Q1 2022 Dollar Tree Inc Earnings Call
Please standby were about to begin.
Good day, everyone and welcome to the dollar Tree, Inc. First quarter of 2022 earnings call. Today's conference is being recorded at this time I'd like to turn the call over to Mr. Randy Taylor Vice President Investor Relations. Please go ahead Sir.
Thank you Alan good morning, and welcome to our call to discuss results for dollar Tree's first fiscal quarter 2022 with me on todays call are executive Chairman, Rick Dreiling, President and CEO , Mike <unk> and CFO , Kevin Wampler before we begin I would like to remind everyone that vary.
Remarks that we will make about our expectations plans and prospects for the company constitute forward looking statements.
Purposes of the Safe Harbor provisions under the private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and our actual results may differ materially from those indicated in these forward looking statements for information on the risks and uncertainties that could affect our actual results. Please refer.
The risk factors business, and managements discussion and analysis of financial condition and results of operations sections in our annual report filed March 15, 2022, our Form 10-Q for the most recently ended fiscal quarter. Our most recent press release and 8-K and other file.
We make from time to time with the Securities and Exchange Commission, we caution against reliance on the forward looking statements made today and we disclaim any obligation to update or revise these statements except as required by law.
Following our prepared remarks, Mike and Kevin will take your questions. Please limit your questions to one and one related follow up.
Before I turn the call over to Rick I want to make one quick clarification to our earnings release as I've received a few questions. This morning.
Our original fiscal 2022, EPS outlook of $768 per share did not include the 43 cents per share of cost at Y in today's earnings release.
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The <unk> 43 per share was incurred in Q1 and reduced our Q1 earnings our updated outlook.
For EPS up $7 80 to $8 20 per share does include the <unk> 43 per share up cost and I will now turn the call over to Rick.
Thank you Randy and good morning, everyone.
It's been an extremely busy 10 weeks since joining the dollar tree team I've been actively meeting with the leaders throughout the organization to get to know them and their businesses and discuss priorities and opportunities.
We see a massive opportunity ahead of us to drive long term sustainable value creation through the combined dollar tree and family dollar brands.
Abundantly clear to us that to deliver this long term opportunity, we're going to be going from a great company.
And that change is needed.
We are fully committed to transform dollar tree from a good company today to our Great Company Tomorrow.
We have this unique opportunity to become a growth engine that delivers profitable growth with attractive returns on capital for many years to come.
However to get from here to there we must build a foundation to fuel this engine.
We need to invest in the areas that were most positively impact the associates and shopper experience.
These investments are intended to greatly improve the performance of the family dollar segment and our supply chain as well as support the continued momentum at dollar tree.
We will be focusing on our people. Most importantly, our teams from store and distribution center associates to field leadership through competitive wages improve store and DC conditions and enhanced safety.
The distribution center network and supply chain presents us with a golden opportunity to amplify efficiencies and deliver greater support to our stores and elevated service to our shoppers through improved in stock positions.
Pricing at family dollar and the value proposition at both banners, we need to be right on price at family dollar on par with our primary competitors and we will work directly with our suppliers to drive greater store productivity.
Dollar tree has a long history of exceeding customer expectations.
By offering extreme value, we will continue to place great emphasis on the value proposition at dollar tree and finally technology, we are simply not where we need to be from a systems perspective to reach our potential.
We have recently begun a comprehensive review of all of our systems and infrastructure. It can make the right decisions and investments to take dollar tree and family dollar to the next level.
I feel great about the long term opportunity for dollar tree and family dollar before I got here now that I have been inside the organization for two months I feel better than ever.
I have full confidence in the team and our board of directors as we embark on this much needed transformational growth journey.
The dollar tree banner is generating renewed momentum and we will be taking the necessary steps to enable family dollar to seize the opportunity to deliver long term operating performance improvements.
We are in the midst of a very challenging time for consumers as many of our living paycheck to paycheck.
They are facing the highest inflation since the early 19 eighties record high gas prices and the effects from the pandemic geopolitical uncertainty and much more.
In tough times value retail can be part of the solution to help families stretch their dollars to meet their evolving needs dollar tree and family dollar provide convenience as our 16000 plus stores are located close to where millions of households, who live and work.
Mike and I view, our organization as a growth company now is the ideal time to shift gears for us to make change happen to unlock shareholder value and enable the next wave of profitable growth for dollar tree and family dollar.
I'd like to turn the call over to Mike.
Thank you Rick it's good to have you here with us and good morning, everyone. Thank you for joining us today.
The team delivered a solid start to the year with a six 5% topline sales expansion.
19, 2% lift to gross profit and a 48, 1% increase to earnings per share during.
During the quarter.
<unk> team successfully completed its conversion to the $1 25 price point contributing to both sales and margin improvements.
Shoppers are responding favorably as the new greater value products hit ourselves.
Importantly, other key strategic initiatives, including the expansion of our three and $5 plus assortment in our dollar tree stores as well as our combo stores and <unk> renovations at family dollar are all working.
Rick outlined the types of additional strategic investments, we'll be making over the next several years that are designed to position the company for improved operating performance and long term sustainable growth.
Before I discuss Q1 performance by segment I wanted to share a few details regarding a very eventful quarter for the company.
