a $1 25, three and five so there really isn't any additional labor needed in those stores either.

Great. Thanks, so much Mike.

Thank you. Our next question comes from Simeon Gutman with Morgan Stanley.

Hey, guys. This is Michael Kessler on for Simeon Thanks for taking my questions Hey, Michael.

Michael I wanted to ask Hey.

Hey, guys. That's it could be broken drum here with the price point, if I can squeeze in one more curious why not be more diverse with the price point. It sounds like you are really sticking to the 125, you could perhaps be even more precise with price point to manage the different skus and categories. So I'm curious kind of what went into that.

Decision process and am I, interpreting I guess the strategy with the price point correctly in that regard and then bigger picture on that is there any even longer term vision of perhaps.

Price points are going up across the store and then you had a separate initiative with plus at even higher price points or perhaps even melding. These initiatives together expanding plus more of the store you see the longer term vision would be.

Interested to hear about as well.

Yes. Thanks for the question. So first of all moving off the $1 price point gives us the flexibility to manage our business and really drive the assortment that our customers are used to and bring value and simplicity to them. So the reason we moved to the $1 25 is it allows us to do all.

Three of those things are merchants are I believe the best in the industry and they've been able to defend and get great product at a dollar and we know the type of product we can get it at $1 25, and we will be able to bring an exciting great products that will drive the business and drive traffic into our <unk>.

Stores and enable us to get back to that 35% to 36% margin and it gives us the flexibility to manage our business going forward.

And it really brings simplicity simplicity is still very important to us.

Is it.

It's a single price point, our customers understand it.

Our our shoppers our customers and our associates understand it so.

We will manage this going forward I think at first we are going to go to a $1 25 billion and then we'll be carrying that $1 25.

And to our combo stores as well so our combo stores baseline will be at a $1 25 going forward.

Be wrapped around that dollar tree brand and then have a great products at the family dollar on that side of the business as well.

So moving off the dollar gives us the flexibility to make changes we need to going into the future.

Okay, Great and quick follow up on traffic I think you guys said it was down at both banners I guess does that has it surprised you at all but we haven't seen more of a rebound in traffic relative to last year is it of any concern or it's not because.

Ticket is up basically more than offsetting the traffic declines and going forward, especially with higher price points at core dollar tree.

Would it be a fair expectation that traffic could remain down but being more than offset by ticket how youre thinking about that.

We think traffic is going to come back at dollar tree, we keep in mind.

Kevin said with our we still have past dues.

Our four five times greater than what we normally have at dollar tree. So there is inventory that we wish we had that would drive that excitement and sales and traffic inside our dollar tree.

And then we have had some items we've added disc.

Discontinued it would be traffic driving.

Where we were limited at the $1 price point, So we think looking forward.

Going to the $1 25, bringing a new assortment and then once we move beyond this transitory freight.

Logistics issues that we have getting that assortment that we want inside our store the combination of those two things.

We'll get back to driving traffic in our dollar tree.

Format.

Okay. Thanks, Mike.

Thank you we do have time for one last question. Our final question comes from Paul <unk> with Citi.

Hey, guys. Thanks.

I'm curious.

Do you bring back some of these discontinued items do you expect the total SKU count to grow or will those be replacing existing skus and then separately can you just talk about your average ticket dollar tree and how consistent that is been over time and as you move to this 125.

<unk> price point, what are your expectations for that average ticket.

Yes.

The assortment that's the beautiful thing about dollar trees, we do not have plan O grams or merchants go out and get the very best product at the $1 25 price point, we surprise and delight, our customers, we bring different products and depending on the seasons and the and the front end of our store changes like the leaves on the trees. So we will.

To use that flexibility in and drive the assortment we need.

That will be meaningful to our customers and in the key categories that drive traffic and then where they can celebrate their lives and live their lives and decorate their homes. So those are the that's how we manage the business before and Thats, how we will manage it going forward.

And I'll, let Kevin talk about the.

The average ticket, but since the pandemic our average ticket at <unk>.

<unk> has been elevated and it's been consistently elevated throughout and we think that this $1 25 will will help with that.

Yes, I think just as a point of reference pre pandemic. The dollar tree price point has hovered right around that $8.

Ft range and <unk>.

Since the pandemic, it's been closer to the $10 Mark.

