Dollar Tree Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
June 5, 2024

Key Takeaways

  • Family Dollar strategic review: Dollar Tree is formally exploring separating the Family Dollar banner to unlock individual valuations and accelerate transformations for both businesses.
  • Q1 EPS above outlook: Adjusted diluted EPS of $1.43 topped guidance range, driven by favorable freight costs and disciplined expense management.
  • “More Choices” multi‐price rollout: Expanded multi‐price assortments in 10% of Dollar Tree stores with 300+ new items, delivering stronger comps and 2× larger baskets in pilot locations.
  • Marietta DC tornado impact: A tornado destroyed the Marietta distribution center causing $117 million in inventory and asset losses; expects ~$0.10 Q2 and $0.20–$0.30 full‐year EPS headwind from incremental costs.
  • Q2 and fiscal 2024 guidance: Enterprise comparable net‐sales growth is projected in the low single digits with Q2 adjusted EPS of $1.00–$1.10 and full‐year EPS of $6.50–$7.00, excluding any strategic review costs or future share repurchases.
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Earnings Conference Call
Dollar Tree Q1 2025
00:00 / 00:00

There are 14 speakers on the call.

Operator

And welcome to the Dollar Tree Q1 twenty twenty four Earnings Call. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Bob LaFleur, Senior Vice President, Investor Relations. Please go ahead, sir.

Speaker 1

Good morning and thank you for joining us today to discuss Dollar Tree's Q1 fiscal 2024 results. With me today are Dollar Tree's Chairman and CEO, Rick Dreiling and CFO, Jeff Davis. Before we begin, I would like to remind everyone that some of the remarks that we will make today about the company's expectations, plans and future prospects are considered forward looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward looking statements. For information on the risks and uncertainties that could affect our actual results, please see the Risk Factors, Business and Management Discussion and Analysis of Financial Condition and Results of Operations sections in our annual report on Form 10 ks filed on March 20, 2024, our most recent press release and Form 8 ks and other filings with the SEC.

Speaker 1

We caution against reliance on any forward looking statements made today, and we disclaim any obligation to update any forward looking statements except as required law. Also during this call, we will discuss certain non GAAP financial measures. Reconciliations of these non GAAP items to the most directly comparable GAAP financial measures are provided in today's earnings release available on the IR section of our website. These non GAAP measures are not intended to be a substitute for GAAP results. Unless otherwise stated, we will refer to our financial results on a GAAP basis.

Speaker 1

Additionally, unless otherwise stated, all comparisons discussed today for the Q1 of fiscal 2024 are against the same period a year ago. Please note that a supplemental slide deck outlining selected operating metrics is available on the IR section of our website. Following our prepared remarks, Rick and Jeff will take your questions. Given the number of callers who would like to participate in today's session, we ask that you limit yourself to one question. I'd now like to turn the call over to Rick.

Speaker 2

Thanks, Bob. Good morning and thank you for joining us on our call today. I'd like to begin my remarks today by extending my heartfelt gratitude to members of our Dollar Tree community following the devastating tornado in Marietta, Oklahoma. While the tornado destroyed our Dollar Tree distribution center there, I'm especially thankful that no one was injured in our facility. I am also extremely proud of the resilience displayed by our team members in the aftermath of this tragic event.

Speaker 2

Fortunately, our distribution network is flexible. And while we expect to absorb incremental operating cost, we believe we will keep store level disruption to a minimum. The leadership team at Dollar Tree is also highly sensitive to the wider impact of this disaster on our associates, their families and the broader Marietta community. With this in mind, we set up a temporary site at a local hotel to help support our associates in their time of need. We brought in food and other essential supplies, such as batteries, chargers, diapers and toiletries.

Speaker 2

Our associates have access to over $200,000 in immediate response grants and mental health services. For everyone impacted by the recent situation in Marietta, I want to thank you for everything you've done during this difficult time. It's during these periods of adversity that the strength and character of our organization shines through. Whether it's dealing with natural disasters or important strategic decisions, our associates and the communities they serve are always top of mind. As I'm sure you saw in our announcement earlier today, we are initiating a formal review of strategic alternatives for the Family Dollar business.

