Q4 2021 Dollar Tree Inc Earnings Call

Good day and welcome to the dollar Tree, Inc. Fourth quarter 'twenty to 'twenty One earnings conference call. Today's call is being recorded at this time I would like to turn the conference over to Randy Gardner. Please go ahead Sir.

Thank you Ashley good morning, and welcome to our call to discuss results for dollar Tree's fourth quarter and full year 2021.

On today's call are Mike <unk>, 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 provisions under the private Securities Litigation Reform Act of 19.

Got it.

These statements are subject to risks and uncertainties and our actual results may differ materially from those indicated in these forward looking statements.

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 of our annual report on Form 10-K filed March 16, 2021, our form 10.

Hugh for the most recently ended fiscal quarter and our most recent press release and form 8-K, and other filings we make from time to time with the SEC.

We caution against reliance on these forward looking statements made today and we disclaim any obligation to update or revise these statements except as may be required by law.

Following our prepared remarks, we will open the call to your questions. Please limit questions to one and one related follow up.

Now I'll turn the call over to Mike <unk> dollar Tree's, President and Chief Executive Officer.

Thank you Randy.

And thank you for joining us on today's call.

Im extremely proud of the team's strong performance during our transformative fourth quarter.

We delivered comparable sales increases at dollar tree and family dollar both representing improvements from the prior quarter on a two year stack basis.

Our EPS of $2.01 exceeded our $1 69 to $1 79 guidance range.

Portly, we recently completed a successful conversion to a $1 25 price point across all dollar tree stores in the United States.

More than two months ahead of schedule, which significantly enhances our ability to provide a meaningful assortment at extreme values to our shoppers.

We continue to have terrific performance on other key strategic initiatives, including the expansion of our three and $5 plus assortments to another 1500 dollar tree stores as.

As well as our combo stores and H two renovations at family dollar.

The dollar tree segment delivered a comp sales increase of three 1% cycling a two 4% increase from the prior year's quarter.

The five 5% two year stack quarterly comp was our best of the year and represented.

Sequential improvement of 90 basis points from Q3.

Discretionary continues to perform extremely well at a five 4% comp.

We are continuing to experience record sell throughs of our seasonal and holiday merchandise.

Our strongest performing categories included Candy Christmas seasonal party celebrations crafts and stationery.

For the quarter discretionary represented more than 57% of our sales up 130 basis points from the prior year's quarter.

For the dollar tree banner December was the strongest comp month of the quarter as we were cycling a slight negative from the prior year.

Remember was a low single digit positive comp in January .

<unk> was our lowest comp month, as we cycled a strongest comp month of the prior year's quarter.

Family dollar delivered a positive one 7% comp against the eight 1% increase a year ago.

This represented the fourth consecutive quarter that family dollar two year comp stack exceeded 9%.

The consumable side of the business comp just below a positive 3%, while the discretionary was a low single digit negative as we were cycling stimulus dollars from the prior year.

The family dollar business continues to gain share the strongest performing categories include pet candy and snack and beverage.

For the quarter consumables represented just over 73% of sales.

At family Dollar November was our strongest comp month of the quarter closely followed by December both periods were above the quarterly comp of one 7%.

January was a negative comp as we cycled the double double digit comp from the prior year related to the release of stimulus dollars. Additionally, retail in January was impacted by omni crowd variance much colder and stormier weather than the prior year and the lapsing of the monthly child tax credit.

<unk> payments.

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

Last week, we completed the rollout of our $1 25 price point initiative to every dollar tree store across the U S more than 7800 plus stores.

This milestone completed more than two months ahead of our targeted date is a testament to the commitment and teamwork between our support teams are merchandising organizations and our field leadership teams demonstrating our ability to execute.

This strategic endeavor will enable dollar tree to ultimately drive store traffic and productivity customer loyalty and operating performance, while enhancing our ability to navigate the business.

Through higher periods of higher cost.

We have been considering this move for some time.

In recent years, we as boss many items that are customer favorites and key traffic driving consumable products from our assortment due to the constraints of the dollar price point.

Additionally, we have been operating through a higher cost environment as it relates to inflation tariffs and supply chain and labor costs.

New <unk> dollars 25 price point enhances our ability to materially expand our assortments and introducing new products and sizes and provide families with more of their daily essentials at a great value.

In preparation for this move our merchandising teams have taken out of the herculean task of reviewing thousands of product SKU by SKU or item by item to reassess the value through comp shops of our competitors.

Many of our products, especially on the seasonal and discretionary side are still considered to be an extreme value at the new $1 25 price point.

For those products that are considered new or to be reinvested in with a larger quantities are package sizes, we have a clear a very clear and focused and urgent plan to bring that product into our stores.

These assortment changes, we will be taking place throughout the year, but we do expect 50% of the categories, new and reinvested in products to BB in the store by mid year example, the products already in the stores, our carbonated beverages and salty snacks all of the $1 25 price point.

I could not be more proud of our team's smooth execution of the transition to the $1 25 price point.

Initially we roll out the program to a diverse segment of more than 100 stores across the U S.

Then we expanded to nearly 200 stores across three metropolitan markets.

