Q2 2023 Dollar Tree Inc Earnings Call
Hello, and welcome to the dollar tree Q2, 2023 earnings conference call and webcast. If anyone should require operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation.
Ask a question anytime by pressing star one on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to turn the call over to your host Bob before senior Vice President of Investor Relations. Please go ahead Sir.
Good morning, and thank you for joining us today to discuss dollar Tree's second quarter results with me today are dollar Tree's, chairman and CEO , Rick Dreiling and CFO , Jeff Davies before we begin I would like to remind everyone that some of the remarks that we will make today are about the company's expectations plans and future prospects and are considered.
Forward looking statements under the Safe Harbor provision of the private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward looking statements.
For information on the risks and uncertainties that could affect our actual results. Please see the risk factors business and management discussion and analysis of financial condition and results of operations sections in our annual report on Form 10-K filed on March 10, 2023 or.
Our Form 10-Q for the most recently ended fiscal quarter.
Most recent press release.
And form 8-K, and other filings with the SEC.
We caution against reliance on any forward looking statements made today and we disclaim any obligation to update any forward looking statements.
As required by law.
Also during this call we will discuss certain non-GAAP financial measures.
Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided in today's earnings release available on the IR section of our website.
These non-GAAP measures are not intended to be a substitute for GAAP measures unless otherwise stated we will refer to our financial results on a GAAP basis.
Additionally, unless otherwise stated all comparisons discussed today for the second quarter of fiscal 2023 are against the same period a year ago. Please.
Please note that a supplemental slide deck outlining selected operating metrics is available on the IR section of our website.
Following our prepared remarks, Rick and Jeff will take your questions.
Given the number of callers who would like to participate in today's session. We ask that you limit yourself to one question.
I'd now like to turn the call over to Rick.
Thanks, Bob I'd like to welcome all of you that have joined our call. This morning.
I'm sure that many of you had a chance to attend our Investor Conference in June I Hope. The information we presented was valuable to you and that you left the event with a better understanding of the key growth strategies that we have in place to deliver $10 or more E. P. S.
By 2026.
I'm confident that the team has identified the right levers to unlock the true value of our business.
We are making good progress and continue to act with urgency to accelerate the pace of improvement in our merchandising store operations supply chain and I T infrastructure.
Our renewed merchandising efforts represent a major opportunity to unlock value.
We outlined our multi price journey at dollar tree detail of our real estate and merchandising initiatives at family dollar and reviewed our plans to improve store standards across the enterprise.
We have also launched efforts to drive sales productivity and increase operating efficiency like simplifying the truck unloading process and then improving in stock levels.
You heard me say many times that retail is all about growing units growing transactions and growing sales per square foot.
When these retail fundamentals move in the right direction everything else falls.
I am pleased to report that all three are heading in the right direction for us.
For the past two quarters, both segments posted positive unit growth in consumables, while the market has been negative.
Second quarter traffic was up over 3% as family dollar and nearly 10% at dollar tree the fourth consecutive quarter of growth at family dollar and the second for dollar tree.
And finally sales per square foot is up 4% at family dollar and 6% at dollar tree.
When it comes to our momentum in these key retail fundamentals, our ongoing merchandising efforts and the investments in labor and stores are paying dividends and setting the stage for everything else to follow.
Now, let me review some of our second quarter highlights.
Little later, Jeff will provide even more detailed review of our results and update you on our outlook for the balance of the year.
For the quarter on a consolidated basis, we delivered an eight 2% increase in sales.
$7.3 billion.
With six 9% enterprise comp growth.
And $287 $8 million of operating income.
Which led to EPS of 91 cents.
In our dollar tree segment or seven 8% comp was driven by a nine 6% more traffic with a modest offset from average ticket.
Dollar Tree's momentum remained strong with this quarter's comp coming in on top of a seven 5% comp last year.
Meanwhile, the family dollar segment continues to make good progress in its operational turnaround.
Second quarter comp of five 8% was nicely balanced between three 4% more traffic and two 3% average ticket growth with the strong comp trends being supported by our improved price position and merchandising efforts.
While the challenging macro environment continues to pressure our sales mix in both segments I am pleased with the gains in traffic new customers and market share.
Regarding the industry wide shift in consumer purchasing behaviors to consumables. We believe this is reflective of the current macroeconomic environment and continuing rotation to a pre pandemic balance after years of elevated spending.
