Q4 2022 Dollar Tree Inc Earnings Call
Good morning, and welcome to the dollar three fourth quarter earnings call. This meeting is being recorded at this time I would like to hand, the call over to ready Giler. Please go ahead Sir.
Thank you operator, good morning, and welcome to our call to discuss dollar Tree's fourth quarter and fiscal 2022 results with me on today's call are chairman and CEO , Rick Dreiling and CFO , Jeff Davis.
Four 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 risks and uncertainties and our actual results may differ materially from those indicated in these forward looking statements.
For information on the risks and uncertainties that could affect our actual results. Please see the risk factors.
And managements discussion and analysis of financial condition and results of operations sections in our 10-K filed March 15, 2020 to our 10-Q for the most recently ended fiscal quarter today's press release, and 8-K and other filings we make from time to time with the securities and exchange.
Commission.
We caution against reliance on these forward looking statements made today and we disclaim any obligation to update or revise these statements except as may be required by law.
Following our prepared remarks, Rick and Jeff will take your questions given the large number of those that would like to participate I ask that you limit your questions to one I will now turn the call over to Rick.
Thank you Randy and good morning, everyone.
I apologize that I'm, a little hoarse I'm coming off with Covid and the good news is I'm fine.
I will review the highlights for quarter four fiscal 2022.
We'll provide an update on current priorities, then Jeff will detail, our financial performance and expectations for 2023.
For the quarter, we delivered 7.72 billion in sales an increase of 9%.
With enterprise comp growth of seven 4%.
Operating income of $618 1 million, leading to a quarter for EPS of $2.04.
Our sales performance for the fourth quarter was a continuation of momentum from quarter three.
Same store sales growth of eight 7% at dollar tree and five 8% at family dollar represented comp acceleration on a one two and three year stack basis.
This improved performance and market share gain is not simply happening by itself is the result of lots of hard work and good work by our store and merchant teams as well as the early fruits of our price labor and store investments.
We believe we are just getting started.
I have been in retailing for half a century.
And I've been fortunate to play a leadership role in multiple transformations I am incredibly excited by an energized to be part of the path ahead for dollar tree.
We have an exceptional team assembled and I cannot overstate the amount of positive transformational change occurring in this business.
We are committed to enhancing store productivity as we focus on developing our people tools and technology to fuel accelerated growth.
And that we do this while simplifying operations, improving the supply chain and innovating, our merchandising strategies to better support our associates and to better serve our shoppers give.
Given the team's relevant prior experiences we know exactly what you do to drive improved productivity and profitability.
We are moving as quickly as possible to capture the full potential of this business.
And I am confident we will succeed.
We have tremendous opportunity to improve the dollar tree banner at family dollar. It's clear that we were at least a decade behind and this is reflected in our prior performance levels and financial results as.
As we narrowed the gap operationally it will be realized in material improvements to our financial performance.
As we get settled in we are finding more and more opportunities to meaningfully improve both banners.
Compared to just a few short months ago. The list of improvement opportunities has grown.
Our guiding objective is to maximize returns to our shareholders.
Doing so calls for implementing these initiatives with responsible urgency.
There is no point in Dallying.
It has over the months become increasingly clear that our teams great experience gives us the opportunity to complete in just three to five years most of what has taken far longer in other situations.
Our merchants stores and other teams are driving lots of initiatives many of them with minimal investment.
I will highlight some of these later.
While these are already gaining traction they will have the greatest impact if supported by additional complementary investments.
The stronger associate team the better the store conditions, the more competitive or a pricing the more we will get out of them.
There is a synergy across these initiatives and the complementary investments, we are making with each enhancing the others.
For this reason, we are accelerating and pulling forward our schedule of major high returning investments.
Cost of these investments is reflected in our 2023 outlook as an incremental 430 million dollar increase in SG&A and the outlook assumes only a minimal return from these investments.
The company is confident that these investments once implemented will yield attractive returns in 'twenty 'twenty four and beyond.
While we are confident these operating expense investments will yield strong returns.
We are also aware of the dynamic nature of the earliest stages of a turnaround.
The many simultaneous moving pieces the interdependence of many of these pieces and then current unusual dynamics in the economy.
These considerations make forecasting the quarterly cadence of the benefits from these investments, particularly challenging for.
For this reason for this first year of our transformation, we will consider these benefits only as they in fact materialize.
This year's investments, which include the full year impact of investments made during fiscal 2022 are in several key areas in the following order of magnitude Les.
Labor and wages, including hourly wage rates and investments in field personnel.
Stores through repairs and maintenance and improving store conditions Corp.
Corporate including technology and other initiatives.
Under this new leadership team, we are increasing average hourly wages and estimated $2 for the two year period of 2022 and 'twenty two 'twenty three.
