Q2 2019 Earnings Call
Good day and welcome to the dollar tree Inc.'s second quarter earnings Conference call.
Today's conference is being recorded.
I would like to turn the conference over to Mr.
Vice President Investor Relations. Please go ahead.
Thank you Kathy good morning, and welcome to our conference call to discuss dollar trees performance for the second fiscal quarter of 2019 participating on today's call will be our president and CEO , Gary Philbin family dollar President Dunkin', but no.
And our CFO Kevin Wampler.
Before we begin I would like to remind everyone that various remarks that we make about future expectations plans and prospects for the company constitute forward looking statements for the purposes of the Safe Harbor provisions under the private Securities Litigation Reform Act of Nike 95.
Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors included in the most recent press release.
Most recent 8-K 10-Q and annual report.
Which are on file with the FCC, we have no obligation to update our forward looking statements and you should not expect us to do so at the end of my prepared remarks, we will open the call to your questions. Please limit your questions to one and one follow up if necessary.
Now I'll turn the call over to Gary Philbin dollar trees, President and Chief Executive Officer.
Thanks, Randy good morning, everyone.
As we reported today that turned around to the family dollar business continues to gain momentum.
Family dollar same store sales increase of 2.4%.
It was the third consecutive quarter of sequential acceleration.
And represented 160 basis point improvement in the two year stack call.
And despite sales headwinds created by the global helium shortage dollar tree segment delivered a same store sales increase of 2.4%.
Well cycling a strong 3.7 increase from the prior year's quarter.
Dollar tree has now delivered 46 consecutive quarters of positive same store sales.
In eight consecutive quarters on a two year stack comps exceeding 6%.
I'm proud of the team's accomplishments.
During the quarter, we successfully consolidated our store support centers and this plan.
Close to our 96 family dollar stores as part of the store optimization efforts.
Additionally, we completed 542 family dollar renovations into the age to format.
Our results for the second quarter included a sales increase of 3.9% to 5.74 billion.
Consolidated same store sales increased 2.4%.
Our GAAP EPS of 76 cents.
Exceeded EUR 64 to 73 cents per share guidance range.
Other highlights for the quarter included completing 542 family dollar age to renovations completing 275 dollar tree snack zones.
Repurchasing 88.4 million of shares during the quarter as part of our share buyback program.
At the end of July we formerly moved all business to the Chesapeake Virginia campus.
This represented the work over the past year to bring all functions and especially our merchant teams together.
Well, we still have associates and the moving process.
We now have one physical location to conduct our business.
Regarding dollar tree sales highlights for the second quarter, the archery get increases in both traffic and ticket.
With traffic slightly outpacing the ticket increase.
Geographically all regions Comped positively.
Cadence of comps through the quarter, all three months were better than 1.5%.
With June being the strongest month.
Archery continues to deliver solid positive comps and the consumables category.
Our discretionary business also comped positive, but was impacted by the global helium shortage, we estimated that our comp was negatively impacted from lost balloon sales.
By approximately 40 basis points.
We expect this helium shortage tried went to continue but to a lesser degree in the back half of the year.
The first half is more impacted with the timing of our biggest balloon holidays Valentines day mothers and fathers day as well in school graduations.
For real estate in the second quarter for both segments. We opened a total of 150, new stores 107 dollar trees 43 family dollars.
We relocated or expanded 17 dollar tree into family dollar stores.
We renovated 542 family dollar stores.
As part of our age to renovation initiative.
And we re Bannered 106 family dollars to dollar tree stores for a total of 817 projects during the quarter.
We also added freezers and coolers into 210 dollar tree stores during the second quarter.
Bringing our total of dollar tree stores with freezers and cores to 5970.
During the quarter, we closed 305 stores nine dollar trees.
And consistent with our previously announced efforts to optimize our real estate portfolio 296 family dollar stores.
We ended the quarter with 15115 stores.
Put out 7306 dollar tree stores and 7809 family dollars.
Last week, we opened up our 24th U.S. distribution Center.
No Kid and moral County, Ohio.
On time on budget.
The 1.2 million square foot facility is creating approximately 400 jobs in central Ohio.
And we will initially be serving dollar tree stores is equipped with the necessary systems to serve both dollar tree and family dollar segments in the future.
I wouldn't call out the partnership and support we received from the state of Ohio.
Borrow county.
And the surrounding communities has been just outstanding.
Before I turn the call over to Duncan to discuss the family dollar business.
I'd like to provide you all an update on tariffs.
We have been operating in you need time to say the least as it relates to terrorists.
As I stated one quarter ago, our merchandising teams have done an outstanding job of mitigating the effects.
25% tariffs imposed under section three or one for Chinese goods.
Included on the list one two and three.
Prior to the recent U.S.T., our announcements on that score.
As well see additional 5% tariff increase on always we believe our team has successfully mitigated most of the adverse effects of the section 301 terrorists.
Given that get negotiated price concessions canceled orders.
Modified specs evolve product mix and diversified vendors.