And starting in December we embarked on seven waves of multistate introductions.

The signage training and talking points equipped our field leadership teams.

Execute the stores checklist to complete the transitions.

The team has embraced the project roll up their sleeves and got it done feedback from our shoppers as indicated a clearly understood. The change in pricing stores were easy to shop and the signage was very clear.

The key has always been and always will be enabling us to deliver extreme value to our customers.

We are focused on exceeding shop, our expectations for the value at $1 25, just like we have been at the dollar price point.

More than 30 years.

We have been closely tracking the performance of converted stores on a daily basis item by item category by category.

We have seen relatively consistent reaction in performance across various demographics geographies and store sizes.

Among our <unk>.

Among our findings are the following.

Our new and reinvested Skus are driving improved performance in their categories, including in our food snack and beverage, which are all very important traffic driving categories.

Our seasonal and discretionary continue to outperform consumable, but we believe this can balance out as we continue to modify the assortment on the consumables and deliver greater value for our customers.

As you would expect we are seeing comp lift sales to the stores that have transitioned to a $1 25, partially offset by a decline in unit sales in the teens.

As we go through the year, we expect to see a greater lift to the gross margin in the first half of the year as we sell through the current inventory.

And importantly, as I have stated before we have confidence we can get back to our historic 35% to 36% annual gross margin range. This year, even with the continuation of elevated freight costs.

And as we reinvest in the key categories to deliver extreme value, we accept expect to see improved traffic and productivity as we move throughout the year.

I've shared much about $1 25 price point.

As it is where many investors are focused and it is transforming our company.

But I want to be clear that we're very pleased with the continued progress we are seeing across each of our strategic initiatives.

Guarding dollar tree plus we finished the year with the multi price product and approximately 660 stores well beyond our original target of 500 stores.

At dollar tree, our $3 $5 plus assortment will be expanded to another 500 stores in fiscal 'twenty two.

Customers are responding very well to holiday seasonal and discretionary categories and we will continue to grow and improve this initiative.

At family dollar our combo stores are working.

Customers Love shopping the best of family dollar and dollar tree in one easy to shop local store in their community.

The stores are driving a material comp sales lift increased productivity higher gross margins and improved operating performance.

We ended the year with more than 240 combo stores and are planning to add another 400 combo stores this year.

We ended the year with 3815 family dollar stores and the H two format. We are planning for another 800 H two store reservations in fiscal 2022.

Which we believe will bring our store fleet current and will enable us to reallocate time effort resources and capital from the renovation program to other value creating initiatives as we move forward.

I'll now hand, the call over to Kevin to provide details on Q4 performance and our outlook for fiscal 2022.

Thanks, Mike and good morning.

For the quarter consolidated net sales increased four 6% to 7.08 billion comprised of $3 92 billion at dollar tree and $3 6 billion at family dollar.

And if price same store sales increased two 5% as we cycled a four 9% increase from a year ago, representing a 70 basis point improvement from Q3 to seven 4% on a two year stacked basis.

Comps for the dollar tree segment increased three 1%.

From a dollar same store sales increased one 7% cycling a strong eight 1% increase from last year.

On a two year stacked basis dollar tree comps increased five 5%, which was a 90 basis point improvement from Q3 and family dollar increased nine 8%, which was a 70 basis point improvement from Q3.

Dollar Tree's comp was comprised of a 6% increase in average ticket, partially offset by a two 8% decline in traffic.

Dollar experienced a four 6% increase in average ticket, partially offset by a two 7% decline in traffic.

Gross profit was $2, one 4 billion for the quarter.

Gross margin was 32% compared to 31, 8% in the prior year's quarter.

Gross profit margin for the dollar tree segment declined 50 basis points to 35, 6% when compared to the prior year's quarter.

Factors impacting the segment's gross margin performance included merchandise costs, including freight increased 110 basis points driven by higher freight costs.

Partially offset by increased initial mark on and increased sales of higher margin discretionary merchandise.

This increase was partially offset by strength that improved 30 basis points related to favorable inventory results in a decrease in the shrink accrual rate.

Distribution costs improved approximately 20 basis points, resulting primarily from lower COVID-19 related expenses and sales leverage partially offset by higher hourly wages.

And occupancy costs decreased approximately 10 basis points as a result of the leverage from the comp sales increase in the quarter.

Gross profit margin for the family dollar segment declined 320 basis points to 23, 4% in the fourth quarter.

The year over year Delta includes the following merchandise costs, including freight.

<unk> 220 basis points related to higher freight costs and an unfavorable sales mix, partially offset by higher initial markup.

Markdowns increased 90 basis points, primarily related to our recent product recall at our Arkansas distribution Center and 404 family dollar stores.

So holidayed selling general and administrative expenses increased 40 basis points to 22, 1% of total revenue compared to 21, 7% in Q4 last year.

For the fourth quarter, the SG&A SG&A rate for the dollar tree segment as a percentage of total revenue increased 50 basis points to 26% when compared to the prior year's quarter.

Other SG&A increased approximately 50 basis points, resulting from higher card transaction fees and operating taxes, along with marketing and store supply costs associated with the transition to the $1 $25 price point.