Across discretionary categories.
We believe we are winning in consumables as more customers come to see dollar tree and family dollar as the compelling destinations for value.
At dollar tree, our multi price strategy provides flexibility to respond to changing customer needs.
Family dollar are improved price image and wide range of merchandising initiatives are clearly resonating with consumers.
In this environment consumers from all income levels are increasingly seeking value, we are well positioned to capture incremental share of wallet with higher income consumers respond to our strong price value proposition and when lower income customers.
Concentrate their spending on needs based consumables.
This is particularly true across food and other consumables, we're value oriented retailers are taking unit and dollar share.
As a result food categories are disproportionately driving sales momentum across the value retail landscape.
Dollar tree and family dollar are no exception.
Our food business is especially well positioned in the current environment and we are seeing extremely high volume growth across our frozen and center store food categories.
There is also growing evidence that consumers are seeking value through private brands, expanding and improving our private brand assortment will be a significant growth vehicle for us going forward.
To this end the private brand expansion program at family dollar remains on track.
This year, we launched over 125 private brand items, which we will further accelerate when our new family wellness and vitamin products hit store shelves in the fourth quarter.
We are already seeing encouraging results across our private brands with second quarter penetration expanding by 55 basis points units sold growing by 4% and private brand comps increasing over 15%.
New customers are the lifeblood of retail and a critical part of driving traffic and market share.
In the past year, we have added nearly 5 million new customers across both segments.
With $2 6 million of these customers, having a household income over $125000.
Importantly, our research tells us that a very high percentage of these new customers come back visiting an average of five times in the year. Following their initial trip in fact, we now rank in the top 10 retailers measured by annual new customer Activations.
These positive traffic and new customer trends are leading to strong market share gains for the second quarter in a row, both segments gained market share in consumables as our unit volume grew while the market unit volume shrank.
According to Nielsen data, our second quarter consumable unit volume growth outpaced the market by over 1100 basis points at dollar tree and 530 basis points at family dollar with both segments extending their margin of outperformance from last quarter.
Shifting from our recent sales performance I'd like to take a few minutes to update you on several key initiatives across our company.
In merchandising, we have increased our dollar tree plus target to 4900 stores by year end up from 4300 stores.
That we articulated in June at the end of the second quarter, our dollar tree plus assortment was available in over 3600 locations and a three dollar for dollar and five dollar frozen and refrigerated assortment was available in nearly 5600 stores.
At family dollar we are on track to complete plan O Gram reset at all of our stores by November and we are pleased with the sales lift from these resets so far.
In real estate, we remain on pace to hit our target of 600 to 650, new store openings. This year with roughly two thirds of those coming in the back half of the year.
We also continue to make progress with our emerging formats at family dollar.
We completed 271, H 2.5 renovations, bringing the total number of H 2.5 locations do 830.
We opened or converted 90 family dollar stores under our rural combo format.
Overall, we are on track to complete at least 1000 family dollar renovations by year end.
In supply chain my Kandy and his team are investing in temperature control across your distribution Center network.
Adding full temperature control to our D. CS improves the work environment for our associates and drives improved operating performance.
It also drives efficiency by reducing cross docking expenses and increasing flexibility to store the full range of OTC HBA products.
We recently expanded temperature controls at two additional D CS which brings us to four until <unk>.
By year end, we expect to upgrade eight. Additionally, these days with the balance rolled out by the end of 2024.
While still in its early days, we continued to make good progress on our road of card rollout.
The testing on Roto car deliveries is currently underway and we are on track for our D. C. In Matthews North Carolina to be rocard enabled by the end of this year.
Moving on to I T. We're also making good progress on needed upgrades to our infrastructure, particularly our new store and inventory management systems mean.
Meanwhile, our new warehouse and transportation management systems are progressing through their development stages with Rollouts anticipated to begin early next year.
With the continued focus on our people we saw double digit improvements during the second quarter in employee turnover and store vacancy levels across both segments.
As the investments, we're making in store level wages benefits and elevated standards.
Again to yield clear and tangible results.
As I mentioned at our Investor Conference, we had a significant number of stores that don't open on time or close early you just staffing shortages.
I'm happy to report that we saw a measurable improvement in this area during the second quarter at both dollar tree and family dollar if.
