Dollar Tree, Inc.

Good day and welcome to the Dollar Tree, Inc.' 's first quarter earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Randy Geiler, VP, Investor Relations. Please go ahead, sir.

Thank you, Shannon. Good morning and welcome to our call to discuss Dollar Tree's performance for the first quarter of 2020. On today's call will be CEO Gary Philbin, Enterprise President Mike Wachinsky, and CFO Kevin Wampler. Before we begin, I would like to remind everyone that various remarks that we will 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 Security Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors included in our most recent press release, most recent 8K, 10Q, and annual reports, 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 our prepared remarks, we will open the call to your questions. Please limit the questions to one and one related follow-up, if necessary. Now I will turn the call over to Gary Philbin, Dollar Tree's Chief Executive Officer. Thank you, Randy. Good morning, everyone. First, from all of us, our report today is against the backdrop of the COVID-19 impact across our country. Our hearts go on to all those affected. Today's Q1 report reflects a number of accomplishments in Collins during a quarter that was impacted unlike any other due to the effects of COVID-19. First, our results around the core businesses of both families speak to the resiliency and strength of both Family Dollar and Dollar Tree in the communities we serve. The investments we have made in our family dollar business and our H2 stores and assortment have been highlighted during this critical time. Second, we took quick action to protect individuals with enhanced cleaning protocols to keep our facilities clean and sanitized. We encouraged social distancing guidelines as recommended by the CDC and provided PPE supplies, including masks and gloves. Additionally, we have installed more than 60,000 plexiglass shields at store checkouts. Third, our efforts to get the right products to the distribution centers and stores have been the key priority for merchants across both banners. We've worked closely with vendor partners to support and streamline shipments of needed essentials. And finally, all of this could not have been accomplished without the leadership of our teams across 48 states, in five Canadian provinces. Their efforts have been remarkable, and it is humbling to see the dedication they have for their teams and for their communities. I could not be more proud of all of these and many other accomplishments against the COVID-19 crisis that's impacted our country and Cunningham. Family dollars comp of 15.5% reflected the initial impact of household stocking up on basic goods in March, related to the disease. The consumable side of business delivered a 17-plus comp and was strong throughout the quarter. On the discretionary side, comps were positive up through research, and then we saw an acceleration through the end of the quarter around at home and other discretionary categories, resulting in a discretionary comp of just under 9% for Q1. Operating income for Q1 improved 230 basis points Despite the impact of selling record volumes of lower-margin consumables and incurring the additional costs related to COVID-19, Dollar Tree's cost decreased 90 basis points, driven by the impact on Easter selling and our party business in general from the executive orders for shelter-in-place mandates. The combined impact of the party, candy, and Easter categories negatively affected Dollar Tree's overall comp by 490 basis points. Following Easter, discretionary comps were nearly flat for the remainder of the quarter. Operating margin was 9.2%, reflecting a negative top line comp in the heavier consumable mix along with COVID costs. All related COVID costs incurred for wage premiums and for frontline associates Guaranteed sales bonuses for field management and supplies for keeping our facilities safe totaled just over $73 million. Now I'll turn the call over to Mike. Thank you, Gary, and good morning. Before I get into the details regarding our Q1 performance, I want to share a little bit about the associates and their remarkable work and dedication. I want to thank our teams for all they accomplished each and every day for the last nine weeks. Our entire leadership team is inspired and very much appreciative of their individual commitments and their collective team efforts across Dollar Tree and Family Dollar, in our stores, in our DCs, and in our store support center. I am very proud of the dedication of all associates. Regarding Dollar Tree's response to COVID-19, Our company took aggressive and decisive actions early on to protect our teams and our shoppers. In early March, we activated our business response team, led by risk management and human resources, with representation from each functional area in the company. The group worked around the clock to assess the situation, develop policies and procedures, and take action where necessary. I would like to recognize the leadership and efforts of our business response team to support our frontline workers. Steps we've taken to provide clean and safe environments include our store associates are practicing social distancing, as recommended by the CDC, and we continue to ask that customers also follow these guidelines. We dedicated the first hour each morning to serve at-risk customers. We continue to provide store teams with hand sanitizer and cleaning supplies for high-frequency enhanced cleaning protocols. We close stores at 8 p.m. to provide associates adequate time for cleaning the store and restocking shelves with essential high-demand products. We supply personal protective equipment, including non-medical face masks and gloves for associates to wear during their shifts. We have implemented associate health screenings to ensure that we are minimizing the potential for exposure. We've installed plexiglass guards at the check lane in all stores to assist in protecting shoppers and our cashiers. Stores are now equipped with contactless payment through tap to pay with Visa, MasterCard, Apple Pay, and Google Pay. We are committed to meeting or exceeding all relevant local and state requirements. By taking these steps, we have been able to keep all stores open as an essential business. Also in March, we announced our plans to hire 25,000 new associates, a target which we have exceeded. Our stores play a valuable role in the communities we serve, and we are dedicated to both serving customers and being an employee of choice, especially in these critical times of need. Now to our first quarter performance. Sales grew 8.2% to $6.2 billion. Consolidated same-store sales increased 7%. And we delivered an EPS of $1.04. For the Dollar Tree segment, our 90 basis point decline in sales was materially impacted by weakness in party, candy, and Easter seasonal categories. We were well prepared for the Easter season with products in stores and set during February following our strong Valentine's season. As stated in our March 31st business update, Dollar Tree had a 7.1 comp increase for the first eight weeks of Q1. What was beginning to see a material drop-off due to traffic and the initial shelters in place as we approached Easter. In March, seemingly overnight, there was a hyper-focus on stocking up consumables. As concerns spread, Schools, church services, weddings, and parties were canceled and widespread stay-at-home orders were mandated. We saw a material decline in demand for many of the seasonal and discretionary products related to celebrations and large gatherings. As Gary mentioned, the combination of party category and Easter seasonal product