Payroll costs increased 10 basis points, resulting primarily from higher store hourly payroll costs due to minimum wage increases and higher health care costs, partially offset by lower incentive compensation.

And depreciation costs decreased 15 basis points, primarily due to lower store impairment write offs and leverage due to the increase in comp store sales.

For family dollar in the fourth quarter SG&A rate as a percentage of total revenue increased 10 basis points to 27% compared to 26% in the prior year's quarter.

Other SG&A expense increased 25 basis points, primarily due to lower miscellaneous income and increase in card transaction fees and an increase in insurance costs related to general liability claims.

Depreciation and amortization expense increased 15 basis points due to higher store asset impairment charges and expenditures associated with the store renovation program.

So our facility costs increased five basis points, primarily due to higher repairs and maintenance expenses, including snow removal, partially offset by lower telecommunication expenses.

And payroll expenses improved 35 basis points, primarily due to lower incentive compensation and field management vacancies, partially offset by higher store hourly payroll, resulting from higher labor rates.

Corporate support and other expenses as a percentage of total revenue were flat when compared to the prior year's quarter at one 4%.

Operating income was $578 8 million or eight 2% of total revenue in the fourth quarter.

Non operating expenses <unk> expenses totaled $79 6 million comprise.

Comprised primarily of net interest expense, including debt extinguish extinguishment costs of $46 $5 million associated with our debt refinancing in the quarter.

The effective tax rate was 9% compared to 22, 3% in the prior year's fourth quarter, resulting primarily from a deferred tax benefit related to state entity restructuring.

Companies had net income of $454 $2 million or $2 <unk> per diluted share.

This compared to net earnings of $502 $8 million or $2 13 per diluted share in the prior year's quarter.

Combined cash and cash equivalents at year end totaled $984 $9 million.

Compared to 142 billion at the end of fiscal <unk>.

2020.

Outstanding debt as of January 29th was 345 billion.

For the year, the company repurchased $950 million in shares at an average price of $103 75.

The company did not repurchase shares during the fourth quarter as our board is engaged in discussions with mantle ridge.

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

Paired to the prior year inventory levels increased 39% at dollar tree and 17% of family dollar.

The higher levels of inventory are comprised of significant increases in goods on the water year over year as we rebuild inventory levels as well as increased capitalized freight costs based on much higher rates during the year.

We do not anticipate any additional material inventory markdowns related to the recent family dollar voluntary product recall.

Capital expenditures were $271 $6 million in the fourth quarter versus $191 8 million in Q4 last year.

For fiscal 2022, we expect the consolidated Capex will be approximately $1 3 billion, which will be focused on 590, new stores, consisting of 400 family dollar and 190 dollar tree stores.

500 dollar tree plus additions in 800 family dollar <unk> renovations.

The addition of replacement of frozen or refrigerated capability to select dollar tree and family dollar stores.

Supply chain construction and upgrades and information technology system projects.

Depreciation and amortization totaled $188 7 million for Q4 compared to $182 9 million in the fourth quarter last year for.

For fiscal 2022, we expect consolidated depreciation and amortization to be approximately $750 million.

Our initial outlook for fiscal 2000 2022 includes the following assumptions where same store sales for the enterprise we are forecasting low to mid single digit positive comps for the year.

Considerations for 2022 include the following the company incurred approximately $33 5 million and COVID-19 related costs in fiscal 2021.

Expect these costs to be minimal in fiscal 2022.

We will be cycling a third round of stimulus checks that totaled an estimated $386 billion in March of 2021 and.

And later in the year, we will be cycling the monthly advanced child tax credit payments that began in July of 2021.

We expect continued pressure on store and DC payroll based on competitive markets states, increasing minimum wages unemployment levels and completing the company's many initiatives.

We expect to incur more than $165 million in store minimum wage changes and market adjustments.

In addition, we are investing more than $30 million in DC hourly wages.

Continue to partially offset these average hourly rates rate increases through productivity and efficiency and efficiency initiatives.

Import and domestic freight will.

Cost pressures due to the annual inflation of fiscal 2021 rates in the first half of 2022.

In addition diesel fuel prices are expected to be significantly higher in 2022.

We cannot predict future currency fluctuations so we've not adjusted our outlook for currency rate changes.

Net interest expense is expected to be approximately $33 million for Q1, and approximately $129 million for fiscal 2022.

We estimate consolidated net sales for the first quarter will range from $6 63 billion to $6 78 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 95 to $2 10.

Consolidated net sales for full fiscal 2022 are expected to range from $27 billion to $2 billion to $27 85 billion.

The company estimates diluted earnings per share will range from $7 60.

To $8, which at the high end implies a consolidated operating income margin of 9%.

Our outlook assumes a tax rate of 24, 3% for the first quarter and 24, 1% for fiscal 2022.

Our weighted average diluted share counts are assumed to be $226 5 billion shares for Q1, and $226 7 million share for the full year.

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

I will turn the call back over to Mike.

Thanks, Kevin.

I'm more encouraged and enthusiastic about our business and the opportunity than ever before.