There are now taking actions to mitigate the recently announced tariff increases.
We will continue to assess a future impact of those cheers.
Our merchandising team is experienced committed and talented you have developed and tested and proven process.
For mitigating cost.
And have the metrics in place to track and measure success.
The team will continue to focus on delivering great value to our customers, while managing and protecting margins.
I'll now turn the call over this Duncan.
Thank you Gary and good morning, everyone.
For <unk> sake family Dollar's performance I'd like to share details regarding a significant organizational milestone that we recently achieved.
Effective July 22nd.
We have successfully consolidated our store support centers and the Chesapeake Virginia.
This was a large complex task that required effective communication collaboration and teamwork throughout the organization.
I'm proud of our team's attitude commitment and determination throughout this process.
Many of our associates stepped up to relocate with the station and are now settling in the southeast Virginia area.
I'd also like to salute recognize those who could not or chose not to relocate.
But they stayed on through July to facilitate a smooth transition.
The benefits of having our brands together in one location are simply immeasurable.
The family dollar team is already seeing the benefits from the stability of having a clear vision of the direction and future of our company.
The family dollar team delivered another quarter of sequential improvement in comps the 2.4% increase the team's performance demonstrates that our efforts to improve the consistency of execution across our stores and our efforts to optimize their real estate portfolio are working and gaining traction.
We continue to believe that we're making the right steps to transform our customer experience to increase the frequency of their visits.
Regarding family dollar sales sales highlights for the second quarter.
An increase in average ticket drove the same store sales increase in the quarter as year over year transaction count was essentially flat.
Our consumable business performed very well delivering its 11th consecutive quarter of positive same store sales.
Regarding a cadence of comps during the quarter may was up against the strongest compare from a year ago and was slightly positive.
In June in July with a strongest month of the quarter.
And notably.
Year over year traffic turned positive.
From a regional perspective comps for all seven zones, we're better than 1%.
With the strongest performance and the west southeast and southwest.
A few weeks ago, we conducted family Dollar's annual leadership conference.
This conference brings together our field leadership team and business leaders to teach to learn to network and strategize as we prepare for the very important holiday season.
The field leadership teams, they are energized and focused and they will take that energy back to their respective store teams.
Theme of our 2019 meeting was the road to reinvention.
We must evolve to be prepared for the future and we're making smart changes and bold changes in our business at family dollar.
As demonstrated by three consecutive quarters of help improve comps our customers are giving us credit for the improvements they are seeing in our stores which include.
Our H, two renovations, which continued to deliver low double digit lift.
And our Grand reopening events are effectively getting the word out to the local communities.
Key components to the HD renovations are.
One dollar dollar stop or one dollar while sections throughout the whole store.
More freezer and cooler doors with a broader selection of products.
New signage, new decor with improved queuing lines at checkout.
Better lighting and much much more.
Our category resets are working we're seeing material comp lifts post reset examples of our recent success include candy household products and food storage.
I'm very proud of the work the teams have done in our private brand offerings with improved labels and packaging.
These national brand equivalent value priced products represent an opportunity to deliver great values to our customer.
While driving customer loyalty store traffic and profit dollars.
At family dollar we are on the road to reinvention. The team has delivered positive comps of 1.4%, 1.9% and 2.4% over the past three quarters and I am pleased with the initial trends for the third quarter.
We have the headquarter move behind US, we have an eager energized and align leadership team and a terrific plan entering the holiday season.
I look forward to providing you more updates on our progress.
In the quarters ahead, I will now turn to Kevin to provide more detail on our second quarter performance and our updated outlook for 2019.
Thanks, Duncan and good morning.
Total sales for the second quarter increased 3.9% to $5.74 billion comprised of $2.96 billion at dollar tree, a $2.78 billion at family dollar.
Enterprise same store sales decreased 2.4% and on a segment basis same store sales for both dollar tree and family dollar increased 2.4%.
Overall gross profit was $1.65 billion compared to $1.66 billion in the prior year's quarter.
As a percent of sales gross margin was 28.7% compared to 30.1% in Q2 of 2018.
Gross profit margin for the dollar tree segment decreased 70 basis points to 33.8% when compared to the prior year quarter.
Factors impacting the segment's gross margin performance for the quarter included merchandise costs, including freight increased approximately 55 basis points, primarily due to higher domestic outbound freight costs.
An increase in the mix of lower margin consumable sold.
Distribution costs increased approximately 10 basis points due to higher payroll costs and occupancy cost increased approximately five basis points on the lower cost compared to the prior year.
Gross profit margin for the family dollar segment was 23.3% during the second quarter compared with 25.7 in the comparable prior year period.
The year over year decline was due to the following.
Mark down expense increased approximately 100 basis points, resulting from store closure rebanner and renovation markdowns as anticipated as part of our store optimization process.
Merchandise costs, including freight increased approximately 95 basis points, primarily due to increased sales of lower margin consumable merchandise.
And slightly higher freight costs.