We feel that looking on a market by market basis, and benchmarking to comparable retail wages. This investment will put us in a more competitive position.
We also made additional investments in store hours and coverage investments in our field labor and managers and other areas to help us execute much better.
We expect these labor and wage investments will drive improved execution in our stores higher sales lower turnover attraction and retention of talent reduce shrink and greater productivity and efficiency.
Our associates and field personnel are critical to our transformation journey.
And we are excited about the investments in our talent.
We are looking to invigorate the culture of this business give our local operators and associates the tools they need to execute and importantly provide them the opportunities they deserve to grow within our company.
On store standards recall last quarter I spoke about an intense focus on store standards, our commitments to clean them up straighten them up and fill them up.
When we do this our shoppers respond with a bigger basket and more importantly with repeat visits.
Our new C O O Mike Creedon joined the team in October Mike possesses a relentless focus on the three pillars of successful store operations the.
The work the worker in the workplace.
The work, we must run efficient and productive stores as a high transaction volume business. It's critical we have processes in place to get product onto our shelves quickly.
I'm certain that we can't sell a product if it's in the back room.
Approving efficiencies and workflows positively impacts our associate experience.
The worker.
As an organization it must be a cornerstone that we support and enable our associates to be successful.
This commitment will enhance our ability to recruit hire train and retain associates, Inc. Contribute to their retail career development.
We believe this focus combined with our wage investments are contributing to the reduction in turnover that we are starting to see.
The workplace.
As we have indicated in the past, we must improve our store and DC conditions and we are in the process of doing so.
Frankly stores in D. C. We're not being maintained up to our new leadership standards.
We are actively transitioning from what we consider to be reactive to proactive maintenance approach.
In addition to the work the worker in the workplace Mike's team are in the process of identifying certified gold stores for each region.
Gold stands for Grand opening look daily these.
These stores will serve as a clear concise example for our district in store leadership teams across all regions. So they have a distinct vision and understanding of what our most successful and well run stores look like.
On the question of our corporate investments I will address these later in the call.
Our merchandising teams led by Rick Mcneely and layer. It yada are working hard.
The dollar tree merchant team successfully managed through the transition to the dollar 25 primary price point as.
As we cycled the majority of these stores throughout the fourth quarter, we saw a 410 basis point sequential improvement in traffic compared to quarter three.
Now that we have anniversaried the remainder of our stores in February traffic is positive and we are confident it will be a contributor to positive comps at dollar tree throughout the year.
In 2022, we added $3 and $5 plus merchandise into more than 1800 dollar tree stores.
We plan to add that's multiple price point product and another 1800 or more stores in 2023, and when we begin flowing this multiple price product through three additional distribution centers, bringing our total to seven.
Separately, we have been aggressively expanding our three dollar for dollar and five dollar frozen and refrigerated product across the dollar tree store base going from zero to 3500 stores in 2022.
This consists of three cooler doors, one at each price point within attractive selection of proteins pizza ice cream and more which the customers are responding positively to.
What we are seeing with dollar tree plus and multiple price frozen is that when the customer purchase at least one of these items. The basket size is more than double the basket with no multi price items.
We are experiencing a more consistent and predictable slide chain.
Stores were set well in advance for Valentines day, and we had terrific sell through.
The stores are now well prepared for the Easter season.
With the dollar twenty-five transition now behind US we believe it's time for dollar tree merchants to get more creative than ever before.
They have carte Blanche to raise the bar on delighting customers and driving sales and all options are up for discussion.
We believe doing what is easy has no reward.
In addition to that the opportunities at the dollar tree banner.
We have a tremendous long term opportunity to improve the operating performance at family dollar.
We have a number of sales and margin driving initiatives that are already underway, albeit in the early stages.
But as you have seen these have contributed to the four play a 1% comp in quarter three followed by a five 8% in quarter four.
Among our actions are the following.
We have the gun raising this shelf height to a 70 inch profile throughout the stores to enable us to broaden the product offering for our shoppers.
This profit enhancing initiative allows us to grow our SKU base by 1000 items, including OTC and HPA without increasing our store related costs.
We are continuing to expand the number of Cooper doors with plans to add 16000 doors in 2023 to accommodate more frozen and refrigerated items.
Our goal is to have 30 doors per store.
Our shoppers rely on family dollar in their communities to provide these consumable based products to feed their families.
We are replacing our control brands with private brands and we will be introducing hundreds of national brand equivalent products in the back half of this year.
These will include new labels and redefine labels, many of which are being developed in our new test kitchen here in Chesapeake Virginia.
To better meet both store and shopper needs, we are improving our ability to ship and each is which improves inventory flow and profitability on slower moving higher margin items, including the over the counter and health and beauty products. This enables us to be more nimble and.