After a few years of dollar tree delivering operating margins lower than we'd like I believe we are poised to benefit from our initiatives to deliver materially improved operating performance.

Because of our team's dedication focus and execution, we have one of the most important milestones behind us converting more than 7800 stores to the new pricing strategy.

Providing value to our customers in a meaningful assortment is at the forefront.

And as we reinvest in and market the extreme value assortment at dollar tree, we are confident store traffic and productivity will improve throughout the year, which will contribute to shopper loyalty.

<unk> and convenience is more important than ever to our customer in today's environment.

We are dedicated align and focus.

The ability to execute our key initiatives is paying off and setting a solid foundation for improved operating performance.

We delivered EPS of $5 80 in fiscal 2021.

And the high end of our guidance range. This year is $8, representing a 38% increase.

I believe we are at an inflection point to exhibit our earnings power in the years ahead.

This year, we are laser focused on meeting our customer needs, while driving our initiatives that are delivering the best returns.

These initiatives combined with our robust balance sheet will position us to deliver long term value for our stakeholders customers associates suppliers and our shareholders.

I would like to once again. Thank every one of our more than 200000 associates for all they have accomplished over the past two years.

Due to the unprecedented challenges presented with COVID-19 supply chain issues and labor shortages. Our teams are there every day to serve millions of shoppers across the U S and Canada.

We have accomplished quite a lot in the last 18 months, but in many ways I feel that we are just getting started.

But the future is bright for dollar tree and family dollar.

Before we take your questions I'd like to provide a brief update on our ongoing engagement with mantle ridge.

We continue to have constructive dialogue with mantle ridge and our shareholders.

And indeed, we have been meeting weekly with Paul of mantle Ridge and Rick Dreiling.

Accordingly, we will not be addressing any mantle ridge related questions. During the Q&A portion of our earnings call.

Operator.

We are now ready to take questions.

Thank you and if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, we do ask that all participants limit themselves to one question.

Great one follow up question may be allowed.

Again that is star one to ask a question.

We will now take our first question from Scot Ciccarelli of tourist Securities. Please go ahead.

Good morning, guys. Thanks for the information so Mike given your comments on the declining units at dollar tree is it is it fair to assume that the dollar tree stores are roughly generating high single digit comps. After the price conversion and then secondly are you surprised at the magnitude of the unit decline.

I guess it doesn't quite seem to reconcile it is on the comment that the consumers have been really accepting of the break price changes so any color there would be helpful.

Yes, thanks, so on the unit client.

We have the same exact sensitivity models of many of you do.

Units comps transactions and then margin enhancement.

And going into it and we've been watching this for the last 18 to 24 months.

And because of the vendor cost increases on our key consumable items that drive traffic for the last 18 months.

Lenders have eliminated items.

<unk> sized items or raise the price on items that we have lost in our assortment.

And <unk>, 18% to 24 months, we have seen unit declines and transaction reduction because of that so.

It wasn't a surprise to us we knew where we needed to invest our dollars and as we roll this out and tested it it really confirmed in our customers told us here's where we needed to do our work.

And that's why it does it does three things for us.

Sure.

We were able to improve our assortment.

And move to the $1 25, and really bring back items that consumers like ended our extreme value and high traffic driving categories.

And that will improve our traffic and our.

Consumable sales going forward.

The other thing it does is it enables us to get again, I keep saying get back to 35% to 36% gross profit margins in this high cost environment.

And then lastly, it allows us to improve our operating performance and a higher cost environment.

And offsetting it.

Kevin said and we share our high end of our range EPS range is $8 up 78% increase and thats absorbing the $600 million in freight that we assumed last year and then Kevin just shared another $200 billion in labor between the stores and Dcs. So thats why this strategy is so important to us.

The unit decline as we see the new items come in we see the customers responded very quickly and many of you even pointed out as you've done your store inspections, you've seen some of the new products and our carbonated beverage and our salty snacks and our meat snacks and.

And we expect those sales to slowly improve and even with the unit decline where it is that you're seeing how it's translated to an improved operating income as you saw that we would be.

Fourth quarter by 25 so.

No we're not surprised but yes, we are working diligently to get the new product in to reverse that trend thats been existing for 18 months and really deliver what the customer wants at that extreme value on both the consumable side to drive traffic and the discretionary side that they know us for.

Okay. Thank you very much.

We will take our next question from Matthew Boss of Jpmorgan. Please go ahead.

Great Thanks, and congrats on a nice quarter.

So on the top line could you help provide maybe a comp forecast by banner. If we broke apart the low single digit comp guide for the first quarter. Mike What are you seeing from your low income customers. So far in February and just how best to think about the delta between low single digits in the first quarter.

And low to mid single digits for the year on the comp side.

Yes, we're not we haven't broken out by banner.

But our customer last year as you know they were they had a lot of stimulus dollars in their hands between the stimulus dollars that child tax credit.

And then the food stamp environment and then the extra unemployment.

And many of those are going away. So not only are they going away, but then on the other side is the highest inflation you've seen in 40 years. So they are starting to see pressure on.

