Q3 2022 Dollar Tree Inc Earnings Call
Welcome to the C B S.
Good day and welcome to the dollar tree third quarter earnings call. Today's call is being recorded at this time I would like to turn the call over to Randy.
Life's precedent of Investor Relations. Please go ahead.
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Thank you operator, good morning, and welcome to our call to discuss results for dollar tree.
<unk> third fiscal quarter 2022.
With me on todays call are executive Chairman, Rick Dreiling, President and CEO , Mike, which N ski and CFO , Jeff Davies.
Before we began 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 1995. These statements are subject to risk.
And uncertainties and our actual results may differ materially from those included in these forward looking statements for information on the risks and uncertainties that could affect our actual results. Please refer to the risk factors business and managements discussion and analysis of financial condition and results of.
<unk> sections in our annual report on Form 10-K filed March 15, 2022, our Form 10-Q for the most recently ended fiscal quarter. 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, Mike and Jeff will take your questions given the large number of those that would like to participate I ask that you. Please limit your questions to one I will now turn the call over to Rick.
Thank you Randy and good morning, everyone.
In my short time here I have been incredibly impressed with the team's overall, suzanne and willingness to accept and embrace much needed change.
As I stated last quarter, we are making change happen to create long term shareholder value and enable and next waves of profitable grow.
For family dollar and dollar tree.
The company is moving at a rapid pace.
We have done a remarkable job of rebuilding our executive team.
And with retail thought leaders.
Our subject matter experts and eager to be part of this transformational journey that we have embarked on.
In a short period of time all of our C suite positions have been filled as well as new leadership roles.
Dedicated to a number of key areas, including diversity sustainability compliance and communication.
Last quarter, we shared news of the material price investments made at family dollar.
These actions God on price parity with key competitors and widen our spread to grocery and drug stores.
Customers are recognizing this commitment to values, which contributed to a 4% comp sales increase and the segments first quarterly traffic increase in three years.
The teams are focused on improving store standards.
They are committed to clean them up.
Great Noma and fill them up.
Improving sales productivity is a vital component of the family dollar turnaround and we are extremely focused on driving sales per square foot.
Unit sales growth.
And transaction count growth.
We are a company with more than 16200 stores, but the way I prefer to look at this is that we are really two growth companies with 8100 plus stores each.
Both dollar tree and family dollar our unique businesses.
With two different go to market strategies.
Having two distinct large segments provides us flexibility like none other in value retail and.
And both dollar tree and family dollar have extraordinary opportunity for growth and improvement over time.
We are prioritizing our areas of growth and we are moving with urgency.
The new management team is in house.
We've taken aggressive action on price.
The advertising and marketing cadence has been enhanced.
We are in the midst of a cultural transformation throughout the organization designed to enhance our associate and customer experience.
Store standards are improving.
Years of sales productivity opportunities are ahead of us and work on supply chain and technology initiatives.
All in handsets to achieve our ultimate goals.
I know many are eager to learn more about all of our plans, including the timing the magnitude and the expected returns.
Details will be shared at our spring Investor day in a more structured format as our new leadership team has assembled more time together.
We are entirely committed on taking the right steps to transform this organization for the long term.
On behalf of our directors I want to thank each of our associates for their commitment.
Dedication and effort.
Specially for their willingness to embrace much needed change.
This is a journey that I am thrilled to be part of.
I'll now turn the call over to Mike.
Thank you Rick and good morning, everyone. Thank you for joining us today.
As you have seen in recent months, we've announced a number of executives have joined dollar tree.
I'm excited about the caliber and quality of the leadership team, we now have in place.
This team will lead our company through the next evolution of growth.
We are committed to transforming our culture.
Meeting, our shoppers and associates needs, improving store productivity and efficiencies and delivering improved long term operating results.
I am pleased with the team's efforts to deliver solid results for the quarter.
Our third quarter sales performance reflects the timely execution of merchandising initiatives to drive our consumables business in this uncertain and inflationary environment.
Same store sales for both segments improved from the prior quarter and delivered sequential monthly improvement throughout the quarter.
<unk> are responding to our new value proposition at family dollar and dollar tree as we focus on driving both traffic and store productivity.
With the exception of Q1 and Q2 of 2020.
At the initial onset of the pandemic, our six 5% enterprise comp represents our best quarter since the family dollar acquisition.
By segment the comp was comprised of an eight 6% increase for dollar tree and a four 1% increase for family dollar.
In recent quarters, we have refined our strategies at both dollar tree and family dollar to focus on the traffic driving consumables side of the business.
Our transition to the $1 25 price point has enabled our merchants to greatly enhance value for our shoppers.