In mid March our board was reconstituted we now have a new executive chair, a new Vice chair and lead director lead independent director and a total of seven New directors. We also have two new Board committees, a finance committee and the sustainability and corporate social responsibility Committee.
This week, we published our new 2022, CSR report I am proud of the progress the progress, we're making as a company and the team's effort on sustainability.
Please check out our new CSR report in our corporate governance portion of our website at dollar tree and fulfill dotcom.
Rick and I have been working very closely together, we share a common vision for our long term growth opportunity for the dollar tree organization.
That value will be created by a combination of dollar tree's unique and resilient business model that is demonstrating its earnings power and momentum with its recent initiatives along with a material improvement over time in the operating performance of our family dollar banner.
We are well underway with plans and priorities to address the performance at family dollar I will share more detail later on this call.
Also two weeks ago, we announced the addition of two key executives to our leadership team.
John Flanagan joined the company as Chief supply chain Officer, John brings decades of leadership experience in retail logistics, including grocery drugstore and the value sectors.
John will be extremely focused on elevating our supply chain capabilities through improved distribution operations hiring and retaining of teams the efficiency improvements throughout supply chain designed to drive greater store productivity through improved in stock positions.
He plans to lead productivity improvements across the logistics function.
Use of data analytics process improvement and automation.
Additionally, Larry Garter has joined the team as Chief merchandising officer for the family dollar segment.
He brings more than 35 years of retail merchandising and marketing experience he.
He is well known and respected throughout the vendor community and will be leading plans to drive our business and in turn the business of our supply partners.
Larry will be focused on improving family dollar's operating performance and productivity through sales driving initiatives that provide great value for our shoppers.
In addition to the investments we are outlining today components of our transformation driven by a number of factors, including continuing to enhance our culture elevated store standards better use of private brands improved category adjacencies enhancing our product mix optimizing our vendor.
Partnerships and many many more.
So to some degree today and especially in the quarters ahead, you can expect to receive more details improved transparency and greater management engagement and shareholder communications as we progress on our plans to improve the operating performance and reassess the long term opportunities for the company.
We're currently in the process of planning an investor day targeted for October timeframe.
Now to Q1 performance the dollar tree banner delivered its strongest quarter in company's history, among the highlights and 11, 2% comp the best quarterly comp performance in more than 20 years, which is including our largest sales day ever which was the date.
The Saturday before Easter.
A 40 or 46% gross profit margin nearly 700 basis points above the prior year's quarter and a company record, 22% operating margin more than 800 basis points over Q1 of last year.
Margins in Q1 did receive an outsized temporary benefit from the initial transition to the new price point as well as <unk>.
So selling through the current inventories.
We are modeling a moderation of the margin level as we focus on providing our shoppers with new assortments, a greater value for the $1 25 price point.
11, 2% comp sales increase was driven by a 15, 4% increase in average ticket.
Partially offset by a traffic decline of three 6%.
For the quarter, the discretionary side of the business delivered a strong 14, 1% comp increase while consumables increased 8%.
April which benefited from the later Easter holiday. This year was the strongest month in terms of both sales and traffic.
Importantly, we successfully completed the conversion to our primary price point of $1 25 across the chain.
Credit to our teams. This project was announced in September of 2021 and was completed by the end of February with minimal disruption.
But by the end of Q1, our customers have already seen more than 960 of our projected 2000, new greater value products skus on the shelves.
Our shoppers are responding to the new items, we are seeing much improved result in the categories since rolling out the enhanced off offerings.
Examples of the consumables category comp improvements, where we've put in these new items.
Carbonated beverage from a 3% decline to a 12% increase now.
In snacks and cookies before the new Skus, we had a decline of 8% now a 12% increase in comp.
And in our food category from a 10% decline before to now experiencing a 2% increase.
The majority of the changes at this early stage are now traffic driving consumable side of the business.
The discretionary changes will occur throughout the back half of the year.
The $1 25 assortment changes are notable and easy to see when you visit dollar tree stores.
In today's environment, where consumers are seeing higher prices everywhere shoppers know they can rely on dollar tree as their destination for extreme value.
And evolving meaningful assortment and thrill of the hunt.
The family dollar banner had a big hurdle to climb in Q1.
In 2020 family dollar at 15, 5% quarterly comp increase at the onset of Covid.
And then last year's quarter, there was a record releases stimulus dollars that positively impacted both topline sales and margin with the lift in discretionary sales or.
For Q1 family dollars comps declined two 8%, which represents a nearly 10% comp since 2019.
The two 8% comp sales decrease was comprised of three 7% decline in traffic, partially offset by a 1% increase in average ticket.
For the quarter, the consumable side of the business delivered a one 2% comp increase while discretionary comps were down 14, 7% as we cycled the massive release of stimulus dollars last year.
February represented the best comp month for the quarter and April was slightly better than the quarters comp.
Importantly family Dollar's comp sales for the quarter were negatively impacted by an estimated 200 basis points by the temporary closures of approximately 400 family dollar stores served by our Arkansas distribution Center.
All of these stores have now reopened.
Last week, we announced that we will be closing the 30 year old West Memphis, Arkansas distribution center that we have deem is no longer part of our go forward strategy.
