Dollar Tree, Inc.

Good day, and welcome to the Dollar Tree, Inc.' 's Third 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, Shelby. Good morning, and welcome to our call to discuss Dollar Tree's performance for the third quarter. With me on today's call will be our President and CEO, Mike Witinski, and our CFO, Kevin Wampler. Remarks that we will make today about future expectations, plans, and prospects for the company represent forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Results may differ materially from those indicated by these forward-looking statements due to various factors included in our earnings release, 8-K, 10-Q, and annual report, 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. Following our prepared remarks, we will open the call to your questions. Please limit your questions to one and one related follow-up question. Now I will turn the call over to Mike Witinski, Dollar Tree's President and Chief Executive Officer.

Thank you, Randy. Good morning, everyone. 2020 has proven to be the most unpredictable and unique year in my 40 years in retail. Nearly every business, family, and person has had to adapt and react to what is currently a new normal. My heart goes out to every family that has been impacted to some degree by the coronavirus. I would also like to give a shout-out to all the medical professionals, frontline workers, and others who are working tirelessly to ensure that we stay safe and healthy. In an environment where individuals are concerned about their health and exposure, about their income and jobs, and about their not knowing what is next, I firmly believe that Dollar Tree and Family Dollar are part of the solution. Our 15,000-plus stores are close to home and easy to shop, providing great convenience, and we offer a broad assortment of tremendous values to meet both needs and wants. I am incredibly proud of our team's effort in the third quarter to continue serving customers effectively while driving operational improvements in both banners through this extremely dynamic retail environment. The team delivered an earnings per share increase of 28.7% compared to the prior year's quarter. These enterprise results were comprised of a 5.1% same-store sales increase, 150 basis point improvement in gross profit margin, and 130 basis point increase in operating profit margin. Our Dollar Tree segment delivered its strongest same-store sales performance in the past 10 quarters with a 4% increase. Gross profit margin improved 70 basis points to 34.9% versus Q3 a year ago. And operating margin increased 50 basis points to 12.7%, which represents a 300 basis point improvement from Q2. The quarter included $28.6 million in COVID-related costs. Geographically, comp sales were positive in all zones. For the quarter, discretionary delivered a positive 10.2% comp, and consumables were down approximately 2.6. We did see sequential improvement in consumables throughout the quarter as inventory flow of high-demand products improved. Categories performing well included crafts, party celebrations, household products, kitchenware, and even early Christmas seasonal. The performance of Crafter's Square offering that was rolled out into approximately 2,000 400 stores in Q1 of this year has been outstanding. We plan to add Crafter Square to the remainder of the Dollar Tree stores in early 2021. The Halloween seasonal sell-through was our best ever. Overall, the fall harvest and Halloween seasonal categories delivered a combined 9.4% comp for the quarter. Our merchants continue to hit a home run on identifying and sourcing great products that customers love at the dollar price point. Customers are continuing to shop early to celebrate events and holidays. Our sales continue to be delivered by average ticket, which increased 19% as consumers continue to consolidate trips. Our 12.6% transaction count decline was a 300 basis point plus improvement when compared to 15.9% drop that we saw just a quarter ago. We believe this is directly related to shopper mobility. Many people are working from home, learning from home, or simply not going out as often. But when they do visit the store, they are filling their baskets. Ticket was up 19% this quarter and 22.6% last quarter. We continue to like the results we are seeing with the Dollar Tree Plus, and we are pleased to announce we are expanding the program to a total of approximately 500 stores beginning in the spring. Based on our learnings, we have continued to test, refine, and improve this initiative since the initial launch in mid-2019. The merchant and store teams have done a tremendous job. Our customers are buying these products and sales of our multi-price items continue to grow. In fact, we are seeing that when multi-price items are included in the basket, the average transaction value is approximately twice the size. Recently, we've been seeing phenomenal sell-through of Dollar Tree Plus items and seasonal merchandise. We are expanding our discretionary assortment to focus on sales and margin-driven categories that do not cannibalize current sales, are accretive to the business, and bring great value to our customers. These $3 and $5 items will also be leveraged through our Family Dollar stores when it makes sense. This is an example of harnessing the power of two brands by bringing Dollar Tree and Family Dollar together. We now have a new merchant team dedicated to these multi-price items that will benefit both banners. Family dollar sales highlights for the third quarter included the 6.4% same-store sales increase was on top of the 2.3% count in Q3 a year ago. This was comprised of a 21.3% increase in average ticket, partially offset by a 12.3% decline in transaction count. The ticket and traffic trends are relatively balanced throughout the quarter. The sales strength was broad-based geographically, with each zone delivering positive comps ranging 4.7% or better. Categories performing well are many of the discretionary categories that we have been focused on improving, including home decor, household products, toys, electronics, and apparel. Both rural and urban family dollar stores delivered mid-single-digit comp increases, with rural slightly outpacing urban. Regarding the cadence of comps, each month's increase was greater than 5.5%, with September being the strongest month and October slightly better than August. The consumable side of the business delivered another positive quarterly comp at 4.1%, and the discretionary comp was strong at 14.6%. On our March call, I discussed the challenge and opportunity to enhance the discretionary performance at Family Dollar through improved product assortment, sharper price points, and greater values. Customers are noticing and they are responding. In Q3, discretionary as a percent of a net sales at Family Dollar increased 140 basis points to 21.5% of sales. Our discretionary grew two times faster than the total market in Q3. During the quarter, we launched the ability to sell product directly on our website at FamilyDollar.com, providing customers another way to access great values. Additionally, we are early in the test phases of the following initiatives, buy online, pick up at store, and delivery options through Instacart and Shipt. There will be more to come on future calls. As I mentioned on our call three months ago, it's a new day at Family Dollar. I continue to be very pleased with the team's overall progress. We are three-quarters into 2020 with an operating margin of 5.1% compared to 2% three-quarters into 2019. The key elements of our improvement plan include improved merchandising and marketing, raising store in-stocks, upgrading brand standards, creating a selling culture, and refining our format strategy. I would also like to recognize Dollar Tree Canada. Our Canada President and Chief Operating Officer, Neil Curran, and his team are hitting on all cylinders. During Q3, Dollar Tree Canada opened two new stores, bringing the total to 230 stores north of the border. Canada exceeded its plan of sales, gross margin, and operating income, delivering low double-digit comps in both consumables and discretionary, including very strong seasonal sales on fall harvest and Halloween. And they have improved on store manager turnover and internal promotion as a result of their continued focus on people development. Regarding real estate, The team completed more than 550 projects in the quarter, including 143 new stores, 34 relocations, 371 Family Dollar H2 renovations, and we had 16 store closings. We ended the quarter with 15,606 stores. I'll now toss it to Kevin to provide more detail on the Q3 performance.