For the second consecutive quarter, our consumables comp outpaced the discretionary comp at dollar tree.
The team delivered a nine 3% comp on consumables with key contributors being in food and beverage snacking cookies and candy.
Family dollar consumables increased four 7% on a comp basis, despite the ticket headwinds related to our price actions in Q2.
<unk> are clearly recognizing the greater value and are responding to our enhanced advertising initiatives.
Importantly at both dollar tree and family dollar we saw an acceleration in comp performance throughout the quarter with October being our strongest month.
We have a number of key sales driving initiatives to drive productivity.
<unk> stores, we are continuing to exceed the customers' expectation for value our merchants do a tremendous job of effectively managing the ever changing assortment that wows our shoppers.
Expanding our three and $5 offering into more stores, we ended the quarter with our plus assortment and nearly 30% of our dollar tree stores and will continue to aggressively expand this initiative in the years ahead.
We are currently refining our three and five dollar assortment as our team operates in an environment of continuous improvement based on learnings.
We are developing our frozen assortment to meet our shoppers family needs as they are looking to save money by dining at home.
We are aggressively expanding our offerings of protein pizza breakfast items and family sizes at price points that meet their budgets.
We will continue to focus on winning the season dollar tree as a destination for shoppers looking to celebrate holidays events and seasons.
Our offering will be better than last year, but not as good as next year as we continue to improve our assortments.
Family dollar from a pricing perspective is in the best position in more than a decade.
Now that we have taken action to reestablish price parity, we're committed to maintaining our competitiveness.
Other family dollar initiatives designed to improve sales per square foot.
Unit sales and transaction count include improving our store layouts through improved adjacency flow, adding linear square footage expanding immediate consumption DSD categories, and optimizing the beverage and frozen food offering.
Developing private brands, we are in the process of growing improving our private brand performance by providing shoppers more choices.
Broader offering of quality products at a greater value.
Overtime, we believe this will enhance customer loyalty as well as our margin profile.
We are refining our marketing effectiveness to provide customers with convenience value variety and an improved shopping experience.
We have evolved our print advertising calendar and format to be more relevant to our customers to drive their visit frequency.
We are also in the process of Relaunching, our smart coupon program designed to improve quality availability clip rate and redemptions.
In this changing and dynamic environment, we feel we are implementing the right plans to drive sales productivity enhance margins and improve efficiencies to enhance the long term benefits to each of our stakeholders.
And October Jeff Davis joined dollar tree as our new CFO , Jeff brings more than 30 years of financial leadership to the organization.
With much of his experience coming from large retailers, including Walmart Jcpenney and Darden Jeff.
Jeff is very much focused on value creation through strategic growth and strategic decision support as well as value preservation through governance and efficiency in operations.
Jeff has been the company for nearly two months, but he is making a difference already.
I'll now hand, the call over to Jeff to provide more color on Q3, and what's ahead of us.
Thank you, Mike and good morning, everyone.
Im delighted to join the dollar tree team at such a pivotal time.
I've been in my seat for almost eight weeks and I have experienced tremendous energy and excitement across the entire organization as a team is and embracing change.
While the company has been around for decades I believe we are in the early phase of significantly improving our long term operating performance.
In October I had an opportunity to meet several of you at store visits and I look forward to connecting with a larger group in the near future more details to come.
Since Mike and Rick already covered our third quarter sales results I will now move directly to the discussion of operating income.
Unless otherwise stated all third quarter comparisons are against the same period last year.
To supplement my comments, we are introducing a quarterly presentation on our website at corporate Dot dollar tree dot com forward slash investors, which outlines several key operating metrics.
Hope you will find this additional information helpful to better understand our business.
Operating income increased 22, 8% to $381 $3 million.
Or five 5% of total revenue.
A 70 basis point improvement in operating income margin.
This was led by a 240 basis point improvement in gross profit margin, partially offset by 170 basis point increase in our SG&A expense rate.
Gross profit increased 17, 5%.
The dollar tree segment gross margin improved 520 basis points, primarily from higher initial mark on related to the move to <unk>.
Dollar 25 price point.
Lower freight costs and sales leverage.
Partially offset by greater penetration of lower margin consumable merchandise and product cost inflation.
Family dollar gross margin declined 100 basis points, largely due to a product mix shift and product cost inflation.
We expect to see continued pressure across both segments related to the inflationary cost environment and merchandize mix is our consumable sales are expected to continue outpacing discretionary.
SG&A as a percentage of total revenue increased 170 basis points to 24, 4%.
The increase is principally related to elevated repairs and maintenance as part of our commitment to improve store standards.
Investments in store hourly wages and higher inflationary costs across a number of expense categories, including utilities.