Speaker 2

The decision to explore strategic alternatives includes evaluating how each separate banner might appeal differently to different sets of owners. It also includes evaluating whether accelerating Dollar Tree's growth and completing Family Dollar's transformation might be best accomplished by separate dedicated leadership teams. Separating the 2 businesses could enhance the performance of each one individually and allow them both to reach their true valuation potential. Let me provide some additional background and context. We have been on a multiyear journey to transform this organization and fully unlock its intrinsic value.

Speaker 2

An important step in this process was our portfolio review and the decision to close 970 underperforming the capital investment required to fix them could not deliver an acceptable rate of return. Moving forward with a streamlined portfolio should help accelerate Family Dollar's transformation and improve returns of the business. While we are working to transform Family Dollar, we continue to aggressively grow the Dollar Tree banner by expanding our multi price offering, accelerating our rate of new store openings and pursuing accretive transactions like our recent acquisition of up to 170 stores out of the 0.99 dollars only bankruptcy. These stores are highly complementary to the Dollar Tree banner and are expected to produce sales, profits and returns that are well above our portfolio average. We are pleased to bring locations under the Dollar Tree banner and look forward to their openings later this year.

Speaker 2

Today, each banner is at a different stage of its respective journey and each has its own set of unique needs. This is why we believe now is the right time to conduct a thorough review of strategic alternatives for Family Dollar, so we can determine what is the proper operational and ownership structure to best support and enable its transformation. At the same time, that should allow us to fully unlock the value of the Dollar Tree banner. In the end, we want to ensure that both the Dollar Tree and Family Dollar banners have the right strategic, operational and capital structures necessary to meet the evolving needs of their customers maximize value creation in each business. As I said in my opening, our associates and the communities they serve are always top of mind for us.

Speaker 2

For 65 years, Family Dollar has played an incredibly important role in neighborhoods across America by helping families do more with less. This would not be dedication of our incredible Family Dollar associates. 1 of the priorities of this strategic review is to make sure that Family Dollar is properly positioned for long term prosperity. All that said, we are still in the very early stages of this review. We have not made any prejudgments regarding the eventual outcome of this process, especially given the wide range of potential outcomes.

Speaker 2

As I'm sure you can appreciate, there is a lot of work to be done and we do not intend to provide any further updates unless and until the Board has approved a specific course of action or determine that further disclosures are appropriate or necessary. I thank you in advance for your understanding on this manner. With that, let's move on to our Q1 results. 1st quarter adjusted diluted EPS of $1.43

Speaker 3

dollars was at the higher end of our

Speaker 2

outlook range. These results reflect favorable freight costs and careful expense management during the quarter. You've heard me say many times that the 3 key fundamentals in retail are growth in transactions, sales per square foot and units. And I'm pleased to report all three of these metrics continue to move in the right direction. Let me now cover some key financial highlights 7.6 to $7,600,000,000 Enterprise comp was 1% as a 2.1% increase in traffic was partially offset by 1.1% decline in average ticket.

Speaker 2

In both segments, comp growth was driven by traffic gains that were partially offset by lower average tickets. The average ticket declines reflected weaker discretionary demand, particularly in the Dollar Tree segment. Looking at performance by banner, Dollar Tree comps increased 1.7% on a 2.8% increase in customer traffic, partially offset by 1.1% decrease in average ticket. Dollar Tree's consumable comp was 7.4% and its discretionary comp declined 3.2%. While a 7.4 percent consumables comp is respectable in its own right, it is worth noting that this came on top of a 6.9% consumables comp last year.