Thanks, Mike, and good morning. For the third quarter, consolidated net sales increased 7.5% to $6.18 billion, comprised of $3.3 billion at Dollar Tree and $2.87 billion at Family Dollar. Enterprise same-store sales increased 5.1%. On a segment basis, comps for Family Dollar increased 6.4%, and for Dollar Tree increased 4%. Dollar Tree's comp represented its best quarterly same-store sales performance since Q1 of 2018. Overall, gross profit for the enterprise increased 12.9% to $1.92 billion. Gross margin improved 150 basis points to 31.2% compared to 29.7% in Q3 of 2019. Gross profit margin for the Dollar Tree segment increased 70 basis points to 34.9% when compared to the prior year's quarter. Factors impacting the segment's gross margin performance included Merchandise costs, including freight, improved by approximately 95 basis points. Dollar Tree saw an improvement in merchandise mix and lower freight costs as a percentage of sales, partially offset by reduced markup. Occupancy costs decreased approximately 20 basis points due to leverage on the comp sales increase in the quarter. Trink improved approximately 10 basis points. These improvements were partially offset by distribution costs that increased 50 basis points, primarily due to higher payroll costs and depreciation. This includes the continued ramp-up for the two new distribution centers, as well as approximately $6.6 million, or 20 basis points, of COVID-related expenses, primarily premium pay and bonuses. GrowGrow's profit margin for the family dollar segment improved 230 basis points to 26.8% in the third quarter. The year-over-year improvement was due to the following. Shrink improved to 70 basis points based on inventory results in the current year and cycling an increase in the accrual rate during the prior year. Merchandise costs, including freight, improved 60 basis points, primarily due to a balanced improvement in merchandise mix and mark-on. Occupancy costs decreased approximately 60 basis points as a result of leverage from the comp sales increase. And markdown expense improved approximately 40 basis points due to lower promotional activity and improved sell-through of seasonal merchandise and apparel. As a percentage of net sales, distribution costs were flat compared to the prior year quarter. The current year quarter included approximately $4.3 million for 15 basis points of COVID-related expenses, primarily premium pay and bonuses. Consolidated selling general administrative expenses increased 20 basis points to 23.7% of net sales compared to 23.5% in Q3 a year ago. For the third quarter, the SG&A rate for the voluntary segment as a percentage of net sales increased to 22.2% compared to 22% in Q3 of 2019. Payroll costs increased approximately 50 basis points based on payroll expenses increasing $17.3 million, or 50 basis points, for costs associated with COVID-19 premium pay and bonuses. Store facility costs decreased 15 basis points, primarily due to leverage of the stronger same-store sales and lower electricity costs. Other excelling general and administrative expenses decreased approximately five basis points, primarily from lower travel and legal costs. The SG&A rate for the family dollar segment improved approximately 20 basis points to 22.2% compared to 22.4% for the third quarter of 2019. Other selling general administrative expenses decreased by approximately 20 basis points primarily due to lower advertising and travel costs as a percentage of net sales. Store facility costs improved approximately 20 basis points primarily from leverage on comp sales and lower electricity costs and depreciation improved 10 basis points, primarily from leverage on comp sales, increased. These benefits were partially offset by payroll expenses, which increased approximately 35 basis points driven by COVID-19 costs of $11.4 million, or 40 basis points for premium pay and bonuses, and increased incentive compensation based on performance. Operating income increased 29.9% to $465.5 million, compared with $358.4 million in the same period last year, and operating income margin increased 130 basis points to 7.5% compared to last year's third quarter. Current year quarter included $46.3 million in COVID-19-related expenses in total. Non-operating expenses totaled $38.2 million, comprised primarily of net interest expense. Our effective tax rate was 22.8% compared to 19.3% in the prior year's third quarter. Current quarter rate reflects higher state tax rate and higher income amounts taxed at the statutory rate. Prior year rate reflected a larger benefit from the reconciliation of the tax provision to the tax returns. The company had net income of $330 million or $1.39 per diluted share, which included $46.3 million or $0.15 per diluted share of incremental operating costs for COVID-19-related expenses. This compared to net earnings of $255.8 million or $1.08 per share in the prior year's quarter. Combined cash and cash equivalents at quarter end totaled $1.12 billion compared to $539.2 million at the end of fiscal 2019. The company paid down the remaining $500 million on its revolving line of credit during the quarter. Outstanding debt as of October 31, 2020, was $3.55 billion. During the quarter, we purchased nearly 2.2 million shares for $200 million. At quarter end, we had $600 million remaining in our share repurchase authorization. We will continue to provide post-quarter updates on share repurchase activity. Inventory for Dollar Tree at quarter end declined 1.8% from the same time last year, while selling square footage increased 4.2%. Inventory for selling square foot decreased 5.8%, and inventory levels are well positioned for the holiday selling season. Inventory for Family Dollar at quarter end decreased 2.9% from the same period last year, while selling square footage increased 1.1%. Inventory for selling square foot decreased 4%. Our inventory levels improved in Q3, and we continue to be more productive with lower inventory, significantly increasing our inventory terms. Capital expenditures were $238.7 million in the third quarter versus $279.8 million in Q3 last year. And for fiscal 2020, we continue to expect consolidated capital expenditures to be approximately $1 billion. Depreciation and amortization total $170.1 million for Q3 compared to $160 million in the third quarter last year. And for fiscal 2020, we now expect consolidated depreciation and amortization to be approximately $680 million. While we're not providing sales and EPS guides, I do want to provide a few data points for your modeling. That interest expense is expected to be approximately $37 million in Q4 and $151 million for fiscal 2020. The tax rate is expected to be 22.3% for the fourth quarter and 22.8% for fiscal 2020. Weighted average diluted share counts are assumed to be 236.3 million shares for Q4 and 237.5 million shares for the full year. We have a strong balance sheet and continue to grow the company by investing in both new and renovated stores, our supply chain, and technology to improve the customer experience. We remain confident in our business and our ability to drive long-term shareholder value. I'll now turn the call back over to Mike.