Provides greater flexibility.
Additionally, we are working on improving family dollar productivity by enhancing end cap displays eliminating flex space and refining store adjacencies to better optimize the box.
These are just a few examples that larry's teams are focused on that we believe will contribute to family dollar's improved sales trajectory in the sales ahead.
We continue to be pleased with our positioning from a price perspective, we are at parity with key competitors and have widened the gap to grocery and drug.
Shoppers have responded to the sharp pricing actions, we took in late quarter, two and third party data suggest at family dollar is seeing an increasing amount of new customers in our stores.
I will now turn the mic over to Jeff Davis.
Jeff has just been in as CFO seat at dollar tree since October he is pedaling fast and making great progress in a number of key strategic initiatives.
<unk>, leading the development of our long term financial plan.
Jeff will now provide more color on quarter, four and what's ahead of us. Thank.
Thank you Rick and good morning, everyone.
Unless otherwise stated all fourth quarter comparisons are against the same period a year ago.
In addition to my comments today, a supplemental slide deck that outlines several of our key operating metrics is available on our Investor Relations website.
Operating income increased six 8% to $618 $1 million or 8% of total revenue a 20 basis point decline in operating margin.
This was compared to a 70 basis point improvement in gross profit margin, which was more than offset by SG&A.
Gross profit increased 11.6% to $2.39 billion.
The dollar tree segment gross margin improved 110 basis points, primarily from higher initial mark on lower freight cost and sales leverage partially offset by product mix product cost inflation and higher costs for markdowns shrink and distribution.
Family dollar gross margin increased 20 basis points. This.
This quarter represented family dollars first improvement in gross margin in the last seven quarters.
The improvement was driven by higher initial mark on lower freight cost and leverage on occupancy partially offset by mix.
Mark Downs shrink and higher distribution cost.
SG&A as a percentage of revenue increased 80 basis points to 22, 9%.
The increase is due to a $23 $9 million noncash store impairment charge, along with elevated repairs and maintenance as part of our commitment to improve store and DC standards investments.
Investments in store and distribution center hourly wages.
And inflationary costs across several expense categories.
Corporate support and other expenses were consistent at one 4% of revenue.
Net income was $452 $2 million and EPS was $2.04 in comparison to $2.01 a year ago.
Moving to the balance sheet my.
My comments will reflect balance comparisons at the end of Q4, 2022 versus Q4 2021.
Combined cash and cash equivalents totaled $643 million compared to $985 million.
Inventory increased 24, 8% primarily from unit growth associated with early receipts of spring 2023 merchandize.
Family dollar combo expansion and new store unit growth.
And cost growth from product inflation, including freight the expansion of the dollar twenty-five and multi price plus inventory.
Units per store are at a similar level to pre pandemic period.
Our inventory is fresh and we have limited data inventory well within manageable levels.
Capital expenditures were.
There were $328 million in the fourth quarter versus $271.6 million.
For fiscal 2023 we expect capital expenditures to total approximately $2 billion.
Of this $2 billion, we would characterize 39% is dedicated to business continuity with.
With the remaining 61% for what we consider to be growth optimization and productivity improvement.
The business continuity includes projects to run and operate our stores and Dcs as well as enhanced safety and compliance programs.
More specifically this would include freezers and coolers HVAC replacements and facility improvements for stores.
D C conveyor projects and building improvements for our distribution facilities.
Enhanced permanent calling for our D CS and.
And store safety and asset protection related projects.
Our growth optimization and productivity improvement projects will include approximately 650 new stores.
And estimated 1000 store renovations.
Numerous distribution center projects.
And technology projects to enhance our efficiencies and support our growth.
Our 2023 sales and EPS expectations incorporate a number of factors.
First this is a 53 week year.
We expect this will benefit the fourth quarter by approximately $500 million in sales and 29 cents and diluted EPS.
Second we are cycling the outsize margin benefit for dollar Tree's initial transition to the dollar twenty-five price point, where last year. It produced a 39% margin rate in the first half of 2022.
As we evolved our assortments to the new price points.
Also for both segments, we expect to see continued cost pressure from inflation and margin pressure from merchandise mix as consumables are expected to outpace discretionary sales.
Third our outlook includes a benefit of approximately $1 per share from reduced freight expenses with nearly all of that benefit realized in the second half.
Approximately half of our fiscal 2023 import container volume will remain at existing long term contracts or charters at elevated rates.
We anticipate meaningfully lower rates for renegotiated contracts and spot volumes, which we expect to impact the remaining half of our container volume for the year.
These factors limit the impact of lower freight rates on operating profits within the year.
The dollar tree segment were realized approximately 80% of these freight savings, which will support a gross margin rate in the range of 36% to 37% in fiscal 'twenty to 'twenty three.
