Q3 2023 Dollar Tree Inc Earnings Call
Hello, and welcome to the dollar tree third quarter 2023 earnings call and webcast if.
If anyone should require operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation. We ask you. Please limit yourselves to one question can you maybe your place in the question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure.
Ill turn the conference over to 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 third quarter results with me today are dollar Tree's, chairman and CEO, Rick Dreiling and CFO, Jeff Davis.
Before we begin I would like to remind everyone that <unk>.
Some of the remarks that we will make today about the company's expectations plans and future prospects 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 contemplate.
By our forward looking statements for.
For information on the risks and uncertainties that could affect our actual results. Please see the risk factors business and managements discussion and analysis of financial conditions and results of operations sections in our annual report on Form 10-K filed on March 10th 2023, our Form 10-Q for.
The most recently ended fiscal quarter.
Our 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, except 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 results.
Yes, otherwise stated we will refer to our financial results on a GAAP basis.
Additionally, unless otherwise stated all comparisons discussed today are for the third quarter of fiscal 2023 and are against the same period a year ago. 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.
Given the number of callers who would like to participate in today's session. We ask that you limit yourself to one question and now I'd like to turn the call over to Rick.
Thanks, Bob I'd like to welcome everyone joining us on the call today in brief thanks to the dedication and hard work of our teams and continued execution towards our business transformation third quarter results were well within our expected range.
In a challenging retail environment, where the accumulating pressures of inflation reduced government benefits and depleted savings had negatively affected lower income consumers, our topline performance outpaced most of our peers.
We accomplished this by taking market share in both segments, which we believe reflects the initial impact of our investments and transformation initiatives.
Despite family dollar softer comps and five cents per share of unexpected costs from the previously announced voluntary recall of OTC and other products, we delivered 97 cents of EPS.
Our sales momentum continues to be mostly traffic driven as we attract new customers and gain both unit and dollar market share.
In the last 12 months, we've added 4.3 million new customers at dollar tree and 2.3 million new customers at family dollar Importantly, most of these first time customers come back to shop with us multiple times after their first visit.
In fact, our loyal customers are now the third largest retail customer base in the United States.
As importantly, dollar trees, attracting customers from a broader range of income levels most of our new customers over the past year have household incomes over $125000 and this income demographic, which is significant contributor.
To dollar trees quarter three comp growth.
At family dollar our price value perception remains strong after last year's price investments, which we cycled in July.
That said family dollar fell short of our quarter three comp expectations Sim.
Similar to what other retailers have reported we experienced softening trends throughout the quarter, particularly in October.
As lower income consumers responded to the accumulated impact of inflation and reduced government benefits. We saw a notable pullback in spending, particularly in higher margin discretionary categories.
I will now review some of our third quarter highlights.
For the third quarter on a consolidated basis, we delivered a five 4% increase in our net sales to $7.3 billion.
This was driven by comp growth of 3.9% with traffic up four 7% and average ticket down a little less than 1%.
Operating income came in at $301.7 million.
Which resulted in EPS of 97 cents, including the negative five say an impact from the OTC recall in the dollar tree segment, our comp was up 5.4% with traffic increasing by 7% and average ticket decreasing by one point.
5%.
We are especially pleased with these results as they come on top of an eight 6% comp last year.
Our consumable comp was up 11.1% and discretionary was up 1.1%.
We believe the consumable strength at dollar tree this quarter as well as our strong multi year discretionary comp shows customers are embracing our compelling value proposition in this strange economic environment.
According to Nielsen dollar tree gained an impressive 30 basis points of consumables market share in the third quarter as our unit volume grew 6% while market unit volume declined.
In the family dollar segment, our comp was up 2% with traffic, increasing one 4% and average ticket increasing 0.7%.
Our consumable comp was especially strong at 6.2%, while discretionary was down meaningfully at 12.5%, particularly in categories like home decor electronics and toys in.
In our view these trends underscore how lower income households are under increasing financial stress and directing their spending towards needs based goods, while traffic and ticket were both positive for the quarter result did soften substantially as we move through the quarter with.
Average ticket turning negative in October as our customers pulled back and we realize the adverse impact of the O T C recall.
Even with these external challenges family dollar grew market share in consumables with both unit and dollar growth exceeding the market by wide margins.
Although our low prices enabled us to operate from a position of strength in consumables, our lower income customers at family dollar had been especially pressured by reductions in government snap benefits nature.