If we eliminated all late openings in early closings it could add one and a half points to our overall comp.
In summary, when it comes to the factors that we can control we continue to execute at a high level as our recent sales performance shows consumers are clearly responding to our merchandising initiatives.
At the same time, Mike Creedon and his team are acting with urgency to upgrade our store conditions and improve operational consistency across our store fleet.
We are making the investments we need to make to accelerate our top line performance.
Generally greater operating efficiencies and improve profitability.
We've built a strong cultural foundation as an organization and we are focused on delivering better results for all our key constituents, including our more than 200000 associates.
And speaking of our associates. We've just spent the last two weeks meeting with their field leadership at our headquarters here in Virginia.
Team of more than 1300 leaders, who represent more than 200000 associates and the energy coming out of those sessions was amazing.
Our people are the key to a great customer experience and I am so grateful for the progress we've made in our turnaround efforts over such a short period of time.
I will now turn the call over to Jeff to review, our financial results and outlook for the balance of the year.
Thank you Rick and good morning, everyone in.
In the second quarter, we continued to generate strong top line results across both segments driven by growth in customer traffic unit volume and an accelerating market share.
We continue to have a favorable view of the current operating environment. Our top line performance was not driven by any material increase in promotional intensity.
While our sales mix continues to shift towards consumables regenerated.
We generated more gross profit dollars in the second quarter than we did last year.
We also remain resolute in our strategy to make the necessary investments in stores I T supply chain and our people.
On a consolidated level operating income declined 43, 1% to $287.8 million and operating margin compressed by 360 basis points.
This was driven by a 220 basis point decrease in gross margin and a 130 basis point increase in SG&A expenses.
Gross margin contracted primarily from lower merchandise margin as we lap the margin benefit from last year's $1 25 rollout and from unfavorable sales mix.
Cost inflation and elevated shrink.
SG&A expenses expanded primarily from wage investments incentive compensation.
General liability claims and repairs and maintenance costs from improving store conditions.
These were partially offset.
By leverage from increased comp sales and lower stock compensation expense.
Notably the impact of general liability claims was seven cents for the quarter.
Our effective tax rate was 24% versus 24, 2% last year as higher work opportunity tax credits were partially offset by higher non deductible expenses.
Net income was $204 million and diluted earnings per share was 91 versus $1 60, a year ago.
Any business segment level dollar trees operating income declined 27, 8% to $397 $8 million and operating margin compressed 510 basis points.
This was driven by a 400 basis point decline in gross margin and 110 basis point increase in SG&A expenses.
Gross margin contracted primarily from lower merchandise margin as we lap the margin benefit from last year's $1 25 rollout and from unfavorable sales mix product cost inflation and elevated shrink.
These were partially offset by comp sales leverage against occupancy costs.
SG&A expenses expanded principally from wage investments minimum wage increases general liability claims utility costs and repair and maintenance costs for improving store conditions. These were partially offset by sales comp leverage.
Family dollars operating income declined 78, 5% to 11 $8 million and operating margin compressed 140 basis points.
This was led by a 30 basis point decrease in gross margin and 110 basis point increase in SG&A expenses.
Gross margin contracted primarily from elevated shrink with a partial offset from leveraging occupancy costs.
SG&A expenses also increased principally from wage investments minimum wage increases and utility costs and repairs and maintenance costs from improving store conditions. These were partially offset by sales comp leverage.
Moving onto the balance sheet and cash flow.
As a reminder, my comments reflect balance sheet comparisons between Q2 2023 in Q2 2022.
Inventory decreased by one 7%.
Inventory was below last year's level is elevated due to early receipts of imports.
With a rapid recovery across our supply chain seasonal imports from Asia arrived well ahead of our scheduled third quarter receipts.
Moving forward, we will continue to manage our inventory and related trade accounts payable to improve free cash flow generation.
Capital expenditures were $425 $4 million in the second quarter versus $276 $2 million last year, reflecting elevated investment levels and new store openings and renovations supply chain and information systems for fiscal 2023 we expect.
Capital expenditures will total approximately $2 billion with approximately 40% allocated towards maintenance capex and the balance towards growth initiatives.
Free cash flow improved $45 million versus the second quarter of last year.
This represents the third consecutive quarterly improvement in free cash flow generation.
Even as we make significant investments to support the long term growth of the business.