I think as we go forward with the $1 $25 price point I think it will remain elevated.

So the question has always been as traffic returned would we see the average ticket come down and to this point, we haven't really seen that aspect, but so overall I think in general that the.

The average ticket will remain elevated as we go forward.

Okay. Thank you good luck.

Thank you. This concludes today's Q&A I would now like to turn the call back over to Randy Garland for closing remarks.

Thank you Katie and thank you for joining us on today's call. Our next earnings conference call to discuss Q4 and year end results is tentatively scheduled for Wednesday March 2nd 2022, Thank you and have a good day.

Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.

[music].

Good day and welcome to the dollar tree third quarter 2021 earnings conference call.

Today's call is being recorded at this time I would like to turn the conference over to Randy Tyler. Please go ahead.

Thank you Katie good morning, and welcome to our call to discuss results for dollar Tree's third fiscal quarter 2021 with me on today's call are Mike with Penske and Kevin Wampler before we begin I would like to remind everyone that various remarks that we will make about our expectations plans and prospects for the company.

Constitute forward looking statements for the purposes of the Safe Harbor provision.

Under the private Securities Litigation Reform Act of 1095. These statements are subject to risks and uncertainties and our actual results may differ materially from those indicated in these forward looking statements for information on the risks and uncertainties that could affect our actual results. Please see the risk factors business.

And managements discussion and analysis of financial condition and results of operations sections in our annual report on Form 10-K filed March 16, 2021, our Form 10-Q for the most recently ended fiscal quarter. Our most recent press release and form 8-K, and other filings we will.

From time to time with the Securities and Exchange Commission, we caution against reliance on these forward looking statements made today and we disclaim any obligation to update or revise these statements except as required by law.

Knowing our prepared remarks, we will open the call to your questions. Please limit your questions to one and one related follow up if necessary I will now turn the call over to Mike with Henske dollar Tree's, President and Chief Executive Officer.

Thank you Randy.

Morning, Thank you for joining us on today's call.

I'd first like to take a moment to recognize our store associates distribution Center staff are field field leadership, and our world class merchants.

Our teams are working around the clock to do everything they can to defend against the current inflationary environment.

Our shelf stock and provide customers with undeniable value and great service and easy to shop close to home store locations.

Their hard work and dedication is critical to our company's success and I'd like to extend sincere thanks for their unwavering commitment to our customers.

During the past quarter freight costs were significantly higher than expected.

Our fourth quarter outlook, which Kevin will provide later in the call reflects the higher cost structure, we experienced in the third quarter.

However, our EPS for the third quarter was at the higher end of the range as the performance of the rest of the business offset these higher freight costs.

Great and supply chain disruptions of course continue to be our biggest challenge in the near term by far and the impact will continue for a while but this challenge as transitory.

As we detailed last quarter. Our team continues to take robust action to mitigate the impact of freight costs and supply chain disruptions.

We believe that based on the steps that we've taken we will benefit meaningfully at least challenges abate.

Dollar tree segment delivered a comp sales increase of 60 basis points against its toughest quarterly compare in nearly three years.

On a two year comp stack basis. This was a sequential improvement of 170 basis points from the prior quarter.

Discretionary continues to perform well with a three 2% comp for the quarter.

Consumables were impacted by assortment constraints and past dues.

<unk> hundred stores exceeding our previous target of 500 stores by the end of the year.

Family dollar delivered a positive two 7% comp against the six 4% increase a year ago.

This represented the third consecutive quarter that family Dollar's, two year comp stack has exceeded 9%.

The consumable side of the business Comped over 3%, while discretionary was slightly negative as we cycled stimulus dollars from the prior year.

We are extremely pleased with the family dollar brand as the business continues to gain share.

Comps at both banners were driven by an increase in average ticket, partially offset by a decline in transaction count.

The last month of the quarter October represented the strongest comp for both banners.

Our digital offerings continue to evolve while while we are steadfastly focused on best meeting our customers' changing needs.

In October we announced our expanded partnership with <unk> to now include same day delivery from nearly 7000 dollar tree stores.

Nearly 100 million U S households, now have delivery options from 13000 of our store locations.

We are very pleased with the initial results from the latest expansion.

Turning to the 125 price point.

Our leadership team has been planning for the expansion of this initiative since late summer.