If current market conditions persist, we expect an additional freight costs relief of approximately a dollar in fiscal 'twenty 'twenty four and 'twenty 25, with the majority realized in fiscal 2024.
For our outlook includes approximately $430 million or $1 45 per share and operating expenses across labor and wages.
Store repairs and maintenance and corporate as we accelerate our investments to transform this company.
These investments are roughly split evenly between the two banners and include investments in corporate.
Given the amount of transformational activity.
Initiative enter dependencies, and the volatility of economic environment. It is difficult to precisely estimate the timing and related magnitude of investment returns.
Our 2023 outlook assumes only a minimal benefit from these investments.
Company is confident that these investments once implemented will yield attractive returns in 2024 and beyond.
There is strong evidence in the back half of 2022 that management's actions and investments are already yielding results at family dollar and dollar tree has evidenced by our recent trends.
While our outlook assumes minimal profit contribution from family dollar. This year. We believe there is tremendous opportunity improve family dollar sales productivity and margins and we are confident this opportunity will realize and produce meaningful profits in the years ahead.
Finally, we will continue to focus on people store conditions tools and technology to drive growth and long term operating performance improvements.
We expect SG&A expense dollars, which includes general inflation.
New store expenses and accelerated investments.
As well as the 53rd week to grow in the low teens.
Based on the confluence of these factors, we anticipate year over year gross and operating margins will decline in the first half of 'twenty twenty-three followed by growth in the second half.
We estimate 2023, EPS will be comprised of approximately 40% in the first half and approximately 60% in the second half which includes one extra week in Q4.
Consolidated net sales for the full year fiscal 2023 are expected to range from $29 $9 billion to $35 billion.
We expect a low to mid single digit comp store sales increase for the year comprised.
Comprised of a low single digit increase in the dollar tree segment and a mid single digit increase in the family dollar segment.
Selling square footage is expected to grow.
From 3% to 3.5%.
Our new store openings this year be more back end weighted compared to 2022.
Diluted EPS is expected to range between $6 30, and $6 80.
For Q1, we forecast consolidated net sales will range from $2 $7 billion to $7 $4 billion based on a mid single digit increase in same store sales for the enterprise.
Diluted earnings per share for Q1 are estimated to be in the range of $1 46 to $1 56.
While share repurchases are not included in the outlook, we had $1.85 billion remaining under our share repurchase authorization as of January 28.
Other modeling considerations for the 2023 outlook include the following.
We expect consolidated depreciation and amortization to range from $845 million to $850 million.
Net interest expense is expected to be approximately $27 million in Q1 and $97 million for the year.
Our outlook assumes a tax rate of 24.25% to 24.5% for the first quarter and for the fiscal 2023 period.
Weighted average diluted share counts are assumed to be 222 4 million shares for Q1, and 222.6 million shares for the full year.
I'll now turn the call back to Rick.
Thank you Jeff.
As an organization we are moving fast.
Our operating initiatives are in flight and are gaining steam and the current economic climate is driving more higher income consumers into value retail.
We believe we are in the right spot to deliver quality value and convenience that shoppers need today.
The momentum is continuing as both segments are off to a nice start early in quarter one.
Before do we move to Q&A I want to briefly discuss two additional contributors to our future success information technology and supply chain.
In order to unlock the value creation opportunity ahead of US we must have the right tools and technology in place to support our accelerated growth Bob.
Bobby Apple attorneys technology group has a clear vision and they are prioritizing projects that will have the greatest impact on our enhanced performance.
Some of the increased speed feeling these projects are capital expenditures and some of our operating expenses.
All of the projected spend for this year is captured and included in our outlook.
And John Flanagan supply chain team is doing a great deal of work to enhance efficiency and ensure the stores have the merchandise they need and can up stock it easily.
We have a dentist and approach for eliminating the inefficiency of our current manual case by case handling process.
This should enable us to more efficiently and reliably get product from our D. C 's onto our trucks and then into our stores.
John is committed to having at least one D C up and running on the new process by the end of the year, which much more to come in 2024 and beyond this.
This will be a big step forward for our organization and especially for our store associates.
Also I would like to Pat our DC teams on the back.
In the past year, all 25 of our D. C had been good distribution practices certified by an independent third party auditors and we are already in the process to begin recertifying for 2023.
The company is very proud of this achievement and believe it demonstrates our company's commitment to our associates to run good clean buildings.
2022 represented a year of substantial change for the dollar tree organization.
Of the 16 officers listed on dollar Tree's website, only too well with our company 15 months ago.
That is clearly a great deal of change in a very short period of time.
I would like to share my sincere gratitude to our 207000 associates that have not only embrace change but have welcomed our new leaders in me to the organization.