negatively impacted Dollar Tree's Q1 comps by approximately 490 basis points. For the quarter, the consumables delivered a positive 9% comp, and the discretionary side of the business was down nearly 9%. Prior to the slowdown, our Valentine's season of category comped over 4% with a strong sell-through. Categories that performed well included household consumables, food, personal care, and crafts. We continue to see great traction in our stores with the new Crafter Square program. We added the Crafter Square assortment to more than 2,400 Dollar Tree stores in quarter one. Our customers are responding to the new offerings and the great values. For the quarter, Dollar Tree's comp transaction count was down 11.7%, while comp average ticket increased 12.2%. As consumers in general have been shopping less but buying more, a trend that has been seen across retail. Interesting are consumables versus the discretionary mix. Through Easter, it was 55% consumables. For the period following Easter through quarter end, it was 50-50 balance. And for the first four weeks of Q2, we've seen a shift to 55% discretionary. Regarding family dollar segment sales, highlights for the first quarter include the team delivered a 15.5% same-store sales increase on top of a 1.9% count in Q1 a year ago. This was comprised of a 17.1% increase in average ticket, partially offset by a 1.4% decline in transaction count. The sales strength was broad across geography, each zone delivering a count increase of 13 to 19%. Regarding cadence of comps through the quarter, February was slightly positive. We had an extremely strong March with customers stocking up on consumables. As provided in our business update, the family dollar comp was 14.4% through the first eight weeks of the quarter. The team delivered great results in April with strength in many of our discretionary categories. The consumable side of the business delivered a 17 plus percent comp, and discretionary comp was just under 9%. We continue to be very pleased with the performance of our H2 stores, with comps continuing to outperform the chain average by 10 plus percent. Regarding real estate for the enterprise during the quarter, we completed more than 350 projects, including 99 new stores, 21 relocations, 220 Family Dollar H2 renovations early in the quarter, and 14 store closings, primarily at the end of this term. We ended the quarter with 15,370 stores. I'm very proud of our leaders throughout the organization, including our store and field leadership teams, our merchant teams, our distribution center and supply chain teams, and our store support center team. I will now turn it to Kevin to provide more detail on our first quarter performance. Thank you, Mike, and good morning. Consolidated net sales for the first quarter increased 8.2% to $6.29 billion, comprised of $3.21 billion of Fama dollar and $3.08 billion of Dollar Tree. Enterprise same-store sales increased 7%, and on a segment basis, ComServe and VAL increased 15.5%, and Dollar Tree decreased 0.9%. Overall, gross profit increased 3.9%, to $1.79 billion. Gross margin was 28.5%, compared to 29.7% in Q1 2019. Gross profit margin for the Dollar Tree segment decreased to 31.9% compared to 34.5% in the prior year's quarter. Factors impacting the segment's gross margin performance for the quarter, including merchandise costs, including freight, increased approximately 140 basis points. Dollar Tree saw a 4.2% shift in mix to lower margin consumables from higher margin discretionary merchandise related to the soft Easter selling season and pandemic demand. Higher costs from the impact of incremental $18 million of tariff costs and higher freight costs were partially offset by improved markdown. Markdown costs increased approximately 40 basis points, resulting from increased seasonal markdowns to the lower Easter sell-through. Distribution costs increased approximately 30 basis points, primarily due to higher payroll costs and depreciation. D.C. payroll costs included approximately $3.5 million of 10 basis points of hourly premium pay for all hourly D.C. associates for hours worked since March 8th and guaranteed sales bonuses. Occupancy costs increased approximately 30 basis points due to loss of leverage on the comp sales decrease in the quarter. And strength increased approximately 25 basis points based on unfavorable inventory results and an increase in accruing. The gross profit margin for the voluntary segment improved 60 basis points to 25.4% during the first quarter. The year-over-year improvement was due to the following. The occupancy cost decreased approximately 105 basis points as a result of leverage from the cost sales increase. And the increased expense in the prior year relates to the acceleration and amortization of use assets from store closures. And strength decreased to approximately 30 basis points, resulting from an increase to the accrual rate in the prior year quarter and improved inventory results in the current year. These benefits were partially offset by merchandise costs, including freight, that increased to approximately 55 basis points, primarily due to a 1.6% mixed shift to lower-margin consumable merchandise as a result of pandemic demand. And higher freight costs, partially offset by the increase in mark-ups. Distribution costs increased approximately 15 basis points due to increased payroll costs at the DC. These costs included approximately $2.7 million or 10 basis points related to the hourly premium pay for all hourly DC associates for all hours worked since March 8th and guaranteed sales bonuses. Consolidated selling, general, and administrative expenses improved 40 basis points to 22.7% of net sales. For the first quarter, the SG&A rate for the Dollar Tree segment as a percentage of net sales increased to 22.7% compared to 21.2% in Q1 of 2019. The increase was primarily due to approximately 145 basis points in payroll costs comprised of the following. Store hourly payroll increased approximately 120 basis points due to the store hourly premium paid to all hourly associates beginning March 8th. The premium paid totaled $30 million for the quarter. Field management payroll increased approximately 15 basis points due to loss of leverage from the decrease in comparable store net sales and $800,000 of guaranteed bonuses paid. Store sales bonus expense increased approximately 10 basis points as a result of $2.7 million of guaranteed bonus payouts. Store supply costs increased approximately 10 basis points as a result of the installation of flux glass guards and incremental costs for PPE. Inventory service expense decreased approximately 10 basis points due to the postponement of inventories from March 15th through the end of the quarter. The SG&A rate for the family dollar segment improved approximately 170 basis points to 19.9% compared to 21.6% for the first quarter of 2019. Improvement was primarily due to the leverage on stronger same-store sales. Payroll expenses improved 65 basis points driven by leverage from the strong comp. Store hourly premium pay totaled $22.2 million, and guaranteed bonuses totaled $1.6 million. Occupancy costs increased 55 basis points. Operating expenses decreased by approximately 40 basis points, resulting primarily from reduced advertising and travel as a percentage of sales. And depreciation and amortization expense decreased approximately 10 basis points. Additionally, corporate and support shared service expense for the percentage of sales improved 20 basis points, primarily related to leverage on stronger sales in the current year and cycling store support center consolidation costs from the prior year. Operating income was $365.9 million