Thanks, Kevin. We certainly have momentum in our business. For Q3, in a challenging retail environment with government stimulus mostly behind us, we delivered very solid enterprise results, including a positive 5.1% comp, 150 basis points of gross margin improvement, and 130 basis points of operating margin improvement, despite incurring more than $46 million in COVID-related costs. Additionally, we completed more than 550 real estate projects, paid down the $500 million drawn on our revolving line of credit, and repurchased $200 million in stock. Our strong balance sheet provides us the flexibility to grow the business and create shareholder value. It is still very early, but I am encouraged by our start to the current quarter. We are just over three weeks into our important fourth quarter, and we are off to a very good start, with same-source sales at both banners currently tracking above reported third-quarter levels. We are truly leveraging the power of both brands. Actions taken in 2019, including the consolidation of store support centers and the alignment of organizational leadership under one team, are paying off. Examples include, we are experiencing improved accessibility to a broader base of manufacturers and vendors by going to market as a 15,000-plus store chain. Many vendors are willing to work with us to support both the dollar price points as well as price points above the dollar. Our merchant teams are harmonized to act with clarity, focus, and speed. When the first COVID wave hit in March, we took action to de-risk the Halloween season and actually saw the best sell-through in company history. This fall, we modified our assortments away from the traditional cold and allergy and to more focus on health products, vitamins, and face coverings. We also made strategic buys on paper, soaps, and sanitizers to get ahead of the curve as COVID cases were expected to pick up in the second wave. Our seasonal businesses both at Dollar Tree and Family Dollar are doing very well. We are able to be a convenient shopping trip to meet the needs of those staying at home, eating at home, working at home, and or learning at home. We are seeing greater sales of seasonal product as it hits our stores. Customers are buying ahead and not waiting until the last minute. This is resulting in better sell-through and reduced markdown exposure. We will continue to develop new strategic store formats so we are able to better serve our customers while improving store productivity, margins, and returns. We want formats that utilize the best of both brands to serve customers in all types of geographic markets. This will be a story of evolution, change, and improvement. Our gross margin return on investment, or GEMROI, at Family Dollar is the highest it has been since we have owned the business. This is a combination of improved sales, gross margin, and inventory returns. An example is our apparel category, where we delivered a significant improvement in sales and margin with material-less inventory. This is why the overall market has been down for apparel. We are focused on delivering the basics at greater values, sharper price points. The team has undergone a significant amount of work to get us to this stage, with one consolidated store support center, a strong balance sheet, and an aligned, energized, and focused leadership team, and a full staff of talented retailers We believe we have the ability to better serve customers across North America. Our actions represent a transformational opportunity to leverage the power of both of our brands through flexible store formats designed to drive operational results and enhance shareholder value. Before we go to your questions, I'd like to wish all of our stakeholders a safe and happy holiday season. I believe we are all looking forward to the arrival of 2021. It's almost here. Operator, we are now ready to take questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please limit your question to one question and one follow-up question if necessary. Again, press star 1 to ask a question. We'll pause for just a few moments to allow everyone an opportunity to signal for questions. We'll take our first question from Simeon Gutman with Morgan Stanley.