And shrink increased approximately 45 basis points, resulting from unfavorable physical inventory results in the current quarter and from changes to the accrual rate.
Consolidated selling general and administrative expenses as a percent of net sales in the quarter increased 80 basis points to 24% from 23.2% in the same quarter last year.
For the second quarter. The guests you can pay rate for the dollar tree segment as a percentage of sales improved to 22.5% compared to 22.6% for the second quarter of 2018.
The improvement was due to the following store operating costs were lower by approximately 15 basis points due to lower utility costs, specifically electricity, resulting primarily from the benefit of the LNG lighting program in the stores.
Payroll costs increased approximately 10 basis points, primarily due to an increase in store hourly payroll due to higher average hourly rate, partially offset by lower retirement plan expenses.
That's DNA expenses for the family dollar segment were 22.7% as a percentage of sales in the second quarter compared to 21.6% for the same period last year.
The increase in EPS DNA as a percentage of sales was due to the net of the following.
Operating and corporate expenses increased approximately 95 basis points, resulting primarily from the loss on disposal of fixed assets due to the store closure write offs as stores supplies expense to support the age to initiative.
Payroll expenses increased approximately 35 basis points, primarily due to average hourly rate increases the additional hours, including temporary health expense to support HD renovations and depreciation and amortization expense decreased approximately 15 basis points as a result of certain assets, becoming fully depreciated or amortized.
Corporate support expenses increased 30 basis points as a result of $10.8 million of store support center consolidation costs and higher depreciation.
On a consolidated basis operating income was $268.9 million compared with $382.5 million in the same period last year.
Operating income margin was 4.7% of sales compared to 6.9% of sales in last years second quarter.
Non operating expenses for the quarter totaled $40.5 million, which was comprised primarily of net interest expense.
Our effective tax rate for the quarter was 21.1% compared to 18.9% in the prior year second quarter.
The quarter and prior years quarter benefited by $5.8 million and $8.1 billion, respectively for a reduction in the reserve for uncertain tax positions, resulting from statute expirations.
For the second quarter. The company had net income of $180.3 million or 76 cents per diluted share. This compares to net income of $273.9 million or $1.15 cents because the share in the prior year's quarter.
Combined cash and cash equivalents at quarter end totaled $623.4 million compared to $422.1 million at the end of the fiscal 2018, our outstanding debt as of August 32019 was $4.3 billion.
During the second quarter, we invested $88.4 million in the repurchase of approximately 882000 shares at quarter end, we had $812 million remaining in our share repurchase authorization.
We will provide updates on additional share repurchases if any following the quarter in which they occur.
Inventory for the dollar tree segment at quarter end increased 15.1% from the same time last year, while selling square footage increased 7.1%.
Inventory per selling square foot increased 7.4%.
Our inventory levels reflect the early receipt of imports to mitigate tariffs. We believe the current inventory levels are appropriate support the scheduled new store openings re banners and our sales initiatives for the back half of the year.
Inventory for the family dollar segment at quarter end decreased 2.3% from the same period last year.
Increased 3% on a selling square foot basis.
Capital expenditures were $293.3 million in the second quarter versus 213.4 billion in the second quarter last year.
For fiscal 2019, we're planning for consolidated capital expenditures to be approximately $1 billion, which is consistent with our initial 2019 outlook.
Grecian and amortization totaled 155.1 million for the second quarter and $152.5 million in the second quarter of last year.
And for fiscal 2019, we expect consolidated depreciation and amortization to range from 630 million to $640 million.
Our updated outlook for fiscal 2009 includes the following assumptions.
Calendar considerations for the remainder of the remainder of the year. Following there will be six fewer selling days between Thanksgiving and Christmas, which will negatively impact Q4 sales.
With regard to tariffs and the recent U.S.T., our announcements, we estimate that without mitigation list for AG and the additional 5% tariffs on list one two and three would cost the company approximately 26 million in additional tariffs.
Our updated outlook does not include the recently announced tariff increases as we are currently working to mitigate these costs.
Our company outlook on March six the 2019 included $95 million in discrete costs related to our family dollar store optimization initiative at our store support center consolidation.
With the increased visibility of our overall costs, we now expect to incur $85 million into <unk>.
Discrete cost for the year of which we have incurred $76 million in the first half of the year.
Our Q3 outlook includes the remaining estimated $9 million in costs related to these initiatives.
We expect continued pressure on store payroll based on competitive markets states, increasing minimum wage and completing the company's initiative plans.
We expect year over year domestic freight cost as a percentage of sales to flatten out in the second half well import freight rates as we noted in last quarter's call will increase in the back half of the year.
That interest expense will be approximately 41.1 million in Q3, and approximately 162.7 million for fiscal 2019.
I cannot predict future currency fluctuations, we have not adjusted our outlook for currency rate changes as always our outlook assumes no additional share repurchases.
Our outlook assumes a tax rate of 22.4% for the third quarter and 22.1% for fiscal 2019.