Corporate support and other expenses increased 30 basis points to one 4%.
Primarily from increased stock compensation expense higher incentive comp and professional fees.
From a bottom line basis net income improved 23, 1% to $266 9 million or $1 20 per diluted share.
In comparison to 96 per diluted share last year.
Moving to the balance sheet.
My comments reflect balanced comparisons to the end of Q3 2022 versus Q3 2021.
Combined cash and cash equivalents totaled $439 million compared to $701 million.
The reduction in cash is largely attributed to the repurchase of approximately $2 eight 6 million shares for $397 $5 million in Q3 of this year.
Inventory increased 31, 1%, primarily from inflationary product and freight costs <unk>.
Expansion of $1, 25, and multi price plus inventory and store growth.
Also recall last year shoppers pulled forward purchases well ahead of the holiday season concerned about product availability, while we were chasing trans specific deliveries of discretionary products as our inventory levels dip well below normal operating levels.
This year shoppers purchasing behavior appears to be more closely timed to holiday dates.
Finally unit counts are at similar levels to October 2019.
Our inventory is fresh we have limited data inventory well within manageable levels.
Capital expenditures were $391 $2 million in the third quarter versus $295 6 million last year.
For fiscal 2022, we now expect capital expenditures to total approximately $1 2 billion.
As we look to Q4, we see the following affecting our business.
We will anniversary a significant number of dollar tree stores approximately 2500 in December and 3000 in January .
The transition to the $1 25 price point a year ago.
We previously experienced an outsized benefit to comps and margins associated to the transition.
The economy continues to pressure middle and low household income customers, resulting in needs based purchasing.
We expect consumables to outperformed discretionary which negatively impacts gross margin.
We are cycling advance child tax credit payments.
Which were distributed mid month from July to December in 2021.
On a year over year basis, we are facing higher costs from suppliers related to this inflationary environment.
While at family dollar, we do have the flexibility to adjust price.
At dollar tree, where we are at a fixed price points.
It takes us time to adjust quantities and pack sizes for cost changes, which can lead to near term pressure to margins.
We will continue to invest in store and DC standards and expect to have higher year over year expenses and repairs and maintenance.
In addition to being right on price, we will be right on wage.
As it continues to be a competitive market for talent.
We are raising our sales outlook for the year.
Consolidated net sales for the year are now expected to range from $28.14 billion to 20 828 billion.
Compared to our previous outlook range of 20 $785 billion to 28 point $10 billion.
We expect to deliver mid single digit comp sales increase for the year.
Comprised of a high single digit increase at dollar tree stores and a low single digit increase in family dollar.
Selling square footage is expected to grow by approximately two 8% as we are experiencing supply chain delays related to procuring equipment and fixtures for store openings.
For Q4, we estimate consolidated net sales will range from $754 billion to $7 $6 8 billion.
Based on a mid to high single digit increase in same store sales for the enterprise.
At the end of Q2, we expected fiscal 2022 diluted earnings per share to be in the range of $7 10 to.
To $7 40.
Due to several factors, including but not limited to an acceleration of consumable product mix shifts and elevated product cost pressure.
We expect to be in the lower half of the previous outlook range.
Other considerations for our updated 2022 outlook include the following.
We expect consolidated depreciation and amortization to be approximately $770 million.
Net interest expense is expected to be $30 million in Q4 and $127 million for the year.
Our outlook assumes a tax rate of 24, 3% for the fourth quarter and 23, 7% for fiscal 2022.
Weighted average diluted share counts are assumed to be $222 3 million shares for Q4.
<unk> $224 2 million shares for the full year.
Our outlook does not include any share repurchases.
As of October 29, we had 185 billion remaining on our existing share repurchase authorization.
I'll now turn the call back to Mike.
Thanks, Jeff.
I am proud of our team's efforts during a period of material organizational change.
Disruptive hurricane through the southeast and macro uncertainty contributing to the highest inflation in 40 years.
We delivered increases of eight 1% and sales.
17, 5% and gross profit.
22, 8% and operating profit.
And an increase of 25% and EPS.
Our results continue to reinforce the relevance of dollar tree and family dollar to millions of households across North America.
As you know in late June we announced that a number of executive positions would be changed.
I am proud to share that by mid November all seats are filled and we are very confident and the outstanding team we have built.
All additions have been successful leaders throughout their careers and bring new fresh perspectives and will enhance our progress in.
In addition to the executive changes last week, we announced new leaders for several key areas of the business, including diversity sustainability compliance and communications.
I am very confident in the team we have developed and that it will enable us to accelerate progress on our transformational journey.
In the months ahead, we will be refining and prioritizing our plans to ultimately deliver improved operating performance across both segments.