We are working closely with the impacted associates to support them with their transitions by providing severance plans to those eligible helping associates with opportunities in our other distribution centers and in our stores as well as providing outplacement services and employee assistance programs.
We are reallocating stores to other dcs to fulfill the store deliveries and have sufficient capacity to serve all stores and our remaining fleet of distribution centers.
We appreciate the hard work and support of West Memphis Associates committed during the transition process.
I will now hand, the call over to Kevin to provide more color on Q1, and our updated outlook.
Thanks, Mike and good morning.
For the quarter consolidated net sales increased six 5% to $6 9 billion comprised of $3 78 billion at dollar tree and $3, one 2 billion at family dollar.
Prize same store sales increased four 4% despite cycling the large outflow of stimulus from the prior year's quarter.
This represented a.
190 basis point sequential improvement from Q4.
For the dollar tree segment increased 11, 2% family dollar same store sales decreased two 8%.
On a three year stack basis dollar tree is at a 15% comp and a $1 99, 9% comp.
Gross profit improved 19, 2% to 234 billion for the quarter.
Gross margin was 33, 9% compared to 33% in the prior year's quarter.
Gross profit margin for the dollar tree segment increased 690 basis points to 46% compared to 33, 7% for the same period last year as a result of the of the net of the following merchandise costs, including freight decreased 590 basis points, primarily due to increased <unk>.
Mishel Mark on and increased sales of higher margin discretionary merchandise, partially offset by higher freight costs.
Occupancy costs decreased 80 basis points from leverage on the comp sales increase distribution costs decreased 50 basis points from leverage and higher capitalized balances, resulting from inventory increases in the current quarter, partially offset by higher hourly wages.
And Mark down costs increased 30 basis points, primarily from markdowns for clearance items as we move to a higher value of assortment at the $1 25 price point.
Gross profit margin for the family dollar segment decreased 100 basis points to 25, 8% compared to 26, 8% for the same period last year.
Mark down cost increased 75 basis points due to higher clearance activity related to the shipping delays for seasonal items and slow moving merchandise.
Occupancy costs increased 45 basis points from Deleveraged from the comparable store sales decrease and higher real estate taxes.
Shrink increased 25 basis points for more favorable inventory results in relation to accruals in the prior year quarter.
These increases were partially offset by distribution costs decreased 15 basis points, primarily from higher capitalized balances from inventory increases partially offset by.
Our higher hourly wages and.
And merchandise costs, including freight decreased 35 basis points, primarily due to higher initial mark on <unk>.
Partially offset by higher freight costs and higher sales of lower margin consumable merchandise.
Consolidated selling general and administrative expenses as a percentage of total revenue increased 100 basis points to 23, 3% compared to 22, 3% in Q1 last year.
For the first quarter, the SG&A rate for the dollar tree segment improved 120 basis points to 24% when compared to the prior year's quarter.
Payroll costs improved 100 basis points of leverage on the 11, 2% call.
Partially offset by hourly wages and investments in store payroll.
Facility costs improved 25 basis points from leverage.
<unk> costs decreased approximately 10 basis points, partially offset by other SG&A, which increased approximately 15 basis points, resulting from higher store supply costs.
For the family dollar segment, the first quarter SG&A rate as a percentage of total revenue increased 280 basis points to 23% compared to 22% in the prior year's quarter.
Payroll expenses increased 90 basis points, primarily due to hourly wage and investment in store payroll as well as deleverage on the comp sales decline.
Other SG&A expenses increased 85 basis points due to asset impairment for the West Memphis, DC, along with higher store supply expenses for store projects and higher legal fees.
Store facility costs increased 65 basis points, primarily from costs associated with the removal product from stores and protect in connection with the voluntary product recall as well as deleverage on the comp decline.
And depreciation and amortization increased 40 basis points due to increased depreciation related to capex capital expenditures for store renovations and improvements.
Corporate support and other expenses as a percentage of total revenue were one 8% compared to the prior year quarter, a one 4%.
Higher costs related to increased legal fees, including the reconstitution of our board and incentive compensation.
Operating income improved 47% to.
$731 5 million or 10, 6% of total revenue in the first quarter.
Non operating expenses totaled $34 million comprised of net interest expense and the effective tax rate was 23, 1% for both the current and prior year's quarter.
Net income for the quarter improved to 43, 2% to $536 4 million or $2 30.
Per diluted share, which includes <unk> 13 per share for costs related to the west Memphis DC.
This compared to net earnings of $374 5 million or $1 60 per diluted share in the prior year quarter.
Looking at the balance sheet combined cash and cash equivalents at quarter end totaled $1 2 billion compared to $985 million at the end of fiscal 2021.
Outstanding debt as of April 33 $45 billion.
The company repurchased approximately 90000 shares in Q1 for approximately $14 $2 million under its share repurchase authorization.
Compared to last year inventory levels at dollar tree are up 39% due to increased capitalized freight costs plus.
Dollar tree, plus inventory and a catch up and pass through inventories.
Inventory levels at family dollar increased 27% compared to last year due to increased capitalized freight and an increase in the average unit cost.