Weighted average diluted share counts are assumed to be 237.5 million shares for Q3, and 237.6 million shares for the full year.
For the third quarter, we are forecasting total sales to range from $5.66 billion this $5.77 billion.
Diluted earnings per share in the range of $1.87 cents to $1.16 cents.
These estimates are based on a low single digit increase in same store sales include approximately $9 million of discrete costs.
For fiscal 2019, we're now forecasting total sales to range between $23.57 billion and $23.79 billion based on a low single digit.
Same store sales increased approximately 1.3% square footage growth.
The company anticipates GAAP net income per diluted share for full year fiscal 2019 will range between $4.90 and $5. An 11 cents, which includes discrete cost of $85 million or 28 cents per share approximately $15 million or five cents per diluted share in store closure related costs I'll now turn the call back over to Gary.
Thank you Kevin.
Sure a brief update on our early reads from the dollar tree plus test.
We are in the very early stages of our multi price point test has like dollar tree stores and will continue to closely monitor the results.
You, putting impacts to traffic sales and margins.
Some details related to test our launched in mid May but June we had the chest scroll down to approximately 115 stores.
The test includes newly AD products, our price points of 234 and $5.
The products being tested which currently include about 200 skews.
Clearly identified as dollar tree saddams, providing customers more choices more sizes more savings.
We are testing a cross section of high moderate and low volume stores as well as urban suburban and rural settings.
So we can understand how customers respond in the varying markets.
Early in the test the product mix as lean more towards consumables, because this will evolve as we move towards the holiday season with more discretionary items.
To the test.
We received feedback on the values from our customers on the initial merchandise assortment.
And this is critical as we know we want to protect the dollar tree brand customers view dollar tree as the destination for a terrific value for what you spend to one dollar.
We are pleased with how our teams have started and implement the test across very geography store volumes in size.
It's giving us valuable insight to our customers view these values across a dollar tree store.
Our teams are excited about the evolution of the merchandise assortment as we approach the holiday season.
On our most recent import trip.
In dollar tree.
This is the opportunity to connect with field leaders face to face teach and learn recognize reward all those individuals and teams for performance in service Awards.
We interact with buyers and sellers to merchants and our field team work together weve coach and mentor people development and ensure that we are all aligned heading into the important holiday season.
We had very productive meetings and I'm pleased with the focus and business acumen of our business men and women that are leading our field organizations.
Our leaders are energetic focused and motivated going to this important back half.
Operator, we're now ready to take your questions.
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Pressing star one.
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We will take our first question.
With Morgan Stanley .
Thanks, Good morning, everyone.
I wanted to ask about some of the improvement in the family dollar comp to what extent you can tie it to initiatives versus underperforming stores coming out of the comp base.
Versus macro strength and do you think that we've turned a corner here on a higher run rate I mean, its been a few quarters now of improve improve sales.
Yeah, good morning, and thanks.
I'd say, we're pretty excited about the two point for the family dollar and what's most exciting to your question is almost a rising we're seeing great performance in our age two stores, but what's to me. What we're seeing is the bulk of the stores are also driving a great comp sales and as I talked about on my prepared remarks, we're now seeing positive traffic across the chain. So thats, telling us our customers like what we're doing is really clean up our stores as you know we have roughly a thousand aged two stores out there and we closed the quarter with 70 809. So you know the good news here is we have multi years add you know we're going to talk about 11 50, or so stores. This year and how do we could really change the face of our chain. So I would tell you that we can't would that small store base, we can't run the whole com. So we're seeing the balance of the chain really help there we did have somehow.
Oh from store closures, but it was not nearly as impactful as the balance of the chain.
And then as a follow up I guess on margin and the visibility at what point does the margin improve and sort of follow this topline and related to it can you just share with us on the dollar tree side, how much helium may have hurt the GM and maybe the EBIT for the dollar tree business this quarter.
So as we look at the margin as we look to the back half obviously the front half in particular was loaded with.
The discrete costs, if we said weve incurred about 76 million of what we now believe is $85 million of costs that we will.
Incur a we look for the for the gross margin to become much more comparable to last year. It's obviously been down I think the you know the one thing Oh, we have to always consider as we've been driving our business and the family dollar world with consumables and even in Q2. The dollar tree business was driven by consumables based upon what everything we have going on.
Touching all these stores that were touching so we're driving traffic, we're getting our core customer back into the store and family dollar and.
They're liking what they are seeing its a little bit more consumable driven so our job that we still have ahead of us is to continue to improve our discretionary business. What we do look for the gross margin on a on the kind of dollar side to start to level out as we go through the back half and soon as Gary Let me add my color to that for both banners I think it's important as we went into this year knowing all the stores that were going to be torn up for renovations page two at family dollar stack zones.
At dollar tree.
Tom we were going to get to Q2, we were touched a thousand plus stores and.
Hi, designed.
Not exactly reading the Crystal ball is as well as you like we went in aggressively closeouts are wild product at the dollar tree side.
