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spk01: Good day and welcome to the Dollar Tree, Inc. First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Randy Geiler, VP, Investor Relations. Please go ahead.
spk13: Thank you, Stephanie. Good morning and welcome to our call to discuss Dollar Tree's first fiscal quarter 2021. With me on today's call will be our President and CEO, Mike Witinski, and our CFO, Kevin Wampler. Before we begin, I would like to remind everyone that various remarks that we will make about 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. 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 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. I will now turn the call over to Mike Witemski, Dollar Tree's President and Chief Executive Officer.
spk11: Thank you, Randy. Good morning, everyone. Our record first quarter performance reflects the progress we continue to make on numerous initiatives to provide even greater value and convenience to our shoppers. Dollar Tree delivered its strongest quarterly same-store sales since 2017, while improving its operating margin by 290 basis points. Family Dollar effectively cycled a 15.5% comp sales increase from the prior year by driving its best post-merger quarterly operating profit. Combined, the enterprise produced positive same-store sales against a tough 2020 comparison and a 220 basis point improvement in operating margin, driven by higher gross margins and better expense leverage. Overall, a very solid start to the year. During the initial post-merger years, much of the company's energy and focus was dedicated to integration-related projects such as stabilizing and restructuring the organization, improving store maintenance, harmonizing our technology, designing and testing store formats, optimizing our real estate portfolio, elevating the operational execution in our stores, offering improved assortments and value, and ultimately consolidating our store support centers. These priorities were critical as we prepared the combined business for long-term profitable growth. Now, over the last 18 months, we have transitioned to an aggressive approach under one aligned leadership team, dedicating our major efforts to customer focus initiatives with clarity, focus, and speed. Examples of the innovation efforts are our brick-and-mortar initiatives include Refining and growing our Dollar Tree Plus multi-price initiative. Continuing to evolve and improve the H2 store format with expanded home, seasonal, and other discretionary categories. Introducing the new combo stores for rural markets. Testing fresh produce and frozen meat products in select stores. Initiating self-checkout in a smaller number of stores. And on our digital and omni-channel initiatives, they include launching FamilyDollar.com as a selling site, partnering with Instacart for same-store delivery, which expands our customer reach, and creating our new retail media network, the Chesapeake Media Group. I'm enthusiastic about the long-term impact of these actions designed to drive shopper satisfaction and loyalty, giving us the ability to meet the evolving needs of our shoppers better than any other company can, especially inside the Beltway and in rural America. I will share more details, more detailed update on these exciting initiatives later on in the call. But for now, for the quarter, our Dollar Tree segment delivered its best quarterly same-store sale since Q3 of 2017. The 4.7% comp increase was comprised of a 9.5% increase in tickets. partially offset by a 4.4% decline in traffic. Notably, we saw a double-digit increase in traffic in April, which represented our best monthly comp traffic increase in years. From a cadence perspective, March was the strongest comp month, with stronger pre-Easter sales compared to the prior year, followed by April. February was slightly negative as we lost more than 2,500 store days in due to closures related to storms through Texas and central U.S. Gross margin improved 180 basis points from the prior year, as we saw record sell-through on seasonal merchandise, including Valentine's Day, Easter, and Easter candy. Compared to the prior year's quarter, the discretionary mix as a percentage of net sales increased 710 basis points to 52.3%. Categories performing well included crafts, party, our Easter seasonal, toys, and floral. Our inventory turn improved 22 basis points for the quarter. Our merchant team continues to source great products that provide wonderful value at the margins we need. With a product already purchased for the back half of the year, I am thrilled with the discretionary back-to-school crafts, holiday, and seasonal assortments that will be hitting store shelves within the next few months. As COVID restrictions ease and customers continue to gather with friends and family for celebrations, we plan to fulfill that need with our compelling mix with even more exciting discretionary items at the dollar price point that our shoppers love. Family Dollar highlights for the quarter include its best post-merger quarterly operating profit at $211.4 million. Let me repeat that. Family Dollar achieved its best post-merger quarterly operating profit at $211.4 million, cycling a very strong 15.5% comp from the prior year. Same-store sales came in at a decline of 2.8%, equating to a positive 12.7% on a two-year stack. Average ticket was up over 11%, and traffic, cycling the initial pandemic-related demand for the consumables from a year ago, was down nearly 13% for the quarter. The family dollar merchants continue to do a terrific job refining the assortment to deliver meaningful value that is resonating with our shoppers. The discretionary side of the business saw a 14.7% comp increase. Consumable comp, again, Cycling unprecedented demand from last year was down 7.7%. Regarding Family Dollar's comp cadence through the quarter, February was the strongest comp, followed by April. March was cycling a 20-plus comp from the prior year. From a category perspective, the strong performers were primarily on the discretionary side of the business, including party, apparel, home decor, beauty care, and floral. We continue to see encouraging results for stores that added fresh produce and frozen meats to their assortment in late 2020. We are seeing materially higher average tickets when a basket contains produce or meats. I am excited to share that we will