Speaker 2

On the other hand, this was the 1st discretionary comp decline we've seen at Dollar Tree since the Q1 of 2020 at the outset of the pandemic. Dollar Tree's quarter 1 comp came in below expectations because Easter was especially challenging for us this year. Easter is historically a major driver of discretionary demand. In fact, to put things in perspective, Easter discretionary sales represent about 1% of our annual sales. For the largest retailers, that figure is closer to 0.1%.

Speaker 2

Looked at another way, Easter is 10x more important to Dollar Tree than it is for other retailers. This year and early Easter, combined with the extra week in our Q4 last year, left us with a much shorter selling season. Also, unusually cold and wet weather throughout much of the country negatively impacted the way many families celebrate this traditionally spring oriented outdoor centric holiday. In fact, recent consumer research showed that Easter gatherings were down 20% this year and that 6,000,000 fewer American households purchased Easter products in 2024. This dampened consumer demand across our seasonal discretionary assortment, which caters heavily to these types of celebrations.

Speaker 2

We also saw related softness in non Easter discretionary categories like garden supplies, outdoor toys and other seasonal items. While the calendar shift was contemplated in our 1st quarter comp guidance, the unusual weather was not. Overall, the soft Easter highly influenced the monthly cadence of our quarter 1 comp. It's also important to note that this softness was Dollar Tree specific and concentrated in the 8 to 10 days prior to Easter. Comps before and after that were essentially in line with our quarterly expectations.

Speaker 2

All in, we believe Easter was a 150 basis point drag on Dollar Tree's Q1 comp. Despite this, Dollar Tree took meaningful consumable market share in the quarter with our dollar growth exceeding the market by 6 60 basis points and our unit growth exceeding the market by 5 20 basis points. Last quarter, I announced the next phase of our multi price strategy called More Choices. As part of this program, we are expanding our multi price assortment by over 300 items at price points above $1.25 in approximately 3,000 Dollar Tree stores by year end. Importantly, these multi price items are being fully integrated into aisles throughout the store rather than concentrated in a single center store aisle.

Speaker 2

Before I expand on this program, let me take a moment to reiterate what multi price is and what it is not. Multi price has never been about raising prices on existing items. It's about adding new items at new price points that are incremental to our core assortment. Multi price offers our customers the high quality products that they've come to expect at price points that represent a compelling value proposition in the categories that are most relevant to them. Multi price is designed to complement our core $1.25 strategy, not replace it.

Speaker 2

Even as we expand our multi price assortment, we expect that at least 80% of the items in any Dollar Tree store will remain at that entry level price point. Now back to the rollout. By the end of the quarter, we had converted roughly 10% of Dollar Tree stores to the new in line multi price configuration. To date, we are pleased with the performance of this latest group of stores, which are out comping our $1.25 only in Dollar Tree plus stores. As we roll out our latest concept to 2,000 more stores over the balance of this year, we are proactively taking steps to minimize any operational disruption by using teams of dedicated third party specialists to complete the conversions.

Speaker 2

I'm excited about our multi price journey. Post conversion comps are running at or above expectation at the vast majority of stores that we've transitioned. That said, there is a bit of a learning curve with multi price as we evolve from our fixed price legacy. This is a new discipline for us, and it will take us a little bit of time to fully build out our core competencies. But we're off to a good start and so far I'm pleased with the customer response to our new offerings.

Speaker 2

Shifting over to Family Dollar. Top line performance in quarter 1 was in line with our expectations. Comps were up 0.1% as we cycled a 6.6% comp in quarter 1 of last year. Customer traffic increased 0.9%, which was partially offset by a 0.8% decrease in average ticket. Both traffic and ticket trends improved on a sequential basis as the multiple merchandising initiatives and growth strategies and growth strategies we've launched over the past several quarters continue to progress.