Little bit more on consumable side or on the merchandise playing that a family dollar. So part of that was to make sure. We could go through touchy stores catch on pulling back together and still drive a positive comp as far as balloons. The the impact there was the impact of 40 Bips and that's really just on what we lost on balloon sales in the first half or.
In the second quarter year over year.
And obviously the first half as I called out is a little more impactful you know what we didn't you know measure was balloon sales usually have a halo effect of everything else in the party Department, which is obviously one of our highest margin in a very large business and that really drives customers, who bad stores. So.
We know, it's not going to be as impactful because the holidays aren't as big and we'd like to think it's going to get moderately better as we go into 20.
But that was probably the best way to measure the balloon impact.
[noise].
My question from Matthew Boss with JP Morgan.
Thanks, and nice progress guys.
I guess first at family dollar how best to think about the sequential same store sales improvement opportunity in the back half of the year, maybe what do you see as top drivers of the traffic inflection at your each to Remodels and any color on early threeq trends would be helpful.
Yeah, I'll tell you what Matt. Thanks for the question Yeah. As you can see our engine is growing our traffic is turning positive and we're driving some real growth of with consumables and our job is to convert that to this discretionary side of the store.
To enhance our margin throughout the year, we've got a really strong back half plan and a strong holiday plan that we just shared with our leaders.
At the annual leadership conference and.
I think year over year, you're going to see us continue to strive to grow our comps.
As we get as we get more hctwos on the ground they mature and what we're seeing in the balance of stores is there really start and have higher standards at store level and there.
So the stores are getting cleaned up the customers noticing and they're getting the components of some of the age two stores, while they may not be an age to store. So we're trying to fast adapt as we learn what are the key winners in key categories and.
We did some a number of resets last year that are now is going to start cycling.
And be helpful to comp in the back half so.
I feel pretty good about our business plan.
With with with comps as we look for.
Gary I would just add I mean, that's part of the energy and why we added.
Mortgage twos.
Shutdown to our openers have gotten US ahead of the game to this point to get a thousand done.
By the time, we finish up August here Labor day weekend, and we had some more runway so.
We're up for another 150 to get done mainly through September little bit probably into October give us.
More age twos on the ground, but to give credit to the family dollar team.
The consistency of what we're seeing in store. The work we've done on key resets already think are what we see is lifting all boats right now.
Great and then Jose out follow up just to help break down margins.
Help bucket that discrete costs at family dollar between the gross margin. Let me ask you again, both what you saw in the second quarter, how to think about the back half and larger picture, what's the best way to think about family dollar's fundamental gross margin recapture opportunity that you see from here.
Yes, Kevin goes as a well do my prepared remarks, you I tried to give some good color on the so lets kind of break it down into pieces here. If we if we can so obviously within the press release, we talked about the $40 million of discrete costs within the quarter as well as 15 million of store closure costs.
Within that so that's a total of $63 million or about 230 basis points and basically what I'd do if you take out the $10 million of of store consolidation expenses that means about $52 million that within the.
Family dollar.
Segment.
And as we called out within the prepared remarks about 100, and that's about 190 bips.
And that basically broke down really about 100 bips of markdowns, which we've talked about so you're talking about all the store closures all the renovations all the re banners everything related around that.
From that piece and then on the S. Gionee side of it it's all of the asset write off for all the store closures and again, we closed 296 stores during the quarter.
Supplies for the agency renovations as well as labor temp labor for the H. two renovations as well. So that's a roughly 90 95 bips. So that's kind of how to bucketize them the best way.
In the Big picture way.
As far as they go forward margin, we have huge opportunities obviously, it's been a disappointing year from shrink perspective, we have a lot of opportunity as we go forward.
As we talked about last quarter look for it to start to.
Flatten out in the back half on a comparative basis.
Lot of initiatives in process, there relating to one just changes in leadership and structure really working on our commitment to training and our execution of our policies policies and procedures, a defensive merchandising initiatives analytics and again getting getting our inventory levels down as well will be very very helpful. In that regard so.
I think we have a huge opportunity as we go into next year to help our gross margin in that regard, Matt. Let me just chime in because I think just a couple of calls so I think about first off with increased traffic. We can steer this boat.
And Thats, what the age twos are doing and what we're starting to see better in the rest of the fleet.
And so an opportune somebody comes to the Moon store and sell them compelling merchandise on the discretionary side becomes all the easier secondly, I got I just tell you having everybody in the same building now in the merchant teams on the same floor vendors now meeting both banners at the same time I can't tell you how excited I am about that.
And we are $25 billion company with a face to the vendor community. We can drive sales and we ought to be on the short list of people to come to do that and then finally, just a continued piece on imports forgetting tariffs for a second if we can the opportunity to design and create value merchandise Stemcells. Both family dollar and dollar tree is a big big impact for us as we look forward.
Once again, if you find your question has been answered you may revisit yourself from the queue by pressing star followed by two.
We'll take our next question from Chuck Grom with Gordon Haskett.