As you know in September we announced our plans to add price points above a dollar to all dollar tree plus stores and on a test and learn basis to select legacy dollar tree stores.

As a result of the positive customer feedback and store performance. During the initial phase we have introduced the initiative to nearly 200 additional legacy dollar tree stores.

In today's press release, we announced for the first time and dollar Tree's 35 year history, we are lifting the $1 price point cap at all dollar tree stores and the majority of our assortment.

The $1 25 price point enhances our ability to materially expand assortments.

Our teams are focused on speed execution and customer research and our shoppers are responding favorably.

When surveyed the majority of our customers indicated they were already aware of the previously announced new price points and not surprisingly many of also indicated they're seeing price increases across the market and that dollar tree is still providing the products they need an undeniable value.

We are extremely focused on flawless execution and are providing our leadership team out in the field with tools to support a seamless transition.

Actions include providing teams with a conversion checklist to ensure consistently across markets and stores.

Dedicate adequate store hours to complete the preparation tasks, including removing the signage and display elements, referring to the everything's a dollar.

Implementing the new signage regarding that $1 25 price point on displays and caps and shelf strips throughout the store.

Hosting clear communications to customers and entry ways and at the checkout.

And we are equipping our store teams with messaging for responding to customer inquiries.

We are closely monitoring the performance of the test stores and sharper reaction through extensive customer intercepts and third party survey since our initial tests began.

We will continue to gather feedback throughout the process to ensure we remain fiercely committed to our brand promise of providing customers with extreme value everyday along with more thrills more fun and more new items every week.

However, we strongly believe this is the appropriate time to shift away from the constraints of the $1 price point in order to continue offering extreme value to our customers.

The independent surveys of shoppers across the U S have indicated that 77% of the shoppers were almost immediately aware of the price point change.

And of those 77%, 31% already knew before they visited the store.

And 17% became immediately aware upon entry in the store.

<unk> 29.

29% were all aware within minutes of entering the store.

Critically 91% of those surveyed indicated they would shop with the same or increased frequency.

Upon validating our store execution customer reception and the performance results, whereas anticipated we expanded the program to nearly 200 additional stores across three major markets and we are pleased to say the results have been relatively consistent as expected we are seeing lifts.

In comp sales, partially offset by smaller decline in unit sales were.

We are seeing an initial lift in product margins that will normalize over time as our merchant teams evolve our assortments.

All of the steps that I mentioned had set a solid foundation to streamline the execution of this important milestone in our company's history.

We have been working hard to prepare this for this key strategic initiative to ensure that we are providing customers with great products, while unlocking long term shareholder value.

We are focused on aggressively executing our plan to rollout the new price point across the entire footprint of legacy dollar tree stores.

Our teams will be introducing the new price points and more than 2000 additional legacy dollar tree stores in December and complete the rollout to all stores by the end of the first quarter and fiscal 2022.

Concurrently.

Our company's merchants are working to continually enhance the offerings to drive traffic and capture market share and further grow customer loyalty.

We are working with our suppliers and we have already begun introducing new items every week, including seasonal crafts party supplies food essentials and more.

Beyond the changes at our legacy dollar tree stores. We are also continuing to expand the availability of a $3 $5 plus assortment.

As I noted a few moments ago, we will exceed our previous goal of now adding the plus concept to nearly 600 stores by the end of the year.

We plan to add the plus assortment to another 500 stores in fiscal 2022 and complete at least 5000 stores in total by the end of fiscal 2024.

We are enthusiastic about the opportunity and improved performance of dollar tree by continuing to deliver extreme value to our customers at the new $1 25 price point driving comp sales and improving store productivity.

Enhancing flexibility to better manage the overall business in an inflationary environment.

And as previously mentioned returning dollar tree gross margins back to the changed historical 35% to 36% annual range in fiscal 2022.

I will now hand, the call over to Kevin to provide details on Q3 performance and our outlook.

Thanks, Mike and good morning, our third quarter EPS of <unk> 96 per share was near the high end of our 88% to 98.

<unk> range.

<unk> net sales increased three 9% to 642 billion comprised.

Comprised of $342 billion at dollar tree and $3 billion of family dollar.

Enterprise same store sales increased one 6% as we cycled a five 1% increase from a year ago.

Presenting a six 7% increase on a two year stacked basis.