Dollar Tree, Inc.

Good day and welcome to the Dollar Tree Incorporated Second Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Randy Giler, VP, Investor Relations. Please go ahead, sir.

Thank you, Shelby. Good morning and welcome to our call to discuss Dollar Tree's performance for the second fiscal quarter of 2020. With me on today's call will be our President and CEO, Mike Witinski. and our CFO, Kevin Walkler. 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 Securities 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 SEC. 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 your questions to one and one related follow-up question if necessary. Now, I will turn the call over to Mike Witinski, Dollar Tree's President and Chief Executive Officer.

Thank you, Randy. Good morning, everyone. I am very pleased with the company's second quarter results announced this morning. Our store and distribution center teams have done a remarkable job of serving customers through an incredibly dynamic time in retail. Their continued efforts to ensure we are providing a clean, safe shopping experience, along with great value and convenience our stores offer, contributed to our solid operating performance for the quarter. Our team delivered an earnings per share increase of 44.7% compared to prior year's quarter. These results for the enterprise were comprised of a 7.2% same-store sales increase, 180 basis points improvement in gross profit margin, and 130 basis point increase in operating profit margin. Same-store sales increased 11.6% at Family Dollar and 3.1% at Dollar Tree. It's a new day at Family Dollar. You know, in early March, on our Q4 earnings call and following our December leadership realignment, I spoke about the challenge and opportunity to turn around the discretionary side of the business at Family Dollar. Our focus is on greater values and sharper price points with an enhanced focus on meeting the basic needs of our customers. It's all about sourcing more of the items customers want to buy. Our team's efforts are paying off as Family Dollar delivered a record 28.9% same-store sales increase in discretionary for the quarter. Our realigned and focused merchandising team is demonstrating how they can be nimble and opportunistic to drive sales, loyalty, and repeat visits at Family Dollar. Examples of this included following on the success we experienced at Dollar Tree, we have now completed the rollout of Hallmark-branded greeting cards to all Family Dollar stores. We are capitalizing on great brand name closeout opportunities, which is a relatively new approach at Family Dollar. We introduced what could be the top toy of the year, Baby Yoda, and sold tens of thousands in a matter of days. As the quarter progressed, we saw a shift from kitchenware and tabletop into more home decor and soft home, as customers are investing in their homes and spending more time in their homes. Anything related to staying at home, such as lawn and garden and outdoor grilling, continues to perform very well. And on the apparel side, we have had strong sell-through of our spring and summer apparel, where the focus on are at-home items like loungewear, sleepwear, slippers, athleisure, children's clothing, as well as newborn and onesies. Family Dollar's 11.6% comp reflected the continuation of momentum that we saw in Q1 as customers are viewing Family Dollar as a convenient, safe, local option with great values on food, essentials, household products, cleaning supplies, home decor, and much, much more. The strong performance and discretionary contributed 390 basis points improvement in gross margin. An operating income margin for Family Dollar in Q2 increased 470 basis points to 5.3%. Other Family Dollar sales highlights for the second quarter included The 11.6% same-store sales increase was on top of a 2.4% count in Q2 a year ago. This was comprised of 25.9% increase in average ticket, which was partially offset by an 11.3% decline in transaction count, as customers continue to consolidate their shopping trips. The sales strength was broad-based geographically, with each zone to bring comp increases between 9.5 and 13.5%. Also, both rural and urban family dollar stores delivered double-digit comp increases, with rural slightly outpacing urban. Regarding the cadence of comps, each month's increase was greater than 8.5%, with May, which had the greatest benefits of stimulus, being the strongest month, and June was slightly stronger than July. While it is still early in Q3, Family Dollar is delivering very solid same-store sales, despite less government assistance being available than during the prior quarter. The consumable side of the business delivered another positive quarterly comp at 6.3%, while as previously mentioned, the discretionary comp was a record, 28.9%. We saw more than a quarter million new sign-ups in our smart coupon program during the quarter, bringing its total enrollment to 12.8 billion customers. Our H2 stores continue to perform very well, delivering year one count lifts