Their rent bills their heating bills their gas bills are utilities and their food bills.

So we think that this value segment that we're in and this undeniable value that we're going to deliver at a $1 25, and our great values at family dollar at convenient locations are really poised well to deliver what the customer is looking for.

Yeah.

Maybe just a follow up Kevin on gross margin is it could you walk through maybe some of the moving pieces embedded this year in the forecast specifically what are you embedding for freight and how best to think about gross margin drivers from here at both the dollar tree banner and family dollar.

Yes, I think as you look at the.

The gross profit section of the P&L. So obviously.

The biggest headwind continues to be freight.

As I spoke to the first half in particular.

So as we went through 2021 rates climbed quarter to quarter until that kind of.

Kind of finally flattened out at the back half of Q3.

For the first half of the year, we'll continue to see some pretty good pressure there.

And that shouldnt be a surprise to anybody I think.

As we look at the year, we do not see things getting better in the supply chain world and moving product and.

The rates that are required to continue to move goods and it's not just the rates to pay for the goods. It's also the rates you pay once you've got it once it gets into the port it's costing more to move the product. So drayage is more storage costs are more.

Everybody is trying to charge for equipment. So there is a lot of pressure on a lot of different places as it relates to moving products. So I think thats.

That's a big one.

Other one is diesel costs diesel costs are up basically I think just over $1 year over year at this point in time right now.

So that adds a significant amount to the pressure as well as we think about it.

And then again I think.

To your point I think we face.

Stimulus dollars in particular in the family dollar business in Q1.

Discretionary business, if you remember a year ago.

In Q1 at family dollar had a very large call, but double digit call.

We would see unfavorable mix in Q1 as it relates to.

Our family dollar business. So those are some of the things that are some of the moving pieces that are kind of going on and then I think the other thing we think about from a.

Mike.

Talked about already is your investment reinvestment in the product that we're making at dollar tree.

The consumer has let us know, where we where we need to continue to look at our value proposition and the merchants are doing a great job working through that and we're flowing new goods and we will continue to flow goods.

Throughout the year, so I think that'll.

An important piece of it.

We'll take our next question from Michael Lasser with UBS. Please go ahead.

Yes.

Please go ahead, Michael your line is open.

Good morning, Thanks for taking my question.

What is the.

With that you are getting from the $1 25 point move and how wide is it.

The lift here.

Stored and geography, and a part of that how is the move to a $1 25 impacted.

Customers shopping frequency.

Some customers just arent.

Aren't coming back out.

And the price change.

Yes, Thanks, Michael.

We did.

The consumer was.

Huge important part of this and our ability to deliver meaningful assortment to them and we did consumer research in depth research back in October and we just recently finished it up and I've seen some of some of the analysts have done their own in depth research and the most important thing is is the research tells.

US They trust dollar tree and at dollar tree as the most recognized and trusted brands in the value segment period. This is after the $1 25 price change.

They expressed a likelihood to continue to shop of above 85%, they still want to recommend our stores above 77% of our shoppers.

And if there is an emotional connection our customers still believe they are they're getting a good value for the money and we receive higher Mark center competitors at a good value even at a $1 25, so our customer, bringing our customer log is critical in.

The reason that we're at that's enabling that is on our discretionary side at solid 25%.

Our comp shops still tell us where we are winning in our in our when.

When I said, a herculean task.

Our merchants starting last fall so in November December and January and so bit into February .

When item by item. They did complete category reviews and reviewed item by item line by line and went out and comp shop them every item and brought it in and wanted to make sure that at $1 25. This items still stood up as a great value to the competitive market.

And where we saw that we see the.

The units sales, where we would expect them and then to your point you see unit declines, where we arent competitive and we knew that over the last 18 months.

But what the breaking the dollar does and go into a $1 25 is really lets us get the new assortment in and we're so excited about it.

Over the last three months, our entire merchant team not only went through and align review category by category, but they also did our January trip and our January trip that we bought for the back half of this year as some of the most exciting items that we've had and our customers are going to be while about compared to what they were seeing.

And in the marketplace and then the new items, where we're delivering we're seeing.

An improvement in unit sales as we bring those in and we absolutely believe that throughout the next six to seven months as the consumable side and those new items start to flow in we will see units begin to come up and we will see our sales come up accordingly, and we will maintain that customer loyalty.

From our customers. They still believe we're the number one value in the dollar segment, because theyre seeing the inflation the highest in four decades.

They see what's happening in the marketplace and they trust us our merchants have worked very hard and I think over the first half of the year, we will slowly get better and better in units and in our traffic going forward.

And the most important thing even with the trap or even with.

The extra cost that Kevin talked about in our freight in the first half we still believe we can deliver that 35% to 36% margin. So it's the it's the flow through that's going to be so important well, while we're bringing in the new items to drive that top line and.

And to answer your question across geographies, we really don't see.

Any difference in unit declines across geographies competitive makeup our demographics, it's really similar.

And when we had the.

When we had.

A foot in both camps are dollars 25 stores.

Moved very similar to our dollar stores there was not the GAAP didn't get worse or better. It just moved very similar so it was very consistent across that perspective, too, which gave us permission to move as quick as possible to get that new assortment in and really leverage this for our customers going forward.