One day, we will be able to reflect on 2022 as the inflection point that got our company back on track to capture the remarkable long term value creation journey ahead of us.
The team knows that I'm all in in my commitment to support our store and field associates as they develop and grow in their retail careers by running full clean and friendly stores to serve our shoppers each and every day.
The long term opportunity ahead of us is bigger than I imagined before I joined the dollar tree team.
I want to be very clear this.
This transformation is not about saving dollars to deliver success, it's about spending dollars in the right places to unlock the future value of the business. This transformation is a process, which includes stabilizing the organization as we run.
And operate our business and make investments to modernize and transform the company to create long term value for our stakeholders.
As Jeff outlined we pulled forward into 2023 certain investments that could otherwise have been extended for several years and consequently, we expect fiscal 2023 to be a step back in earnings from the prior year.
We're excited about this acceleration initiatives and investments.
As it means higher and earlier returns in the years ahead.
This is an important year to put us on a path for an acceleration in growth and earnings as we move forward.
We believe that disapproved, she will maximize returns for our shareholders.
Our leaders are eager to share more details on our vision and the path to get there and we will do so in a more structured format in our Investor day here in Southeast Virginia currently being planned for June .
We intend for this to be the first of several events over the years, Ed as we outlined our transformation and its progress along the way.
Before I turn it over to questions I would like to take a moment on behalf of the employees board shareholders do extend our thanks to Mike for Kinski for his years of service and contributions like we're all grateful to you and wish you the best operator.
Operator, Jeff and I are now ready to take questions.
Thank you Sir as a reminder to ask a question. Please signal by pressing star one how do our first question comes from Matthew Boss from Jpmorgan. Please go ahead.
Great. Thanks, I appreciate all the color and hope you're feeling better rack.
Thank you Matt.
So maybe to kick off at dollar tree can you elaborate on the sequential improvement in comps that youre seeing in stores that have now lapped the break the dollar maybe larger picture how to how best to think about opportunities for that concept going forward relative to before the decision to right to break the Buck and then just separately can you.
Touch on success of the three and $5 item introduction.
Yeah. The answer Matt is let's get the last one first the three to $5. We're very pleased.
And the key takeaway on that is not only selling the product with the store's ability to manage it the multiple price points and not creating confusion for the customer which is why we've taken the approach that everything is now on the table.
So very pleased with that the improvement.
As I look at the improvement is not only the sales, but more importantly, the transaction counts and what's going on in the basket and we know that the basket is substantially larger when we get the multiple price points in it.
So very.
We're pleased we're excited and know that we've cycled that we're getting a true measure of what's going on.
Did that or.
Yeah, No no no absolutely and then maybe just to switch gears over to family dollar so with mid single digit comps now for the second straight quarter could you just elaborate on the market share gains that youre seeing with the acceleration of the investments I guess, what I'm trying to get to is is there any vis.
The ability that you can share for multiyear return and any change in the high single digit long term operating margin opportunity at family dollar.
We will spend a lot more time talking about that sort of thing at the Investor day, and while I do not want to be specific family dollar is starting to gain share.
And it's also gaining a larger share of the wallet.
Okay next question please.
And our next question comes from Scot Ciccarelli from Trust Securities. Please go ahead.
We got that check or how are you. Good to hear you I guess, a little bit of follow up on that second question, which is.
I think we all kind of understand that they need to accelerate investment in the business, but Rick you made a comment earlier in your remarks about you.
Do you plan to achieve in three to five years, what usually takes a lot longer. So I guess the question is is should we view kind of 'twenty three as a reset or starting point for growth in 'twenty, four and beyond or just given that lift of growing projects. You mentioned could we see investment spending continue to pressure earnings growth in 'twenty, four and 'twenty five.
We actually question I would look at 'twenty three is kind of getting getting us level set and I think the investments we will utilize in 'twenty four 'twenty five we'll be more basic you're always investing in the business, but it wont be anything of the magnitude that we're tackling now.
Yeah.
Got it and then the second question is just you know.
In a lot of retail turnarounds in the past there is a natural limit to how much change and you imagine team can induce and in a short period of time do you think that could be a challenge as you've kind of settled in at the dollar tree family dollar operation at this point Gregg.
Another great question.
It's the more time I spend here I'll make a couple of observations for you Scott is becoming really clear to me.
Composition of the new team married with the older team, there's a tremendous amount of experience here and we believe that experience is going to help us drive get to drive to get things done faster then you couple that with an organization.
The family dollar and dollar tree organization I have never seen the willingness to accept change like I'm seeing here.
207000 people in this company are dying to be high performers and they believe in what we're doing.
And they're seeing R&D investments, we've made so far in price and wage.
Store investments, we've made in terms of the quality of the facilities that the employees are seeing that are staying in those changes they are seeing them in sales and they are dealing with it's all positive.