continue to expand on this initiative in 2021 and beyond as we are focused on meeting the needs of shoppers in all markets. On the previous earnings call, I spoke to the fact that Family Dollar customer satisfaction survey scores had improved three consecutive quarters across each of the four key categories, store cleanliness, product assortment, customer service, and speed of checkout. Credit to our field leadership and our merchant and operations teams, each of those scores improved again for the first quarter, making it four quarters in a row. Increasing store productivity at Family Dollar has been a critical component of the turnaround. In addition to all the sales and traffic driving initiatives that have been increasing average sales per store, we believe Family Dollar is squarely positioned to continue serving more customers and gaining market share with its compelling discretionary mix, especially as Family Dollar shoppers are benefiting from stimulus dollars, increased SNAP participation, child tax credits, and earning higher wages. Now, regarding Dollar Tree Canada, the team had a strong quarter one. From an operating income standpoint, the Canada team exceeded their budget despite challenges to sales in April related to increased COVID restrictions. From a real estate perspective, we completed 575 projects, including 106 new stores, 36 relocations, 414 family dollar H-2 renovations, 19 store closures. We ended the quarter with 15,772 stores. Before I hand it over to Kevin, I wanted to let you know that in April, we released our updated Corporate Sustainability Report. The report is available on the homepage at our website, dollartree.com. I am very proud of the team's progress related to our ESG program in fiscal 2020. Accomplishments included that we conducted a detailed assessment of our impact on the environment and measured our carbon footprint to establish an initial baseline. We developed our first generation of climate goals aimed to reducing emissions and increase the use of renewable energy. We participated in the chemical footprint project for the second consecutive year. We partnered with ADT Commercial for Comprehensive and Innovative Security Solutions, and we formed our Diversity Equity Inclusion Executive Council. And lastly, we launched our inaugural Choose to Give Workplace Giving Campaign. We will remain steadfastly committed to improvement, especially as related to our ESG goals and initiatives designed to minimize corporate sustainability risks while reducing cost and driving efficiencies. I will go into more detail on several of our initiatives after Kevin speaks to the Q1 performance and our outlook. Kevin.
spk08: Thanks, Mike, and good morning. For the first quarter, consolidated net sales increased 3% to $6.48 billion, comprised of $3.32 billion at Dollar Tree and $3.16 billion at Family Dollar. Our enterprise same-store sales increased 0.8% or 0.9% when adjusted for Canadian currency fluctuations. Comps for the Dollar Tree segment increased 4.7% or 4.8% when adjusted for the Canadian currency fluctuations. Family Dollar same-store sales decreased 2.8%, cycling the very strong 15.5% increase in the prior year's first quarter. Overall, gross profit for the enterprise increased 9.4% to $1.96 billion. Gross margin improved 180 basis points to 30.3%. Gross profit margin for the Dollar Tree segment improved 180 basis points to 33.7% when compared to the prior year's quarter. Factors impacting the segment's gross margin performance included merchandise costs, including freight, improved 85 basis points, Improvements in merchandise mix were partially offset by increased freight costs and slightly lower mark-on. A 50 basis point improvement in shrink, resulting from favorable inventories, and a decrease in the shrink accrual rate. A 30 basis point improvement in markdowns related to improved sell-through of Easter-related products compared to the pandemic-affected prior year. And 25 basis points of leverage on occupancy costs from the stronger comp sales. These improvements were partially offset by distribution costs, which increased 10 basis points, primarily due to higher payroll and depreciation costs. Gross profit margin for the family dollar segment improved 140 basis points to 26.8% in the first quarter. The year-over-year improvement was due to the following. Merchandise costs, including freight, improved 85 basis points related to merchandise mix and initial mark-on, which were partially offset by higher freight costs. Trink improved 60 basis points based on favorable inventory results. Distribution costs improved 20 basis points compared to the prior year quarter. These improvements were partially offset by deleverage on occupancy costs based on the comparable store sales decline in the first quarter. Consolidated selling general and administrative expenses improved 40 basis points to 22.3% of total revenue compared to 22.7% in Q1 last year. For the first quarter, the SG&A rate for the Dollar Tree segment as a percentage of total revenue improved 110 basis points to 21.6% when compared to the prior year's quarter. Payroll costs improved 110 basis points primarily due to decreased COVID-19-related store payroll costs and leverage related to the comp store sales increase. Other SG&A decreased by five basis points, resulting from lower store supply expense partially offset by increased inventory service expense. Store facility costs increased 10 basis points due to higher repairs and maintenance costs. For Family Dollar, the first quarter SG&A rate as a percentage of total revenue was 20.2% compared to 19.9% in the prior year's quarter. Store facility costs increased 25 basis points driven mainly by higher snow removal costs. Other SG&A expenses increased 20 basis points, and depreciation and amortization expense increased five basis points, both due to deleverage on the comp sales. Payroll costs decreased 25 basis points, primarily due to decreased COVID-19-related store payroll costs, partially offset by deleverage related to the comp store sales decline. Corporate and support expenses as a percentage of total revenue were essentially flat compared to the prior year's quarter. Operating income increased 42.1% to $519.9 million compared with $365.9 million in the same period last year, and operating income margin was 8% in the first quarter compared to 5.8% in the prior year's quarter. The first