compared to $385 million in the same period last year, and operating income margin was 5.8% compared to 6.6% in last year's quarter. The current year's quarter included $73.2 million in COVID-19-related expenses. Non-operating expenses totaled $40.7 million, comprised primarily of net interest expense, and our effective tax rate was 23.9% compared to 22.1% in the prior year's first quarter. The company had net income of $247.6 million, or $1.04 per share, which included $73.2 million, or $0.23 per share of incremental operating costs for COVID-19 related expenses. This compares to net earnings of $267.9 million, or $1.12 per share in the prior quarter. Combined cash and cash equivalents at quarter end totaled $1.76 billion, compared to $539.2 million at the end of fiscal 2019. Outstanding debt as of May 2, 2020, was approximately $4.3 billion, which included $750 million drawn on our revolving line of credit. Income for the dollar tree at quarter end increased 4% from the same time last year, while selling square footage increased 7.2%. Inventory for selling square foot decreased 3%. The team is actively managing the mix of inventory to rebuild essential goods while controlling categories such as party that saw a decrease in demand in the first quarter. Inventory for family dollar quarter end decreased 10.6% from the same period last year, while selling square footage decreased 3.9% based on store closures in the prior year. Inventory for selling square foot decreased 7%. Our family dollar inventory reflects higher than normal out-of-stocks in certain categories. Our merchants, supply chain, and vendors are working diligently to improve our position to meet increased product demands going forward. Capital expenditures were $235.8 million in the first quarter versus $209.2 million in Q1 last year. For fiscal 2020, we're now planning for consolidated capital expenditures to be approximately $1 billion compared to our original guidance of $1.2 billion. Changes to our capital expenditure plan are we now expect to open 500 new stillers compared to our original plan of 550. These will be comprised of $325.30 and $175,000, which includes a reduction of 25 planned stores per each banner. Due to the COVID-19 related suspension of our H2 renovation program, we are now planning 750 family dollar H2s for fiscal 2020 compared to our original plan of 1,250. Additionally, we've seen a reduction in our capital needs for supply chain based on finalization of projects for the year. Appreciation and amortization totaled $165.5 million for Q1 compared to $151.2 million in the first quarter last year. For fiscal 2020, we now expect consolidated depreciation and amortization to range from $670 million to $680 million. While we are not providing sales and EPS guidance, I do want to provide a few data points for your modeling. That interest expense is expected to be approximately $39 million in Q2 and $160 million for fiscal 2020. The tax rate is expected to be 23.2% for the second quarter and 22.7% for fiscal 2020. Weighted average share counts are seen to be 238 million shares for Q2 and 237.9 million shares for the full year. As reported on March Business Update, the company withdrew our prior Q1 and fiscal year guidance. Due to the continuing uncertainty, we have limited visibility into our future business trends, which results in a wide range of potential outcomes for our 2020 financial performance. We're in a strong financial position and remain confident in our business and ability to drive long-term shareholder value. I'll now turn the call back over to Gary. Thank you, Kevin. The current macro environment was obviously not contemplated when planning our business for fiscal 2020. Our performance in Q1 validates that Dollar Tree and Family Dollar are important to shoppers in times of need, especially for their daily essentials. With more than 38 million Americans filing unemployment claims in just the past nine weeks, we believe families need value and convenience more now than ever before. We have a resilient business model, a very strong balance sheet, an experienced leadership team, and a tremendous opportunity to continue serving customers with those values and conveniences they seek. I cannot say enough about our store and distribution center teams. They have been up to the challenge in being nimble and agile in a quick-changing work environment and committed to running the business through an unprecedented time. To recognize their efforts, we have rewarded our hourly store and D.C. associates with wage premiums. Going back to March 8th, this investment in our frontline associates has totaled approximately $95 million to this point. $63 million occurred in the first quarter. We were also pleased to welcome more than 25,000 new associates to the organization during the quarter. T1 is in the books. We finished the quarter strong. The momentum has carried into our second quarter. While we are still less than four weeks into the quarter, I am pleased to say that business has been good to this point. At Dollar Tree, we have seen an improvement on the discretionary side of the business. In fact, with the exception of party pay for all discretionary categories are copying positive in Q2. Categories performing well include crafts, kitchenware, lawn and garden, hardware, toys, they're all performing well. We had a strong Mother's Day and school graduation sales. Crafter Square, like Mike discussed, continued to gain momentum and is now available in more than 3,000 Dollar Tree stores. And the balloon business, which was hindered in 2019 by the helium shortage, has bounced back nicely. The comp performance at this early stage in the quarter has returned to a level we are accustomed to seeing from Dollar Tree. At Family Dollar, we believe the current environment with families staying close to home has provided us an opportunity to showcase improvements we have been working very hard on in recent years. Our investment in the Family Dollar store base with our H2 renovations has been a key driver since we accelerated our renovations a year ago. Now with customers and communities needing us more than ever, we are being introduced into a format that has a better shopping experience when they need it most. I'm also pleased with the work of the merchant team in the traction we are seeing on the discretionary side of the business. Our customers have moved from all things essential to more purchases to support their at-home and outdoor living. Discretionary momentum that we saw late in Q1 has certainly continued into the second quarter as well. Q2 is off to a very good start in family dollar. That said, We do expect this to continue to be an extremely volatile consumer environment. Factors impacting retail will continue to be evolution of the macroeconomic factors, including unemployment rates, variability in vendor supply chains being able to meet product demands, volatility in consumer demand related to the crisis, the value and timing of government stimulus, the duration, degree, and geographic breadth of varying shelter-in-place mandates, the evolving competitive landscape across retail and restaurants, and our incremental costs related to managing the business during the COVID crisis. We continue to focus on making meaningful progress to grow and improve our business for both brands. We believe we are well positioned in the most attractive sector of retail to deliver continued growth in increased value for our shareholders. The combination of more than 15,300 Dollar Tree and Family Dollar stores provides us the opportunity to serve more customers in all types of markets. Operator, we're now ready to take questions.