Mike Pat Deep helpfully provided.

The comp lift.

Dollar tree soften the Galaxy quest.

Thanks.

We are an equal number that you can give us for the $1 25.

And how did you turn this into a longer term comp driver for the.

Business make sure it doesn't it's not too.

So for one and done impact for 2022.

And then in the business goes back.

Experiencing some challenges longer term.

For example, we could open the door.

Move from $1 25 to $1 50 that could provide even more merchandising flexibility to drive the business down the road.

Yes, so with a $1 25 going forward enables us to do is.

Really going forward the one.

Dollars 25.

Allow us to bring in greatest assortment to drive traffic and meet the customers need at a fixed price point and differentiate us just like we've been differentiated for 30 years, we think a $1 25 allows us to do that but to your point then how do you continue to drive our comp store sales.

The dollar tree plus that's why we're accelerating that to another 500 stores and I've shared we want to get to 5000 stores going forward. So we think that the growth in dollar tree a similar to a lot of you have referred to.

Dollar ramp up in Canada, we believe that this is going to be.

A point, where we can continue to drive comp store sales improved assortment with our dollars 25, three and $5 assortment.

So going forward, we're going to do 500. This year, we're going to continue to grow in other.

Large amount of stores. The following year and then we're also at a dollar tree plus items at the three and five.

We're planning for and looking to expand in 2023, so not only not only grow the store count, but expand the assortment and depth inside the store so that one enable continuous.

Comp growth year over year as we move forward.

And to answer your question on the we just completed the assortment we will share more as we get forward on the comp store growth with the unit decline.

We are very confident we can be in that.

Low to mid single digit comps, but even at that it translates on flows through it at the higher margin and leveraging throughout the P&L to a 38% increase in our EPS. So that's why we're very excited about the improvement this year will bring.

And as we move forward now that we have the whole fleet on there in the prior quarters.

We'll definitely share more details because it will be the whole fleet and in consistent timeframe.

Throughout the last three months, we were just.

December we had a few stores, but it was during the Christmas January we'll roll it out more stores, but it was in a cycling January was a tough month for retail and then February was in our cycling bad weather from last year, and we had one of the best Valentine's we've ever had.

So.

Theres just been a lot of moving parts. So once it stabilizes and we have the whole fleet on here, we will absolutely share it but it is doing exactly what we thought it would and is delivering that EPS, we expect it to.

Just to clarify.

Because you don't want to provide at this point the market should not interpret it.

Bonds the comp quick responses to disappoint.

Not at all no.

No and it's evidenced by our 25% beat in the fourth quarter and 38% increase in EPS. This is.

The key is is this really enables us I can't stress enough.

It enables us to bring back those key items on the consumable side that over the last 18 to 24 months are just slowly disappeared and there were one by one it wasn't all at once but over time, we lost unit sales on the consumables and comps on the consumables, which ultimately lost transactions accounts.

The last 18 months and you've seen it in our reporting every quarter, but this enables us to do is bring back all of those items and then even more new items and I am so excited about the assortment that youre going to see flowing in there and our customers are excited.

Our end caps with the brand name liters of carbonated beverage four feet of meat snacks that we brought back are really going to be key traffic driving items that we see will accelerate as they increase throughout the first half of this year.

And as a reminder, please limit yourself to one question and one follow up question if necessary.

So that we may accommodate all county.

Our next question comes from John <unk> of Guggenheim. Please go ahead.

Hey, Mike wanted to start with what do you think happens to total assortment inside the dollar tree, let's say over the next year and then broader than that right because.

You don't want the assortment I would imagine to get.

Significantly larger than it has been historically.

Then what do you do with.

You guys don't have the kind of tight planet grams that some others do.

Can you go back and do a strategic replanted grabbing and space allocation, maybe giving more to consumables.

When would that happen.

Yes.

Great call. We can this line item review, we went category by category and we strategically look at what drives traffic and give it the appropriate space needed and we arent planet grabbed and that enables us to bringing great new items and bring out closeout items and invest in.

Wow items and thrill of the Hunt islands to really.

Get the customer excited about seeing newness in our stores.

And as it is.

As we look at the store the $1 25 items and then this $3 five I believe going forward, we will moves we will monitor the productivity in dollars in profitability in our stores.

We don't have a shelf stretcher inside our stores Youre right. There is the only a set amount of linear footage.

But we believe we can continue to optimize based on the customer's reaction on the $3 $5 and when we have those categorical those items.

They are highly productive and deliver higher penny profit and more efficiencies throughout the supply chain and inside the store. So we will manage that going forward.

We'll continue to look at the space, we need for the right consumables to drive the traffic and then will you will grow the discretionary based on the productivity and continue to manage that going forward just as we have over the last 35 years, we've flex the space Accordingly.

And then maybe as a follow up to that right. So if you're talking about reinvesting.

Some of this gross margin benefit.

Is that more likely to be in consumables right to drive traffic for discretionary.

And once you get to that 35% to 36.

Would you like to run that kind of.

Neutral.