Got it thank you very much.
Thank you win and a moat around our next question from Kristine that Cotai from Deutsche Bank. Please go ahead.
Hi, good morning, and thank you for taking the question.
Wanted to just follow up on the market share of family dollar I mean, certainly it has.
Been challenged over the years, but it does seem that with price in store investments that he is actually starting to change. The a question on traffic, which remain negative on a year over year basis, but also multiyear so how important is it to inflect positive for the model to work here and how do you envision arriving there like what are the most critical components on to strategy.
Actually unlock that.
Yeah, I mean, I think as I reflect on what you are asking here. Most important thing. We can do is maintain consistent store standards and execute against our operating model.
We have we know what to do.
And I think if you look what's taking place there.
Consumer is responding to it and they're responding to it in terms of a bigger share of their wallet.
Finding in terms of market share.
And all of the initiatives that we are putting in place Christina are all designed for that store experience.
You know, even if you look at what we're doing with labor.
We're not trying to take labor out of the store, we're trying to eliminate work. So we could spend that on more customer facing activities.
That's great and just a quick follow up.
Again regarding family dollar, but can you just touch on in stock levels, how is that improving since then.
The new team has been in place.
Far from optimal levels of in stocks.
Yeah, I would say one of the key initiatives in this building is the in stock level at family dollar several things are happening a lot of the manufacturers have retailers on allocation. So if you order 100 cases, you might get 65.
And that that is affecting everybody right now.
The other issue. We are we have discovered we've had for a long period of time as we use a perpetual inventory system.
And if that system is not right, if it's not showing their on hand quantities.
Properly this system order product so we're going through a process now of Truing that up.
But I will reiterate one of the people are tired of me talking about it around here in stock as one of our key initiatives.
Great. Thank you so much and best of luck.
Thank you. Thank you and before to take the next question I'd like to remind you. Please limit your questions to one is we have a large audience today. Our next question comes from Anthony each combo from loop capital markets. Please go ahead.
Thank you so much for taking my question.
Hey, good.
Good to hear your are recovering from the bit hey, So I just wanted to clarify you talked about those wage investments can you just walk through that again, because I wasn't quite sure.
I think you said $2 an hour, but I wasn't sure on the sequencing of that so I just wanted to better understand that thank you.
Yes, so we're doing that market by market.
And what we're looking at is not only the hourly wages, which is where the bulk of the investment is we're also looking at coverage to ensure we have the proper amount of coverage and then we're also looking at what I would call the field team the store manager and the district manager.
We do know and it's proven that when we had the white right wage structure, we increased our retention and our turnover has been it's been pretty astronomical and we're seeing that slowdown we know we get better shrink we know we get better store standards, and we get better morale.
And that all leads to better execution, which the customer sees on the shelf when theyre in the store.
So it's a broad based approach.
Got it I'll look forward to seeing them in June .
Thank you Sir.
Thank you, we'll now move to our next question from Michael Lasser from UBS. Please go ahead.
Good morning, Thanks, a lot for taking my question so.
So really the message today and what it's been for the last few quarters is what we're going to burden the cost structure with a lot of investments.
Get this business to where it needs to be and we're going to frame that.
And quantify what the return on these investments is gonna be.
Later date, so could you give at least a framework on what you expect the return on these investments to how they you expect them to flow in terms of timing and the nature of how the return on investment is going to look if it just feels leverage on fixed costs at me.
Take quite a bit of time for the enterprise to get back to the operating margin level that it's at.
It seems historically and it's part of that for the $400 million that you're investing this year, how does that break down between those wage investments that are more structural in nature and the maintenance and repairs that are perceived to be more onetime in nature. Thank you very much.
Thank you Michael this is Jeff.
As we.
Think about the returns.
And Rick had indicated earlier there are a number of interdependencies that are.
Related to these investments so as you can imagine we are a lot of these investments are complementary to what we're doing with our merchandising and our other store initiatives.
Those interdependencies are dependent upon us being able to execute against this against all 16000 stores and it will take time through the course of 2023 to accomplish that.
We have seen early on at the back half of 2022. Some early returns on some tests that we've done. So we're confident that we will have an improvement in returns in future years.
But.
I mean, the interdependency as well as quite honestly trying to execute this and what we are all seeing is somewhat uncertain macroeconomic environment. The combination of these two things we believe that the impact this year will be minimal we're saying it is minimal because it is not any relevant level for us too.
Actually speak any specifics to it at this point in time.
Okay.
Thank you will the level of our next question from John <unk> from Guggenheim Securities. Please go ahead.
Hey, John .
How are you.
Good Sir.
Good excellent looking forward to seeing you again.
Can you touch on right.