Thanks. Good morning, everyone, and nice quarter. I'll ask one and a follow-up as one full question. First, the quarter-to-date acceleration at both banners, what are you attributed to? Is there any stocking up going on at the family dollar banner? And you mentioned maybe some shopping earlier. Is there any signs of pull forward of holiday spending? And then I just want to go back to the Dollar Tree Plus. For a second, it sounds like you're excited. The initial results are good. I guess my question, a little tongue-in-cheek, is why did it take so long? If it sounds like it's so successful, why didn't it come sooner? And anything about the current backdrop that could be unreliable as a test. Thank you.

Hey, thanks for the question. So according to date, we are seeing some of the stock up right now. It's not quite at the level as it was back in March and April. We're estimating at about 30% of the rate it was earlier in the year, but we can see that they are stocking up now. And the seasonal pull-through is some pull-forward sales. We do see they're buying earlier and decorating their homes, and it's really helping us a lot in our sell-through. We have less markdowns, and so there's less exposure there and ability to get more product out on our sales floor. Regarding Dollar Tree Plus, while I know it seems like it takes long, but this is really similar to other tests that we have. When we have our crafter square, we tested it in three or four stores, then we put it out into 800 stores, and then rolled it out, and now we're rolling out to the chain, and that took probably 18 months to two years. It's just that we didn't show you all the backdrop of the early testing. And we took the same pace as we were looking in our snack zones at Dollar Tree. We tested that for a year in stores and refined it and then rolled it out to a certain amount of stores and then began our process. So this is what we're doing, the same process. We want to make sure it's right and aligned. And we've even learned a lot from our process by shifting a lot from consumables. And to the discretionary items that the customer really wants that we can bring great value in. And it also takes our buyers times to go. These are import items and we actually manufacture and create these items to be a great value and a wow factor at the three and $5 price point. So we want to make sure it's the right thing and it's adding value to our customers. and to our company as well. Thank you.

We'll take our next question from Edward Kelly with Wells Fargo.

Yeah, hi. Good morning. So, Mike, just a follow-up on Dollar Tree Plus. I was hoping that you could provide a bit more color on the actual decision to expand the test. Any more detail in terms of What you've seen from a sales lift or a margin impact in the stores where the product is currently. Why is 500 stores the right number? And then, you know, it's notable that you have a team that's now focused on this product internally. So what does that say about where we go from here?