quarter of 2021 included total incremental operating costs of $7.4 million for COVID-19-related expenses compared to $73.2 million in the first quarter of 2020. Non-operating expenses totaled $33 million, which was comprised of net interest expense. Our effective tax rate was 23.1%, compared to 23.9% in the prior year's first quarter. The company had net income of $374.5 million, or $1.60 per billeted share. This compared to net earnings of $247.6 million, or $1.04 per share in the prior year's quarter. Our combined cash and cash equivalents at quarter end totaled $1.47 billion compared to $1.42 billion at the end of fiscal 2020. Outstanding debt as of May 1st was $3.25 billion. In Q1, we repurchased approximately 2.15 million shares for $250 million. We currently have $2.15 billion remaining on our share repurchase authorization. Inventory for Dollar Tree at quarter end increased 13.5% from the same time last year, while selling square footage increased 4.1%. Inventory for selling square foot increased 9%. This includes a significant increase in goods in transit year over year. Excluding this increase, inventory for selling square foot would be down 1.7%. Inventory for Fama Dollar at quarter end increased 11.9% from the same period last year, while selling square footage increased 1.9%. Inventory for selling square foot increased 9.8%. Capital expenditures were $224.9 million in the first quarter versus $235.8 million in Q1 of last year. For fiscal 2021, we expect that consolidated capital expenditures will be approximately $1.2 billion consistent with our initial 2021 outlook. Depreciation and amortization totaled $172.7 million for Q1 compared to $165.5 million in the first quarter of last year. For fiscal 2021, we continue to expect consolidated depreciation and amortization to range from $720 million to $730 million. Our outlook for the remainder of 2021 includes the following assumptions. We are forecasting a low single-digit consolidated comparable sales increase for the year. We expect the COVID expense run rate for Q2 through Q4 to be consistent with Q1 at approximately $7.5 million per quarter. As noted in our March earnings call, minimum wage increases in states and localities will increase store payroll by $45 to $50 million for the year. Additionally, we expect pressure on wages due to the current shortage of workers available for our stores and distribution centers. With regards to freight, the market conditions have continued to deteriorate since our update in March. We are now expecting costs to be significantly higher than originally projected by import freight due to the continued disruption in the global supply chain from equipment shortages and capacity issues. Rate costs in the remaining three quarters of fiscal 2021 are projected to be 70 to 80 cents per diluted share higher than the comparable period in 2020. These additional costs will have the biggest effects on Q2 and Q3. If these disruptions affect the timing of inventory receipts, it could affect sales and mix. We expect shrink will continue to be a tailwind as we go through the year. Higher sales, lower store inventory levels, and better processes continue to drive better results. That interest expense is expected to be approximately $34 million in Q2 and approximately $137 million for fiscal 2021. For fiscal 21, we expect net income for devoted share will range between $5.80 and $6.05. Our outlook assumes a tax rate of 23.7% for the second quarter and 23.4% for fiscal 2021. And weighted average diluted share counts are assumed to be 232.9 million shares for Q2 and 233.3 million shares for the full year. Our outlook does not include any additional share repurchases. I'll now turn the call back over to Mike.
spk11: Thanks, Kevin. Through 2020 and into 2021, We have demonstrated great momentum in our business. I believe this is attributed to all the work in developing great strategic store formats, finding our assortments, and accelerating many key sales and traffic driving initiatives. We have a resilient business model, and we are in what I believe is the most attractive sector in retail. Value and convenience is more important to the customer now than ever before. And like most retailers, we are currently faced with higher freight costs, both international and domestic, worker shortages, and uncertainty related to inflation. These issues are rising as COVID abates, and they are not systemic to Dollar Tree and not expected to be permanent. In fact, we believe we've increased the long-term earnings potential for both banners. As always, we are working hard to adapt and react. and navigate the business based on the current environment. I have great confidence in our team, and I'm extremely proud of their commitment, dedication, and focus. Now I'd like to provide an update on several of our key initiatives. We incorporated the Dollar Tree Plus multi-price assortment into an additional $128 Dollar Tree stores in Q1, bringing the total to more than 240 store locations by quarter end, and the offering is currently in just over 280 stores. Feedback from shoppers on the compelling offering has been extremely well received and very favorable. The Dollar Tree Plus assortment has expanded into select stores in Colorado, as well as states in the southeast, such as Georgia, Alabama, Louisiana, and the Carolinas. The newest iteration is seeing sales lift of more than double prior versions which is why it's been so important for us to evolve and refine before a larger rollout. We are committed to reaching our 500 store target, although the timing may shift beyond August due to the stronger than forecasted sell-through and inventory availability. We will definitely continue to expand Dollar Tree Plus in fiscal 2022. More details about the expansion will be provided later this year. Last quarter, we introduced our newest strategic store format, our combination or combo store. We continue to be extremely pleased with the performance of these stores. At quarter end, we had 61 combo stores in rural communities, of which 34 are new stores, 19 are renovated stores, and eight are relocation or expansions. We continue to experience a 20% comp lift in renovated combo stores. The new stores are exceeding their performer. The combo store leverages both Dollar Tree and Family Dollar brands to serve small towns across the country. The store combines Family Dollar's great value and