And whatever benefit you get on.

EIT margin is leverage right from the from the higher comp.

Yes, we'd like to we'd like to definitely get to 35% to 36, but we believe there may be upside beyond that and as you just said, it's the stick stick and rudder that a retailer always does they wanted to do what they need to to have great value and drive that top line and then at the margin that they need to deliver continuous.

And EPS.

Okay. Thank you.

We'll take our next question from Paul <unk> with Citi.

Please go ahead.

Hey, Thanks, guys.

Going back to the dollar tree comp impact from the move to 125, you said you didn't want to give.

Given a specific number but you did share that units were down.

Mid teens and I think all else equal if units went down you would have seen a 25% comp lift.

Simple math is right. So can you just confirm that you are actually seeing a net.

High single digit to low double digit comp lift in those stores.

And if that is the case is that how youre planning.

That contract Com for F 'twenty two.

And are you ordering units down in that mid teens.

That you've experienced thus far or something better than that and then just I guess I'll ask my follow up now I'm, just curious which categories, you're seeing more or less elasticity.

Yeah. So as I said before we haven't we haven't shared that comp on the rollout because we just got everything rolled out but we have shared we believe in our forecast going forward in our guidance is low to mid single digit comps that we're very confident we can achieve.

And even with that the lower units.

And the comp in that range still delivers a 38% growth in our EPS.

And what was the second part of the question.

All of the categories. The elasticity is it's exactly where we thought it would.

Our customer gives us we have such great value and I've said this before when when we go to buy and create our seasonal items on the discretionary side. We go out in the comp shop, and we find five and $7 of items and we will we are merchants, we'll we'll make those items at the dollar that's why we're known for such.

Great value on the discretionary side. So when we moved to $1 25 are discretionary units are still selling very very well and our customer research tells us that in our sales tell us of that and then it also as I've shared on the consumable side is where we're seeing the unit decline, but as we bring in.

Those new items the unit decline in fact, the categories are positive comp where I've shared the last 18 months. They were negative and we were losing units where we've already introduced the items and they're flowing in its absolutely reversed and starting to trend in a positive nature.

So how does that influence how you planned units in terms of hedging inventory.

Yes, so we're planning.

To feed that growth that we talked about and.

We're buying on the discretionary side like we always buy to continue to drive our seasonal and our discretionary side and the good thing is we're getting every consumable item, we can't right now in the marketplace.

Our new items that we're bringing in we're buying as many as we can and the timeline to replenish that it's most of that is domestic so we can keep feeding the sales growth and unit growth as it happens.

We will take our next question from Edward Kelly of Wells Fargo. Please go ahead.

Hi, guys good morning.

Mike I wanted to ask you rolling out the $1 25 without the new product makes it difficult for you to showcase what this ultimately means for your customers over the long term are you I mean, it doesn't sound like but based upon what you've seen so far.

Looking forward are you concerned at all about the gap in time between the $1 25, and when the new product comes in.

And what that could potentially do to customer loyalty and then as part of this question can you just talk a bit more about.

How the merchandising from here changes the cadence around that.

What percentage of the Skus are actually going to change for customers how important is bringing.

Bringing things back rate that you haven't sold historically.

Any additional color on all of that would be great. Thank you.

Yes, it's extremely important to bring back items that they haven't seen in as I've reiterated several times.

In the last 18 to 24 months, we've seen are discretionary.

Sales decline and especially it has accelerated as everybody has seen throughout last year. Our vendors, we're getting pressure costs were increasing and inflation is at the four decades high so we needed to move for several reasons one to quickly get in that assortment.

<unk> that we wanted.

And number two we needed to be simple for the organization, we can't have our merchants buying dollar assortment and $1 25 assortment and mixing it up we needed to be crystal clear for them and they went to task over the last three to four months and went through that entire line item by line review and category review item by item.

And now the items are flowing back in so we didn't want to confuse our customers and confuse our merchants and confuse our operators. So we move to a $1 25 as fast as we did and we're bringing our customers along with us.

Absolutely we're afraid of our customer thought process. That's why we did in depth research back in October when we first introduced it and our customers told us because of the increases we're seeing in the marketplace. The $1 25 is still an extreme value. They also told us after we moved to a $1 25.

Dollar tree is their number one trusted store by far and the dollar segment in value segment and I think some some of you have done research, stating the same thing that dollar trees Trust and brand loyalty is still there and now as these new items at $1 25 flow in.

It's even going to increase from there we it's very important for us to get this item and as soon as possible and Thats why we believe that throughout the year.

A year as this flows in we will see the union units improve in the categories that we've addressed.

The categories on the discretionary side are already a great value because of the market has moved significantly around us. So we think we're in a great position when the customer's stressed more than ever.

Highest inflation in four decades, they're getting pressure on their rents and their fuel for their cars on their heating bills and on their food bills, they're going to come to dollar tree and family dollar now more than ever because of the great value that we have.

And then just a quick follow up on the gross margin on dollar tree.

Why wouldnt the early part of the year, particularly the first half be much higher than 35% to 36, just given what's going on from a from a pricing standpoint, and then that normalized.