Yeah, well, I think the first answer is that, you know, we're organizing around the strategy. So that tells you that there is commitment there that we want to find great products. at the $3 and $5 price points. And it gives us the ability to also leverage that across both banners where it makes sense. And the $500 gives us a... We're actually rolling it out to more distribution stores, and we look at stores that are sized appropriate where we can bring this product into those stores. So $500 is an estimate of stores around those distribution centers And it also gives us enough stores to really see how it continues to grow and improve and how our customers respond. We like the results. We can tell that the sales are growing compared to when the sales of the consumable items, they're reacting more. So the overall sales of these items are growing. The challenge we have is in the backdrop of the COVID with all the increase in sales and mix of the stores, how it shifted. It's really hard for us to isolate those specific categories in those stores, but it's easy enough. There's enough evidence that the sales of those specific categories are doing well enough and our customers are responding that we're going to continue to roll it out and test it more. The thing that we do like is even in the seasonal items where the $3 and $5 items are really responding well in seasonals.

Thank you. And just a quick follow-up related to that. So, you know, I think it was about a year ago that, you know, when asked about this initiative, you guys had talked about how, you know, customer response, that maybe like a third of customers liked it, a third were indifferent, a third didn't like it. And I think it had people sort of thinking like, you know, maybe this is not something that would make sense. How has that customer response changed?

Well, I think the number one thing that we can see is the sales are up. over the program when it was consumable. So we think that they're responding favorably because the products that we are buying are selling through at the rate we expect, and it's continuing to grow.

Okay. Thank you.

Thank you.

We'll take our next question from Matthew Boss with J.P. Morgan.

Great. Thanks, and congrats on the performance, guys.

Thanks, Matt.

Maybe first, on Dollar Tree banner gross margins, what drove the 95 basis points of merchandise margin expansion this quarter? How best to think about puts and takes in modeling fourth quarter gross margin at Dollar Tree? And I know we've talked in the past about the return to 35% to 36% gross margin. Is there any impediment to getting there potentially next year at the Dollar Tree banner?

Hey, Matt. This is Kevin. So obviously, as we went through the quarter, mix was an important component of driving the improved merchandise margin, that and freight. So which, again, mix moved about 300 basis points year over year towards discretionary, and that really speaks to Obviously, things like Halloween, Mike spoke to, had a great sell-through, speaks to Crafter's Square, which has just been a dynamic element in our stores. So I think those are important things as we've seen that mix shift a little bit. And it may be a little counterintuitive, the fact that we saw improvements in freight, but you have to remember a year ago, from a compare standpoint, we saw a pretty big increase a year ago from a surge standpoint. And so our comparisons were maybe a little bit different than some people. So we actually saw a little bit there. So I think that's important at the end of the day. And again, I think we saw some leverage with the comp on occupancy, which again, obviously with a four comp, we would expect leverage there. But as far as the 35 to 36, this was our best gross profit in Q3 since, I believe, 2017. It gets us on track to basically, you know, if we continue this type of trend where we would be able to be in that 35 to 36 range. And again, nothing, there is no barrier stopping us. So we just have to continue to build the business as we've always had. And, you know, I think the discretionary side is very strong right now, and I think that's a big benefit as well.

That's great. And then as a follow-up on the family dollar side, what have you seen from new customers relative to spending from existing customers more recently in the improved performance? How to think about retaining some of these new customers? And Maybe larger picture, how do you envision the family dollar comp story as we think about relative to the low single-digit historical comp profile at Dollar Tree? Do you see it similar? Do you see it lagging? What's the best way to think about family dollar multi-year relative to comps at Dollar Tree in your opinion?

Yeah, in my opinion, I see it similar to the Dollar Tree low single-digit continued growth year after year in comp store sales growth. I think both banners should be able to settle into that with no problem. Regarding the new customers, what we're seeing is just overall it's very similar to new and old, as I shared in the prepared remarks, that when the customers are coming into the store, they are shopping with intent. And what we do like to see is they're shopping the entire store in the discretionary side that we are working so hard on, to fill that basket and we're seeing our discretionary side grow with both new and old customers. Great color. That's a lot.

We'll take our next question from Brad Thomas with KeyBank Capital Markets.

Hi, thanks for taking my question. Nice quarter here. I was hoping you could give a little color on how you all are starting to think about 2021 at this point. You know, clearly 2020 is shaping up to be a good year for you all. But there are also some dynamics like traffic that have been challenges for you. I guess, how are you thinking about some of the puts and takes at a high level at this point for next year?

Hey, Matt, we're all looking forward to 2021. I think, you know, the way I think about it, I do think the customer's The dynamic in their shopping patterns have changed, and I think it's going to be slow to change. I don't think there's going to be a light switch that's going to turn on and all of a sudden they'll go back to their old shopping patterns and activity. I think we will keep going after driving that basket size, and when they're in our stores, drive it with intent.