At our spring Investor Day, we will provide you with more transparent and comprehensive view into the opportunity ahead of us and the path to get there.
Before we transition to Q&A I want to sincerely share my gratitude to our associates, especially in Florida and the Carolinas for their efforts during hurricane and at the end of September .
Their efforts through the preparation for and the recovery from this devastating storm was critical to countless families and communities we serve.
In many cases, our dollar tree and family dollar stores were among the first to reopen to assist customers with products they needed most.
Thank you to each of you.
Operator, we are now ready to take questions.
Thank you.
I would like to ask a question. Please signal by pressing star one on your telephone keypad B will take the first question from line Matthew Boss from Jpmorgan. Your line is open now. Please go ahead.
Great. Thanks.
So maybe first question at family dollar.
Could you elaborate on the drivers of sequential improvement as the quarter progressed, how much do you think more so of this is tied to the macro or the value trade down behavior versus what inning do you think that your company specific initiatives are in today at family dollar.
Yeah. Thanks. Thanks for the question I think it's a combination of everything that you're seeing going on in the pressure on the customer.
And then our merchandising team invest and the investment we made in getting our prices rate to be at parity in the marketplace.
Then as well as writing more impactful ads.
And and more frequency of our ads. So I think a stronger promotion stronger base pricing and then the work on the assortment in our H two five I think is meeting the.
Overall macro impacted the customers seeing the pressure that they have to try and meet the budget each and every day.
I think that customer we're seeing.
<unk> seen continued pressure.
As I've shared we are seeing more customers come into our segment.
And once they are in our segment. These are the majority of the customers are at 80000 and higher household income, but even once they're inside the store, we're seeing shifts in their behavior, whether theyre very consumable and needs based focused to try and make that make that budget work.
And stretch it over the month.
We're seeing private brands now for 39 weeks in a row.
Have outpaced national brands 39 weeks enrolled.
We have not seen that the prior five years to seven years or private brands are outpacing national brands, but it's now been 39 years in a row.
With our 39 weeks in a row I'm, sorry, and then we're seeing first of the month business is getting stronger we're seeing are snapping food stamp business is growing.
And we continue to see credit is outpacing debit. So we do see that shift in the customer coming into our segment and then when they're in our store they are shifting into the consumables and need space to make their budget happen and I think the work that our merchants are doing are absolutely aligned and helping drive meeting their needs when they are in our.
Store.
Great and then just at the dollar tree banner, what's your overall assessment to date on breaking the Buck overall can you and can you speak to sequential trends with traffic to the banner that youre seeing or what's been the reception to dollar tree plus or the rollout of the $3 $5 skus across the assortment.
Yeah, I'll start with a $1 25, I think overall, our traffic has been very stable and.
And we saw a slight improvement in Q3 and traffic.
But what was more important is throughout 2020 in 2021, our consumable sales continued to decline quarter after quarter because of the product availability in the assortment. We just couldnt provide for the customer at that dollar price point once we move to the $1 20.
Five throughout this year, our merchant teams have worked hard at bringing in that new assortment and we have absolutely change that trend instead of declining business in consumables is now accelerating and leading the growth and I believe over time that will continue to drive traffic into our <unk>.
Stores at dollar tree, so what I'm really excited about is for the second quarter in a row consumables have outpaced our discretionary business.
And it was nine 3% nine 4% comp sales, but discretionary is still doing well at over 8%. So we like the business and the reaction we're seeing from our customers based on us being able to have a better assortment at a greater values and products they need and I think as we continue to provide that.
That will help stabilize our traffic and the long term going forward.
On the three and five dollar we're seeing.
Great response from our customer, especially on the seasonal side of the product.
And that's where we think we can continue to refine and grow that business.
And then as well you as you've also heard us.
On the frozen food apart.
At $1 25.
What's the cost pressures, it's even hard for us to get a great value assortment at $1 25. So we have moved to multi priced products and our frozen foods that it's easier to communicate to our customers and our associates, because it's door by door and our that assortment as.
Im sure that the customers are responding greatly and again.
This is our frozen business for the last 18 months was in a decline because of the same pressures we are seeing on the consumables and now we've completely reverse that where we have introduced the multi price three and $5 items customers are responding well and we see strong growth in our sales there.
So I think between the two of those things the consumable side and then the frozen side over time, we will continue to drive traffic and do it.
And then on the discretionary side proven by our continued growth.
Percent comp the customers still see the value in our seasonal party toys crafting.
And that continues to be strong so I like the trends we're seeing overall.
Great color best of luck.
Thank you we will take the next question from Lyne Scott Chuck.
Ciccarelli from J. Your line is open now please go ahead.