For the first six months of 2023 free cash flow improved $157 million versus the same period last year led largely by lower merchandise inventories with a partial offset from lower net income adjusted for noncash items increased capex and the timing.
Of accounts payable.
In the second quarter, we repurchased approximately 700000 shares for $99 $9 million, including applicable excise tax at.
At quarter end, we had $1 $6 billion remaining under our share repurchase authorization.
Cash and cash equivalents totaled $512 $7 million compared to $688 9 million a year ago.
In July we established a new commercial paper program to issue unsecured notes with maturities up to 397 days with an aggregate face amount outstanding at any time of one $5 billion.
We expect to use the net proceeds for general corporate purposes.
The notes will rank parry pursue with all other unsecured and Han subordinated indebtedness.
Our revolving credit facility will serve as a liquidity backstop for the repayment of outstanding notes under this program.
This new program provides additional flexibility to manage our working capital needs and at current rates. It provide short term borrowing at lower rate than our credit facility.
There are no notes issued in outstanding as of the end of the quarter.
Now, let me provide some additional visibility into ourselves and E T S and expectations for the third quarter and the balance of 2023.
At a high level, we are reiterating the center point of our full year outlook, we gave last quarter and bringing in the high and low end to better reflect the balance of opportunities and risk we see in the current operating environment.
Our outlook takes into consideration the following factors.
Continued shift in sales mix and unfavorable shrink trends over the balance of the year.
Higher utility and repairs and maintenance costs related to the national heat, though.
Higher diesel fuel prices.
On the plus side, we expect improved sales performance and.
An incremental ocean freight savings.
That all said, we see nothing systemic or structural in the current environment that would have a lasting negative implications for the multi year outlook that we shared in June .
So against that backdrop, we expect consolidated net sales for the third quarter will be in the range of $7 $3 billion to $7 5 billion.
Based on a mid single digit increase in comp store sales for the enterprise and each of the segments.
We estimate third quarter diluted earnings per share will be in the range of 94.
Two a dollar and <unk>.
For the full fiscal year, which includes a 50 <unk> week this year.
We are raising our 2023 sales expectations to a range of $36 billion to $30 9 billion.
Driven by a mid single digit increase in comp store sales across both segments and a full enterprise.
Based on better visibility into the margin headwinds I just detailed we are narrowing our full year diluted GAAP earnings per share outlook to a range of $5 78.
Two $6.08.
Including the 12 cent legal reserve, we talked in the first quarter.
We still expect selling square footage to grow between three and three 5% for the year and new store growth to be back end weighted.
Other considerations and our 2023 outlook include the following.
We have not included any assumptions for incremental share repurchases.
Depreciation and amortization should be in the range of $845 million to $850 million.
Net interest expense should be approximately $25 million for the third quarter and approximately $110 million for the full year.
We are assuming an effective tax rate of approximately 23% for the third quarter and approximately 24% for the full year.
We expect 226 million diluted shares for the third quarter and 221 million diluted shares for the full year.
Our outlook reflects continued margin pressures that we expect to persist through the back half of the year.
Based on our continued market share gains at both dollar tree and family dollar we are in a good position to generate higher levels of rebates and promotional allowances.
So continue to be disciplined in managing our cost structure, even as we make investments necessary to meet our stated long term growth objective of $10 or more of EPS by 2026.
Now I'll turn the call back over to Rick for closing remarks.
Thank you, Jeff we remain very pleased with the progress of our transformation in these early stages and remain confident in the three year roadmap outlined in June .
For those of you familiar with my operating philosophy, the immediate focus of any retail turnaround is growing sales.
From that perspective, we are succeeding.
We are providing a new experience to the next generation of customers across both our segments and seeing strong repeat purchase activity from these new shoppers.
Our goal is to provide the consumer with convenience value variety and a great shopping experience.
Our stores are already conveniently located 87% of the population of the continental United States lives within a five mile radius of one of our stores as.
As we grow our footprint will be closer and more convenient to an even greater number of customers.
I remain confident that our long term earnings potential can be realized within the timeframe we have communicated.
Our improving top line performance places us in a position of strength and the combined impact of our merchandising.
Real estate supply chain I T and people initiatives should put us in an even stronger position relative to the competition.
Operator, Jeff and I are now ready to take questions.
