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.