Dollar Tree, Inc.

Good day and welcome to Dollar Tree Q1 2023 earnings call. Today call has been recorded. At this time, I'll now turn the call over to Randy Gaylor. Please go ahead, sir.

Good morning and welcome to our call to discuss results for Dollar Tree's first quarter fiscal 2023. With me on today's call our Chairman and CEO, Rick Dreiling, and CFO, Jeff Davis. 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. These statements are subject to risk and uncertainties, and our actual results may differ materially from those indicated in these forward-looking statements. For information on the risk and uncertainties that could affect our actual results, please refer to the Risk Factors, Business, and Management's Discussion and Analysis of Financial Condition and Results of Operations sections in our annual report on Form 10-K, filed March 10, 2023. Our Form 10-Q for the most recently ended fiscal quarter our most recent press release in Form 8K, and other filings we make from time to time with the Securities and Exchange Commission. We caution against reliance on these forward-looking statements made today, and we disclaim any obligation to update or revise these statements, except as may be required by law. Also during this call, we will discuss non-GAAP financial measures, reconciliations of these non-GAAP items to the most directly comparable GAAP financials are provided in today's earnings release and SEC filings. These non-GAAP measures are not intended to be a substitute for GAAP results. Unless otherwise stated, we will refer to financials on a GAAP basis. Unless otherwise stated, all first quarter comparisons for fiscal 2023 are against the same period a year ago. Please note that a supplemental slide deck that outlines a number of the company's key operating metrics is available on the IR portion of our website. Following our prepared remarks, Rick and Jeff will take your questions. Given the large number of those that would like to participate, I ask that you please limit your questions to one. I will now turn the call over to Rick.