Nationwide third quarter snap benefits were down 23% on a year over year basis, which was much more than the 5% reduction in quarter, one or the 16% reduction in quarter two tie.
Timing wise the month by month deceleration in our quarter three comps matched the progressive reductions in national snap payments throughout the quarter.
In addition to pressure from lower snap payments family Dollar's comps were negatively affected by lower tax refunds this year.
That said I believe that the wide range of growth initiatives, we have in place will help us maintain our momentum relative to the competition.
As a value retailer, we're uniquely positioned to meet customers' needs in a challenging economic environment.
We remain focused on the factors that we can control and we'll continue to navigate as best we can around those that we don't now let me take a few minutes to update you on our transformation journey.
Our merchandising I T and supply chain initiatives are on time and on budget and we are pleased with our progress to date.
At dollar tree, we're ahead of schedule on our multi price journey, our dollar tree plus assortment is now available in 4500 stores and we are on track to finish the year with more than 4900.
Our dollar tree frozen and refrigerated Assortments are now in 6500 stores significantly ahead of our original year end target of 5500 cuts.
Customers are clearly responding to our expanded multi price assortment as our research shows us that 17% of U S households have purchased a multi price product from a dollar tree store at least once in the past 12 months importantly, these customers are adding.
Multi price products on top of their traditional baskets.
For example in quarter three.
The average multi price basket included 2.3, multi priced items and 11.6 traditional dollar twenty-five items.
At family dollar, we completed our plan of Graham resets by November as scheduled improving and expanding our product assortment, while increasing our shelf profile and merchandising to seven to eight inches across the portfolio.
We're on track to renovate more than 1000 family dollar stores by year end.
We have now upgraded 1600 family dollar stores to our H 2.5 rural and extra small box formats in quarter three private brand penetration at family dollar reached 14% a quarter ahead of schedule and we are on pace to hit our 20% target by <unk>.
<unk> 20th twenty-six. We're also on track to add over 70, New S. K, you're used to our family wellness product line and more than 100, new private brand S. K use in total by the end of December within that same timeframe. We also expect to complete our conversion of 300 control brands the private brands.
In real estate, we opened 197, new stores in quarter, three and we are on track to meet our target of 600 to 650 new stores this year.
In supply chain, we are preparing to implement our streamlined delivery process for stores serviced by our Matthews North Carolina distribution center with Roto carts and liftgate trailers, starting next month.
We have been testing, our roto cards and the feedback has been extremely positive.
We remain on schedule for all of our distribution centers to be using Rota cards by the end of 2027.
Across our teams the investments we've made in our people, including increased wages in key markets simplified work at the store level and increased communications throughout the company are driving meaningful improvements in store turnover and associate satisfaction.
Additionally, as we prepared for our busiest season of the year I am proud to report that our annual National hiring day in mid October was a huge success. We hired nearly 14000 part time associates to work in our stores for the current holiday season, and all time record for this event.
While we still have a lot of work to do in this transformational journey I am pleased with what we've accomplished to date, we are focused on our plans to accelerate sales and grow earnings and I remain confident in our ability to execute this ambitious undertaking.
That said this journey also needs to be dynamic and adapt to changing market conditions and our learnings along the way.
We believe being thoughtful about our store portfolio will help enhance our results.
To maximize value creation, we need to periodically reevaluate our portfolio in terms of current market conditions individual store performance and overall portfolio considerations.
To this end we have initiated a comprehensive review of our family dollar portfolio to address underperforming stores that are not aligned with our transformative vision for the company.
This will involve among other things identifying stores as candidates for closure re banner ing or relocation.
With the goal of ensuring that each asset under the family dollar banner is delivering its full value for our shareholders on a sustainable basis.
I'm a strong believer in the family dollar brand and what it means to our customers and associates in thousands of communities across the country.
Going forward, we need to ensure that the family dollar portfolio is well positioned for success and meets the financial and operating objectives of our organization and the expectations of our valued customers and associates. We believe that this action will fortify our base.
Strengthen our brand and allow family dollar to achieve its full growth potential.
Jeff will now review, our financial results and outlook for the remainder of the year.
Thank you Rick and good morning, everyone.
In the third quarter, our dollar tree and family dollar segments, both generated higher levels of customer traffic unit volume and increased market share.
Overall regenerated, 5% more gross profit dollars in the third quarter than we did last year as consumers continue to respond positively to our growth initiatives.
Consistent with prior quarter trends sales mix continued to shift towards consumables. This trend was more pronounced at family dollar while our third quarter consumables mix reached an all time high of 82%.