Both banners have less average inventory units in store then at the same period in 2019 pre pandemic.
Capital expenditures were $253 4 million in the first quarter versus $224 9 million in Q1 of last year and for fiscal 2022. We currently expect that consolidated capital expenditures will be approximately one.
<unk>.
Slightly higher than our initial outlook for the year based on additional supply chain projects and construction cost pressures.
Depreciation and amortization totaled $188 9 million for Q1 compared to $172 7 million in the first quarter of last year and for fiscal 2022, we expect consolidated depreciation and amortization to be approximately $770 million.
Yes.
In March our initial outlook for fiscal 2022 diluted EPS with a range of $7 $68.
Spec to incur costs totaling an estimated 43 per share which were not included in our original outlook.
These costs represent in Q1 13 per share for asset impairment and the product recall costs related to our west Memphis DC.
For Q2, an estimated 22 per share for loss sales freight merchandise disposal payroll and legal costs associated with the west Memphis matter.
And for full year fiscal 2020 to a total of eight <unk> per share for stock compensation expense related to an option grant issued drive new executive Chairman.
Diluted earnings per share for the full year is now expected to range from $7 80 to $8 20 assets, which includes the 43 sets of costs I've just outlined.
Consolidated net sales for the year are now expected to range from $27 76 billion.
20, 814 billion compared to our previous range of $27 billion to $2 billion to $27 85 billion.
We expect to deliver a mid single digit comparable store sales increase for the year comprised of a high single digit increase in the dollar tree segment at a more or less flat comparable store sales in the family dollar segment.
Selling square footage is expected to grow by approximately three 9%.
For Q2, we estimate consolidated net sales will range from $6 60.
$6 65 billion to $6 seven 8 billion based on a low to mid single digit increase in same store sales for the enterprise.
Diluted earnings per share for the quarter is expected to be in the range of $1 45 to $1 55 per share and this estimate includes approximately <unk> 24 per share for cross with West Memphis matter.
Compensation expense.
Considerations for our updated 2022 outlook include the following which we anticipate that we will continue to continue to experience uncertainty related to inflation the global supply chain and geopolitical factors. For example, we've seen diesel costs continue to rise and natural gas price increases are affecting utility.
<unk> costs throughout the business.
We are once again experienced experiencing shortages and the availability of helium and have not been able to procure the volume needs with will negatively affect balloon sales.
Our outlook includes our best current estimates of the pressures from these factors.
We cycled the third round of stimulus checks that totaled an estimated $386 billion in March of 2021.
Q2, we will begin cycling the monthly advanced child tax credit payments that began in mid July of 2021.
We noted that our original outlook in March that we expected to invest $195 million in store and DC associate wages in 2022.
As an update given the competitive retail environment, we expect that we will likely exceed this amount as we invest in our associates.
Important domestic freight will present cost pressures due to and utilization of fiscal 'twenty one rates in the first half of 2022.
As noted in March we plan for diesel fuel prices will be higher this year, we have increased the forecasted them out for the remainder of the year based on the current market.
Additional color for the year regarding our expectations include for the enterprise. We are forecasting improved operating margin for the business driven by gross margin improvements, partially offset by higher SG&A costs as a percentage of total revenue.
The dollar tree segment gross margin in Q1 included an outsized benefit from the transition to the new $1 $20 price point.
We expect to see a gross margin moderation from the Q1 level as new greater value Assortments are incorporated into the business.
The dollar tree segment is expected to deliver improved operating margin for the year with gross margin benefiting from our strategic initiatives as well as leverage on SG&A.
The family dollar segment gross and operating margins are expected to be lower year over year impacted by the following higher costs, including freight and needed investments in the business such as labor and improve store conditions. The.
The impact of product mix as a result of stimulus dollars driving discretionary sales in the prior year and the impact on sales and expenses related to the west Memphis DC matter.
Net interest expense is expected to be approximately three 9 million in Q2 and $123 million for the year.
Our outlook assumes a tax rate of 24, 2% for the second quarter and 24% for fiscal 2022.
Weighted average diluted share counts are assumed to be $226 4 million shares for Q2, and $226 5 million shares for the full year.
Our outlook does not include any share repurchase and as of April 30, We had $2 5 billion remaining in our existing share repurchase authorization I will now turn the call back over to Mike.
Thanks, Kevin.
As Rick mentioned in the opening we are committed to transform dollar tree from a good company to our great company.
Our initiatives are working and providing increased profits and cash flow.
Rick and I. Both believe now is the ideal time to accelerate investments focused on driving growth through improved associate and shopper experience, while propelling greater efficiencies there.
These strategic initiatives will be designed to position dollar tree for long term sustainable growth.
And we are going to invest and incur costs associated with making this journey. It's the right thing to do and this is the ideal time to invest in our future.
Again to reiterate we will be investing in our associates in our stores, the DC network and supply chain.
Family dollar pricing and the value proposition and our technology.
Both Rick and I are committed align and extremely focused.
The ability to execute our key strategic initiatives is paying off and setting a solid foundation for improved operating performance and accelerated growth.
We believe any we delivered an EPS of $5 80 and.
In fiscal 2021, and the midpoint of our guidance range. This year is $8 representing up 38% increase.