Consumable opportunity at dollar tree, Brian I know historically, it's not been a huge consumable business because of the price point limitations. How do you think about that opportunity right in terms of getting MPP rolled out coolers everywhere expanding that beyond the three coolers.
And then when you think about it.
Guarding against going too far.
In terms of either mix or.
Cannibalizing <unk>, if thats an issue.
Yeah, Great Great question, I think as I reflect on the consumables. The three four and five dollar frozen food is a perfect example.
There is an AD there is an appetite for it in the stores.
I do think it's a balance.
But I will say this.
Removals drive transactions and what we have to figure out is how to get our consumable items and a non consumable item in the basket together and grow the basket.
And that's the challenge right now so as we look at consumables, John it's going to be a very selective approach.
Hey, this sounds silly, but we introduced bred into dollar tree.
Over the last quarter, we put ice in dollar trade over the last quarter and they're doing very very well and we've done it without upsetting the mix in the store. So it's a methodical process, but I think what's important here is that it's nothing but opportunity if we can manage our.
Through it.
Okay, great. Thank you.
And our next question comes from Paul do Paul <unk> from Citi. Please go ahead.
Hey, Paul Hey, everyone.
Hey, this is Brandon Cheatham on for Paul Thanks for taking my question.
I wanted to dig in on that.
The freight cost just curious if you can expand on why wouldnt that be kind of be a benefit in real time spot rates are below where you contracted.
Imagine you'd be able to go back to your business partners.
You know negotiate something that looks a little bit more like the freight costs that are being experienced on the spot market. So just was curious if you can expand on some of the dynamics there.
The timing of that benefit this year and next year. Thanks.
Yes.
A couple of pieces to this.
First off our teams are always going back to our supplier partners and looking for ways to reduce our costs, where that is available and to the extent that spot rates, where they are and given our volumes and sort of our scale to the extent that we can do so we will take advantage of that.
But part of the challenge also for US is that a large portion of our contracts are about 60% of all the contracted business that we have for any particular year right now about 60% of that is long term charter or contracted rates.
That's the reason why those those contracts in charters do not roll off until star.
Starting late 2024 or 2025.
The other element of this is that.
We capitalized our freight.
Into our inventory cost so in any one particular year to the extent that our inventory is turning let's say four times, you've got that portion of that is going to rollover to the next year as part of your capitalized cost.
So the combination of those things so it's going to be the timing contract exploration and renegotiation. It is going to be the carryover from one one year to the next or the two reasons why for US we have more of a back ended loaded.
Benefit of freight in 2023.
There will be carrying over into 2024, but then also you have a further continuation of freight cost reductions as those other contracts roll off.
Thank you that's very helpful best of luck.
And our next question comes from Kelly Bania from BMO capital. Please go ahead.
Hey, Kelly.
Hi, good morning, Thanks for taking our question.
I'm wondering if we can just talk a little bit more about the operating expense investment in particular wages, how much of the $430 million is wages and you called out the $2.
The increase.
Increase in your labor rates and just curious if you can help us understand where that brings your average starting wage.
How would that compare to peers.
Once this is implemented and does this bring you in line with peers or get ahead of.
The rest of the industry.
Kelly I appreciate your question because I realized I didn't answer the <unk> question earlier, so I apologize.
$430 million about two thirds of that is related to.
Wage and wage related items.
The Delta if you will is.
Around especially in that store standards, what we're doing on store standards what were doing before.
What we're doing in our.
Our supply chain.
Yes.
As it relates to our wage rates of $2. It definitely brings us more competitive in the marketplace as it closes the gap.
We believe that.
Once again, it's the only closing the gap on hourly wages, but then it's also for us collectively bringing us.
More competitive as it relates to the field leadership teams.
We haven't provided any.
Sort of average hourly rate, but it is about a 20% increase over the course of the two years.
That.
That $2 would represent.
Yeah.
Yes.
Okay, that's very helpful.
Just another one on freight the comments you provided are very helpful, but you've outlined sort of $2 and freight really over the next couple of years.
I guess the question is would that be a would that reflect the full recovery of the significant increase in freight cost that you had over the last few years or is that assuming only a partial recovery.
It would only be a partial recovery.
There's a number of factors to this one freight rates have not gone back to 2019 levels in its entirety.
Also as you think about freight there are really three components of freight and everyone seems to want to focus only on the trans Atlantic portion, but there is.
Import and Oh I'm sorry.
Inbound and outbound freight also which is ultimately included in all of this.
And those particular rates you have not seen a significant reduction or return back to 2019 as driver costs.
Chassis costs fuel all of those components continue to be at more elevated rates versus 2019. So as we look at these freight cost reductions.
In its entirety, we do not we're not forecasting or if this is going to recover that.
That which we would have seen in comparison to 2019.
Okay.