Thank you well now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad in the interest of time. We ask you. Please ask one question one follow up and return to the queue. Once again Thats star one to be placed in the question queue and I'd like to remove yourself from the queue at star to one woman.
Please while we poll for questions. Our first question is coming from Michael Weiser from UBS. Your line is that life.
Good morning, Thanks, a lot for taking my question.
The knock on the transformation at dollar tree has been that it's just going to take a lot more heavy lifting a lot more investment than what was originally anticipated and the fact that your sales are or are trending better than what was expected as a good sign but it does not seem like the profitability.
<unk> is flowing through so a do you have.
A good handle right now on all of the.
Anything else those different considerations.
Considerations with the profitability and be as you look towards the next 12 months, there's going to be a benefit from lower supply chain cost is that going to flow through or will you use that as a source of further savings to then reinvest that back in the business to drive the $10.
Of earnings several years out. Thank you very much for taking my question.
Yeah. My three really good questions first off is the lift heavier than we thought it was going to be a I would say no.
When we all got in on this we knew what we were facing.
I do think what we're trying to do.
Because of what has to be done we are moving much faster than I thought we would and when you move fast.
It takes it takes a little more expense it takes a little more effort takes a little more push and so is the lift heavier no. It's the same but what we're trying to do is move as fast as we possibly can.
In regards to the the drop through you know I think we are learning to do a lot of things flexing a lot of muscles that we have not used it in the past.
The family dollar side.
It's all about the commitment you can't make to the vendor community and just called out the potential for increased rebates and allowances, that's all driven by retail execution and the family dollar people are doing a really terrific job on that what has happened on the dollar.
Tree side. The dollar tree people have responded to the change in patterns are that the consumer is exhibiting our store buying more consumables.
So I think and I always have subscribe to the fact that when top line starts moving everything else catches up I remain incredibly bullish on our margin targets and where we're going.
And I I do not see any trouble to getting to more realistic margin levels in regards to the improvements in the supply chain that would be a combination of both as you know we've got massive changes taking place on the supply chain side some of that will make it to the bottom line.
And some of it we'll invest and Jeff and Mike anything you want to add yeah. There's a couple of additional items, Michael we as it relates to the flow through and we tried to call. This out you know, it's really a situation where our sales mix is an area that you see across the retail landscape.
People are moving more into consumables in that.
We're not immune to that.
Other area that we talked about with shrink and the ongoing progression. There those are the two more significant items from a gross margin basis that are really impacting us in addressing the flow through or restricting the flow through.
The other thing that it was it's kind of muted in our comments, but this past quarter, we had about seven cents related to an accrual adjustment that we needed to make for the progression of certain general liability claims, they're really dated back to 2019 and 2020 during the pandemic period.
You know once again something that we needed to take care of but it's also a restricted the flow through and the and the tremendous sales that we were driving over the course of the year. So you know I think that we're seeing right now we've called out in the past and the reason for our adjustment in the overall guidance, we gave last quarter, which was rounds.
Sales in shrink and then it was further exacerbated unfortunately with this accrual adjustment we need to make.
Thank you next question today is coming from Edward Kelly from Wells Fargo. Your line is now live.
Hi, Good morning Kelly.
How are you.
Yeah.
I wanted to dig in on the core dollar tree gross margin this quarter.
If you think about the 33.4, it's obviously a step back versus you know where you are in Q1 I was hoping that you could talk a little bit more about the incremental pressures.
And then how we think about the back half you had previously talked about at 36, 37% gross margin for the year, obviously, that's coming down.
So thoughts there and then just you know as it relates to all of that.
How does this inform our longer term target of 35 537, five it looks like this year you may be below the low end of that range.
What does it take to get to the middle end of that range. You know do you need the backdrop to normalized demand was sufficient that freight coming in but I'm not sure of shrink has bottomed just tossed around all of that I think what you know what we're gonna be helpful. Thank you.
Yeah, Great question again, Ah Hey, what what's happening in dollar trees, we were responding to the needs of the consumer.
You go back a year ago, we did not have nearly the number of consumable skus that we now have in the store.
Saying all of that our discretionary business on the dollar tree side was slightly up.
But what where when I think about quarter, three particularly our quarter four.
We're gonna be in a much stronger position on the <unk> on the margin due because of the change in the mix. We think it's going to happen and that takes us quarter. Four is a very seasonal quarter for us with Christmas and Halloween and all of that so I remain bullish on it.