Hey, Thanks, Good morning, just Duncan I Wonder if you could amplify on on the improvement in traffic in the quarter. I guess do you think its new customers that you're gaining or is it existing customers repeating and then one for Kevin just a follow up on Matts question. There was a lot of confusion on the on the gross margin line and family dollar. It's looking like if I can ask it from a different way just can you just sort of look at the the onetime cost both the discrete and the store closures what that was from a basis point impact versus sort of the normal course of business I you shrink in any markdown activity. Thanks.
<unk>.
Yes, Thanks, Jeff.
At the family dollar traffic I will tell you that yes, as we talked about low double digit lifts in our age two stores and about two thirds of that is coming from traffic and so we're seeing transactions go up there and we're seeing a lot of repeat purchases coming so.
As part of that is really study the marketplace. We know we're acquiring some some new customers from some other folks in the marketplace. So I will tell you that part of it is both their existing customer coming back more often and then getting acquiring new customers that may have been a family dollar customer and through our Grand reopening. It initiative is we communicate back to them that we got a new family dollar for UAN should come check it out and they see what we have to offer and where they may have stopped shopping with us they come back to us so.
We feel real good about the about that pattern. So in the balance of the chain. We're seeing I think people are seeing that our store standards have been better and they're seeing that we've been pretty aggressive with a growth in consumables and were working on the discretionary side of the business as Gary talked about to move that that customer over Weve also modified our marketing campaign to.
They have more frequency so that we can be in the marketplace more often which I'm excited about because that we've got a gap there before so that that will close that gap. So I would tell you that it's in the H. twos is this a new customers in the <unk> in the <unk> and the rest of the chain. It's both.
And I think the good news is as trips are going on.
And Chuck regards to your question relating to the family dollar margin again.
Really three buckets are related to the.
Change year over year for the quarter and again it was a 100 basis points from markdowns related to the initiatives.
About 95 basis points related to.
Increased sales of lower margin goods as well as slightly higher freight and then about 45 basis points related to.
Shrinks, so it's really kind of the three buckets as we as we.
You know put them in and can best describe for you. So well if there is something beyond that that you are looking for.
That's helpful. I just wanted to get all the information and then just on the on the tree just maybe unpack for US the difference between the first and the second quarter gross margin performance and I guess, how you're thinking about it in the back half of year. Thanks.
Yeah, I think if you look at the.
First quarter gross profit was roughly flat year over year.
Ah versus this quarter and so we were impacted more by freight in this quarter.
We were the first quarter and again.
So little bit of timing, a little bit of a of what we've got going on again, we did build inventory as well during the quarter with though from a important standpoint to mitigate tariffs are there some effect from that a little bit but.
Yeah overall as we look at it you know I think.
The the idea of freight was a bigger piece, we do look for that to mitigate a little bit as we go through the back half as we said and then the other piece is as we called out was really the idea that you know we did sell we had a better consumable business in the second quarter and so our sales mix.
Our margin mix.
Average is a little lower at the end of day because of the overall consumable mix as we go forward I don't know that we are like I said I don't think weve. So expect to see the same type of pressure that we saw in Q2 and Chuck I would just give you. Some color I think really the last two years, our seasons have gotten out of the gates very quickly and performed very well.
All of US are inventory, we brought in to beat the tariffs is there that see imports it's higher margin.
As we kick off really the fall harvest season, as we get past Labor day.
To me, we are set up to take advantage of the dollar tree does best and that's getting geared up on the discretionary side of the business.
We had invested in consumables to make sure we had the kind of traffic and customer account, we needed as we went through all of our snack zones.
Snack zones are delivering wells across the network and now it's let's shift gears a little bit back to what are the best time of the year is for dollar tree and that's really September October on through the Christmas holiday.
Please limit your question to one question and one follow up if needed.
We will take our next question to Judah Frommer with credit Suisse.
Thanks for taking my question.
First to circle back to tariffs it sounds like you've quantified the potential impact from the increase on this one through three and list for a while but its not embedded in that 2019 guide is the messaging that you do feel you can fully offset that or is the message that you're working to offset an annual update us with the magnitude of offset at some point.
Thanks, Judy, Yes, [laughter] shopping [laughter] isn't it I mean, we're six days from the last change right. So.
I mean, here's how we've gone through the year the merchant teams and mitigated list one two and three as we knew it.
Then when Lewis for a four be first came out we had plans on that than actually on our trip.
The Asia.
I felt very good about where we were on that and then of course. The most recent changes you know make that a the call well give our most recent news well the things. We're doing are working pretty darn well I you know I would say the vendor community is stepping up.
We have done things like we've said before we can really worked hard on changing our packing things are the packaging and how many units can we get on containers. So we can land the overall cost lower.
You know we've been able to move I would say modestly you know 100 million Bucks on one and some of the buying trips out of China with our strategy of China plus one.
I give credit to our merchants. This is about negotiating a vendor at a time to make those differences and that's why I went into this call. We see the most we wanted to give you the math to give you some sense of the scale and really you know while its work we got to do from six days ago I have confidence in the group that will mitigate it.