Thank you, we'll now move to <unk>.
Please go ahead.
Yeah.
We'll now move to our next question Joe Feldman Telsey Advisory Group. Please go ahead.
Yeah, Hey, guys. Thanks for taking the questions.
I had a question about the investments that you guys are making you've outlined both the dollar tree side of the family dollar side.
As you think of store improvement, presumably its more on the family dollar side.
I'm just curious how you balance the investments between the two and how you decide.
You know where to allocate to each brand in.
And where you feel there is more need for store improvement is it because it sounded like dollar tree actually could use some store improvement too, which I think I was a little surprised by it but maybe you could address that issue.
Yeah, I'll take that Jeff and then you can jump in.
First thing I want to say is we believe in the long term earnings power of both banners.
And we think theres potential there and I look forward to sharing that with everybody on the analyst day.
I think if we are honest with ourselves, which we are.
Facilities in both banners need work.
In terms of the quality of the gondola is floor care.
Lincare lights I can go down the list that applies to both banners.
I think when you look at the difference between the two banners and what shows up in one versus the other in terms of store standards is dollar tree has no plan to grant in it. So it's incredibly easy just to put stuff on the shelf and a lot of things get covered up what do you do that.
Family dollar every square inch of that thing when we get done by the middle of the year, we'll be playing to craft and out of stocks.
Rusty shelves and more problems show up when you have a plan to ground based merchandising strategy. So I would look at you and say.
Both stores have a tremendous amount of opportunity in.
Both banners have a lot of long term earnings power. So it's really not it's really not a balanced it's more about getting it done in both.
Got it got it that's helpful. Thanks, and Rick you had mentioned earlier that you.
Youre seeing that trade down or trade in from higher income consumers, which I know, we've all heard about and are seeing it as well, but how does the health of the consumer factor into your forecast this year.
And how you see the consumer health playing out that'd be great. Yeah, I mean, what we're what we're seeing is the consumer making $80000 a year is trading down.
And Thats timing is everything we're doing better on so many fronts with a long way to go there having an experience they can relate to but as far as far as planning for that.
Outlook now we don't do that.
Yes.
Got it okay.
Thank you good luck this quarter.
Thank you. Thank you we will now.
We'll take our next question from Simeon Gutman from Morgan Stanley . Please go ahead.
Hey, everyone two parter on family dollar first on the comps, we would've expected it to be more traffic than ticket given some of the price investments. It's the opposite so maybe related to that last question to diagnose how the customer spending and maybe you can give us a peek on the basket composition and then second it's a little.
Have a twist on what was asked before that there is a step change that should happen in family dollar with EBIT margin. Your comps are inflicting obviously the business isn't really generating a lot of profit I know theres a lot of assumption in that but curious whats the assumption that needs to happen for the profit that you have to keep keep comping at this rate or there is some profit.
Or is there some profit hallmark. Thank you.
So.
In terms of the composition of the basket like every other consumable retailer, we're seeing the shift towards more consumables.
I do think the comp wise, we are seeing transactions improve.
Which I think was called out.
But I think what we're seeing is a larger share of wallet.
So the basket is increasing.
Theres two things if I could maybe add to that.
One as it relates to the traffic.
We believe that is reflective of one quality of merchandising opportunities, we're presenting but also from a pricing perspective. The work that we've done there has been a multi point of reduction in.
Against the market, if you will and our pricing to gain clarity.
Mike excuse me as Rick had said with respect to our competitive set as well as widening the gap occurrence grocery and convenience. So the combination of those two things is very encouraging for us as it relates to improve traffic as well as being able to drive still ticket at those lower prices on a year over year basis.
And then as it relates to family dollar and its ability to generate.
Greater levels of.
Profitability, there is somewhat of a step function thats going on right now with these accelerated investments and it's more exacerbated against a family dollar P&L because of its overall unit economics versus that of dollar trees. You will recognize we believe that as we continue.
To drive greater productivity from a topline perspective improve.
Simplify our stores and it's operating procedures such that.
We can further further leverage off of the existing base that we're building up we believe that we will be able to drive higher levels of profitability. The last piece is from a margin perspective gross margin perspective, the things that Larry is doing we're talking about from a private label.
Additions.
That will also help us from a gross margin. So top line sales gross margin improvement and then leverage against some of these expenses that we are now incurring over the longer period of time.
I'd add one thing.
I think the key takeaway on whats been said is there is no structural problems with either banner, it's all fixable and we know how to fix it.
Thanks.
Thank you ladies and gentlemen, we have reached our allotted time I will turn it over to Randy.
Geiler for final comments.
Sure. Okay. Thank you very much. Thank you for joining us on today's call and have a good day take care.
Thank you. This concludes today's conference call. Thank you for your participation you may now disconnect.