Thank you, ladies and gentlemen. If you'd like to signal for a question, please do so by pressing the star key followed by the digit 1 on your touch-tone telephone. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. We ask that questions be limited to one question and one follow-up if necessary so that we may accommodate as many callers as possible. We'll take our first question from Edward Kelly of Wells Fargo.

Hi, guys. Good morning. I wanted to ask you about the comp cadence. Could you talk a little bit more about the trends that you saw in April, both leading up into Easter and then after Easter, and then what we have seen so far each banner in May? I know you provided some qualitative commentary. I'm curious if you could provide some more specific color on May and what you have seen to date from a comp perspective.

Hey Ed, this is Gary. Let me characterize it this way. Obviously on the Dollar Tree side, Easter was the first week of April. So we really saw the impact of shelter in place mandates going in, traffic dropped, and obviously Easter was not on anyone's mind going into the holiday. So the bigger seasonal impact to Dollar Tree was the Easter holiday basically evaporating. But post-Easter, you know, traffic, while negative, moderated, and maybe more importantly, what we saw people buying also changed too. From the hoarding of essentials moved to some of the other elements of what people were buying around stay at home, which meant children were out of school, so more stationary, more back to school, toys for kids. And Family Dollar was maybe slightly a little different, not as big of a holiday effort for Easter at Family Dollar, at least around pure Easter. But the things that get impacted at Family Dollar are things like when people go out, it's a family celebration, it's apparel. But I would describe it the same way. Post-Easter holiday, we saw folks get back into buying more of what they needed around at-home living and outdoor celebration, I would call it. And with more folks at home, obviously we're experiencing the essentials spiking of both banners. So as we go into May, while we see some traffic down, we see baskets go up, and we see the breadth of what folks are buying being expanded clearly beyond the essentials. So we like what we see going into end of April, and it's carrying on into May.

All right, and then maybe just a follow-up from the margin perspective, particularly around the core dollar tree business. This has been a 35%, 36% gross margin business for a very long time. You've had some headwinds recently. A lot of it seems like it could just be transitory. Is there any reason to think you can't get back to that range, and can you get back there soon, meaning Q2, Q3, you know, at some point this year?