Ah I do believe and that we are responding to the customer.
And sales takes care of everything eventually and the two year stack in dollar tree is just outstanding.
So I remain very very bullish on where we're going with the margin.
And then the other thing I would add to that.
It doesn't sound like a broken record here, but unfortunately, the headwinds, we're having and shrink errors are muting, our our margins right now.
You get a chance do you have an opportunity to take a look at the supplemental presentation that we have and you'll see that shrink is continuing to be restrict our margins by about 75 to 80 basis points on a year over year basis.
We are taking the appropriate actions, we believe in the organization to start to address that as you know shrink has a sort of a trailing indication because stores are shrinking over the course of the year and as you're adding new.
New actions to reduce it it takes time for those things to actually take hold but between the sales mix and the shrink. Once again. This is one of the things that have been muting the margin. The other thing that while we are seeing less frequency of product.
Cost increases and maybe the magnitude of those are not as significant they are still in the marketplace and Rick Mcneely and his team are figuring out ways to work through those through a number of different merchandising actions. So we still have a little bit headwind there on product cost pressures, which.
As we move forward, depending on consumer demand, we believe that those will start to should start to abate over time.
Thanks, guys.
The next question is coming from John Hind Buckle from Guggenheim Securities. Your line is now live.
Eric.
My question's, a multipart really revolve around the three or four or five dollar right frozen and cooler.
Can you maybe talk about the experience you've seen that clearly has to be lifting consumable comps.
Your thoughts on the rollout not just all stores, but then expanding doors right getting to more than three doors today port on the rollout and then the impact that that's having on traffic.
Benefiting discretionary.
Right and then ultimately do you think that are that should it should hurt gross.
But the increased ticket right should positively impact expense.
Control over time, so maybe.
On that as it impacts the dollar tree P&L.
Yeah.
Other another effort that we're working really really hard on.
In regards to the number of cooler doors, we're going to go from three.
I believe 10 or 12 is the plan.
We'll have a door that is a bucket of quarter a couple of doors will be $3 $4 $5 and we're actually looking as we look at the multi price point to expand that even more.
The interesting thing is when a frozen food item goes into the basket.
The basket actually gets larger.
So your point about driving traffic driving tranche transactions is spot on.
The other interesting thing when we went to $3 $4 and $5.
That allowed us to offer a family serving versus at a dollar and a quarter, where it's just a single serve so again much more appealing.
Two the actual to the consumer.
The other thing John is the fact that we went to multiple price points allowed us to put ice back into stores and ice is always a big seller. When we were locked in on the Dol or we had to take it out and we went to a larger bag seven pounds took it to $2 and again, we're back in the ice business.
I also agree.
What will happen is we will keep growing sales and allow us to leverage our SG&A down in the stores.
And then I also want you to think about the fact as we roll the roto cards out.
That will be delivering to the dollar tree stores. It knows also so all of that time that it takes to unload the truck will be invested in putting more multi price point items out on the shelves.
Yeah.
Okay. Thank you.
Thanks, John .
Thank you next question is coming from Paul the juice from Citi. Your line is now live.
Good morning, Thanks, guys.
I'm curious if you could talk about the monthly trends for for each segment also curious to hear about your performance in urban versus suburban and rural locations and anything that you would say in terms of the competitive landscape that you see changing out there from a pricing perspective. Thanks.
Yeah, Great question as I look at the flow across both banners through the quarter. It was pretty consistent all the way through we started off strong and it remains strong through the balance of the quarter.
There is the in terms of performance Yeah, I think it's pretty even but I will make this operate observation is.
It appears that the trade down from a higher income customer, it's coming more in the urban environment than it's been in the rural environment. So that's a it's an interesting spin but.
It's pretty even all the way across our in regards to the competitive environment out there in regards to pricing the way I see it it's very rational right now.
Nothing significant that's going on I would say the add collateral is basically the same it's always been a everybody's kind of Ah Ah I think everybody's on the same playing field right now.
Thank you next question is coming from Matthew Boss from Jpmorgan. Your line is now live.
Good morning, Matt.
Good morning, Rick great. Thanks.
Maybe a two part question Rick at the dollar tree banner could you elaborate on the traffic trends it.