Speaker 2

Family Dollar's consumable comp was up 1.4% it is worth pointing out that the underlying trend has gradually improved. The pace of mix shift towards consumables at Family Dollar has definitely slowed. And since quarter 1 of last year, our 2 year stack discretionary the worst of the SNAP headwinds appear to be behind us. While lower SNAP benefits were a meaningful 2 80 basis point drag on Family Dollar's 1st quarter comp, this was a 200 basis point sequential improvement over the quarter 4 snap headwinds. Similar to Dollar Tree, Family Dollar also continues to gain consumables market share with our dollar growth exceeding the market by 180 basis points and our unit growth exceeding the market by 80 basis points.

Speaker 2

Lastly, on Family Dollar, let me take a moment and update you on the portfolio optimization. We closed 506 underperforming Family Dollar stores in the Q1. The remaining 90 or so stores we identified in the initial round of closures were closed in May. None of the stores that closed in quarter 1 are included in our comp results, although any revenues and expenses from the time they were opened are included in our quarter 1 P and L. Before I turn things over to Jeff, I want to again emphasize that our operating performance in both segments remains strong.

Speaker 2

At Dollar Tree, we continue to acquire new customers and gain market share as our next generation of multi price resonates with a broader base of consumers. And at Family Dollar, we believe the decisive actions we took to solidify the portfolio will have a positive impact on operations and returns. As a more streamlined organization, I am confident that Family Dollar's best days are ahead of it based on the wide range of growth initiatives that are in place. With that, I'll turn the call over to Jeff.

Speaker 4

Thank you, Rick, and good morning. I will start by discussing our Q1 results, after which I'll provide comments on our Q2 and fiscal 2024 outlook. Where applicable, I will focus on our adjusted results. A reconciliation of non GAAP adjusted results is provided in our earnings release. Let's begin by looking at the business on a consolidated basis.

Speaker 4

Net sales increased by 4.2 percent to $7,600,000,000 Adjusted operating income was $436,000,000 a 3% decrease from last year. Adjusted operating margin decreased by 45 basis points, reflecting a 30 basis point increase in gross margin, offset by a 75 basis point increase in adjusted SG and A rate. Gross margin improvement came from lower freight costs, partially offset by unfavorable sales mix and elevated shrink. Adjusted SG and A increased primarily from temporary labor for Dollar Tree's multi price rollout, higher depreciation and amortization and sales deleverage. Adjusted Q1 SG and A this year excludes $17,500,000 of severance and other store closure costs and a $2,500,000 reversal of a legal accrual.

Speaker 4

Q1 last year excluded a $30,000,000 legal accrual. Our adjusted effective tax rate was 24.2% compared to 23.3%. Adjusted net income was $312,000,000 and adjusted diluted EPS was 1.43 dollars Moving to our business segment results. Dollar Tree's net sales increased 5.9 percent to $4,200,000,000 Operating income decreased 3 percent to $522,000,000 Operating margin decreased 110 basis points, driven by a 10 basis point increase in gross margin, offset by 120 basis point increase in SG and A rate. Gross margin improved primarily from lower freight costs.

Speaker 4

This was partially offset by unfavorable sales mix and elevated shrink. SG and A expenses increased primarily due to temporary labor for the multi price conversions, higher depreciation and amortization and sales deleverage. Family Dollar's net sales increased by 2% to $3,500,000,000 Adjusted operating income was $51,000,000 a 32% increase from last year and adjusted operating margin increased 30 basis points. The increase was all attributable to gross margin as the adjusted SG and A rate was flat at 23.7%. Gross margin increased primarily from lower freight, partially offset by product cost increases and an unfavorable sales mix.

Speaker 4

Moving on to the balance sheet and free cash flow. Inventory decreased by 2% or $103,000,000 On a related note in the quarter, we recorded a $70,000,000 loss related to the book value of inventory destroyed at our Marietta distribution center and a $47,000,000 loss related to property and equipment destruction. Given our expansive scale and breadth of operations, our insurance policies include significant property and inventory coverage above cost. Based on the catastrophic nature of this event, we expect these losses to be fully offset by insurance recoveries. As our recorded losses were fully offset by the insurance receivable, there was no net impact to the Q1 P and L.