Good morning, everyone. So can you talk about the consumable versus discretionary mix at both banners. It seems like there is a concerted effort to focus more on consumables, obviously that helps the traffic but is margin dilutive. So I guess the question is how do you guys expect to manage that balance number one and then number two when would you expect the mixed pressures to stop.
To ease is there like I guess, a certain target you are kind of shooting for.
Yes, and Youre right right right now we're meeting the needs where the customer is taking us and we are improving that assortment and I'll speak to family dollar.
Got it and the merchants have done a wonderful job at really improving that assortment and that pricing for that customer where they need us and it's all in that consumable and DSD related product and we've done that not only in our base pricing, but our promotion pricing and then also in the linear.
Footage dedicated to our resets at our $2 five so youre right I think our biggest goal to drive improvement on the family dollar side is to get more sales per square foot and our boxes and the first thing is is driving at with consumables and being right on that but the team is also at the <unk>.
Same time really working on discretionary to be right on seasonal and home to meet their needs, but really it's the consumable driving that that trade over more that our effort in the works that we're doing on the merchandising side.
And then on the on the dollar tree side, just as I have shared.
I like what Ive seen in the last two quarters, where one is up 95% of the other one is a that's a great balance and I think as we continue to provide that value on the consumable side I think over time, we like when both are 50 50, 50%.
Discretionary, 50% consumables and then as they grow over time I think like dollar tree historically has always grown low single digit comps with a combination of traffic and units in the basket and I think once we settle and cycled through that and providing that effort.
On the consumable side, we will get back to that.
Normal.
Cadence that we've seen in the past.
So just from an earnings algorithm perspective, Im not asking specific guidance for next year is it fair to assume kind of a lower gross margin, but maybe more SG&A leverage on kind of a go forward basis, maybe than what we've seen historically.
Given the mix shift.
Yes. This is Jeff absolutely from a standpoint of given the mix shift and some of the other cost pressures.
Margin is much more under pressure, but given these.
Increase in revenue and the opportunity to leverage our SG&A is is definitely there.
Got it thanks guys.
And I would just say too the other thing is as family dollar continues to prove their execution and drive market share in these products in DSD and National brands and then even in our private brands.
Vendor rebates and allowances will follow that because we're executing better and Larry's team is really working hard on trying to drive that so it's really even the mix within the mix.
As consumables grow there is levers that we can pull with allowances and rebates and that mix in the private brands as that consumer shifts to that should help with some of the margin pressure too.
Very helpful. Thanks, guys.
Thank you we will take the next question from line, Joe Feldman from Telsey Advisory Group. Your line is open. Please go ahead.
Yes.
Good morning, and thanks for taking the question.
Wanted to ask you just to go a little deeper on the private brands, where do you see the most opportunity like what maybe categories that you're focused on and where you think you can drive some incremental improvement quickly.
I believe across the board in later Larry's team, we have staffed up we brought in.
Additional experts in this area on the private brand for family dollar on the OTC in health over the counter drug and health.
Where we're going to be focused and leaning in first and of course on the paper side of it. We think there is opportunity and then just on the everyday foods side. So those would be the three big areas.
And I think <unk> team, our organizing around it we're looking at the brands and driving penetration by category comparing to the rest of the market and we've partnered with a third party broker to really help accelerate that so.
Those would be the three big areas and is a huge focus for Larry and his team.
That's great. Thank you if I could follow up with maybe a bigger picture question.
Rick had said in his prepared remarks that the company is kind of two really strong growth companies under one roof.
And which I guess is not too different from the past, but it does imply that there's.
Two different go to market strategies, which we know and ways of doing business. So I'm wondering how do you guys leverage the scale of the overall company and the operations.
Has anything changed with that strategy to have these combined fulfillment centers in.
Purchasing power being stronger maybe you can just give a little more color on that.
Hey, Mike.
Lead with that that's okay.
Hey, what I would say is.
The things that how we go to market, how we face the customer between the two banners are totally different.
One is basic consumable retailing the family dollar side.
One in.
Everyday low price one price point.
The leverage the beauty of the combination is all of the back side things that the consumer doesn't experience.
County.
The HR.
Legal and Thats, where all of those synergies exist.
Even on the supply chain, how we delivered to the stores Halloween Tomorrow.
Tomorrow.
So all of those synergies are still there, but what we're doing a much different.
But I would think not only different but better job.
Ed.
With how we're facing the consumer realizing that one is more promotional driven and then again one is more concerned with every day.
Bollywood.
Michael I'll turn it over to you on that.
No I think I think you stated it right all the.
The customer facing side is where we're leveraging but on the backside.