It seems like that's the real positive progression here any change in momentum that you've seen in August and maybe just speak to market share trends that youre seeing by category at dollar tree and then Jeff on the expense front I guess is there a way to think about the progression of the foundational investments that you've been putting in place.
We think maybe beyond this year it seems like store standards and in wages, maybe two of the more stickier initiatives or maybe just asked differently.
What do you see as the comp that we need to leverage fixed costs, maybe next year and are in the model.
So I'll take the first part Jeff a massive traffic Ah is steadily increasing in dollar tree, our traffic was up 9% in quarter two.
Really really pleased with that your other question is discretionary was still up.
And in our dollar tree you can was up three 9%.
Consumables, though were up over 11%, which is our way right and remember consumables drive that traffic and we have by unlocking that price point and as we continue to unlock the price point is going to open up more opportunities for us to bring in really powerful value items.
So pleased with customer traffic in fact I'll throw this in customer traffic was up three 4% on the family dollar side. So we are we are seeing movement now with the customer base.
And as it relates to the the investments that we're making are there really to fall. So you had expense.
Investments as well as Capex as we think about the expense our investments I think you're spot on with respect to the wage.
And store standard elements. So there's a few elements that also transcend into our supply chain as we need to increase the improve the standards and our D. CS.
We're right on track with respect to how we thought they would play out over the course of this year and then as we think about going into next year from a capex perspective, you kind of layer on top of that then the work that we're gonna be doing with our roto carb rollout and what they need to do.
Trailers and lift gates and the actual.
Parts and as well as what we're gonna be doing from an I T perspective.
And adding additional capabilities with systems.
As you think about.
What's the level of comp that we're going to need to deliver there's going to be a number of factors that when you have to take into account and quite honestly. We are working through that right now as we look out one is gonna be what's gonna be rate of inflation as it relates to our <unk> of cost in the marketplace, especially in.
And labor, which is one of our more significant areas.
The other piece of it of course, there's going to be and sales mix. The comp you need a little higher level of comp when your sales mix is more.
Weighted towards consumables versus discretionary we believe over time, we're going to see.
This.
Mix.
Balance out and then be not as significant a shift on a year over year basis, what youre seeing right now once again, that's over the long term, we have talked a little bit about this at the Investor day, where we think that.
Both family dollar and dollar tree will kind of average out over the period of time, so I'm not going to give you a comp number that we need to.
Meet in order to leverage expenses at this point in time, because there's a number of factors that we need to.
I'll give a little more thought too and you know quite honestly, depending on what the economy does.
Thank you as a reminder, please ask one question one follow up then return to the queue. Our next question is coming from Simeon Gutman from Morgan Stanley . Your line is now live.
Good morning, guys.
Good morning wanted to just clarify and then ask a follow up on one the higher expenses this quarter parsing.
Parsing it out between inflationary pressures being a little bit higher or are you spending more.
And then plant or than you thought and then bigger picture the $10 in 2026.
Long way to get there gives you flexibility I don't think you've said, it's ratable in any way it may not be linear.
The the what happened with expenses show that you are not afraid to spend back into the business. So curious where you're tracking I'm sure you have your own plan and where 24 I know it's an early look may land in terms of that run rate on expenses.
Great question.
And I'm glad that.
I got this question finally, one one of the things that if you take a look at this.
This quarter and the pace that we're on we are right on our outlook than we had anticipated with respect to the level of spend.
And the transformation.
And we are actually leveraging against our original forecast.
Given this strong sales performance. This is also taking into account once again. Unfortunately this accrual.
Accrual adjustment that we just needed to make so as we move forward, we continue to be disciplined in our spend we look as.
Rick has said in some situations as an opportunity to pull forward a few items. If we believe that we're gonna be able to get the returns that much sooner.
But the rate at which we are.
Investing is according to our original outlook that we work.
We said at the beginning of this year.
There are some modest inflationary components as you can imagine predominantly in utilities.
And it is as a result of the heat though.
That we're seeing on a national basis. The other area, we're seeing a little more inflation would be and fuel particular in diesel fuel and we've seen that here most recently.
And as reflected in both of these items are reflected in our guidance for the back half of this year.
Thank you. Our next question today is coming from Kelly Bania from BMO capital markets. Your line is that life.
Good morning Kelly.
Good morning, Thanks for taking our questions.
I just wanted to go back to the shrink and mix and just be clear about the magnitude.