Well, I don't have a crystal ball that says what's going to happen exactly with the macro environment. There's no reason Dollar Tree can't get back to 35 and 36 with what we see on how we're selling our assortment. Even now, I like how the mixes are occurring at Dollar Tree. The impacts that we're experiencing from COVID, everything on the supply chain, And it's everything from how we need the DCs to run on the priorities of getting key vendors into the DCs and out to stores, we're spending extra on. When we are buying low value essentials, big Q, low value, that impacts the cost of the freight coming in and out of our margin as well. And obviously, we're paying the current wage premiums. Long term, there's no reason. I don't know that I see it in Q2 or, you know, in the back half of the year. I dare make a guess on how the retail environment will be. But what we're buying in the value for Dollar Tree is as great as ever. Mike called out Kraft. I mean, here's a category that really didn't even live in Dollar Tree last year to any extent. And, you know, our customers have welcomed it wildly in the stores that we put it in. And that's the nature of Dollar Tree. We We find something, we build it, you're on to the new thing, and that's really the underpinnings of what's going to drive margin. The thing that we've got to handle on the expense side, you know, I've always said, given enough time, we'll steer around the rocks. But the key to Dollar Tree's magic is keeping the magic of incredible value in front of our customer on the product we're selling.

Great. Thank you, and good luck going forward.

Our next question will come from Choudhny Luthra of Goldman Sachs.

Hi, thank you. This is Choudhny on behalf of Kate McShane. Could you guys talk a little bit more about stimulus in terms of, you know, sort of when did trends start to improve for you, both teacher-like programs Has that continued? Because we are also hearing from some customers, anecdotally, that some customers are only getting payments right now. So could you talk about how you're seeing stimulus impact the business? And then is there a parallel to be drawn with tax refunds? We heard one retailer talk about it. So do you see that kind of retail wind in terms of durations? Stimulus versus tax refunds. Thank you.

Chandra, you were getting a lot of echo on your first question. Was it around how we're seeing the customers with the stimulus check?

Yes, that is correct. So basically my question is, you know, is there a parallel between stimulus checks and tax refunds?

Yes, so yes, we are seeing some impact as the stimulus gets released into the market and the tax refunds, especially on the family dollar side.

And as Gary described, we saw some nice momentum in our discretionary side of the business with our home and grilling and clothes.

So we can see a correlation of the stimulus dollars being released and an increase in our basket size.

Got it. And then if I could get a follow-up. I'm sorry, go ahead.

Yeah, we were just wondering what your second question was.

Yes. So in terms of your global supply chain, in light of the disruptions this year we've seen and then, you know, with tariffs last year, are there any efforts to kind of realign sourcing globally? Thank you.

Well, you know, this ripple effect of the COVID impact obviously started in Asia and then has moved to the U.S. side. And so initially when we saw the disruption in Asia, you know, part of that was just the short-term effect of factories shutting down right after Chinese. I would say, you know, that rebounded fairly quickly. to the point that other than being measured a few weeks late on some shipments, that was something that moderated and now is not an issue for us. On the domestic side, however, the spike in demand on domestic essentials is something that all retailers are chasing. And, you know, varied by vendor, varied by geography, and anything that's related to cleaning, toilet paper, paper towels. While they're all getting better and we're selling record amounts, it's still something that we're probably going to be chasing, I think, into June and I would guess maybe July with some vendors. But it's getting better week by week and we see it in our sales. But it's almost shifted more to the discretionary side now. Some of the things that folks are buying that our imports, we're having to go back and take a look at orders on inbound and up those. So it's been a changing shift in dynamic from when it started all the way back to the impact to China, supply chain, U.S. domestically, and now what people are buying. And so I think about it almost in those three stages, you know, how we're running our business and where the priorities are.

Great, thank you so much. And our next question will come from Michael Montani of Evercore.

Great, good morning. Just had two questions. The first was on the tariff front. I think initially there was discussion of around 45 million plus of impact in the first half of this year. So I wanted to see if 20 to 25 million is probably about right for 2Q. And then on the COVID expense side, You know, you called out some of the initial labor costs to expect into TQ. I was hoping to understand if there's additional kind of PP&E, safety equipment run rate, you know, that we should be factoring in here, you know, and how normal and ongoing that would be.