We will be leveraging all the opportunities that we can as one organization.
That's great. That's a helpful response, thanks, guys and good luck with this quarter.
Thank you.
Thank you we'll take the next question is from line John .
Hi, Marco from Guggenheim. Your line is open now please go ahead.
Hey, guys couple of questions on family dollar merchandising. So one given the size of the box how do you think about.
Product breadth versus depth.
That fundamental tension.
Do you need to accelerate.
Cooler capacity.
As part of the process and then lastly, I know youre working on supply chain right to try to improve out of stocks.
Quickly do you think that begins to impact the business.
Is that kind of.
Six months out a year out.
Maybe not that long.
So that would be great.
Yes so.
I'll start with the breadth and depth of family dollar again, Larry and his team is growing category by category and he has already made changes in our new H two five but that will be a continuous improvement throughout this next year as him and his team apply that discipline and strategy to each category.
Laurie we will be bringing in more skus, where it makes sense.
To help meet the needs of the customer and comparing it to the rest of the market and where we've done that in the categories that he has done so far we're seeing great results in it and I think that's why we're excited about our our two five we're also using our linear space more we're putting in more shelves inside the box and then we can go vertically.
Higher and the <unk> the <unk>.
The roles of shelving that we have right now and again that allows us to bring in more assortment into the store and getting more sales per square foot. The cooler is absolutely an improvement in every time, we remodel a store we want to bring in more coolers, both coal accrual beverage and frozen beverage because that's where the.
<unk> is moving too and its a convenience item and it's meeting their needs. So there is room for continued expansion there and Larry and his team is even really looked at a reset for the whole frozen foods set and where we've rolled that out going into this back half of the year. So that's going to be a continuous improvement side.
And on the supply chain I would say, we're constantly looking at the enabling our supply chain as Rick said to try and drive efficiencies and making it easier for our stores and we're seeing improvements right now and things that we're doing in our supply chain.
So I think it's.
You'll see it now throughout the next two to three years on how do we continue to refine our supply chain is a key enabler to drive the efficiencies and make it easier for our stores to get the product in the stores more efficiently.
Okay. Thank you.
Thank you we will take the next question from the line Edward Kelly from Wells Fargo. Your line is open now. Please go ahead.
Yes, hi, good morning, guys.
Want to ask about.
The dollar tree gross margin youth.
But in the past that.
Potentially it could be higher than 36% over time, I think if I try to sort of like look at where you're run rating now.
Based upon our commentary around a little bit of incremental pressure in Q4.
Maybe you're run rating.
Alright, 35% range.
Just thoughts around that and then.
Think about next year.
You do get a big freight benefit likely how do you think about.
Investing that versus letting that flow through and I asked that question because the consensus is probably in the high 37% range.
For next year.
Sort of all boils down to what do you think the right margin is for this business to provide value to customers.
While also delivering for shareholders.
Yes. Thank you for your question.
Think about our margins right now and as we think about as we move forward.
It's really driven by with the customer is really leading into and buying so right now we're seeing a little more of a rotation into our consumables.
Our discretionary, but yet youre, saying good growth on both sides, we like the balance of that we're doing a number of things to continue to provide value to the customer and maintain that margin rate as best we can recognizing right now that we are still under some level of product cost pressures.
As well as from a freight component.
But still being able to deleverage you said.
Hi.
Mid <unk> mid <unk> types of margin rates.
As we move forward, we will continue to look to deliver value to the customer across both of those broad categories of discretionary and consumables.
We believe that a number of things that we're doing with the multi price point will allow us to lean into the.
Discretionary even more and hopefully continuing to balance out that ended the business also so it's really a combination of the two.
And it depends on how the customer is in their behaviors and their needs and we are able to provide them across a broad broad continuum.
Okay. Thank you.
Okay.
Thank you I will take the next question is from line Michael Lasser from UBS. Your line is open now. Please go ahead.
Good morning, Thanks, a lot for taking my question, Jeff just.
Within your answer you mentioned, a mid 30% gross margin moving forward for the dollar tree banner. The dollar tree banner has half a billion.
$1 billion of costs that were negatively impacted from all of the significant amount of freight and transportation over the last few years, especially container cost container costs are now back to where they were in 2019 levels. So understanding that there could be some mix.
At the consumer focuses on consumables.
Why would you not get a more significant benefit to dollar tree's gross margin from the significant decline.
In freight cost moving into next year should we interpret that to mean that you have to make more sizable investment in dollar tree.
Order to maintain the sales productivity of that banner is.
We know that you can see how those stores that were really too.
Raise prices.
Last year are performing Wednesday, Alaska, Thank you very much.
Yes.
As I look at this.
There is definitely the opportunity has shrunk right.