Looking at the business on a consolidated basis.
Net sales increased 5.4% to seven $3 billion operating income declined 29% to $301.7 million.
Operating margin compressed 140 basis points, which was a substantial trend improvement versus the first two quarters of the year.
The contraction in Q3 operating margin was driven by a 15 basis point decrease in gross margin and a 125 basis point increase in SG&A rate.
Gross margin contracted primarily from higher shrink unfavorable product mix increased distribution cost and markdowns from the OTC recall.
This was partially offset by lower freight cost while still elevated across both banners shrink results were mostly in line with our expectations. We have now completed physical inventory checks across more than 90% of our stores with a balanced set for completion in January.
SG&A expenses expanded primarily from ongoing labor investments in our stores I T costs depreciation and facility costs.
Our effective tax rate was 21, 8% versus 23.4%.
Our tax rate was favorable versus expectations as higher work opportunity tax credits and lower net state taxes were partially offset by higher non deductible expenses.
Net income was $212 million and diluted EPS was <unk> 97 cents versus $1.20.
The net impact of the OTC recall was approximately five cents per share.
At the business segment level.
Dollar trees net sales increased by six 6% to $4 billion.
Operating income declined three 4% to $482 $7 million.
And operating margin compress approximately 125 basis points driven by a 55 basis point decrease in gross margin and a 70 basis point increase in SG&A rate.
Gross margin contracted primarily from higher product costs distribution center cost and shrink these.
These were partially offset by lower freight and sales leverage and occupancy cost.
SG&A expenses expanded principally from store labor investments minimum wage increases and facility costs. These were partially offset by sales leverage.
Family dollars net sales increased by three 9% to $3 $3 billion.
Operating income declined $47 $9 million to a loss of $66 $3 million.
Operating margin compressed 140 basis points on a 20 basis point increase in gross margin and a 160 basis point increase in SG&A rate.
Gross margin increased primarily from lower freight.
Partially offset by higher shrink.
Markdowns related to the OTC recall and sales mix.
SG&A expenses increased primarily from store labor investments minimum wage increases facility costs costs related to the OTC recall and depreciation.
Moving onto the balance sheet and free cash flow.
As a reminder, my comments reflect balance sheet comparisons between Q3 2023 in Q3 2022 <unk>.
Inventory decreased by 2.5%.
As we worked through our shipments of seasonal imports, we expect a meaningful improvement in our inventory position by year end.
Third quarter capital expenditures.
Were $541.4 million versus $391.2 million.
Reflecting elevated investments in new store openings renovations supply chain and I T.
Free cash flow improved $142 $1 million versus the third quarter last year.
This improvement comes despite a challenging macro occam marmon and the accelerated investments to support our multi year growth strategy.
For the nine months of 'twenty twenty-three free cash flow improved $299 $1 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 third quarter, we repurchased approximately 2.2 million shares for $252 $3 million, including applicable excise tax.
At quarter end, we had 1.35 billion remaining under our share repurchase authorization.
Cash and cash equivalents totaled $444.6 million compared to $439 million.
You'll recall last quarter, we announced our new commercial paper program as an additional source of liquidity to manage our working capital needs.
At quarter end, we had $230 million outstanding under this program during the third quarter. We also implemented a new supply chain Finance program.
Participation in this program is voluntary for our suppliers and provides them with additional flexibility to finance payments due from dollar tree.
This process will be managed by a third party financial institution.
At quarter end, our leverage as defined under our revolving credit agreement was 2.53 times.
Now, let me provide some perspective into our sales and EPS expectations for the fourth quarter and its impact on our full year outlook.
Our outlook takes into consideration the following factors and expectations.
Consistent with our prior expectations and the patterns, we have seen throughout the year, we expect shrink trends will remain unfavorable in the fourth quarter.
Family dollar comps are expected to remain soft, reflecting the unfavorable macro environment for low income households continued discretionary weakness and elevated promotional activity in the market.
On the plus side, we expect continued strength at the dollar tree banner has.
As consumers embrace our compelling value proposition and multi price strategy. In addition to incremental freight savings.
With that background, we expect net sales for the fourth quarter will be in the range of $8 6 billion to $8 8 billion.
Based on low single digit increase in comp store sales for the enterprise.
Supported by a mid single digit increase at dollar tree.
And a minus one to plus 1% comp at family dollar.
As a reminder, last year's family dollar comps accelerated meaningfully throughout the year, most notably in the back half as we began our price and labor investments and launch our transformation initiatives.