Sure. My name is Kevin. As it relates to the tariffs, again, to your point, at the beginning of the year we stated the fact that Tariffs were an incremental $47 million this year, primarily on the Dollar Tree side. And again, part of it is annualization of List 3 at 25%, and then obviously List 4 as well. And as we called out $25 million at that point in time, but at the beginning of the year we said $25 million in Q1, it actually annualized, it came in about $23 million, $18 million at Dollar Tree, and $5 million at Bama Dollar. As we look at Q2, again, we do expect roughly, I think it's a little less than what we probably initially expected. We really expected it to be around $20 million. I think it may be closer to $15 million. Part of that is just due to some timing as we continue to work with supply chain and what comes in when. But I do believe it will be about $15 million roughly in Q2. As it relates to COVID and the cost there, again, obviously we did have significant costs in Q1 as we ramped up PPE supplies. Again, we also did, as Gary mentioned, 60,000 plexiglass shields in our stores, which is probably a bigger cost than the supplies at the end of the day because those are put in place in a very rapid order. As we go forward, we are expecting, again, to incur additional supply costs as we continue to make sure that our stores have the PPE they need, masks, gloves, and accordingly to keep them safe and as mandated in many areas, as well as additional cleaning supplies and sanitizers in our stores. additional cleaners for the enhanced cleaning protocols we have on a daily basis in our stores. Again, it's hard to predict what it will be for Q2, but it will continue forward. And again, that's one of those unknowns and one of the reasons why we really can't give guidance going forward. Michael, I would just add, you know, the biggest lion's share of that once you get past these initial expenses is obviously the wage premium. Our folks are on a biweekly pay cycle in advance of each one. We give them our announcement that it's continued. Right now we are out to mid-June with our associates on wage premium so they can plan around that too. So that's where we are right now.

Thank you.

And our next question will come from Paul Tressel of Deutsche Bank.

Good execution in a volatile and challenging marketplace. First question is on Family Dollar. Maybe just touch a bit more detail on what you're seeing there. Should we think that 2Q is more or less in line with 1Q results? Also, what's the feedback been from customers? as they return to the format, potentially for some for the first time in a few years, and how you plan to keep those customers there. Also, just curious on any updates on the H2 front and how you feel about your inventory and overall merchandise assortment, especially on the discretionary side, which you were planning to kind of change over the issue. Thank you. Let me start. I have Mike chiming in on some of what we've seen on the categories. You know, I think Family Dollars responded maybe even better than we might have thought going into what we didn't know what was ahead of us. And our customers came in and shopped the store hard because when you think about it, it's convenience, it's value. And with the early and quick work we did, I think we also got credit for being a safe place to shop with all of our protocols in store, and I think we were recognized for that, with some of our internal measurements that we saw. I think we also saw more folks sign up for our Family Dollar app, which was a pretty good signal that we were gaining some new folks for the first time into the store. So I think early on we got, you know, folks needed us. I think it has moved to some recognition on even some of the early work we've done on assortment and having in-stocks. Now, I would tell you our supply chain, we're pretty capable on supply chain around the world, but we are stressed on domestic supply chain like lots of other folks on essentials. And we send the essentials to stores every week. It used to last about two hours. I would tell you now it's probably lasting between a day and a half to four days, depending on who's getting what amounts. But as much as any, it's been maybe our folks that have risen to the occasion in their neighborhoods and communities. And, you know, when I just see the amount of thank yous that come into our stores, it's anecdotal, but I can only tell you folks that really count on the Family Dollar banner during this time. I think what's interesting are some of the categories. I'll let Mike give you some color on that. Yeah, Gary described in his comments that, you know, at first with the huge demand for those first three weeks, it was very weighted heavily towards the consumable side and the cleaning products and paper products. And post-Easter, it shifted to at-home. Our apparel business is very strong, soft home, housewares, home decor, toys, and hardware. And the good news is you asked about our inventory position. Going into the year, we were very strong in inventory position on those categories. So we were able to maintain this good in stock position for the back half of the first quarter. And now we're, as Gary's saying, the good news is we're replenishing those sales. And as you heard from me on March 4th, Talk about that family dollar. Those are the categories that we're going to work really hard on to turn around our discretionary business with basic products, with sharper price points, and trying to get it into our stores in our sets and our H2. And that's what we're replenishing with now. So we sold to our inventories. What we're buying now and the changes of our replenishment, as you heard from Gary, it is selling just as fast as we are bringing it in. So the good news is we're chasing that product and it's turning fast. And the product that we are buying now with our new disciplines is turning and the customers are reacting to it. I would say one other piece of the pie that we didn't plan on but it's starting to show up is in the closeout business. we believe there's going to be a lot of value at Family Dollar and Dollar Tree for closeouts going into the next several months. And if I follow you, you asked about H2, and obviously hard to look at March and the pandemic effect, but I would say this, as we got post-Easter, H2 has continued to have a 10 lift, even during this time. And it's interesting that as you get into the April timeframe post-Easter period, Our rural H2 that we have most of them outpace the urban locations. And that's not entirely surprising when you think about some of the hot spots that affected the urban locations more than rural. So we're still pleased with the H2. I think just in time, you know, I think back to 2008, it's a different crisis, but that's about the time Dollar Tree was, you know, getting to our prototype the way we wanted it. I don't think that's dissimilar to the 1,500 H2s that we have out there that are helping start the business now. That's really helpful, Colin. Thank you. My follow-up is just to get any other comments that you can provide as it relates to guidance. I know that you're not giving anything specifically, but anything else that we should keep in mind as it relates to 2Q for the balance of the year on some of the items you've mentioned were an impact in the first quarter, things like the merchandise costs or markdowns and other pressures. Yeah, Paul, it's Kevin. I think as we think about it, Gary's comments, he alluded to the fact that the Dollar Tree business mix has become what we would call more normalized. Obviously, I do believe that as we look at Q2, that can be a positive compared to Q1. I think another item to continue to think about is as we look at diesel fuel costs. For Q1, they were down on average about 12% year over year. They started at the beginning of Q2 down 25%. That's a small piece of the overall freight rates, but that's helpful. The other thing I would mention is we began the year with the expectation that we would see increases in our import freight, and with our contract that begins in May, we didn't see the increase maybe that we thought we would see, so I think there's a little benefit in the back half related to that. as we go forward. So a lot of moving pieces. I think distribution costs, I think if you look at that, I think there's going to continue to be pressure on our buildings. The throughput is very high right now, as you can imagine, as we try to get our essential inventory caught up along with the normal business. So I think there could be a little pressure as we continue there. The company's working on a lot of things, and as always, I think we did a good job of controlling expenses in general in Q1, and I think we'll obviously have a huge focus to continue to do that as we go through the year, no different than any other year, and try to keep that SG&A growth at a very reasonable point. Thank you. My best.