I believe we are at an inflection point to exhibit our earnings power into the years ahead.
Committed to meeting our customers' needs while investing in initiatives that are delivering the best returns.
These initiatives combined with our robust balance sheet will position us to deliver long term growth for our stakeholders shows associates customers suppliers and our shareholders.
We all know it is incredible challenging and uncertain time for the businesses today.
We believe our company offers the following as we manage through these times.
Stable and resilient business model that has worked at good times and in bad.
16000 store footprint that is convenient for shoppers buying their needs.
A tremendous value assortment that helps shoppers stretch their budgets.
Our strong balance sheet that enables us to invest in our business, while enhancing our ability to manage and maneuver through the current environment effectively.
Our roadmap to deliver shareholder value.
Performance at family dollar.
And improved supply chain and our continued momentum at dollar tree.
We have a fantastic growth story of opening 590, new stores this year alone.
Driving top line sales growth through our key initiatives and again, an expected 38% year over year earnings growth at the midpoint of our range.
Operator, Kevin and I are now ready to take questions.
Yes, Sir thank you.
I'd like to ask the question again, please signal by pressing star one on your telephone keypad, if youre using a speakerphone. Please make sure that your mute function is turned off to allow your signal to reach our equipment. We ask that you. Please limit yourselves to one question and one follow up question. So that we can take as many questions as possible.
Once again that is star one if you'd like to enter the queue. We will take our first question from Matthew boss with Jpmorgan.
Great Thanks, and congrats on a nice quarter and welcome back Rick.
Thanks, Matt.
So and maybe just a high high level one for you Rick I know you've only been back for a few months, but you described the dollar tree organization as a growth organization. So maybe just is there a way to speak to any potential timing of initiatives across the banners, how youre thinking about the team that you are.
Assembling around Gilles or just even at a high level. The degree of low hanging fruit that you see across the concepts to drive what it sounds like your goal is sustainable profitable growth.
Yes, Matt I'll throw a little color out here and then turn it over to Mike.
We are really taking a good hard look at the entire organization, we're looking at both banners.
And the goal here is sustainable long term growth.
And we've got a very good team here.
A lot of really solid people and we're going to supplement them with incremental people that quite frankly I have been involved with in my career.
But the.
As I reflect on this you have two great banners.
Dollar tree is incredibly exciting and fascinating to me.
It's the true treasure Hunt.
Work, that's been done on expanding multiple price points I think has been great.
And now what we have to do is focus on the fundamentals of consumable retailing in family dollar and.
And Mike what would you like to add to that just the timing of our initiatives and the way we're thinking about it.
Short to mid term will be.
Definitely investing in our associates in our stores.
And we'll be working on that throughout the quarters and thats embedded in the guidance that we gave.
As well as in our pricing.
One of our key initiatives is to get sharper on our pricing and close that gap to our key competitors at family dollar and Larry is working on that right now and we will be laying that plan and over the next several quarters.
Longer term things that.
For our long term growth is really leveraging and driving efficiencies in our supply chain.
And John Flanagan actually is out in one of our Dcs today assess.
Assessing those things.
And then our <unk> and.
And we're looking at all of our systems, especially our supply chain merchandising and storefront system. So those are bigger capital items, but theyre going to take time as we assess them and I think over the next two to three years, you'll see those improvements come into the into.
And to the business.
That's great color and then Mike just at the dollar tree banner could you help break down an upside in the quarter on the comp side, maybe relative to plan that drove that first quarter performance at dollar tree and just speak to customer reception that youre seeing to the new product assortment or the product changes as now you're bringing in.
The product that was bought for the higher price point, just as much as it's been introduced what youre seeing from the customer front.
Yes, that's the exciting part of it our dollar trees got such a great references.
<unk> reputation for delivering extreme value.
<unk> have responded well.
Throughout the quarter units were better unit declines is better than what we had planned and expected.
Net decline is around the 10 ish Mark R and we shared our transition transactions are down a little bit more than 4%. Our average ticket is up 15%. So those all feel good for us.
And going through the going through the quarter.
Levering almost half of the new items and customers are responding very very favorably.
And we did.
So the metrics are telling us the customers have responded in those categories that we shared we are seeing.
The last 18 months prior to this change we are seeing declines in the consumable side and declines in our traffic because of that but now we have reversed and our salty snacks and our cookies and in our food.
And also externally we've done some more extensive research a second round in the quarter.
And customers are highly likely to continue shopping one dollar.
After the price change, 85% expressed strong likelihood to shop, 77% are recommending our store. So our customers still appreciate that great find the extreme value and the meaningful assortment for them. So we feel good about where we're at right.
Now and then.
As we are.
Our word.
You've only got one quarter under our belt.
<unk>.
Looking downstream, we're excited about the new assortment coming in and this is going to take a while for us to really reset our assortment and our.
Our level of margin as we cycle through the new items coming in and then of course added to our import items that will really take throughout the next year as we're incorporating those into our import buys.
Congrats again and best of luck.
Thank you.
Alright, and once again, everyone. Please limit yourself to one question and one follow up if necessary. We'll next go to Scot Ciccarelli with <unk> Securities.
Good morning, guys and welcome back Greg.