To turn back around.
That we are on con.
Contract most of our business. We do is on contracted carriers versus spot rates, so theres going to be a little bit of a lag in that timeframe and at this point, we're not giving any guidance for 2023 as of yet but to the extent that we continue to see the freight rates and the other trans specific.
Pacific rates coming down and staying down that will be reflected.
Our longer term contract rates, we will then have the opportunity to balance that with giving back to the customer as well as the shareholder but.
But having said that that's only one component the other component of it is under an underlying product cost and right. Now there is as much pressure in many times in the product cost underlying vendor product cost as there is in freight so we have to balance the two in and definitely keep an eye on.
In my mind is how we create value for the overall organization is balancing that and being priced right in the marketplace for our customer as well as.
Providing a higher return to our shareholder.
Thank you if I could just follow up on that Jeff.
As of November 2022, you have 312 stores that are now anniversarying the rollout of the $1 25 price point from last year are those stores comping positively in the range with the rest of the dollar tree banner performance.
Yes, so were.
In the new quarter here, we're not going to give you a.
Intra quarter guidance.
And it's really early for us to tell so.
Think that when we release, our fourth quarter results will be able to tell you a little bit more about that.
Yes.
Thank you very much and good luck.
Thank you we will take the next question from the line Michael Montana from Evercore. Your line is open now. Please go ahead.
Hey, good morning, Thanks for taking the question just wanted to ask first off if I could on the SG&A side, if there's a level of comp that you feel you'd need for natural leverage into the fourth quarter and into 2023.
In order to lever some of the expenses there.
And then a follow up.
Yes.
Yes, Michael that's a good question.
One in which.
What would be a natural level leverage in normal circumstances versus.
What we are doing.
We had mentioned earlier.
A good focus continued focus and commitment around elevating our store standards.
Investing in not only store standards, but our wage rates for our stores.
And the combination of the two.
<unk>.
We have.
We've been making some.
Sure.
Material investments, but if you look over the period of time, we've been able to leverage our SG&A. If you will on about a 2% to 3% comp.
Okay. Thank you.
And then if I could just follow up on Capex. The past few years, it was trending around $8 a foot and this year it looks like it could be north of nine so given some of the inflationary components there and the investments you are making.
Is that kind of the right baseline that nine plus to build off of or should we think of this as maybe some more catch up that could subside.
Yes once again.
Don't want to give any guidance beyond 2022 other than what we've provided.
The investments that we're making this year in technology and supply chain on top of our normal basis, what's really driving the increase.
And we believe it's the right thing to do is we set up for the right capabilities for us to accelerate our growth going forward.
Thank you.
Thank you we'll take the next question from line Chuck Grom from Gordon Haskett. Your line is open now. Please go ahead.
Hey, Thanks, very much Jeff on the implied fourth quarter Guide can you help us think about the segments, where you see more margin compression relative to the third quarter. It looks like you're anticipating operating margins to be down about 30 basis points or so they were they were up about 70 basis points in the third quarter on a similar comp. So just wanted to get a hold our hands on.
On the segment for <unk>.
Yeah.
Yes.
Historically have not given guidance necessarily on AR.
Banner basis.
We look at it in total.
The pressure that we're seeing is once again, the continued rotation into consumables and how the customers responding there as.
As well as we know that we are continuing to.
See other inflationary cost pressures.
The P&L, but.
But all of this is more it was anticipated back when we gave our earlier guidance it's really the.
Product mix shift that is.
The predominant sort of driver of hard.
Sort of direction around the lower half of the of the range and the continued pressure on cost.
Okay.
Okay, Great and follow up question for Rick and Mike Obviously the price.
Investments.
A few months ago, where smart I'm curious.
When you think out over the next couple of years and the next big levers you can pull to improve productivity.
No I guess, what should we be thinking about Mike touched on it a little bit in terms of raising the gondola heights, adding coolers, but I guess, maybe a little bit of looking inside the playbook.
What to expect.
Yes.
Go ahead go ahead sorry.
Yes.
Hey.
Go ahead brother, I'm, sorry, Bye bye.
Rick opened up with the cleaned it up fill it up and straighten it up I think getting the product filled in our stores and better store conditions and more consistently for our customer.
There's one thing I think that private brands is another big leverage and I think the work that Larry and the team are going to do yet.
Yes.
We're really at the beginning of that.
A better job on that category by category assortment that our merchants need and being priced right. I think those are the big levers inside our store to really keep driving the overall sales per square foot of our buildings.
Yeah, and the only thing I would add to that is we are especially on the family dollar side, we are under skewed.
And we are under skewed based on how we ship product to the stores.