For the balance of the year.
Okay, Great and Kevin you were kind enough with Q4 earnings to give us an early read on.
Next year and the earnings growth related to that and I think you've been clear that that do you guys guide on a GAAP basis, but.
GAAP earnings have moved around quarter to quarter as discrete costs kind of come and go is there any directional update you can give us on how you're thinking about.
That earnings growth trajectory for next year.
No we haven't updated the guidance we gave back in March on that subject, obviously were just kicking off our budget season.
Right now as we speak basically for for next year, and you know I don't think ER and ER.
Simplest terms I don't think anything in the in the basis change I think we have the unknown of tariffs and where they go and what they may do I don't know that any of US have an answer for that at this point in time, we'll have to take that into consideration accordingly, well I would tell you. The base case I don't see necessarily a change in our thought process.
Okay. Thanks.
Yeah.
Next question.
Feldman with the Tesla.
Hi, guys. Thanks for taking my question wanting to ask with regard to the the new front end that you have at the family dollar side of the business.
How many stores have that at this point and like how fast can you get that to all the stores.
Hey, Joe Thanks for the question. This is Duncan I, we believe we've got obviously in all age two stores and we're putting in at all our new stores as well the key constraint a at a store level is kind of the the size first then the wit second.
And we do have multiple formats of the queuing line. So I will tell you that where we can we're putting it in because it is very profitable to the store not only the single serve beverages that are there, but then again the that front end is quite profitable both on the the snack side as well as you probably noticed we've been putting discretionary items on there and the team right now is testing a another front queuing line that will actually enhance profitability for that front end and really fit the needs of our customer I think better so.
It's primarily an age to initiative at this point is where we're focused.
Where we're doing any kind of other written renovations will I will see if it can be accommodated but it's really the age two number.
Got it thanks, and then I'm also just a question on the D.C.'s I know you guys. Just open the 24th New D.C. and you made a comment that you know it's set up for both but you're only going to start with the dollar tree can you remind us where you're at with how many I guess cobranded de sees that you do have at this point and how many you kind of want to have.
Well, we have one do you see that is in Utah that distributes to both family dollar and dollar tree.
We now have 1234 additional dcs.
I have the internal workings in a warehouse management system that allows us to deliver to both we've needed the capacity for the dollar tree banner, because we have capacity in the family dollar network because of the closures rebanners.
Yeah of course, that's putting pressure on the dollar tree banner.
So ultimately it comes down to the size of the building a new building that we've done it comes out now with the ability to deliver either banner, which will be a place that we moved to and that the stem mile opportunity for us.
In the out years.
It's right now a function of capacity needed for dollar tree banner to make sure. We can service those stores and we pick up.
Obviously, some stem miles every time, we opened up our dollar tree banner.
Because we have more stores closer to that.
Your next question comes from John Heinbockel with Guggenheim Securities.
It's just a two quick things we are [noise] I know, there's not a lot of.
Hctwos with with a lengthy history, but do you guys have a sense of how that the that the format will mature and waterfall in years, two and three comp wise anything it's above maybe what what a new store would do.
A normal new store.
It settles into a more normal waterfall.
And John as Duncan.
Thanks for the question.
I think it probably comp like regular new store as what we're thinking about.
And we've got a handful of them that have kind of cycle themselves.
So we're learning quickly, but it's behaving like a new store.
Okay, and then and then maybe for Gary when you again, I know that multi price point is in its early stages here, but have you found anything interesting. When you look at the basket constructive people, who have a dollar tree plus item in there versus those who don't other fewer items when they buy a dollar tree plus.
How is it different.
Thanks, John I would say at this point, it's purely additive to the basket.
So its telling us.
Dollar tree shopper I commend, our like my regular items and.
Here's something that surprised me is is some of the feedback we hear and that goes into the what was quote unquote their regular basket.
So I think we've started off with some.
Items that are giving us some pretty good information, how our customer abuse, it but what I'm going maybe most excited about.
He is putting a bit more of a dollar tree wind Z and surprise of the wealth effect into some of the items and then that will give us another very into what customers are buying in especially as we get around.
Holiday time, so more to come we bought specifically for these stores and it will be in addition to the assortment as we continue to evolve it to get the best read we can.
Okay. Thank you.
Yes.
Your next question comes from Karen short.
Hi, Thanks for taking my question.
I just wanted to clarify a couple of things you commented that you are pleased with three key trends at family dollar. So I guess I just want to clarify is that to be interpreted that comps are above kind of where you came in into Q.
And then I had another clarification on guidance.
Duncan made that comment I mean, obviously.
Because we're only three weeks into those dollars were going to give a whole lot of other information, but I mean, we're pleased as where its stated.
We're not going to make a statement, whether it's higher lower or what it might be but we're very pleased at this point.
Okay, and then just with respect to guidance are not guidance, but I guess loose commentary on 2020, I guess it was just a little confusion.