<unk> retail transformation, almost always take longer and cost more than us on the outside tend to anticipate can you guys provide any color regarding the magnitude of the incremental investments that may be required to get dollar tree and family dollar kind of where you want them from an operational and technological standpoint.
While the dollar tree side as I've said, we've got a lot of momentum because we've been working on this.
For quite a while.
Last two years, what I'm excited about is during the two and a half years of COVID-19 than supply chain disruption.
We've come out of this.
And with two formats that we didn't have in 2019, we've got a great combo store and we broke the dollar of $1 25, and we're enhancing that with three and $5 assortments.
So we've got some momentum in our strategies are working and our cash flow are strong we've got a great talent. She has got a new reconstituted board and with Rick on board and including the new talent that we talked about so we're in a place where we're coming out of <unk> I believe the era of Covid with great momentum in our.
<unk>, a great balance sheet, a new board and we're going to accelerate our growth. So we're not we're not starting today, we're really going to accelerate this going forward. So I think on the.
The investments.
We will get more detail as we continue to work through this and that's where we said we're going to have our first analyst day in October that will be really getting into the more of the nuts and bolts of when to expect.
As we look at this over the next quarters and years on how we lay that in and the benefit accordingly that goes along with those investments.
Alright, so there is no way that necessarily bracket or get a general view in terms of how much incremental investment or operating costs might be provided.
No not right now we've got everything embedded in our outlook for this year and then we're working really hard both Larry and John are looking at those items as we think about how does the beyond years look in and we'll be sharing that in the future.
Got it thanks, a lot guys.
Thank you.
Next we'll go to <unk> with Oppenheimer.
Okay.
Good morning, Thanks for taking my questions. So first just on dollar tree gross margins I know you indicated that sequentially you expect them to moderate versus what you saw in Q1 is there a ballpark level you can help us frame that for maybe Q2 and the balance of the year and then just any thinking longer term in terms of where their gross margins are for the banner.
35% 36, or do you think you could do better than that.
<unk> this is Kevin.
As we think through this and obviously to Mike's point, we're one quarter in.
We're still learning a lot as we work through this.
So moving pieces.
The marketplace continues to move as to what investment into the product is going to be necessary.
To get them to be.
A value in the marketplace I.
I would tell you this year.
I think.
At a minimum we would hope to be to the higher end of that.
The historical range and if we can be above it will be above it.
Know that we.
You know where that will exactly land again.
The environment is such that there's enough uncertainty that it's pretty hard to peg given the fact that the newness of the dollar 25 price point and some of the.
Things that are going on in macro on a macro level out there, but it will be a positive.
In a big way for the for the overall company.
Okay, Great and then maybe just my follow up question just on the family dollar banner just given the initiatives that you guys plan to make in some of the capital investments over the over the coming years do you guys think you can close the gap with your I guess your closest competitor in the on the operating margin line, but could you could you get to a high single digit operating margin within the family dollar banner longer term.
Absolutely.
Okay, great. Thank you.
Alright next question will come from the line of Karen short with Barclays.
Oh, hi, thanks, very much for taking my question.
I had to try this just a slightly different angle so.
Theres obviously been.
The expectations in terms of what you are.
New operating profit margin could look like with all of the opportunities you have at both banners, but as I look at today's press release.
Everything.
We're investing.
So I mean I wanted to see if you can just triangulate that a little bit.
Danielle talk about this at the analyst day, but you know everything gallbladder that you had in terms of strat strategies investing as opposed to operating margin.
Opportunity and investors clearly have high very high number in terms of what the actual margin opportunity could look like so any color on that would be helpful.
Yeah, I'll throw it to Kevin for.
For a little bit of color, but the way I think about it yes, we are investing.
But also we're delivering earnings EPS growth throughout the time and topline growth. So.
As Rick and I said, the things that we are investing they will have a return for long term sustainable growth.
And if you look at our EPS from the midpoint range up.
It's a 40% just under a 40% increase in EPS and we moved our top line up so yes, we will be investing in the future, but we're going to be investing with the thought of continuing to drive that top line and the bottom line at the same time.
The other thing I would say Karen as you know is more.
Mike mentioned.
Early comments, we do have a new Finance Committee. This committee, obviously will be very focused on the return on invested capital as we think about things.
There are some things we have to do because we need to do it which is you can look at our store standards, we want to make sure we have stores that are.
The standards that we.
We expect that our customers deserve. So those are investments you make maybe you look at a lot of this is capital investment and systems and our.
Our supply chain that again, it's about productivity and efficiency and making it easier at the store level for that store manager and the assistant manager and that team. There. That's working very hard every day. So the our job at the end is to make their jobs easier and that's where these investments will have a big payoff at the end of the day.
Yeah, and I would just close with R.
Our balance sheet and cash flow enables us to do this we can invest to keep growing our store count to be a growth company. We can invest in the key enablers in supply chain and <unk>.
And we can buy back shares to grow our share. So we've got options going forward, it's not just simply investing and expenses.
Great. That's helpful. Thank you.
Next we'll go to Michael Lasser with UBS.
Good morning, Thanks, a lot for taking my question.
Some of the skeptics are arguing that dollar tree is going to get a bunch of growth this year from raising its prices by 25% and the bulk of its assortment.