I think the other thing, Brad, is obviously, as Mike laid out early this year, focus on discretionary business in the family dollar store. Obviously, we've had the pandemic this year, which obviously muddies the water a little bit. It's obviously an area that we feel where we can drive new business and convert more customers at the end of the day. The team continues to work cross-functionally to build out those assortments. And, you know, we saw our best Halloween sell-through in the time we've owned Family Dollar this year. So it tells us that we can sell seasonal. It can be a bigger part of the overall business, and it needs to be a part of our overall business, a bigger part as we go forward. So it's going to be a continued focus, just like we talked about earlier this year.

Great. And if I could ask a follow-up on the H2 stores, you talked about your plans for the multi-price expansion on the Dollar Tree side. Do you have a target at this point for how many H2 renovations you'll do next year? I know you pared back a little bit this year in the COVID backdrop. How are you thinking about those models next year?

Yeah, Brad, you're right. This year, about 750 H2s. We entered the year expecting to about 1,250, but obviously COVID kind of got in the way of that. We do expect 1,250 additional H2s in 2021 to continue that process forward. It continues to be something that we can build upon. Our customers really like it. I really like the layout and the offering and the assortment, and, you know, it's an important part of the growth as we go forward.

Great. Thank you so much.

We'll take our next question from Peter Keith with Piper Sandler.

Hi. Good morning, everyone. Maybe just to touch base quickly on some of the gross margin trends, This looks like the first time in a while where shrink is now a tailwind. So have you gotten over the hump where you think you've controlled shrink and can you continue to see some benefit there? And similarly on gross margin, freight is a nice tailwind for Q3, but we have seen freight rates jump rather dramatically. How should we think about that impact in the fourth quarter?

Yeah, two really good questions. Thanks for the questions, Peter. I think as we look at Shrink, we did see some nice improvement. Again, it's been a headwind for much longer than it should have been. As I've stated before, it's been front and center on many people's desks. I would tell you a good call-out for our operators and our asset protection team. We've made progress. We've got some momentum. I would tell you we are not where we need to be overall yet. Our goal is to be not just good, but to be class leading as it relates to this. We have more work to do, but the good news is we have some momentum, which is very, very positive. Do I expect it to be a benefit? I think it could be a benefit as we go forward into Q4. I'll be not to the same rate on the family dollar side because we were cycling a fairly big increase in the accrual rate in Q3 a year ago, but I do believe there can be some improvement there. As it relates to freight, I would tell you while it was a good guy for us in Q3, I expect that to be somewhat tempered in Q4. To your point, again, as I stated earlier on the call, Q3 last year our freight was significantly high due to surge costs and just moving trailers. We have seen some of that increase that you just spoke to in the rates. The transportation team is working really hard to mitigate every dollar they can, but I don't expect it to be the same type of benefit in Q4 that it was in Q3. We saw more of that on the Dollar Tree side

uh than we did on the family dollar side um just from a from a banner specific side i think way to think of it so um so it's kind of how those two eyes look to play out as we go forward okay uh thanks kevin uh maybe a separate question for mike uh you fleshed out some omni-channel initiatives looks like you're looking at opus for family dollar maybe give us a little bit of sense on what you guys are playing around with there, and is it only in the family dollar business where you're looking at that, or would you think about more omnichannel investment needed for Dollar Tree as well?

Yeah, thanks for the question. That's a great question. We think it's critical, and especially after this year, as you've seen by others and how the customer is really moving into the omnichannel and using that, so We definitely are going to build that capability at both Family Dollar and Dollar Tree. And like we have organized around our Dollar Tree Plus, we are organizing around our omni-channel business as well. We've got a new leader there who's got great experience, and we will accelerate our capabilities.

Okay. Thanks so much, guys. Good luck on the holiday. Thank you.

We'll take our next question from Chandini Luthra with Goldman Sachs.

Hi, this is Chandini Luthra at Goldman. Thank you for taking my question. Just building up on that last question on Omnichannel, you also talked about introducing delivery at Family Dollar. If you could provide any color on what early leads are, what sort of customer is buying that, what the delivery basket is looking like, and finally, How do you think about economics with Family Dollar, you know, economics to ship to home with Family Dollar?

Yeah, it's really early. We launched it mid to late quarter. I would say we really like the basket size. We like the product that they are buying inside the basket. And we're excited about offering that opportunity to our customers as they shift in some of their behaviors. The beautiful thing is, is we've got, you know, we are 15,000 store chains and we're conveniently located in their neighborhoods and close to their stores. And then when we combine that with their ability, should they want to buy online or pick up in store or get it delivered at home, we're going to have that capability as well. But it's really early for us, but we do like the basket we're seeing in the mix of the product.