And ladies and gentlemen, once again, to ask a question, please press star 1. Also, please limit yourself to one question and one follow-up question, if necessary, so that we may accommodate as many callers as possible. We'll take the next question from Peter Keith of Piper Sandler.

Hi. Thanks. Good morning, everyone. Gary, you commented that Dollar Tree is now running, I guess in May, at a level you're accustomed to seeing. The two questions on that is, would that apply kind of an up-low single-digit run rate for the quarter? And then secondly, just thinking about the exposure sort of party and celebrations, is Dollar Tree being negatively impacted at this point because there's still fewer get-togethers and potentially fewer celebrations?

Well, let me answer the second one first. Clearly, we did see the impact of shelter-in-place, obviously, you know, parties took a bigger tip to that, but I think the resiliency of our customer and just the creativeness that we've seen out there with the drive-through birthday parties, what's been happening at graduation. We actually comped on graduation balloons last week, which I thought was just remarkable for our business. Now, parties are a big category for us. We split it into, you know, our celebration and paper, so the celebration is actually doing quite well right now. A party paper, as we called out before, is a piece that's lagging. On the other hand, crafts. A category that we didn't talk about a year ago is now a significant category in dollars. The comp is something that customers have responded to. And I think it sort of speaks to families are trying to figure out how to entertain themselves with the magic of products you can buy for a dollar at Dollar Tree and even at Family Dollar with toys and some of the home essentials there too. Anything related, kitchen, bathroom, bedroom, outdoor living. I mean, I sort of put it into those buckets. So, you know, that's how I think about it. And then, you know, we're earlier into the quarter. I think what we want to call out on what we see at Dollar Tree was You know, it doesn't do normal. But it certainly, at least in terms of the categories that we are seeing respond, shows a lot more like what we're used to. Now, we don't have any huge categories or maybe celebrations, holidays, until we get to the back half, really, right? We go from, you know, Memorial Day to outdoor grilling to back to school, whatever that's going to tend to be in the early fall. You know, after Easter, you know, We like what we see. We're not going to have the same kind of impact on the seasonal side that we had all focused on one week in April with Easter. So I think that also lets us sort of spread our opportunity out there in the store and what we merchandise and what we put on display. And I think what we're encouraged with is the things that our customers needed, they have found in both stores. and have bought at elevated levels now really family dollar starting with the April timeframe and now it seems like the dollar tree is getting back to its normal cadence.

Okay, thank you for that. I want to ask a separate question and maybe asking you and the team to put your economist hat on which I know can be a little bit dangerous. But on the federal unemployment benefit that's being paid out right now of $600 per week, that at present time is set to expire at the end of July. And obviously no one can predict what will happen. But if that were to expire, do you view that as a notable negative to the business and maybe to the spending power of your core customer? Or conversely, does it allow you to pick up some share with your value offerings?

Hey, this is Mike. We think about it as that goes away that we will be in a great position as a value retailer when people are unemployed and they don't have that source of income. They will need value more than ever, and we should be in a great position to provide that for them. Yeah, it's not 2008 for all the obvious reasons, and it's... What our customer has right now is money in their pocket. That's obviously a tall one for anybody that has doors open. In 2008, folks lost jobs too, and they needed us and they found us, and I think that's some of what we're planning for as we take a look into our crystal ball here back half of the year in the 21 year.

Okay. Sounds great, guys. Thanks a lot and good luck.

Our next question will come from Michael Lasser of UBS.

Good morning. Thanks a lot for taking my question. Gary, what percent of Dollar Tree sales relate to gatherings? Presumably, party is a big piece of that, but it extends also across seasonal and discretionary as well. Would you say it's 10% of sales, 20% higher than that?