And being the timing benefits from selling through some older cost inventory.
And now talking about investment do you think in light of all that that's the key.
Core banner or the enterprise I should say.
Global steel in margin next year, while you're making these investments.
Yes, we do.
And my follow up question is.
Yeah, that's helpful. Mike.
My follow up question is as you focus your price investment.
How do you ensure that you're not going to spark a race to the bottom in light of the very competitive environment that you operate in with some really large competitors.
Yes.
That's important we've got it we've got to be meaningful to our customers first and foremost.
And that's what we're going to focus on and on the other side, we've got Larry here, who works very closely with the vendor manufacturers.
And we will balance it right.
We'll make good decisions to invest where we need to do to meet the customers' needs in the marketplace, where we're just going to simply close the gap to where we are on our our kpis are key value items, and then just to make sure the entire shopping experiences at a great value for our customer.
And it is a balanced.
Understood. Thank you very much.
Next we'll go to Chuck Grom with Gordon Haskett.
Hey, Good morning, everybody Records, it's really great to hear your voice. After all these years my question is on <unk>.
The traffic decline.
At dollar tree, you talked I think you said it was down about 4%.
Curious how that trended during the quarter, particularly in light of your introducing more new products into the mix in a follow up what would be I think you said 960 skus with a plan for 2000 I think the average store has about eight so I'm just curious like how many skus you want to change and how do we think about that rollout.
Over the balance of the year.
While the 2000 worthy the amount that we needed to change.
Remember the last earnings call our merchants since last September went item by item.
Put our item on the table and went out and shop, the entire competitive market to make sure that it's at $1 25. It is still a great value and our customers are telling us that in our <unk> and the results. So the 2000 items are the ones that we thought we needed to invest more in and turnover and or bring new.
New that we had to discontinue over the last 18 months or just weren't a value anymore. So the 2000 is what our goal was and we're halfway through 47%. The other half are going to flow through.
And as they flow through we're getting great results, but also remember not with <unk>.
Kevin talked about it.
It's a dynamic situation and market right now so what we thought six months ago has changed already just because of the cost pressures we're seeing so.
Our dollar tree merchants.
No that had a fixed price point, they don't have to carry every item and they dropped the item and go get a replacement item and at the margin that we need and our mix of items always changes out that's the exciting thing about dollar tree, it's an extreme value and Everett exchanging meaningful assortment.
<unk>.
And then the customers respond and it's the thrill of the Hunt that's part of our our mission at dollar tree, they're used to it they have always done it at a dollar now theyre just doing it at a $1 25, and it's working very well.
And Chuck on your question about traffic.
This quarter in particular is very affected by Easter Easter was two weeks later, so you would have seen the best.
Traffic in the third period.
And probably the the.
Biggest decrease in traffic more likely in the second period because of the later Easter as well as when the stimulus dollars were released so I think those are probably the kind of the two factors.
It's pretty lumpy because of those two but thats kind of the factors that are in play in Q1.
One of the things that we're really seeing excitement around our seasons are accelerating more than they used to.
At the $1 25, and the meaningful assortment and then with our rollout of our three and $5 items.
We're rolling out to another 500 stores. This year. So the combination of $1 25, 3% and five in our seasonal business has really given us a lift that we're excited about and in quarter. Two if you think there is a quarter one Kevin talked about great Easter and Valentines and we saw great rich.
<unk> from the customers quarter to as summer and you got Memorial day, and fourth of July but the back half of the year is when back to school Halloween and Thanksgiving and Christmas.
We're really setting ourselves up to have a great back half.
That's great and just my follow up would be you know historically speaking when you look back at other periods of consumer for us.
And then maybe lifting upon.
Question to a degree.
I'm curious how long of a lag it was before you saw that middle income customer begin to trade down and if you think this current macro environment is going to be different than what we saw over a decade ago.
Yeah, they're just it's a different pressures this year.
But youre right in 2008, nine and 10.
Both family dollar and dollar tree saw an acceleration in there.
Comp store sales and there was a.
Just a slight drag but they saw it a little bit in 2008, when it was happening and then 910 and 11 it was sustained.
It's hard to it's hard to predict what's going to happen now just because it's they're being pressured for different reasons.
Okay, great. Thanks, very much and good luck.
Thank you.
Alright, we have time for just a few more questions. So once again that is star one if you'd like to enter the queue. Please do limit yourselves to one question and one follow up we'll next go to Edward Kelly with Wells Fargo.
Hi, everyone.
Good morning, Rick Great day, Great to hear your voice.
Firstly I wanted to ask is just about the $1 25, and the elasticity, improving where you are adding value.
Just more a little bit more detail on the number of categories that you have.
Don in terms of adding value back.
And what's left to do and then how much bigger is the opportunity within discretionary in terms of like adding value, we're bringing items back. It does seem like that would be the area, where there is potentially more.
A more powerful impact.
Well actually thanks for the question.
Discretionary the value in our discretionary or customer recognizes and there wasn't a lot of rework that needed to happen, there and thats evident and Thats why our discretionary business comped at 14% and we really haven't touched it that much.