Our family dollar comp results for Q3 and outlook for Q4 reflect these tougher comparisons.
We estimate fourth quarter diluted EPS will be in the range of $2.58 to $2.78.
For the fiscal year, which includes a 50 <unk> week, we expect sales in the range of $35 billion to $30 $7 billion driven by a mid single digit increase in comp store sales at the enterprise level supported by mid single digit comp at dollar tree and a.
Low single digit comp at family dollar.
With respect to EPS, we believe that higher sales at dollar tree incremental savings in freight and proactive expense controls will allow us to offset lower revenue expectations at family dollar.
We are tightening our full year GAAP EPS outlook to a range of $5.81 to $6 and one in.
Including the 12 cent legal reserve, we took in the first quarter.
We still expect selling square footage to grow by 3% to three 5% for the year and new store growth to be back end weighted.
Other considerations in our 2023 outlook include the following.
No incremental share repurchases depreciation and amortization should be in the range of $840 million to $845 million.
Net interest expense should be approximately $30 million for the fourth quarter were approximately 110 million for the full year.
We are assuming an effective tax rate of approximately 24% for the fourth quarter and approximately 23, 5% for the full year.
We expect $218 4 million diluted shares for the fourth quarter and 220 million diluted shares for the full year.
We expect capital expenditures will total approximately $2 billion with approximately 40% allocated towards maintenance capex and the balance towards growth initiatives.
Finally.
Our Q4 and full year outlook does not include any potential impact from the optimization review of our family dollar portfolio that Rick outlined in his remarks, we expect the review process will take several months and we will update you on our progress no later than our Q4 call in March.
Now I'll turn the call back over to Rick for closing remarks.
Thank you Jeff similar to other retailers you've heard from this earnings season, we are seeing more macro pressures than we did earlier in the year.
Particularly among our lower income consumers.
Nonetheless, I am encouraged by our market share momentum and am confident in our outlook for the balance of the year.
Across our enterprise, we are making good progress on our transformation initiatives as I've said before we benchmark our operating performance on growing traffic units and sales per square foot.
All three of these metrics are heading in the right direction.
With the steps, we're taking to optimize our family dollar portfolio, we want to be better positioned to meet our financial and operating objectives of our organization and the expectations of our valued customers and associates.
Relative to our competition, we want to operate from a position of strength at both banners I look forward to updating you on our continued progress in the months ahead.
And since we're in the midst of the important holiday season I also want to take this opportunity to thank our more than 200000 associates for their dedication in support of our continued growth as an organization.
Operator with that 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, if he'd like to remove yourself from the queue. Please press star two as a reminder, we please ask you to limit yourselves to one question. Our first question is coming from Michael Lasser from UBS. Your line is now live.
Good morning. Thank you so much for taking my question. It's a two part question number one.
Is given the economic environment that you're facing seems to be different than what you expected. When you offered your long term guidance.
Earlier this summer how does that influence your thinking about your ability to achieve $10 of earnings.
2026, if the economic environment that is current to date remains the case for the next few years.
And the second point is.
The question is there's a perception that you're going to earn call. It round six bucks. This year you get a dollar a freight benefit next year.
And that.
And that would generate $7 of earnings what would stand in the way of you not realizing that thank you.
I'm going to let Jeff handle that.
Michael and I appreciate your question.
The first part of your question regarding the longer term outlook.
If the economic environment. We're in today, we believe that we are managing through you see the dollar tree and family dollar are continuing to take market share they are doing well across our consumables.
We believe that many of the actions that we're still.
Sort of developing and will be put into action as we go through the fourth quarter into next year will help improve our top line, especially with a customer who is.
Looking for additional value opportunities.
We're early in the transformation, we believe that the actions we're taking that we feel strongly we will continue to move us forward to arm our longer term outlook. There's a lot that's going to happen between now and 2026 and Israeli isn't a real crystal ball there remain resolute in our outlook.
As it relates to 2024.
I think that the way you're thinking about this from a standpoint on a sort of pro forma no growth no incremental basis, yes, you have $7 of EPS. When you take all the puts and takes between.
Our forecast for this year you remember you got a backup to the 50 <unk> week, which is about 30 cents and that but yeah. We feel as if that's a good starting point as you think about our 2024 outlook we remain.
Very confident in our ability to pick up the additional dollar in freight and Etfs are there may be some additional upside to that based upon what we're currently trending.