assortment with Dollar Tree's thrill of a hunt at a dollar price point, creating a new store format targeted for populations ranging from 3,000 to 4,000 people. Remember, these are markets where we would traditionally not open a Dollar Tree store alone. We will open more than 100 combo stores this year and are in the process of building a strong pipeline for fiscal 2022 and beyond. You can get more information at familydollar.com forward slash combo stores. We continue to be very pleased with our partnership with Instacart. We are offering Instacart in more than 6,000 family dollar stores across 47 markets. During the quarter, Approximately 5,500 of these stores had at least one order, and 96% of those stores had multiple orders. We are seeing a materially higher average ticket as well as higher gross margin on these transactions. With sales continued at a healthy pace on a weekly basis, as expected, we've seen a softening in the growth trajectory as vaccinations are on the rise and more shoppers are comfortable visiting our retail store locations. Last month, we introduced our new retail network, the Chesapeake Media Group. This new platform provides our shoppers with compelling content never seen before on Family Dollar Digital Space. We serve 95 million weekly digital impressions and have approximately 14 million subscribers to our digital smart coupon program. We currently have commitments from our largest CPG brands for more than 40 campaigns. These engagements are coming to life through ad placement on the Family Dollar app, FamilyDollar.com, email, and social media, influencing purchase decisions in real time. We believe the Chesapeake Media Group will enhance the opportunity to further drive loyalty and store traffic for Family Dollar while increasing brand partner awareness and product sales, ultimately driving market share gains for Family Dollar. These are just a few examples of our ability to act with more speed, clarity, and focus on initiatives since many of the integration priorities are now behind us. I could not be more excited about the opportunities ahead of us, especially the H2 combo store formats and our Dollar Tree Plus initiative. As an organization, we are certainly in a much better position to be aggressive and drive innovation. Looking forward, We believe our strategic store formats, our store growth plans, Dollar Tree Plus, and many key sales and traffic driving initiatives, along with our robust balance sheet, will enable us to drive long-term value for our stakeholders. Operator, we are now ready to take questions.
spk01: Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using the speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. To allow time for all questioners, we ask you limit yourself to one question with one follow-up question. Again, you may press star 1 to ask a question. Our first question comes from Matthew Boss with J.P. Morgan.
spk04: Great, thanks. So maybe to start off, Mike, could you just speak to the cadence of performance of the Dollar Tree concept? maybe particularly around events such as Easter, and how has performance continued in May? And then just with that, as we think about the remainder of the year, how are you planning receipts around events as we think about your discretionary side and the party opportunity for the remainder of the year?
spk11: Yeah, thanks, Matt. So our Dollar Tree cadence of sales, we had a great Easter with record sell-through, Our receipts came in on time to the plan, and our sell-through was the strongest we've ever seen. The challenge that Dollar Tree had to their comp was in February when we had, you know, that huge snowstorm, and that equated to, you know, well over 1%. So if you think about it, Dollar Tree, you know, the 4.7, if it wasn't for that storm, could have came in at a 5.7 or plus comp. May has been on plan, and to your point, we are seeing strong sales and party as people are having gatherings again, and our receipts are flowing to meet our needs for graduation. Our graduation receipts are in place and through into the stores. And then we are, you know, of course, prioritizing any of the seasonal events, and we believe that the receipts will come in according to our plan throughout the summer, and then certainly as we approach the back to school and Halloween and fall selling time.
spk04: Great. And then maybe a follow-up for Kevin. Could you just help us break down the drivers of second quarter and back half gross margins at the core Dollar Tree banner? Clearly, there's an impact from freight, but does this change your margin profile multi-year in your view? And I think in the prepared remarks, you mentioned comments regarding higher long-term operating margin targets than maybe you initially would have thought by brand. If you could just elaborate on that, I think that would be really, really helpful.
spk08: Sure. Thanks, Matt. As we look at it, obviously one significant headwind this year in the sense of freight, which we've tried to lay out for everybody to help them understand. Obviously, we don't believe it's permanent, but obviously the global supply chain issues that are out there that everybody's working through and go through that. I would tell you this, Matt, I think obviously the big question that you and others continue to ask is, as we've said, we do believe Dollar Tree can return to that 35% to 36% range. from a gross profit standpoint, which is an important aspect. If we take the freight out of the picture this year, I think we would be right there on the cusp of that. So I think that just gives the indication that obviously our mix of product continues to be good, as Mike spoke to in many of the discretionary categories. We've seen some great progress in our shrink, and obviously we have more work to do, but we have made some great progress and do expect that to continue to be a tailwind as we go through the year. And I think, you know, then as we go down, look at the rest of things, you know, I think as the sales go, it helps leverage things. I don't think our leverage point as it relates to SG&A has really changed. all that much. It's traditionally been in that 2% range, and I don't think that's really changed. So I think all those things go into it. I think we have a great foundation built, and as this unusual event in the supply chain of baits, I think that will give us the ability to flow that through.