Towards that towards the end is that a fair assessment.

Yes, I think as we think about it Ed there is that possibility obviously.

Because we haven't changed as much of the product.

In process, but again I think the other side of that is just a little bit of the freight market and the diesel costs and some things like that.

Obviously.

We obviously hope there is upside to that but.

So we've got to go out.

Worked through the quarter and prove it at the end of the day.

Understood. Thank you.

Yes.

We will now take our final question from Simona Kaufman of Morgan Stanley . Please go ahead.

Hey, everyone. Good morning, So I guess my one question is when we look at the guidance on the face it looked it felt a bit conservative Mike you mentioned the units down mid teens and then there was some higher inventory costs.

I wanted to ask you.

If there is points of conservatism you mentioned that as you rollout new units Youre seeing new product the units look like they are getting better.

I don't know much on the cost flow through throughout the year, but can you talk about the points of conservatism that could be in this model.

Throughout the year.

Yes.

And I'll toss it to Kevin on a few line items, but overall, we just got completed.

And the merchants just went through their line by line items. So.

It is a wait and see we think that we're going to see traction throughout the year to drive the comp and the improved unit decline and reverse its course.

So we've put out based on what we know now.

To be.

Our model of the low to mid digit comps and the most important thing is at that higher margin price point.

So we think there is as we see if the items start flowing and faster than what we want.

Yes, we believe that then there could be some higher sales.

Yes, I think as we as we look at it.

We've talked about some of the things the bigger.

Headwinds obviously.

Labor is a big one at the end of the day with the <unk>.

Continued investments that we continue to make.

The workforce.

So I think we have to think about that but I think again as Mike is.

Said many times is this assortment changes it does give us the opportunity to potentially hoped.

We outperformed that guidance at the end of the day.

But I don't know that it makes sense to go beyond where we're at at this point to Mike's point, given the fact that we just got all the stores converted.

It's been somewhat lumpy from a business standpoint, given the.

January timeframe and with Omicron, whether between January and February so there's a lot of different things as I think Mike statement about getting.

Into the first quarter and hopefully all of this all kind of settles out it will give us a much better read and give us.

Obviously the data that.

We will be able to speak to and make changes if changes are warranted.

Yeah, and I would just reiterate this is a tranche moving beyond the dollar price points enable us to unlock our assortment.

And really deliver a 38% in improve.

The improvement in our EPS.

And for long term the way I think about it it continues to move beyond that and then we're bringing in 500 more dollar tree pluses and growing that year after year going forward and how thats going to leverage our sales and productivity of our stores and margin dollars and then when you look.

At our combo stores on the family dollar side, and multiply and getting 400 of those going.

All of our initiatives will keep driving our topline at a better margin rate and enhance the EPS as we go forward not only this year, but in the years to come.

Okay.

Thank you.

And we will now take our final question from Michael Montana of Evercore. Please go ahead.

Hi, Thanks for taking the question.

Just wanted to ask on the inventory side, if you could help us to understand.

What is the build there in terms of units versus pricing given some of the accounting.

And how we can get comfortable with that relative to sales.

And then I just had a follow up question.

Yes, I think as you look at inventory.

Obviously the number.

They sound like big increases.

Got to remember that a couple of things one.

There is more.

We are.

We've had a backlog trying to get inventory moved for some time now we still have a backlog of inventory, it's taking longer to get goods.

From Asia.

Through the ports.

And into our distribution centers so.

There is an element of the goods on the water being higher that are just because of the fact that it's taking instead of being.

30 to 40 days, it's now 50 to 60 days to get goods from one place to the other.

I think the other side of it is as I spoke to us.

The freight rates that we've talked about all of this past year, the additional $600 million of freight.

A large obviously that gets capitalized into inventory and doesn't come through the P&L until you sell those goods. So there is a large portion of freight costs that are also part of this build and what you got to remember as dollar tree imports significantly more than family dollar. So thats why the dollar tree side of it is high.

We feel very good about our inventory position I mean, obviously I would tell you that in our.

Our merchants, we'd like to have more more goods.

They have right now.

In certain categories in particular.

So we feel very good about where after an inventory perspective, and I think of a comparative probably too.

Two or three years ago, probably three years ago, we would probably look pretty reasonable if we looked at it on us on a store basis.

Okay. Thanks, and then just to follow up on the ticket if I could for family dollar if I heard correctly that was up.

Four 8% so could you just give us some color there in terms of like units per transaction versus inflation and mix.

Yes, I think as you look at it.

I think there is some obviously inflation in that number.

And I don't have it broken out, but I would guess, it's probably about half of that number potentially.

About 2%.

As we look at the as we look at the price increases that are bidding.

Incurred over the last 12 months in particular.

So that's probably about where it falls out.

Okay. Thanks, very much for taking the questions.

I would now like to turn the call back to Mr. Glaser for any additional or closing remark.

Thank you Ashley Thank you for joining us for today's call. Our next earnings conference call to discuss Q1 results is tentatively scheduled for Thursday May 26 2022.

Good day.

Okay.

Thank you that now concludes the call. Thank you for your participation you may now disconnect.

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