And the actions that we're taking and the returns that we believe it will get from the initiatives that we've started this year and we will continue to develop as we move forward that that's a good starting point for you.
And Michael let me add a little more thoughts on getting to 2026% number.
We remain very bullish on that.
And I think as we look into 2024, what's important is the a number of initiatives that we've gotten done in just one year are really starting to gain traction and let's don't lose sight of the fact why.
The fact that discretion is discretionary sales are softer than we all want our consumable sales are excellent and we were responding to the needs of the consumer and when we have the items they want they're going to come into the store and see the incremental items the incremental price.
Points on the dollar tree side, they're going to see the new shelf profile and they are going to see the fact that we're more relevant.
And that's what gives me great confidence as we look into 'twenty four and beyond.
Thank you. Our next question today is coming from Simeon Gutman from Morgan Stanley. Your line is now live.
Hey, good morning, everyone.
I'm wondering if it's a good morning.
It's a little follow up to the prior question and then maybe a slight <unk>.
Second part.
If we take again, the one dollar and freight should should we think about next year again without talking about real guidance. The core business should grow plus we get freight or where youre not endorsing that the core business necessarily grows we get freight for sure and then just the second part of it is on family dollar.
Can you remind us if the crux of generating higher margins as sales productivity.
And then what what's going to be the step change and when should that occur.
Thanks.
And we'll take the first part you Jacob you take the freight and I'll take the second one very good.
I think the way I was trying to respond to Michael's point from a standpoint of what's the starting point for.
FY 'twenty four.
As he was kind of putting together the components.
So once again it seems.
If he was looking at.
Assuming a no growth no incremental investment year, you would be starting off with a point that would be roughly.
$6 $87 of EPS.
Assuming where we believe we'll end this year plus the additional dollar afraid and then once again the other puts and takes around the 50, <unk> week, which comes off as well as some of those discrete items. We had this year as it relates to west Memphis, OTC and general liability.
But we believe that we will have the opportunity to grow our business from there, we're not giving guidance for 2024 as of yet but.
I think that people are focused on the right components that gets you to a starting point and then what your assumptions are.
It's fun.
<unk> taken our initiatives will continue to take hold and grow from there.
And then in regards to family dollar in.
When we should start to see the incremental margin.
I think as I reflect on where we're at right now.
Do you think about the incremental sku's of which the bulk of our OTC and HBA, which all carry higher margin rates now they tend to be a little more discretionary do you think about the fact that now private label.
We've already reached our 2014% which carries.
Massive incremental margin all of that stuff is going to be in place as we roll in to 2024, which again gives me a lot of comfort.
On our family dollar is going to perform next year.
There is no doubt there is pressure on that consumer.
But I've always said the lower income consumer has the ability to figure it out and we are offering a better value proposition in family dollar than it has ever had and I'm very very comfortable with the way the box looks the way its presented and how the consumer.
Responding.
And I would add that when we enter quarter three.
First period of the quarter, our comps were very good in family dollar and we watched them a road through the period through the quarter. So again, we entered it from a very strong position.
Thank you next question is coming from Paul <unk> from Citi. Your line is now live.
Okay. Thanks, guys Hi, there can you talk about your family dollar comp assumption for Q. Just how are you thinking about how that breaks down from a traffic versus ticket perspective, and then within ticket AUR versus U P. T and I'm curious if you could make any comments about your inflation assumptions for <unk>.
<unk> and 'twenty four.
Paul I guess the way the way we think about it.
We really.
The balance of.
The comp is really been between ticket and.
And traffic it's been pretty consistent in its makeup it's been around 50 50.
What we've seen here more recently is it has dropped off as that customer has been a little more challenged.
We're continuing to see that going into the fall.
Fourth quarter versus our guidance of down one to plus one.
We're not prepared to start getting into AUR and other.
Dissection of it but as we think about traffic and ticket it's going to when you think we're going to have.
Traffic, probably driving more of the comp.
Offset by some ticket pressure and Paul I'd like to add to that that I. We look we are intently focused on three key metrics transaction traffic, whether it wherever you want to call it unit growth and sales per square footage.
A square foot.
And those are the things that we want to report on because I believe that drives that drives comp sales and ultimately growth in the chain.
Thank you next question is coming from Edward Kelly from Wells Fargo. Your line is now live.
Good morning, Ed.
Hi, guys good morning.
Rick I wanted to ask you I guess the two part question around around dollar tree core dollar tree business.
You continue to rollout new price points, maybe just an update on.