Speaker 4

With cash and cash equivalents of $618,000,000 and long term debt of $3,400,000,000 our balance sheet remains strong. Our bank defined leverage at quarter end stood at approximately 2.3x, which continues to underpin our investment grade creditworthiness. Regarding cash flow, we generated $696,000,000 from operating activities compared to $752,000,000 last year. Capital expenditures were $472,000,000 in the quarter versus $350,000,000 last year, reflecting accelerated new store openings and ongoing investments in growth and other initiatives. Notwithstanding the higher CapEx spending, we generated $224,000,000 in free cash flow in the quarter compared to $402,000,000 last year.

Speaker 4

Consistent with our disciplined approach to capital allocation, after investing in the growth of our business, we returned $310,000,000 to our shareholders by repurchasing 2,500,000 shares at an average price of 1 100 and $2 per share. At quarter end, we had approximately $1,000,000,000 remaining under our existing share repurchase authorization. Now let me provide some perspective on our 2nd quarter and full year expectations. Our current outlook reflects the following. We expect to incur additional operating expenses related to the loss of our Marietta DC.

Speaker 4

The EPS impact of incremental transportation and other costs is estimated to be approximately $0.10 in Q2 and approximately $0.20 to $0.30 on a full year basis. As more information on the costs associated with this disruption becomes available, we may revisit this outlook in subsequent quarters. The expected impact of freight, shrink, mix and SNAP on our full year adjusted EPS outlook remains consistent with the expectations we outlined last quarter. Additionally, given the relatively low level of our freight volume that is subject to spot rates, we believe our exposure to recently observed volatility in the global shipping markets is limited and may be partially offset by favorable domestic carrier cost. With that as a background, for the Q2, we expect net sales will be in the range of 7.3 $1,000,000,000 to $7,600,000,000 based on a comparable net sales growth in the low single digits for the enterprise, 2% to 4% for Dollar Tree segment and approximately flat for the Family Dollar segment.

Speaker 4

Adjusting for the stores that were closed as part of the portfolio optimization, we expect 2nd quarter net sales for the Family Dollar segment to decline by 1% to 3% on a year over year basis. We expect adjusted EPS will be in the range of $1 to $1.10 which reflects the incremental operating expense associated with the loss of the Marietta DC. For the full year, we still expect net sales to be in the range of $31,000,000,000 to be in the lower half of that range. We still expect comparable net sales growth in the lowtomidsingle digits for the enterprise, the midsingle digits for Dollar Tree segment, and the low single digits for the Family Dollar segment. Adjusting for stores closed as part of the portfolio optimization, we expect full year net sales for Family Dollar to decline by 1% to 3% on a year over year basis.

Speaker 4

Adjusted EPS for the full year is now expected to be in the range of $6.50 to $7 again reflecting the incremental the incremental operating expenses associated with the loss of Marietta. Our outlook for Q2 and the fiscal year does not include any severance or additional incremental costs related to the portfolio review or related workforce reductions. It also excludes any future share repurchases. In the interest of time, I will direct you to our supplemental financial presentation, which is available on our IR website for the remaining details that support our current guidance. With that, I'll turn the call back over to Rick.

Speaker 2

Thanks, Jeff. We are pleased that we delivered 1st quarter adjusted EPS results towards the high end of our outlook range. At Dollar Tree, we overcame some Easter softness and remain focused on rapidly rolling out our next generation of multi price stores. At Family Dollar, we are taking the difficult but necessary steps to position the business for long term prosperity. Change is never easy and I couldn't be prouder of our 200,000 associates across Dollar Tree and Family Dollar for their ongoing commitment to their communities and the customers that they serve.

Speaker 2

I am truly honored to lead and be part of one of the best teams in retail. Operator, with that, Jeff and I are ready to take your questions.

Operator

Thank you. We'll now be conducting a question and answer session. Our first question today is coming from the line of Edward Kelly from Wells Fargo. Your line is now live.