Got it. I guess my follow-up is a little bit long-term, you know, as we sort of think about 2021 and beyond. There is a lot of talk about raising the federal minimum wage threshold. Could you perhaps give us color in terms of what percentage of your employees are minimum wage? How do you think about if that headwind were to come about? How should we think about that?

Yeah, that's a good question because we think about that a lot. And, and, um, As you can imagine, the state minimum wages are all over the board, and it's hard for me. It would be a different number by state and geography, but there are probably six to seven states already on their path to that $15 an hour minimum wage that they've announced several years ago, and they're on their path to that. So our operating teams are absolutely working on driving, first and foremost, in-store efficiencies. You look at if you can bring in technology and self-scanning to help leverage some of your resources that way. Our merchants continue to look at merchandising methods through shelf-ready PDQs, and then distribution methods. I mean, those are our three levers that we can pull our operators in the store, technology, distribution, and the product our merchants are buying are all the things that we actively are going to be working on.

That's great. Thank you for taking my question, and congratulations on a great quarter.

Thank you.

As a reminder, if you would like to ask a question, please press star 1. Please limit your question to one question and one follow-up. Again, that is star one to ask a question. We'll take our next question from Michael Montani with Evercore.

Hey, good morning. Thanks for taking the question. I just wanted to ask first off on flow-through rates, if I could, for the fourth quarter. Third quarter was quite healthy in the mid-20% range. I just wanted to see if there's any puts and takes that you would call out to think about at the enterprise level if that is sustainable. And then I just had a follow up on Dollar Tree Plus.

As it relates to flow through, it was a very good month, or a very good quarter, I should say, in regards to flow through. Obviously, we've got significant leverage across both businesses. And we saw, obviously, help on the mix, in particular, from both. Generally, as you go into Q4, I would tell you where I do expect gross profit to improve year-over-year, but not at the same rate on a consolidated basis as it did in Q3, just based upon some of the things that we won't necessarily repeat, which we've talked about today. Shrink may not be as big a help. And freight may not be as big of a help and things like that. So the flow through probably won't be quite the same on total gross profit. But in general, Q4 does tend to be a higher discretionary period for Dollar Tree in particular. And we see traditionally some of our highest margin out of all of our four quarters. some puts and takes there. I think, you know, obviously we expect some improvement. It just won't be the same probably as much as what we saw in Q3.

Okay. It's helpful. And then if I could just around Dollar Tree Plus, I wanted to see if there's any incremental color that you could share in terms of, you know, how the stores were performing, you know, relative to the overall chain from a comp perspective when you roll out Dollar Tree Plus. And if there's any incremental color perhaps related to that on incrementality, either in terms of shoppers or kind of basket size, just any incremental color there.

Yeah, Mike, thanks for your question on the DT+. You know, as I shared earlier, right now when you look at relative performance to other stores or prior, the challenge we have is when we change to the our 2.0 and brought in all our discretionary, it landed right in March. So there was so much noise around other stores and or themselves that it was really hard for us to determine the lift that was associated specifically to these products. And remember, the linear footage is still 10% to 11% of the total store, so it's hard to see what this is doing. But the two things we do see, we like the sales that these are doing. the product that we're putting in there at the $3 and $5 price point are selling. It's also selling at a much higher margin because it's a discretionary product and we're able to manufacture these products and bring value to the customer. And then the third thing we can see is the basket size. When one of these items are in the basket, it is twice the basket size when they're not in there. Those are the things that we can see and gives us courage to keep moving forward and we're going to keep improving it.

Thank you for taking the question.

We'll take our next question from Scott Ciccarelli with RBC Capital Markets.

Good morning, guys. Scott Ciccarelli. I know you guys have made a really concerted effort to improve your discretionary mix, but have you been surprised by the magnitude of change in discretionary versus consumable mix? And then related to that, are there any supply issues with consumables, or is that just not what your customer is looking for in today's environment?

Hey, Scott, thanks for the questions. I'll answer the first, the consumable. We are chasing the product and the national brand, and it's the products that that are COVID-related and manufacturers are still trying to build up capacity. And it's in the paper, the hand sanitizers, the wipes, and some consumable-related products. So the inventory levels are improving from April, but they are still not caught up with the demand. So yes, we're still chasing a little bit of that, and there's still some upside capacity there.

You know, Scott, I think as your question around discretionary and the strength there, I mean, obviously, I think, one, it does speak a little bit to the pattern of the consumer. They are buying closer to home. And so it's definitely part of it. But it's really the categories that they're buying itself, right? So people, as we've talked about, seasonal in particular has been good as people try to, you know, stay somewhat normal in what's been an unusual period of time. decorate their homes, or supplement their soft home at our $500 stores has done well. You think about that as they kind of resupply their home and things like that, and decor. So a lot of things like that have done very well. Those are things we think we can provide on a regular basis, and I think it gives us the opportunity to show folks what we have in that arena, and hopefully convert them to continued shoppers with us as we go forward. So it's a good opportunity as we continue to build out that assortment.