Where do you think the evolution of that is going over time, and how we should think about the timing.
The rollout of those price points and then you know.
That concept generally.
It does look like it's developing into a very formidable traditional dollar store competitor I'm curious as to where you think you're gaining share from is there any impact.
And family dollar given what is happening there and how is the evolution of the concept.
Impacting the way you think about growth both number of units and where those units may make out.
Great question.
Let's start with the price points are.
We have.
Rick Mcneely and his team have done an outstanding job of introducing new price points and you have to remember Ed we have to buy these things almost a year in advance in order to get them into the stores and we're starting to see them arrive.
<unk> actually done a test on Halloween and a number of stores with multi price candy M.
And we're really really excited with what happened with that now.
Now, it's really important that and I've said this frequently I don't want anyone to think there's going to be 100 different price points in that store, we're going to hit our core price point is still a dollar in the quarter.
And what we're working on what is the right amount and light number of price points.
And what.
What I can tell you is the consumer is spirit is when we broke the $1.25.
A year ago.
I have to tell you that that barrier was broken and now the consumer is very receptive to what's going on and when we add an incremental price point, Rick and his team we're not adding a dollar in the quarter item, that's a little bit bigger or a little different at $2, we're adding a dip.
For an item that has even more value. So there is no S. K you overlap, which makes this a little more harder to get executed now we've already done the work on what it's going to take to get the items into the store get a marked price properly.
40% of our Skus are coming from overseas and they're gonna add the price point right on the product. So a lot of great work has been done and I think that's some of what we're seeing as the with a multi price point, we've been able to make the brand more relevant to more people.
And and I know, it's hard, but the consumable side and the way the team reacted to that.
Thank is also proof positive that we're attracting a different customer segment now in regards to future store growth.
We are weighing right now what is the proper mix between family dollar and dollar trees, obviously the dollar trees.
I'm very profitable very fast and it appears that we broaden the demographic appeal of that Brad.
And I've said this.
A well run dollar tree is a pretty powerful retail format and it's a format that a lot of people would shop in and the fact that we're getting our arms around the price points. The fact that we're getting our arms around our store standards is putting us in a position where that brand might be we might be able to go to different areas that we've historically stayed away.
Yep.
In regards to is it affecting family dollar I would look at you and say those are two different customer segments. The first thing we did when we got together as a team is realized that to go to market strategies for both brands are totally different.
One is the thrill of the treasure Hunt in and out if you run out I should've bought more versus family dollar, which is traditional consumable retailing, where theres an expectation of what has to be in that store and it's got to be there every time I come in to get it.
And then just to add in our prepared comments, we had mentioned the fact that a lot of the growth that's happening in dollar tree is actually coming from that higher income customer, while we're attracting four 3 million new customers on a year over year basis.
A lot of those customers are in that income demographic of $125000 or greater and we're capturing that that basket.
Yeah.
Thank you next question today is coming from John <unk> from Guggenheim. Your line is now live.
Good morning, John.
Two quick things or maybe the first one is not as quick but on your ft overview.
Can you talk philosophically right, how youre going to attack that.
Because on the one hand, you want to dedicate more resources to the stores that have the most potential.
But you also don't want to cut back too far from a scaling red or deleverage perspective, So maybe talk about that the opportunity to convert a lot of those to dollar tree does that exist and then small follow up is just remind.
Remind us when do you think you'll get to eight cooler doors at three to $5 price point at dollar tree is that you know 10 years out a year out three years out when is that.
Well, let's go with the easy one the dollar tree cooler doors, we should have done within the next couple of years.
Now the FPL review.
You know, we started off with all of our initiatives and the idea being that we get everything in place and see what stores responded and what doesn't and what I do want on this exercise John is not everyone to get ahead of me because I do think this is a very heavy.
The thing to do and it's a timing thing to do.
There will be some stores will relocate maybe some stores will close maybe some stores will re banner, but I do not have any of that information at this stage of the game are I've always prided myself on being transparent and all I'm trying to do is tell the world. We're taking a look at it and I do think it's prudent and I do.
I don't want anyone to misconstrue that are not totally behind family dollar because I am and I don't want anyone to think that that doesn't mean, we're not going to grow family dollar cause I'm not saying that at all it's simply a matter of reallocating.
So where we think we can be more productive.
Thank you. Your next question is coming from Matthew Boss from JP Morgan. Your line is not a lot.
Good morning, Matt.
Good morning, Rick.