With respect to the comments you made in March and I'm asking this question excluding tariffs, but when you think about that 14, 18% are you looking at a number that's based on GAAP EPS or adjusted EPS.
We said, we've always said it's based upon GAAP EPS.
Okay, great. Thank you.
Your next question comes from Kelly.
Hi, good morning, Thanks for fitting me in to the questions.
Just wanted to ask about about tariff. It was helpful to have the quantification I guess of.
The 26 million.
Over the next couple of months.
I guess I'm guessing in terms of list for that you're still working through that which is why that wasn't quantified, but maybe you could just talk about.
Order of magnitude how that would compare to what your what youre quantifying today. If you can at all and then I guess couple of other questions related to that how much have you saved.
With respect to tariffs by bringing inventory early.
You know at multiple points throughout this year.
And then is there is there an upper limit to what you think your team can offset.
Here or do you do you feel confident that even if you get into next year that this can can further be mitigated. Thank you.
Hi, Kelly well.
Yes, and we're managing to what we know started there so.
I think what we tried to thank the picture of the magnitude for this for Ray.
When we knew it was initially 10% that was in our sites and the team went to work right away.
On for a knowing that for B was coming.
We had more time on four b.
Once the.
Tariff was increased.
For both list for and just one two and three.
We just continue to do the same playbook, that's been working for us everything that called out before so.
You know were in unique times and were in unique times, where I think there is the opportunity is I would tell you that our vendor community is both.
Once to work through this and help at this moment in time and part of that is there are also concerns they might lose business and some have as we found.
Other opportunities, we either inside China or outside China. So.
No Theres never Fist, one tune you play.
To overcome so.
Well guess what gives me confidence for the balance of this year as I can see the rocks in front of me and our teams have worked real hard to overcome but we see this year.
Ill too early to comment on 20 shoot I'm trying to think about what might have been this week or next week.
But we are working real hard on what we know today based on the U.S.T.R.
As we go into.
What's going to be.
The first increase on September 1st knowing that Theres. Another one October and then finally December 15th those of Theres, they're the ones that we know of right now.
So my guess.
Just on the inventory how much how much has been mitigated by just bringing inventory in early.
No we I can't in scale on of what we sell I mean, we try to bring items and it's not a huge amount I mean of course, you try to bring it in if it's on the water but.
Keeping in mind at six weeks before.
Yeah, we've a partner you get somewhere else and were often not given six weeks to make much of a move if we can do if we can do anything we do but it's not meaningful on the.
On the scale of what we're talking about on cost of goods and the tariffs.
Yeah.
Final question comes from Edward Kelly with Wells Fargo.
Yes, Hi, guys. Good morning, just a few questions for you first I just wanted to ask you about store manager turnover at family dollar I was hoping you could give us an update on the progress that you're making there and the you know the initiatives that you have in place to add to improve that.
Yeah.
Hey, Edward its Duncan.
Thanks for the question I will tell you that and store manager turnover has improved slightly we're still at a level that I'm not happy with but last year. We we focused all our training at our field <unk> meeting on year of the manager, which was all about trading or people, giving them tools about hiring the right person training the right person and retaining the right person and we gave them many tools and consistent playbooks across the chain.
To do that and we they've all been trained on that and we highlighted it again this year and get updated those tool kits.
And we've had a national recruiting fares as you're probably aware of and we've we've made made progress there. It does attract a fair amount of people and I would I would I would just have to call out.
What some of the same efforts dollar tree is going to have one of its best three years ever since I've been here and store manager turnover. So I think the initiatives are well focused and pointed out the right things and we're working real hard to get both banners to ought to be a banner year on store manager turnover.
All right, great and just a follow up on a on dollar tree Clos.
Any color you can provide provide on.
Timing around a decision in terms of you know your assessment.
Of the of the initiatives and then do tariffs that on escalation of tariffs impact sort of strategically how you're thinking about the plus format.
Well I on the timing side listen I think as we get any evolving assortment, we're going to learn more so I do you know I can't quite give you timeline I'm more interested in what can I learn from giving our customers.
Evolving assortment that will tell us more what resonates with her when she is going to.
Dollar tree.
As far as tariffs, obviously anybody out there today, whose importing is affected no matter what the price point. It obviously goes into the equation, but it does make you take a look at where are you buying it from.
But but to hit the Mark you have to really focus on what the customer wants as always in retail for our dollar tree stores, how does that play out.
When we take a look at retails that go up to $5 and I think it's.
That's really what we're focused on what's our cost or whats our dollar tree customer going to look for.
In our world and that's what our merchandising teams are very focused on.
Thank you.
That concludes today's question and answer session. Mr. Guy there at this time I will turn the conference back to you for any additional or closing remarks.
Thank you Kathy and thank you for joining us for todays call and for your continued interest in dollar tree. Our next quarterly earnings conference call to discuss Q3 results is tentatively scheduled for Tuesday November 26, 2019. Thank you.
That concludes today's presentation. Thank you for your participation you may now disconnect.