Speaker 5

Hi. Good morning. Good morning, everyone. So I wanted to start with Dollar Tree. You've maintained the mid single digit comp guidance for the year.

Speaker 5

Q1 was obviously a little bit softer. Can you just help us what underpins the confidence around that? And then Rick, as it relates to this concept, obviously, there's a lot going on with multiple price points, you're accelerating growth. Can you give us a little bit more perspective on how you see the future of this business? What you think the earnings growth profile is here over a multiyear basis and the real opportunity?

Speaker 5

Thank you.

Speaker 2

Yes, sir. I'll take the first part and you can have the second part. The confidence I have in Dollar Tree as we move through the year is the impact of multi price point. We continue to see trade down customers into that brand. I love the traffic and the multi price stores, Ed, are out comping the stores that have no multi price in them and they're out comping the stores that have the valley of multi price.

Speaker 2

We continue to be pleased with where we're going with consumables and we also see nothing but upside in regards to the basket as we introduce these new items. So I'm very, very bullish on the Dollar Tree side. And by the way, just for a reference point, the basket when there's a multi price item and it is 2 times larger than our normal basket. And they also multi price is driving more trips into the stores. And you've heard me repeatedly talk about transactions are one of the key drivers of the future.

Speaker 4

Just maybe add a couple more points on the multi price before going into longer term profitability. On the multi price, we mentioned that we had roughly 10% of the stores that have been converted to the in line conversion. That happened over the course of the Q1. Those stores are still ramping up. We will still continue to roll that out for another 2,000 stores in the rest of the year.

Speaker 4

That ramp up will give us some additional sort of tailwinds, if you will. On top of that, our comps, I don't know if you've noticed and you probably have by looking at some of the things that we've published before, but our comps actually get to be a little softer on comparison in the back half of the year versus the first half of the year with the second quarter being our most stringent sort of compare. The second part of your question, I believe, was with respect to how we're thinking about the long term profitability of the enterprise and the brand. And we continue to be very encouraged by what we're seeing across both banners. The multi price offering is allowing us to drive sales, allowing us to drive greater profitability.

Speaker 4

We continue to deliver from a standpoint of our freight cost. We believe that there is opportunity across the Family Dollar brand to continue to drive greater gross margins as we continue to drive continued improvement in private label as well as the OTC and HVA. The combination of these things will allow us to drive greater gross profit dollars in the organization, as we continue to drive greater discipline in our expenses along the way. So the outlook that we have for the year, we feel very confident in. There's the opportunity to manage through some of this.

Speaker 4

So at this point, we really don't have any additional outlook considerations to provide other than the fact we continue to remain on the numbers that we've given you so far.

Operator

Thank you. Our next question is coming from Michael Lasser from UBS. Your line is now live.

Speaker 6

Good morning. Thank you so much for taking my question. My question is a 2 parter on the strategic process. If you are not able to sell Family Dollar, what is the plan B? And as a way to help us frame what the ongoing earnings power of the business could look like, can you give us a sense of how much the corporate overhead is allocated to Family Dollar and what the dissynergies might be if you were to divest the Family Dollar business?

Speaker 6

Thank you so much.

Speaker 2

Hey, Michael, thank you for the question. It's too soon in the process for me to say what's going to happen or exactly what all the alternatives are. So I'd like to stay away from that and come back to my original comment that I promised to keep you all updated. In terms of how the corporate overhead is, basically I think in terms of fifty-fifty. I would also look at you and say that the business, the supply chain, merchandising and retail are all pretty much separate.

Speaker 2

There is some legal, HR, the basic functions add to that.

Speaker 4

I think that covers it.

Operator

Thank you. Our next question today is from Matthew Boss from JPMorgan. Your line is now live.

Speaker 2

Great. Good morning, Matt.