spk11: Yeah, Matt, I think some of the key components, just to reiterate what Kevin's saying, is we can control our margin through the product we carry. Our Our team's just finished an April buy trip. We're getting great value at the margins we need. And that discretionary mix we're driving, and just like with our crafter square, last year we finished rolling it out to all stores, and now this year we're actually expanding it and expanding the seasonal part of our craft. So we can manage our mix. We're controlling our shrink, which is a component of margin. And if you think about You know, what I really like about the first quarter, of course, we beat last year by 710 basis points and hit a 52.3%. But if you go back to 2019 for the first quarter, our discretionary mix was 49.4. And we liked our mix back then, and we grew it above a normal baseline of 2019. So those are levers we can pull so that we can hit that 35% to 36% margin.
spk04: That's great, Colin. Best of luck, guys.
spk01: Thank you. Our next question comes from Scott Ciccarelli with RBC Capital Markets.
spk03: Good morning, guys. Thanks for the time. I want to ask about the sales performance for Dollar Tree. I know you guys had a 4.7% comp, but to be fair, we are seeing extremely strong results across so many retailers on a stack basis. and yet Dollar Tree is saying they're just under 4%, which is well below even your own family dollar operation. So I guess the question is, do you think there's any headwinds impacting that business? Is it maybe a function of trip consolidation versus a low price point model or any other colors or thoughts would be great. Thanks.
spk10: Yeah, Scott, thanks for the question.
spk11: As I said, no, we don't see anything structurally wrong with Dollar Tree's capability of delivering you know, that low single-digit comp store growth quarter after quarter. And we agree, you know, with the 4.7, if it wasn't for that snowstorm, we'd be sitting at a 5.7 to 6%, and we probably wouldn't be having the conversation. But Dollar Tree is doing great. Customers are responding, and they're responding to the categories of party and seasonal and crafts. So, no, I don't see anything structurally in the way of Dollar Tree continuing to grow the comp.
spk03: So just more of a, you know, we're hoping to get on a steady kind of low single-digit, you know, kind of comp cadence and, you know, regardless of what the economic environment is.
spk10: Absolutely. Got it. Okay. Thanks a lot, guys.
spk01: Thank you. Our next question comes from John Heinbockel with Guggenheim.
spk07: So a quick follow-up on freight, right? So it looks like the full-year impact, you know, might be 80 or 90 BIPs. When you think about trying to gauge how much of that might be structural, is it 0% in your mind? How long do you think your best guess this kind of takes to play out? And then what are you doing to mitigate, and I assume the numbers you gave us are netted mitigation, to mitigate that, right, on any level, including pricing?
spk08: Let me start, John, and let Mike add anything that he would like to add. I'm just going to try to give you some better color, I guess, in general around freight to begin with. Obviously, as we went through Q1, and again, we finalized our import contracts in late April. That's well known. We've talked about that in the past, but I think what we've seen out there is a capacity constraint, and we've seen a dislocation between what we call the contracted rates and the spot market. And so really what we're seeing from where we were at the beginning of the year to where we are now, the biggest drivers of the increased freight is really import freight and really just seeing higher rates to move product due to the capacity constraints as well as looking at the spot market because we will use the spot market zone as well based upon all things. So that's by far the biggest category. I think the next thing we've seen that is tightened as we've went through the Q1 is related to domestic freight inbound and outbound and just the pressure from you know, lack of drivers as well as just trying, everybody's trying to move freight across the country right now. And so it's putting pressure on drivers as well as, you know, you may have to be paying surge rates to get goods moved. And then the third thing I would tell you that's up from the beginning of the year is the fuel prices have come up above where our assumptions were at the beginning of the year. Obviously, we saw that spike during the quarter. with a couple events that took place out there. So those are some of the things just in general that are driving the rate itself. And again, as we work through the year, our expectation right now is that the global supply chain will take pretty much the full year to work through this. And that's really within our assumptions as to what those costs related to that are. If for some reason it breaks loose earlier, that could be a benefit to us, but that will be yet to be seen. Structurally, I don't know that we believe that there's anything structurally there specifically for our business. I think we obviously have to look at the capacity and try to think through that and how we continue to get ahead of that in our planning.
spk11: Yeah, John, just to tell Kevin, I don't believe it's structural at all. I believe it's the downstream implications of COVID and then the huge demands and that the industry right now is upside down where the equipment is and the delays still at the ports out on the West Coast and the East Coast. The time that it takes to unload the ships, the amount of ships that are backed up and and the equipment is in the wrong place. And then just the high demand as stores open up that were closed last year and are bringing product in. So clearly this is a bubble. It's not structural for us. And we're looking at, like every other retailer, looking at all other SG&A items. And as you heard Kevin speak to, our shrink is a tailwind, and that's offsetting these high costs. We don't have the $289 million in COVID costs from last year. So That's going to offset some of this cost. And then, you know, our teams are navigating the challenge of the inflationary challenges and pressures that we have. And the teams look at the cost of goods and negotiate that. And as you mentioned on the prices, we will absolutely, you know, we're going to monitor and maintain the needed price gaps by market, you know, and we'll keep in mind our customers and our shareholders.
spk07: And then just lastly, quick, you talked about Dollar Tree Plus, right, the new iteration driving 2X, the sales lift. Is that more items that you're merchandising? Is it more customers actually buying that product? What's the driver of the 2X?