Yeah, just a little bit more color on that. Our merchants have worked really hard at providing a much better value at sharper price points, and it met the need the last several months, as Kevin just described. So that is going to be going forward. Our merchants are going to continue to buy better, buy basics, and buy great value and supply that to the customer from this point forward.

Okay.

Thanks a lot, guys. Appreciate it.

And we do have time for one or two more questions. We'll take our next question from Paul LeJouet with Citi.

Hey, guys. Thanks. You know, In response to an earlier question, I think it was Ed's on Dollar Tree Plus, you mentioned something about doing it in stores that are close to the DCs, I think. I just want to make sure I understood that and whether the Dollar Tree Plus rollout would be in certain geographies. Also, if you're happy with the test, are there any limits to how many stores could get this assortment, either because of store size or proximity to a DC? And then just a follow-up, maybe a silly question, but why don't you like the even numbers, $2 and $4, when you think about that Dollar Tree Plus business thing?

Yeah, so the first one, the reason we're rolling it out, no, we're not limited by proximity to the DCs at all. It's really about bringing in these products into a DC, so you're bringing in and creating slots for the different items. And we're going to do our due diligence and roll this out and test. And the store size was really more related to we do not want to impact our single price point assortment that the customers used to in our stores. So we're looking for a size of stores right now during the test. that doesn't adversely impact that assortment. So that's the only reason we're doing that. And your question on the two and four, we're looking for great value with great products, and the $3 and $5 price points seem to resonate more with our customers, and it differentiates itself from the dollar price point, and we don't want to muddy the water with those in-between products. We want to really focus on step-changing items that we're selling for $3 and $5 that are really $7 and $10 items anywhere else in retail. So we're trying to bring clarity to ourselves, to our merchants, and for our customers on the value. Got it. Thanks.

Just to follow up on the store size, what percent of the fleet you know, are large enough to handle that Dollar Tree Plus assortment at this point.

You know, I do not have that right now with me. Well, we can, Randy can get that for you. Okay, thank you. Good luck, guys.

We'll take our last question from Michael Lasser with UBS.

Good morning. Thanks, Rob, for taking my question. You outlined a diligent and disciplined process that you typically go through when you're rolling out initiatives from pilot to test to full rollout. Could you see any conditions under which you would roll back this test or this expansion of the test to $500 three-plus locations, particularly given some of the opacity that you spoke about in determining the results of the initial 100 in the last six months?

Yes, I mean, so the obvious ones, if it impacts, if we had adverse implications to comp store sales in the stores and or margin dollars, and it's not accretive to the business, I mean, that's what we're really looking for is that this program has to be accretive to sales, margin, and operating income, and that's what our expectations are.

Have you gotten to a point like this where you expanded a test and then subsequently have had to roll back the test? I'm sorry, what was the question? Have you gotten to a point like this where you've taken a test to the next level and then subsequently have had to roll it back?

I can't remember one to this level, no. We've got certainly a lot of tests out there that people Never went forward with it. No, not pretty sure.

And my follow-up question, Mike, is on framing the family dollar consumable business, which increased in the 4% range in the most recent quarter. If we compare that to a lot of the results from the other consumable retailers, it was a bit slower recently. and perhaps suggest that Family Dollar's market share in those categories was lagging behind others. How do you think about that, and how do you see the ability to improve share from this point for Family Dollar?

Yeah, that's a great question, but first and foremost, it was a positive low of single digits, so we continue to grow our consumable sales, and You know, nine months ago in March, we were talking about how consumable has always been healthy for the family dollar business, and I foresee that continuing to grow. And we're going to keep doing the same thing as we are on the discretionary side. We're bringing great values. We have the right assortment. We're going to sharpen our price points to be competitive in the marketplace. And we are chasing the inventory. I would say on the consumable side, we are not happy with our everyday in-store stocks on consumables. So we believe that we can build that business going forward. Okay, thank you very much, and have a good holiday. Thank you. Thanks for your interest.

That concludes today's question and answer session. At this time, I will turn the conference back over to Randy Geiler for closing remarks.

Thank you, Shelby, and thank you for joining us for today's call and for your interest in Dollar Tree. We would like to wish best wishes to all of you for a happy and safe holiday season. Our next earnings conference call to discuss Q4 and full year results is tentatively scheduled for Wednesday, March 3, 2021. Have a good day.

This concludes today's call. Thank you for your participation. You may now disconnect.