We're focusing the 2000 items are really concentrated mostly in consumable categories. So in the salty snack in the carbonated beverage and in the food.
That's where these categories, we have 47% of the skus in but really we're going to add more in food, we're going to add more in carbonated beverage and more in salty snack to really drive that consumable and it will take time, we believe that as a traffic driver and as the customers.
<unk> items and appreciate the value, we're giving them over time, we believe that that will help drive traffic into the overall store not just those categories.
Okay, and then just a.
Quick follow up on three and $5.
Can you go faster why not go faster response seems to be good.
Any thoughts there.
Yes, it's a great question, we would go as fast as we can we are going as fast as we can if you remember last year, it's really supply chain right now.
That's tempering our speed last year, we wanted to open up 500, and if you'll remember.
The customers are responding so well that we were selling through the supply chain was slowing things down.
So we slow down our acceleration of rolling it out throughout the year, but we still ended up at 600 stores. So we're gonna do we accelerated to 1500 and its really.
Depending on the supply chain, because we are buying these products nine to 12 months out.
We're excited about rolling this out.
Our expectations are to get this done as soon in the year as possible and we're going to continue to roll that out but we have.
Every expectation to roll this three and $5 out throughout the entire network.
And that's probably something that we can share at our October .
October analyst day is what what's that looking like because we really like where we're putting this product in our stores, we're really seeing a benefit on the seasonal side of it so our three and $5 items combined with our great value of the $1 25 is just lifted that entire seasonal sales.
And those respective stores, so we're going to keep enhancing the product and we're learning a lot.
And it's going to be absolutely dedicated on the.
The discretionary side of the store.
Great. Thank you.
We'll go next to Kelly Bania with BMO capital markets.
Hi, good morning, Thanks for fitting us in.
I wanted to just ask first about freight cost there was a comment about maybe annualizing the increases from last year and I think that's consistent with last quarter. So just curious if you can help us understand just how you view the state of the global shipping backdrop from your seat what you're expecting from.
Contract versus spot this year and just the AUM.
<unk> cost for that.
Yes, Kelly this is Kevin I'll start with.
Some information on that.
Really cute.
Q1.
Our freight was up but it was very consistent with how we had forecasted it in.
Again, as we've talked about in March we expected the first half of the.
Year in particular to be affected by the annulus station the rates we saw in the last half of 'twenty one.
So that feels.
Like a good place to start obviously diesel fuel has increased and we've increased our forecast for the current market rates.
And here's a.
Something to maybe give all of you with kind of a metric kind of think about diesel freight.
Just a $1 change in rate.
For the year would be about a $63 million headwind. That's the annualized number. So you guys can do the math on what that means on a.
On a prorated basis, but that kind of gives you a feel for that.
We have the current market rates as we see it in our forecast and embedded in our in our guidance.
In regards to ocean freight.
The backlog is.
Is definitely significantly less than a year ago. It is not completely gone, but it's definitely better than it was.
It's early.
Cartilage contract carrier performance has been pretty much on plan at this point.
We are still using chartered vessels, which has been successful and been helpful.
Continuing to move goods.
And the enviable rates.
Pretty much been in line with the way we have budgeted at this point in time so.
From our point of view.
And the way we came into the year looking at it we're comfortable with where we're at obviously its the market can change rapidly, but we feel good about where we're at at the moment.
Yeah, I would just add that from.
Add on to what Kevin said, we've been battling this ocean freight for two and a half years and we felt it probably before anybody else did just because of our fixed price and the amount of containers, we import so.
This year, we've contracted slightly more than our needs.
And it's because of we're anticipating a continuation of some blank voyages.
We'll continue to disrupt the supply chain.
And as Kevin said to fill our needs we're using a combination of contracts of the <unk> and our own dedicated charters, so and we've smoothed out or the purchasing of what we need we have smoothed that out to be more consistent and dependable for the carriers. So we've gone into this year with 2%.
Five years of disruption experienced in as Kevin said we're.
We think we have a good handle on the cost of it.
Without knowing any disruption that could happen going forward.
Okay.
Thank you that's that's very very helpful.
And then maybe I'll just ask one more about dollar tree.
U S merchandise against this new dollar 25 price point are you targeting that 36% gross margin today or do you maybe leave a little cushion.
For some higher costs in the future.
And as well do you do you consider testing, even more price points $8 50 or two.
Just given given how this is already going.
While we have a $1 $25 fixed price point that we moved after 35 years and then we've got the three and $5 price points that are fixed price points that we are rolling out as fast as we can over the next couple of years. So we feel really good that we can deliver a unbelievable assortment that is exciting and meaningful and at extreme.
Value for our customers and still delivers on that thrill of the hunt.
So we're excited about that and we.
As you think about our comments about continuing to drive topline and Bottomline performance.
We will always keep in mind the margins needed to deliver those two things.
Thank you.
Alright, and Thats all the time, we have for questions. At this time, so I'd like to turn it back over to Mr. Randy Garland for any additional or closing remarks.
Thank you Alan and thank you all for joining us for today's call. Our next earnings conference call to discuss Q2 results is tentatively scheduled for Thursday August 25, 2022, Thank you and have a good day.
And that does conclude today's conference we thank everyone again for their participation.
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Okay.
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