spk11: Yeah, it's a little bit of both. We organized around it, as I shared. We've got a team dedicated to this. They're driving great value and exciting products, and it is in a few more expanded categories. And we're bringing it all together. We're just bringing all the things that we've learned through the iterations as we roll it out. So the sales are strong. You know, the basket's still twice the size. And we've done a lot of customer intercepts, and it is all very, very favorable and positive. So we like what we're seeing in the market. Family Dollar Plus or Dollar Tree Plus.
spk07: Thank you.
spk01: Thank you. As a cricket miner, you may press star one to ask a question. We ask you limit yourself to one question with one follow-up to allow for time. Our next question comes from Chuck Grom with Gordon Haskett.
spk09: Hey, thanks. Can you guys talk about rising input costs outside of freight? You know, clearly concerned with rising inflationary pressures out there in the markets. you know, over the past 15 years, you guys have done a really good job managing through this period. Just wondering if, if today's different in any way.
spk11: Yeah, no, I mean, it's, we see inflationary costs. Thank you. There's more than 15, 35 years, dollar trees held a $1 retail price point over 35 years of inflation. And they've been able to, you know, manage it. We've seen oil at $185 a barrel and, uh, Our model gives us great flexibility to change the item, change the mix, drop an item. And I would say after 35 years, being the only retailer in 35 years of inflation that hasn't raised a price. And in those 35 years, you walk our store now, we've got a better product mix. We've got a better value for our customers and at better margins. So, yeah, we're used to managing through these inflations. We've got all kinds of different levers that we can pull to do that effectively. And I'm confident in our team. And, again, we just finished a great buy, and we're getting the margins we need. And then you pull the other leverages of markdowns and shrink and manage it all together.
spk09: Okay, good answer. On family dollar, margin rate, I believe, was 6.7%. I think that's the best since you've acquired the company. Just when we look ahead, how sustainable do you think those margin rates could be, given that you seem to have your arms around the business?
spk11: Yeah, I'll let Kevin speak to that after this. But, you know, directionally, we absolutely believe we can continue to expand that bottom line margin of family dollar. And it's these initiatives. It's the great strategic format that we have. We've got the H2 that continues to drive a 10% lift. We've got that combo store that drives a 20% lift. So getting more sales per square foot in these stores is important. Our merchant team is going to keep refining that assortment, better price points, more value, and expanding that discretionary business is key for us. And that's why it's so exciting about Family Dollar, what they've been able to do. It's It's now, Family Dollar is now a top 10 retailer in discretionary in the United States. And we've doubled our discretionary share of market in the U.S. So, and the team is going to continue to refine this, and yet we still have a lot of growth on the seasonal part of it. So, yes, we just had the record Valentines and a record Easter sales at Family Dollar, and the best sell through ever, but we've got tons of upside. So, We absolutely believe that drying our sales per square foot, driving our store count and our renovations of the H2s will keep the top line going. Our merchants are absolutely going to keep this mix and margin improvement. And then with the Chesapeake Media Group that we have going, we'll be able to have stickiness, making real-time offerings to our customers. So, yeah, we've got a lot of great initiatives aligned to keep that top line going.
spk10: and then leveraging it to a better bottom line.
spk08: And Chuck, just from, I guess, the absolute numbers side of it, we do believe that these numbers are sticky, right? And that's our expectation. It's always our expectation to continue to improve over time. You know, we have the headwind of the freight this year, but, I mean, all other things are going in a very positive direction, which, you know, gives us the confidence that we can continue to grow our family dollar business in a very profitable way. And, you know, with the way we've been moving the discretionary business, which is an important piece of it, you know, that's what gives us that confidence. Thank you, and good luck.
spk01: Thank you. Our next question comes from Michael Lanser with UBS.
spk06: Good morning. Thanks a lot for taking my question. The number one piece of feedback that we've heard this morning is your transportation cost assumption went from $80 million 90 days ago to something in the range of $210 to $240 million now. So it's essentially tripled, recognizing that the gas prices have gone up, The markets remain tight. What has changed or what caught you off guard to have such a substantial impact on your profitability that you just didn't anticipate 90 days ago? And as you mentioned, you signed those contracts in April. They kick in in May. Now is it that you have to wait until the following May to see those costs come off? and so your profitability can be impacted by this. For a while, I think what investors want to hear is whether or not 2022 profitability can be substantially higher as the imbalance between the demand for transportation and supply-level transportation comes back more imbalanced.
spk08: Yeah, Michael, it's Kevin. you know from the standpoint I gave some color would tell you that from a contractual basis we do sign annual contracts we do have the multi-year contracts as well and then the other piece to your point you know what what's different compared to where we were three months ago and as I said by far the biggest component is the import piece of this and it's really related to capacity, as well as then how much of the spot market we will need to move product. And the spot market is very dislocated from what contractual rates are at this point in time, based upon demand out there. So that is where, you know, we really probably got, you know, a little more surprise than maybe we expected, obviously. But again, it's That will take care of itself over time. Our contracts are our contracts. They do go through April of next year. So that is the way to think about it. So this will continue a little bit in the first quarter, but we have higher costs already in Q1 this year. So we'll see. That's a long ways away, and a lot of things will change between now and then.