We tend to ship only encase backs versus E G.
The higher margin slower turn merchandise.
If you look at our who are commitment we are under <unk> for lack of a better phrase in.
In our family dollar stores and probably our dollar tree stores.
So there is lots of upside by managing the optimal use.
Great. Thank you.
Thank you and we'll take the next question from Kelly Bania from BMO Capital. Your line is open. Please go ahead.
Hi, good morning, Thanks for taking our question.
I was wondering if you could just help us.
Give us a little more specific magnitude of b product cost inflation, you're seeing on the consumable firstly, the discretionary side of both businesses and just.
As you work with suppliers.
Seeing any light at the end of the tunnel in terms of in terms of the product cost inflation front.
Yes Kelly.
Maybe the best way to describe the support dimension to it is if.
If you take a look at our inventory when you take a look at our inventory on a year over year basis.
And in my prepared remarks, I had mentioned that part of the inventory increase was as a result of last year that coverts being fairly bare last year as a result of.
Customer pull forward into holiday and then us chasing goods, but even if you step back from that.
About 40% to 45% of our increase in inventory on a year over year basis is as a result of product vendor product cost increases.
There is another roughly 20% that is as a result of higher freight costs associated with those inventories.
So just those two components represented about.
Roughly 60%, 65% of the increase in the cost of our inventory and Thats. What is now embedded in our inventory and then of course, we'll be rolling through with respect to <unk>.
Margins on a go forward basis, and which we have been dealing with over the course of the year.
Okay.
Yes, as it relates to.
Our merchant teams continue to be I think very resourceful and looking at.
Different suppliers negotiations working with them around allowances working with them across other ways to get support on the.
Business.
And then of course, one of the things that is really important to us and Mike had mentioned is we're leaning into his private brands and the opportunity to be.
Blend that more into our offering our customers are looking for that opportunity and it gives us.
More.
Margin protection.
Okay.
Thank you we'll take the next question from line Simon Gutman from Morgan Stanley . Your line is open now. Please go ahead.
Hey, good morning, guys its Simeon Gutman.
Following up on this first question I wanted to ask maybe a different way. So it is part of it.
The timing of contracts means that we don't see a lot of the savings in 'twenty three or are you just reserving the right to figure out how to plan the business there will be savings, but you're not sure of how to how to reinvest or use the savings yet.
Yes, I think youre spot on as it relates to.
Sure.
The freight.
Those contracts and the way that we would recognize it.
It's more of a forward look.
So it would be into 2023 year, and then as that freight as we negotiate those new freight costs received those freight costs coming down it would run through our inventory turns.
Okay. So I guess, it's a 23 into 'twenty four phenomenon, where the real savings buildup is that is that the right way to interpret that answer.
We wish is in the back half of 'twenty three we should start to see its about a quarter drag.
Turn our inventory four times a year. So it's usually about a quarter drag once we start appreciating the lower <unk>.
Rates, then we can see that in our product as it's coming through.
Okay.
Okay and then just my quick follow up on the traffic on dollar tree can you talk about I'm sure. This has been asked but why like multiyear I think it got a little better this quarter, but structurally it's been down for the past several years can you talk about that and then why shouldn't the right Algo B you get price, but traffic is either flat or it could.
It could decline because it's hard to understand why the traffic is structurally been weaker over the last several years. Thank you.
Yes, I would just say this I think a lot due to our assortment that we provided for our customer and the majority with apples on the consumable side and then just during the pandemic our customer.
We werent high consumable driven and high discretionary where they were when they had money in their pocket trips were consolidated in 2020, one and they were buying high ticket items too.
To decorate their homes decorate outside and.
Replacing a lot of things inside their house, that's not what dollar tree is at our single fixed price point, so 2020 one.
Okay for us, but but.
When we saw the consumable side of the business that that assortment go away that was impacting our traffic that's why I'm really excited about going forward.
Last two quarters now, we're seeing that consumable sales come back nine 4% comp in third quarter, and we see that continue and especially on the consumable and then on the frozen side of the business, we do see that traffic starting to settle back into what dollar tree has been known for that low single digit.
<unk> increases with ticket increase to have a nice go forward balanced between the two and continuing to balance our mix between consumable and discretionary I think thats ahead of us and that's what the work that the team has been doing in the last two quarters, we are seeing evidence of it.
Thank you good luck.
There are no further questions I will hand it.
Back over to your host to conclude today's conference. Thank you.
Thank you Caroline and thank you for joining us for today's call. Our next quarterly earnings conference call to discuss both Q4 and fiscal year end results is tentatively scheduled for Wednesday March one 2023, Thank you and have a good day.
Thank you for joining today's call you may now disconnect.
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