So couple of questions from my side, maybe first Rick on mid single digit comps at the dollar tree banner well what do you think is the best breakdown B.
This year to think about between traffic and ticket at family dollar Rick what what was the comp in October have you seen any change in November and then Jeff could you just elaborate on what you've seen change in the promotional landscape.
Yeah, I mean, let me, let's start with the promotional landscape.
And I'll take that Jeff if that's okay, unless you put the color around it.
I think the promotional landscape I have not seen anything irrational at this stage of the game.
Look at you and tell you that we are seeing discretionary items being promoted which I think is more a reflex against people worried about the inventory they have on hand.
I will tell you Thanksgiving being an old time grocer historically, you get the right price on Turkey, then you make your money on all the grocery items around it we saw a lot of incredibly well price grocery items this year.
Coming out of the big box in the grocery channel, which is a little contrary.
And there has been a elevated activity on CST basically 12 packs.
But other than that there hasnt been a lot out there.
And then on.
The first question.
Question regarding the family dollar.
Comps, yes, the family dollar comps during the course of the quarter or are they softened as we went through the quarter. We started off with a nice pace October was the.
The most challenged a month of the quarter and I think you'll see that that was across all retail we were essentially flat in that particular month and.
Our guidance for Q4 was reflecting the fact that that has continued to soften for us and.
That's the guidance of down one to plus one four for the entire quarter and the one thing I'd add to that Matt.
You know why do we think we saw things soften in October I am knocking on wood here. Thank God, we had our initiatives in place because why it softened it could've been a lot worse and I am very pleased how we got ourselves through that quarter.
Thank you. Your next question is coming from Kate Mcshane from Goldman Sachs. Your line is now live.
Good morning, good morning, Thanks for taking our question.
We wanted to ask specifically about dollar tree, we know you noted that.
You saw a broader range of income shopping at dollar tree I think contributed to your Q3 comp growth at the higher end, we wondered with regards to the lower end just to what you were seeing specific to the dollar tree banner.
Yeah.
I would say you know I mean, I look at you and say dollar tree has always had a broad appeal and I think what we're seeing what we're really focused on is the fact that we're seeing a trade down into dollar tree, our I would say the customer base is essentially.
The same theres been no erosion.
In the lower income strata, but the growth undoubtedly is coming from the higher income 125000 a year.
No.
As I reflect back on this for dollar tree.
Had a very strong consumable.
Performance, but also you know.
Rather than a 1% comp and discretionary.
And it's still showing growth.
So sizable growth on a year over year basis and discretionary.
The lower end customer lower income customer, we're probably seeing more of their dollar and consumables.
Which is good because were contingent captured units and share there.
The higher income customers supporting us in that discretionary as well as consumable areas with respect to the multi price also so it's a combination of both of those customers is that Thanksgiving is such a strong performance across the dollar tree banner.
Okay.
Thank you next question is coming from Christina <unk> from Deutsche Bank. Your line is now live.
Good morning Kristina.
Good morning, Rick and Jeff. So my question is on family dollar Understandably there was some weakness with the with the low end consumer but how are you planning to address the softer than planned pipeline at family dollar to get it back on track to with mid single digit.
And that is a big part of the profitability inflection. So how do you think about your current pricing position relative to your peers and I know in the second part of that I know, you're not guiding to next year, but philosophically how best to think about the ability of the banner to drive positive units to offset any potential deflation next year.
Inconceivable. Thank you.
Yeah in regards to the top line.
In regards to our pricing position.
So first thing I would say our pricing in family dollar's as good as it's ever been.
And we measure our pricing on a full book basis, and what we call key value items and key value items are the most sensitive items out there.
And we do these checks every month and we do them across multiple multiple channels, so big box as well as small box as well as drug as well as grocery and we're very very comfortable where we're at we're right around right on the Mark.
A 100% in both which means we have price parity.
And I believe Oh boy, we've been in this for a year now.
I do believe the consumer is starting to respond to that and remember we had very powerful consumable growth in quarter three and are in the family dollar brand. It's the consumable side, where that consumer is feeling that pressure and I think you asked me a little bit about diffley.
Asian, I would look at you and say deflation will put us in a position where I think the consumer would be able to afford more discretionary items.
So.
We will take it as it comes and of course, it should help us with our margin at the same time.
Just to add one final point.
With respect to the work that Larry and his team is doing on private brands is something that is really important for us.
The ability to drive greater value for that customer give her other options. This is something that we're really just fully getting implemented here in the fourth quarter going into 2024.