spk06: Okay. My follow-up question is on Dollar Tree Plus, and the combo stores. The combo stores, the way you've spoken about them is with a lot of enthusiasm and also alluding to some financial parameters around the store, that you're seeing big lifts to sales and profits on the store, whereas you're alluding to more unique financial characteristics around the Dollar Tree Plus test where it's just providing a little bit of a lift or seemingly a bit of a lift to those Dollar Tree Plus items and providing less of a lift or at least talking less about a lift to the entire store. So can you characterize why you're talking about these in different ways? And does it suggest anything about the long-term potential of Dollar Tree Plus? because this could presumably be in all of the Dollar Tree stores, whereas you might only have a few hundred combo stores over time.
spk10: Yeah, so the difference is there are two totally different strategic formats.
spk11: We'll start with the combo store is going after small-town rural America. We've identified These are towns of about 3,000 to 4,000 people that Family Dollar would go into, and we would do okay. And what we thought is these are towns that Family Dollar wouldn't normally go in. So here we have two powerful brands. What if we brought them together into a small town to meet that customer needs? And by doing so, we absolutely are getting customers that are very enthusiastic about it. Our sales are higher. than if it was just a family dollar. So now we're in a small town. There's 3,000 of them. We're going to get to over 100 this year, and we're going to continue to grow this. And we have the seed points identified on a map. And we're going to keep growing this rural format. And yes, it's got a better sales per square foot, more productive store. It's a better margin because you've got Dollar Tree items in there leading off with what they're known for. on the seasonal, the party, the celebration, the greeting cards, and the home. And then offset by everyday needs, the customer needs to live their life in rural America with the discretionary side, decorating their home, dressing up their children and their kids, and feeding the family. So it's a great format. And we're going to continue to grow that in rural America. Now separate that from DT+, which is a Dollar Tree format And what we're trying to do is we will always defend that $1 price point. It's the most defensible retail strategy in America. Nobody's been able to hold a dollar price point for 35 years over all those inflations. And we've got a great assortment and great excitement, and there's great brand recognition. What we're trying to do is bring in now, what if we take that same passion and value at $1 and give the offering of a $3 and $5 item to those customers in home, in party, in seasonal, and certainly in the crafting area. And we're bringing those items to the customer and they're responding wildly. They enjoy it, they appreciate the value, they recognize it, and it's lifting our sales. So they're two totally different strategies and they're getting great responses from the customer for different reasons. And we will continue to grow the Dollar Tree Plus as we refine and roll this out.
spk10: Great. Thank you so much and good luck.
spk01: Thank you. Our next question comes from Karen Short with Barclays.
spk05: Hi, thanks very much for taking my question. I just wanted to clarify one thing and then I had a bigger picture question. When you said May was on plan, can you just clarify what you mean by that at each respective banner? And then I had a bigger picture question.
spk11: Yeah, May is on plan from how we look at our sales and everything happening in the marketplace. And on a consolidated basis, we're hitting what we're expecting.
spk05: Okay. And then I guess when it's... Sorry, go on.
spk11: Yeah, I'm sorry. I didn't know. Was there two questions in there, Karen?
spk05: Well, I mean, I guess I'm wondering if you could just give us what plan was specifically at each banner for May.
spk11: Yeah, no, we don't. In the middle of the quarter, we don't share where we're at.
spk08: Karen, we gave obviously our outlook for the consolidated comp sales for the full year. We don't break it down by quarter at this point.
spk05: Okay. And then I guess what I'm wondering is, in terms of the Dollar Tree Plus banner, it sounds like maybe you're pushing out, there may be a little bit of delay in reaching that 500. Probably, I'm assuming that's more of a permitting issue. But I guess the question is, what would it take to accelerate Dollar Tree Plus, not necessarily this year, but increase the number meaningfully in 2022?
spk11: Well, there's nothing structurally that's going to hold it. Yeah, there's nothing structurally that will hold us back rolling out DT Plus. What we're going to continue to manage it against is all the projects we have. You know, we've got 600 new stores, 1,250 H2 renovations, Dollar Tree Plus, and our other various initiatives. So we will look at this and balance it. But there's nothing structurally that can hold us back at rolling this out at at the pace that we want. Regarding this year, you know, really the delay is more in just the great pull through. It is selling double our expectations. So as I shared on March 3rd, we had already in January at our buy trip, we had already bought for this year. And we're potentially, we potentially could sell what we bought in 300 stores instead of rolling out to the 500. So We're just managing that, and our buyers, our merchants are working hard at chasing product and bringing it in, and we're going to open these, right? I don't want to keep opening stores and not have the great inventory to satisfy that customer demand. So that's the thing that's kind of driving our cadence right now, but we're absolutely committed to getting to the $500,000. We're going to keep buying and chasing the product to feed these correctly, but we're going to make sure that when we open one, we have the inventory to keep feeding it and meet that great demand from the customer.