Speaker 7

Good morning, Rick. So a couple of questions, 1 near term, 1 multi year. So at the Dollar Tree banner, near term, just thinking about the 2% to 4% comp guidance for the Q2, what trends have you seen post Easter? Maybe if you can comment on quarter to date just to provide some confidence around the 2% to 4 relative to the Q1? And then multi year, Rick, could you just elaborate on the acceleration strategy at Dollar Tree?

Speaker 7

Maybe speak to the acquisition? Is there any ceiling to consider in terms of annual unit growth? And just how you're thinking about long term saturation for that concept?

Speaker 2

Yes. A couple of great questions there.

Speaker 4

Josh, let me take first one.

Speaker 2

Yes, I'll let you handle the first one. I'll take the second one.

Speaker 4

So, Matt, the guidance we gave of 2% to 4% comp for the Dollar Tree banner coming out of Q1. We're in line with that guidance. That's the reason why we've provided it. As we came out of that Easter period and we had mentioned in our prepared remarks that in the absence of 8 to 10 day period, we actually pretty much through the course of the quarter had a comp that was pretty reflective of a mid single digit comp I'm sorry, a low to mid single digit comp. So I think we're still in line with that as we move into Q2.

Speaker 2

And in regards to the long term future of the company, you look at $0.99 the acquisition there, totally reflects Matt our commitment to the Dollar Tree franchise and the fact that we think that there are opportunities there to grow the business even more. The acquisition in California, to be very frank, is going to generate returns above our average in the overall chain. And we are very excited about these stores in terms of the real estate that we were able to acquire and the term we have on them. And as we've said on many occasions, a well run Dollar Tree is an exceptionally powerful retail format. And we are committed and I actually think I'm going to say this, multi price is attracting a higher income consumer into that box.

Speaker 2

And I think we have a lot of really good things moving together right now.

Operator

Thank you. Next question is coming from John Heinbockel from Guggenheim Securities. Your line is now live.

Speaker 2

Good morning, John.

Speaker 8

Good morning. This is actually Anders Meyer on for John. Thank you for taking our question. So I just wanted to touch on the cooler resets. So overall, how have they been progressing?

Speaker 8

What has been the overall impact to comps? And upon completion, how do you size the sales opportunity with this product? Thank you.

Speaker 2

Yes. I mean, the cooler work we're doing is basically on both franchises. Incredibly pleased with what's going on in the Family Dollar banner. We're pulling the number of cooler doors up to approximately 30 and it is driving incremental sales into the store overall. And the consumer is moving more to refrigerated and frozen product.

Speaker 2

Now on the Dollar Tree side, we now have 5,700 stores that have multi price frozen food in them. We've expanded the assortment in 1900 stores. And to be very frank, one of the big surprises for us is frozen and refrigerated in the Dollar Tree banner. The multi price unlock that category. And you have to think about it.

Speaker 2

You go into a Dollar Tree, you can buy a pizza for $4 or $5 that feeds a family of 4. And that is a very powerful statement. So very pleased, continuing to push it. It's where the consumer is going and both banners are chasing it.

Operator

Thank you. Our next question is coming from Simeon Gutman from Morgan Stanley. Your line is now live.

Speaker 9

Good morning. Good morning, Rick. I

Speaker 4

want to

Speaker 9

be I want to ask about Family Dollar, but be respectful if you can't answer, I'll put a second question about Dollar Tree in as well. I wanted to ask if the EBIT that we see in the P and L, I think it's going to get a little bit better. You're going to run rate a little bit better from what the leftover stores look like. Can you tell us if there's a big distribution, call it among the 7,000 remaining Family Dollar stores, a wide range of profit outcomes or if they're relatively concentrated? And then are you able to share what the average life of the leases are in that portfolio?

Speaker 9

And then have you talked about or can you share what the lease break costs could be could look like?