So we believe that as that customer is looking for greater values. They have more options within our private brands.
It's an opportunity for us to improve our margins.
To the extent that there is.
Sort of price deflation, there's opportunity to actually provide even more value as we think about how we assort that particular product line.
Thank you. Your next question today is coming from Chuck Grom from Gordon Haskett. Your line is now live.
Good morning, Chuck.
Good morning, Rick Good morning, Jeff.
On the family dollar store optimization.
Curious how wide of comp and profitability gap exist today across the fleet and then I guess, that's a question more for Jeff on the gross margin line for the fourth quarter, how should we think about that between each banner.
And the trade in and then into 2024 what are the what are the biggest puts and takes to think about thank you.
Yeah, Chuck at the first question I would rather not comment at this stage of the game as the process is underway and we have started it.
And I will disclose more of that as we get when we get into the March call, but let's say this.
Obviously, it's an opportunity for us that we intend to address head on.
And then Chuck is I think your question is around Q4, and as we think about gross margins.
Let me take at dollar tree first.
We would expect our margins to continue to expand and gross margins in the fourth quarter largely driven by additional freight.
The mixed shift a stronger mix of discretionary as you would normally have more seasonally.
The other impact there is that as we had mentioned we've taken approximately 90% of our inventories we have the remaining 10%.
While we don't expect that that remaining 10% to have any different outcomes than we had in the past the impact on the quarter is much less because you're only talking about.
Small portion of your inventories on a much larger portion of your overall performance.
Our.
Taishan is for further gross margin expansion for dollar tree in the in the fourth quarter.
We also believe that that opportunity is there for family dollar also.
For many of the same reasons as it relates to freight less of an impact of shrink on the quarter as well as some opportunities we have within distribution. So we would expect margin expansion gross margin expansion in the fourth quarter also for family dollar.
Thank you. The next question is coming from Scot Ciccarelli from true as Securities. Your line is now live.
Hey, Scott.
Hey, Good morning, this is actually Josh young on for Scott.
On the shrink issue, obviously, it's been a big margin headwind. This year as we think about 'twenty four where do you guys think you are in terms of dealing with it.
You've talked about some of the mitigation efforts there, but curious if you think we're still in the early innings or do you think you are starting to make some substantial progress on dealing with the problem.
Yeah, I would say we're in the early innings, but I do feel we're making we're making headway there.
The deal is.
That we take our physical inventory once a year. So if you make these improvements. These adjustments you still have to wait in order to see them.
See the fruits of your labor.
I can tell you we've eliminated certain skus in certain stores, we put items behind the check stand counter we've moved certain items upfront. So they have a line of sight to the cashier and the important thing.
As we haven't affected our sales and I might also say, we've put in Oh and I forgot to mention this.
And I and tie sweep.
O T C panel, that's basically like sliding doors.
And you move it it doesn't work the counter up but you move that little Dover and you could only pull one item at a time, which prevents a thief from coming in and cleaning out the whole shelf. So.
We think we're going to make progress.
And I don't I don't think we're gonna have to cycle through everything so it's not like it's going to be an overnight change, but I do believe we're moving in the right direction.
Without having to lock product up.
Thank you. Our final question today is coming from Peter Keith from Piper Sandler Your line is now live.
Good morning, Peter.
Hey, good morning, Thanks for squeezing me in I, just wanted to circle back on the deflation theme because that seems to be something that's percolating out for 2020 for Rick you mentioned your customers had a little bit more money, but is it possible that deflation could be negative for the banners.
Thinking about maybe less fill in trips and.
Maybe more competition.
So on the dollar tree side at all it will do is enhance the margin because you have basically the fixed price point so.
So we ended up getting the goods cheaper so Ah I can say that it could be a benefit that might affects the top line a little but it should be a benefit.
The family dollar side, I would look and say is it might affect the top line, but again I could make an argument that should enhance the gross margin line.
Let me also gives us the opportunity for that customer to take those dollars and up.
Our customer today is a limiting our purchases maybe more on consumables lesson discretionary.
The additional disposable income that they would have.
It allows them to pick up an additional discretionary and they didn't have before.
Yeah, and again I'd add it.
If we do have deflation it allows us to invest more in value of the product and actually gave the consumer something a little bit additional.
Thank you we've reached end of our question and answer session I would like to turn the floor back over to management for any further or closing comments.
Hey, Thank you all very much for taking the time and look forward to talking to you soon.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.
Yeah.