That is maybe coming in different or the same versus your expectations and also how those two factors are planned for the second half and also just related to the shrink what kind of margin investment at all do you see necessary to combat the shrink headwind.
And is that in your long term plan.
Okay great. Thank.
Thank you Kelly there, there's a few things here.
As we think about shrink and mix. It is definitely advanced a little further than what we had anticipated in our guidance, we had given last quarter.
Having said that we believe that there are other more favorable items that are helping to offset against that.
One in our sales momentum.
Two we are seeing additional freight opportunity as it relates from from an ocean perspective.
But as it relates to shrink and mix. We had mentioned earlier that we had about 55 cents and total expected.
As an adjustment to our <unk> com are to R. R.
Our earnings and that was gonna be spread pretty evenly between shrink and mix of that 55 cents about 15 cents of that was actually.
<unk>.
Incurred in the first quarter. So that remains that gives you a 40 cents for the back.
For Q2 through Q4.
In Q2.
Against our original forecast.
Shrink and mix advanced another eight cents on us.
All of this is included in our forecast and as we're thinking about the back half to the extent that there is any further acceleration how we're thinking about offsetting that through other margin opportunities.
As we think about.
Once again from additional freight favorability and or other options that we have through the P&L.
So and I'd like to add one thing if I can Jeff.
We are now taking a very defensive approach to shrink and it's taken us a quarter, but we have several new shrink formats that will be introduced in the back half of the year and it goes everything for moving certain S. Skus do behind the check stand it has to do.
With some cases being locked up and even to the point, where we have some stores that can't keep a certain S. SKU on the shelf just discontinuing the item.
So we have a lot of things in the works that's gonna roll forward.
You had a question about the mix.
Is that correct.
And what's in the back half assumption.
She's asking specifically, what's in the back half assumption, which I have not provided yeah. Okay fair enough. So then let me.
What I gave was Uh huh.
Widespread cancer, if if you think about the balance of the year.
In Q3.
We've said and really.
Really in the back half the year Q3 sales mix and shrink continues to be a headwind for us. We've we've taken approximately 70% to 75% of our stores and our inventories. So it will be through the balance most of those stores by the end of the third quarter. So sell.
Our mix and shrink continues to be a little bit of a headwind for us.
Great as far as diesel fuel continues to be a little bit of a headwind for us and then once again I said from utilities and this heap down but this would be a little bit of a headwind for us offsetting that is gonna be certain tailwind. We've got sales momentum that we are projecting.
We know that we believe that we have opportunities and additional freight from an ocean.
Freight perspective, and also we are starting to lap many of the SG&A investments that we started last year.
As you go further into the back half of the year.
We have less impact of sales mix and shrink because once again, we've taken all of our inventory.
Fourth quarter is a much stronger quarter for us from a seasonal perspective and its focus on discretionary.
And then the tailwind in the back half or in the fourth quarter. Once again, we have the 50 <unk> week, which will make an adjustment for continued sales momentum in our projection Ocean freight and then once again, we can further along and lapping those SG&A investments that we.
Started in the back half of last year, so as we progress through the quarters.
The fourth quarter, we believe will be one of our strongest quarters, because we have less headwinds from shrink and mix as well as the sales momentum and continued organic freight opportunity.
Yeah.
Thank you. Your next question is coming from Chuck Grom from Gordon Haskett. Your line is now live.
Hey, good morning, John .
More of a couple months ago I'm. Just my question is on family dollar I Wonder if you could speak to the progress on rolling out the higher shelf Heights.
Across the chain and then just one for Jeff on the on the seventh sense, which which banner was was that in or was that in the corporate line.
Yeah in regards to the 78 inch profile, we hope to have that complete towards the end of the year.
I would say, we're probably maybe 40 or 50% done.
While we're doing the family dollar side, we're also going to do the dollar tree side.
So we're.
We're making progress on it and the.
The H two 2.5 Remodels all of those have the new shelf profiling.
And by the way the shelf profile raise allows us to add more cooler doors and refrigerated.
Yes, and on the general liability claims it was across both banners and the best way to think about it it was pretty evenly split.
Thank you we've reached end of our question and answer session.
I'd like to turn the floor back over to management for any further or closing comments.
No. Thank you all for your time.
And look forward to talking to you soon.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.
Okay.