greater than 10% when compared to non-renovated stores. For fiscal 2020, as previously stated, we plan to renovate 750 family dollar stores, while new stores are also being opened in the H2 format. For the Dollar Tree segment, Dollar Tree bounced back with a 3.1% same-store sales increase for Q2, following a quarter where Easter seasonal performance was materially impacted by COVID-19. Gross margin, which was down 260 basis points year-over-year in Q1, was down 10 basis points for the second quarter. This sequential improvement was primarily due to the rebound on the discretionary side of the business following Easter. Geographically, comp sales were relatively balanced with increases by zone ranging from 1.2% to 4.25%. For the quarter, discretionary delivered a positive 9% comp and consumables were down approximately 3%. The comp sales for every line of business at Dollar Tree improved from quarter one to quarter two, with the exception of the food categories. Factors impacting food include reduced availability of protein products from periodic plant shutdowns, slowed sales of impulse snacks as traffic has declined, and some vendors are focusing more on larger pack sizes based on demand and their production capacity. Categories performed well in the quarter include crafts, kitchenware, housework products, party celebrations, and beauty and eyewear. The Crafter Square program is a tremendous hit with our customers and is driving repeat visits to our stores. Our timing with the rollout of more than 2,400 stores in Q1 could not have been better. The improved performance in the basic craft assortment is also contributing to a lift on a seasonal craft business as well. But for the quarter, Dollar Tree's transaction count was down 15.9%, while average ticket increased 22.6% as consumers in general have been shopping less but buying more. Q3 has gotten off to a good start at Dollar Tree as well. Regarding upcoming seasons like back to school, fall harvest, and Halloween, we are seeing more volatility than usual on the timing of back to school sales. But the good news is these are in my categories. and there is minimal markdown risk associated with these items. I view this as similar as the graduation category. The timing of the sales were disrupted, but overall, the category performed very well for us. Consumers are adapting to their current environment and are still celebrating, albeit in smaller groups or celebrating in different ways. In March, the merchant team took action to make adjustments in Halloween buys and de-risk the categories. much less focus on traditional trickle treating and large gatherings, and more focus on decorations and costumes. We are seeing very nice trends regarding the early sales related to fall harvest and Halloween. Now regarding Dollar Tree Plus, our focus on selling great value merchandise at price points of $5 and below. We are continuing to analyze, learn, and make adjustments to the program. Earlier this year, we transitioned from the initial consumable dominate assortment to more of a wow-type discretionary products that Dollar Tree is known for. We recently added bins to our larger test store to promote some hot one-time item sales. Sales of these discretionary products remain strong with good sell-through as customers are responding favorably. We are excited about the many new multi-price discretionary products that we already have on the store shelves for this fall selling season. We remain encouraged about the potential for Dollar Tree Plus. Inventory levels in both our segments were impacted during the quarter as it relates to higher-turned consumable categories. Current environment and related in-stock levels on domestic items are improving, but the continuation of high customer demand especially on items such as paper towels and cleaning supplies, is still outpacing both vendor production capacity and the supply. In-stock levels on certain items are constrained, but we do expect to see continued improvement as we move through the quarter. Throughout the quarter, we rewarded our dedicated hourly store and distribution center associates with premium pay. This was in recognition for their extraordinary efforts to protect and serve our customers effectively with enhanced cleaning protocols and other safety measures. We believe these efforts contributed to our solid top-line sales performance during the quarter. The value and convenience of our store's offer is desired in the current environment by customers who are looking to save money while shopping close to home. The COVID-19-related costs incurred for wage premiums for the frontline associates our guaranteed sales bonuses for field management, and the supplies needed for keeping our customers, associates, and facilities safe, totaling nearly $135 million for the quarter. Surveys indicate that customers want to shop where they feel comfortable and safe. We have invested in our associates and believe this is contributing to enhanced loyalty, attendance, while reducing turnover in our stores.