Thank you, Randy. Good morning, everyone, and thank you for joining our call. As many of you are aware, Dollar Tree will be hosting its investor conference in four on June 21st in Norfolk, Virginia, near our corporate headquarters. The conference will be webcast, and I hope to see many of you at this important event. Our investor conference has been overdue, and we understand the level of anticipation from many investors. I hope next month's gathering will provide each of you a better understanding of the transformation taking shape and the speed with which we are making these changes to increase both our productivity and profitability at Dollar Tree and Family Dollar. We have been hard at work building the team we need to drive the transformation of this business. The more we dig in, the more starkly clear the opportunity becomes, and we are on our way to most fully realize upon it Our stores are of comparable size to those of our closest peers, but they generate far less revenue per store. We understand why, and we know how to close the gap. There are no structural impediments to our progressing towards this goal. As we do, we will drive growth and gain market share. With the operating leverage embedded in the retail model, accelerating growth in revenue per store will translate into higher margins. And higher margins will increase our return on capital and fueling accelerated store growth. We've gone down this road before, and we know the way. We have a tremendous opportunity to improve both of our segments and we are pursuing that with vigor. While our enterprise-wide transformation is still in the early stages, we are already seeing results. Our early initiatives have begun to deliver growth and market share gains. We are driving this transformation in the most dynamic retail environment I have seen in my career. While this volatility is real, and will generate bumps along the way, it will not affect where this great adventure ends. In addition to the historic levels of inflation and labor market challenges, retailers have seen in just the past quarter elevated levels of shrink and even further pressure on the consumer's willingness to spend on discretionary goods. Shrink and the mixed shift from discretionary goods have pressured margins throughout retail. We are no exception. Ultimately, shrink will either be resolved through defensive merchandising, store closures, and or through government action at the local level. Regarding the near-term unfavorable impact of consumables mix, we believe consumer shopping behavior will normalize over time and the margin profile will rebalance. We are acutely attuned to each of these bumps. In the end, none will materially affect our delivering on the promise of this transformation unless we allow them to distract us from what we know we have to do. And we will not allow that to happen. We bench our top line sales performance primarily on three specific metrics. Sales per square foot growth, growth in transaction count, and unit sales or volume growth. Based on these three metrics, I am pleased with our quarter one performance and the direction we are headed. Overall, the fundamentals of our business are strong. Most significantly, We continue to gain market share, and our traffic and unit volume growth are driving strong top-line momentum. The market share gains are a clear validation of the actions that we have taken on pricing and wages and the ongoing improvements we have made in our merchandise assortment, service level, and store standards. Now, despite our commercial success, and building momentum, we are experiencing near-term margin pressures from the macro factors impacting sales mix and elevated shrink. But the most important message that I want to convey today is that we remain completely focused on delivering on our full potential and are executing on our transformation investments at full speed. I will now review the highlights for quarter one. Following my remarks, Jeff will provide a detailed overview of our financial performance and our updated 2023 outlook. For the quarter, we delivered $7.32 billion in sales, an increase of 6.1%. With enterprise comp growth of 4.8%, an operating income of $419.7 million, leading to EPS of $1.35 and adjusted EPS of $1.47 when adjusting for a $30 million accrual related to pending legal matters regarding our West Memphis Distribution Center. Our merchandising and execution remains strong, with comp increases of 3.4% at Dollar Tree and 6.6% at Family Dollar. The underlying sales strength was concentrated in consumables and driven by meaningful transaction growth across both segments. Results were even more impressive in the context of Dollar Tree's 11.2% comp increase from a year ago. After fully cycling the $1.25 price point in February, customer traffic remained very favorable at Dollar Tree as comparable traffic count increased by 5.5%. Notably, this was the fourth consecutive quarter of sequential improvement in comps at Family Dollar with comp traffic up 4.3%. For nearly all of 2022, comp traffic counts trends in both segments were negative. So quarter one was an important inflection point for the company, with traffic increasing both sequentially and year over year. The turnaround at family dollar is gaining meaningful traction. In addition to the improving traffic, Family Dollar's comp was driven by a 2.2% increase in average ticket. At Family Dollar, we increased our private brand penetration by approximately 80 basis points. Moving forward, we expect to continue growing private brands penetration as we further improve merchandise presentation, packaging, and quality control For example, we recently opened a new test kitchen here in Chesapeake and are excited about our growing pipeline of private brand products across consumables, health and beauty, and other high-growth categories. We are also encouraged by the margin opportunities associated with expanding our private brands business. Last year, we took pricing actions at Family Dollar to bring us more in line with our most direct competition. These price investments strengthened our value offering at Family Dollar and followed our transition to the $1.25 price point at Dollar Tree. Along with investments in wages and store standards, the steps we have taken on pricing across both segments are critical to improving our long-term financial and operating performance. As I mentioned earlier, the consumer continues to be under pressure. There are simply fewer dollars available to them, and those dollars are not going as far as they did a year or two ago. We are past the multiple rounds of government stimulus. Snap dollars have been reduced. and tax refunds are running lower. These impacts, combined with persistent inflation, have more families prioritizing needs over wants. Both Dollar Tree and Family Dollar are part of the solution for shoppers buying for need and close to need as they look to stretch their paychecks. Our stores are nearby, easy to shop, and provide tremendous value. While these factors are contributing to the mix shift and pressuring our gross margins, they are also driving more shoppers into our stores with increased frequency. We will continue to respond to the needs of the consumer across both consumables and discretionary categories by offering tremendous value and a great selection. While this mix shift towards consumables is clearly a margin headwind. It is worth noting that the promotional environment remains rational and is not driving any additional margin pressure. At Dollar Tree, we've made great strides with our multi-price strategy, and we remain on track to add $3 and $5 plus items to another 1,800 stores this year. In quarter one, we added Dollar Tree Plus assortments to more than 400 stores and anticipate accelerating the pace of this rollout over the balance of the year. Additionally, we have aggressively expanded our product assortment at Dollar Tree stores with $3, $4, and $5 frozen and refrigerated products, adding 3,500 stores last year alone on this initiative. During the first quarter, we added multi-price frozen and refrigerated doors at more than 400 Dollar Tree stores. Both our Dollar Tree Plus and our multi-price frozen assortments drive incremental sales, with average ticket more than doubling at stores that we have added this expanded offering. Consumers are clearly responding, and these sales-driving initiatives are already having a measurable impact on the results. On Family Dollar, we are on track to add 16,000 new cooler doors in 2023. This is helping drive Family Dollar to its highest market share in close to four years, as measured by quarter one dollar volume. On a unit volume basis, Family Dollar's quarter one share of industry growth was the highest in more than three years. We continue to improve the in-store experience at Family Dollar and completed more than 250 store renovations in the quarter. On last quarter's call, I shared the strategic rationale for increased SG&A spending in 2023. These investments should be pursued as rapidly as our management bandwidth will allow. The sooner each is implemented, the sooner we will enjoy the benefits and the greater impact of our other investments. All of this is ultimately connected and interdependent. Many of our investments will be ongoing, including those on our associates and store conditions. And again, the results are starting to come in. We have already seen meaningful improvements in sales momentum and reduced associate turnover. In closing, we have a plan. I'm confident this plan will drive meaningful top-line growth, increase productivity, and improve profitability. We are vigorously executing on it. We will not allow bumps in the road to distract us or slow us down. And it's clear it's starting to work. Our investments in price, our stores, our merchandise, and our associates have already begun delivering results. We will get to where we're going, but how we get there matters as well. I firmly believe that investments in our people, in the communities we serve, are the cornerstones of a successful retailer. We've taken a comprehensive approach to improve wages and benefits for our people and to increase associate engagement to make Dollar Tree and Family Dollar great places to work and grow. It is vital for the continued success of our organization to have a strong culture. While there is work to be done, we are pleased that our culture efforts are taking root and building the foundation for a thriving future. Finally, I am so very proud of the tremendous efforts of our 200,000-plus associates, each of whom has contributed to the great progress we are making and each of whom deserves our collective thanks. While Jeff will cover our outlook in more detail, I want to emphasize that we remain confident in the outlook for our business, and our continued sales momentum. Our go-to-market strategies at Dollar Tree and Family Dollar are working and clearly resonating with consumers. I look forward to sharing more detail on our long-term vision and our multi-year outlook next month at our investor conference. I will now turn the call over to Jeff.