Well, that's a tough one. I mean, I would just point out sort of what we've seen is that we've seen, you know, if we just take a look at Easter, what was impacted was obviously the pure Easter product, along with that party and candy was the 490 basis points impact for that holiday. I think it spreads a little more out once you get past that big holiday. I think You know, party is where we've obviously made it one of our key categories. And it's sort of bifurcated into what people can buy right now for celebration. Hey, parties or birthday parties are still going on. They're just happening in a different way. Graduations are still going on. They're just happening in a virtual environment. The things that get sold with that, now we're starting to see selling close to the same rate we saw before. The party paper is a little different. That goes to some gift giving and some other things that I think, you know, catch up over time. It's just a slower burn. But past that, it's, you know, you just think of category like stationary. You know, it means kids are home. It was parents trying to teach virtually or online, and they needed school supplies. And so a category like that picked up. I mentioned crafts. But you go down the discretionary line, people are still buying now, I think, on a normal cadence of what they have been used to on, dare say, a normal shopping trip. You know, what we're just seeing is they're coming in shopping with intent. You know, folks aren't coming in to buy a soft drink and a candy bar. They're coming in because they have a need, and right now Dollar Tree and Family Dollar feel that void for them.

Thank you.

And my follow-up is on the family dollar gross margin. It is up year over year, but against a really easy comparison, particularly on a two-year basis. So how should we think about the trajectory of the gross margin of family dollar?

Understanding that Nick might have had some issues in the first quarter, but what's it going to take to be able to get this business back to a 26% to 27% gross margin, and how quickly is it realistic to expect that that's going to happen?

Thank you. Yeah, Michael, I think as far as the timeline, that's maybe the harder part of the equation there. I think obviously we're very happy with, you know, Where we're headed now to the H2 renovations are a big part of that, and just the overall work that the merchant team is doing on the discretionary side of the business also plays a big role in this. And again, I think our opportunity here is to get more people in the store, show them the assortment and the reassortment, and get them excited about their family dollar store. that they shop. And I think, so the opportunity is there. I think, again, obviously increased volume always helps, but I think, you know, changing our trajectory of mix potentially plays a bigger role on an overall basis. We want to sell more consumables, but we also want the discretionary categories to play a bigger role. And then there's other things that we have to do a better job with. You know, we've talked about shrink the last couple of years, and it's not where we want it to be in our family dollar stores. And we have work because the team is working hard, but there's more work to be done there, even though we saw some improvement in Q1. I think if you look at other line items in there, you know, obviously markdowns have been heavy the last couple of years. I think we feel better about that as we get through this year. We talked about Q1 being more markdowns originally when we went into the plan because of the fact that we'd be working on a discretionary reassortment. But I think we've moved through that with the sales that we've seen. So I think going forward, we have this opportunity, and I think the team is working hard to make that consumer realize that it is a new assortment, a new mix, and I think it will be exciting to them.

Can I just clarify one thing? One of your competitors reported this morning, and they noted that they've seen a modulation in their sales trends in recent days. Have you seen the same thing?

I don't think that's something that we would comment on, Michael. Okay. Thank you very much, and good luck with the upcoming period.

And our final question will come from Paul Edgewitz of Citi.

Hey, thanks, guys. I'm curious on the family dollar side if you have any idea about the number of new customers that may have come into the network over the past several months. And then second, just to go back to the Dollar Tree gross margin, I'm curious if we take the mix out of the equation, if maybe you can talk about the gross margin within categories relative to themselves on a year-over-year basis where you're seeing increases and decreases basically. Well, for the thing I mentioned, you know, I would tell you in a go, we see from our folks in the field that just tell us, you know, they're seeing new customers coming in. A data point we do track is on customer feedback that we see folks who identify themselves as new customers. And on a weekend recount basis, we see the number of folks that actually sign up for the first time using the Family Dollar app, which we saw a spike on as people were looking for essentials. So, you know, that sort of vectors in on me, to us, that we've had an opportunity here to showcase our H2 stores, but also just improvement in our store base in Family Dollar. So that's a positive in my book. For Dollar Tree, on the margin mix, you know, when you think about that 490 basis points, shift. I mean, I guess you want to start there. I mean, that was the low point of us losing, you know, that amount of business on a key holiday in the discretionary business. And we're getting that back to normal now. And I think if you're asking a question around, you know, we always think like a mix and mark on. Well, mark on is just fine. You know, we took a look at categories like craft now that are copying outside the norm, that's going to be a help. So as we get back to a more normal mix, the mark-on is just fine, and then to Kevin's point, the things down the line that still deserve our attention, we do have to do better on shrink. You know, we're willing to spend more in our DCs right now to get essentials to our stores. That's probably going to be with us through at least Q2, if not past that. And, you know, when you're bringing in essentials, That does have an effect on the fact that you're paying, you know, basically the same freight on lower value trailers of bleach or paper towels or whatever it is compared to the normal mix. Those are sort of the near-term and short-term things, the way I'm thinking about it. But we're in a different place on mix right now, and we would expect Dollar Tree's gross margin to get the help from those that I called out. Thank you. Good luck.

And I'll turn the conference back over to Randy Giler for any additional or closing remarks.

Thank you, Shannon. Thank you for joining us for today's call, especially for your continued interest in Dollar Tree and Family Dollar. Our next quarterly earnings conference call to discuss Q2 results is tentatively scheduled for Thursday, August 27, 2020.

That does conclude today's teleconference. Thank you all for your participation. You may now disconnect.