spk05: But sorry, can I just follow up on that? But presumably by this end of this year, you will have had four buying trips as you look to 2022. So I guess what I'm asking is if you're looking at 2022, What would internally be the decision factor to not reallocate resources to expanding the Dollar Tree Plus as opposed to some of the other projects?
spk11: Yeah, again, just looking at the return and what return we get on it, what the lift is, what the resources take. So as we manage through this year, we'll look at all those things.
spk05: Okay, thanks very much.
spk01: Thank you. Again, as a quick reminder, in the interest of time, please limit yourself to one question. Our next question comes from Peter Keith with Piper Sandler.
spk02: Oh, hey. Good morning, guys. Thanks for taking the question. I guess I'll just ask a quick follow-up on the last comment. With the Dollar Tree Plus stores seeing double the sales lift, what's the total comp lift today versus non-Dollar Tree Plus stores in a comparable market?
spk11: Yeah, Peter, thanks for the question and clarification. It's not double the lift. It's double the sales we thought it would do in the $3 and $5 items. That's why this cadence thing is. It's selling the $3 and $5 multi-price items faster than what we expected. So that's the clarity. And we still see the double the basket size when this is in there. The other thing I would share that what we are able to do is now that we've got a broader geographic view, we're seeing the results from customers at every household economic sector. So we measure our stores and what the demographics and the household salary is and the household income in those stores. It is getting the same response in 30,000 and under, 50,000 to 60,000, 70 to 80, and even 100 and over. We're seeing the same results. So our customers recognize that great value at $3 and $5, and it's working across all geographies right now. So that's really what we can share. Basket size is great. It's working across all geographies, and it's doing better than what we thought in the $3 and $5 items. Okay. Thank you.
spk01: Thank you. Our next question comes from Edward Kelly with Wells Fargo.
spk12: Hey, guys. I just wanted to follow up on freight just one more time. So, can you just talk a bit more about how much of the freight impact you think may ultimately be transitory? And, you know, I asked this question because, you know, it looks like you expect to earn 650 to 680 this year in EPS excluding freight. You know, if you normalize, if this is normalized and you see some growth on top of that, I mean, you obviously have share repo as well. I mean, it's not hard to get your earnings well into the $7 range in 22. So maybe a better way, Seth, has your internal thinking on 2022 changed at all on the freight headwind that you've seen to date? And what's the variable like the key variable to you know to there being a flaw in the logic that I just laid out?
spk08: Thanks for the question that I think it's a good question. You know one of the reasons You know obviously we return to give giving guidance for the full year with this Release today, and we also obviously gave the information on what we believe the freight costs are are what that will be this year. And really, that's to dimensionalize it for you and all of our shareholders, basically, in the sense of helping them understand, again, we don't think it's structural. You know, again, will there be a piece of it that sticks through next year as well? We don't know that yet. Obviously, we'll come to those conclusions as we work. But The point being is we do believe that we've set this great foundation and that the earnings power of both banners and the company in total is significantly better than what we'll be able to post this year, giving this what we would call a temporary headwind of this freight. So again, that was really the way we wanted to frame it for you all, give you that kind of viewpoint. And to your point, If it all went away next year, I would not foresee a reason why we couldn't get to $7, as I sit here today, obviously knowing that a lot of things will change between now and next March. But that's the way we think about it, and that's the way we kind of wanted to frame it up.
spk11: Yeah, and I'd just reiterate what Kevin said. That's why we are very excited about the initiatives that we have going. We're driving our top line. We're getting great margins. And that's why I stated I absolutely believe we've increased the long-term earnings potential for both of these banners to drive that EPS growth. And that freight, it's temporary, it's not permanent, and it's due to the tailwinds of COVID. And just the world and container of ocean freight is just upside down right now. But it will not last forever.
spk12: Mike, can I just ask one follow-up then? Sure. you know, as it pertains to your store growth, you have a lot of irons in the fire here, you know, multiple formats, opportunities, a lot going on between Combo, H2+, Core, Canada, et cetera. Why couldn't you grow stores faster over time? And is that something that's possible when things settle down and, you know, you have more confidence in, you know, in the outlook of all of this?
spk11: Yeah, absolutely. And And remember, the combo store is store growth. I mean, when we open a new store, that will be a combo store in rural America. And as I've shared on March 3rd that, you know, we have 1,250 H2 remodels this year. We believe next year we have about another 1,250, and then we'll pretty much be done with remodeling the current fleet of Family Dollar. And then we'll take that capital and all that energy and all of our resources to top-line total store growth and You know, this year it's 600. It could go to 700, 758. I mean, absolutely. But right now, there's over 5,000 projects we have going. But you're right. We move our resources where we need them. But ultimately, when the remodels get done, we will absolutely point that to total store, new store growth.
spk10: And the great thing is our balance sheet allows us to do that. Excellent. Thank you.
spk01: Thank you. This concludes today's Q&A session. I would like to now turn the conference back to Mr. Randy Geiler for closing remarks.
spk13: Thank you, Stephanie, and thank you for joining us for today's call. Our next earnings conference call to discuss Q2 results is tentatively scheduled for Thursday, August 26th. Thank you and have a good day.
spk01: Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.
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