Speaker 4

Let's see if I can take a few pieces of that. And I'll take a couple of them. Some of this, of course, we aren't in a position share, but I can tell you that as you look at the remaining portfolio stores, you still have a sort of a distribution of profitability across those stores at a much higher level than what you would have had when we before we closed the non performing stores. We had already indicated also that for the year, you should expect about $0.15 of additional profitability or increased profitability coming from those closed stores and $0.30 of EPS on an annualized basis. Our leases that we enter into are normally somewhere between 5 to 10 years on average.

Speaker 4

At any one point in time, approximately 10% to 12 percent of those leases are being renewed on an annual basis. And that's about what I can really share with you at this point with respect to the lease obligations.

Speaker 2

And the one thing I would say as you reflect on this announcement is the fact that we have not lost faith in Family Dollar and the progress it's making. The team has done a great job of implementing many initiatives that are designed to drive the long term growth. What we're wrestling with and trying to figure out is we have 2 different brands at 2 different stages of where they're at in their development. And while we want to accelerate Dollar Tree, we want to position Family Dollar's transformation where it has the chance to grow. And by looking at them differently, that might provide more acceleration for both brands long term.

Operator

Thank you. Next question today is coming from Rupesh Parikh from Oppenheimer. Your line is now live.

Speaker 10

Good morning and thanks for taking my question. So just going back to your commentary on multi price point expansion, we've been in some of your newer locations with the new product. Just any surprises in consumer behavior that you're seeing in store? What type of consumer feedback are you guys seeing with those with that expansion? And then just want to get a sense how the consumables versus discretionary mix is playing out versus expectations within those locations?

Speaker 2

Yes, a couple of great questions. Our biggest problem with multi price right now is we can't keep it on the shelf. The consumer is responding to it. The consumer likes it. And I think it's going to be, I don't think, I believe, truly believe it is going to be a very powerful piece in our ongoing future.

Speaker 2

You will see as we move through the calendar year, as you guys know, we have to buy multi price products, seasonal products more than a year in advance. As we get into the holidays, you're going to see more multi price show up on the discretionary side. I'm pretty positive for the first time, we'll have an inexpensive Christmas tree in our stores that they will probably have Christmas lights that will go with all the Christmas decorations we sell. In regards to consumables, multi price points, again, are driving what's going on with our consumable share. And what we are committed that we are not raising the price or introducing like items, we are bringing in different SKUs, which broadens the appeal of the assortment to the consumer.

Speaker 4

I had just one other point. With multi price, as we're looking at those stores that have had this in line conversion, the mix of discretionary and consumables is more in line with what we would have seen historically with a heavier balance on discretionary than consumables. So we like that balance and that the multi price is not only driving consumables, but it's also lifting the discretionary basket also.

Operator

Our next question today is coming from Paul Lejuez from Citigroup. Your line is now live.

Speaker 5

Good morning. Hey, thanks.

Speaker 11

Good morning. Thanks. Just to follow-up on that last comment, what is the change that you see in terms of traffic versus ticket in the multi price converted stores? That's just my first follow-up. And second, I'm curious what you're seeing in the promotional landscape.

Speaker 11

What do you see in 1Q versus your expectations? But also curious what you assume for the rest of the year and what you've seen based on what you've seen year to date on the promotional landscape out there?

Speaker 2

So with the first part of the question is, we see traffic increase in the multi price stores to the tune of about approximately 3%. And we also see the ticket goes up about 55 bps. And again, it's soon. And again, I want to come back to we're building a new muscle. I would look at you and say off the top of my head, I'm guessing the old retailer in me, 50% of the stores are probably outperforming our expectation, maybe 25% are right on it and 25% have opportunities.

Speaker 4

And we're definitely seeing the customer right now buying a little bit more on promotion. And it's not that there is more promotional activity, but what the customer is actually buying is items on promotion.

Speaker 2

And I think what's important on the promotion thing is that Jeff is in my office every Monday asking me what's going on in the promotional landscape. We have seen nothing irrational at this time. And I think that's really important. And what we are seeing is maybe incremental movements on CFC soda pop and 2 liter pop and that is a very easy traffic driver. But I always remind everybody I talk to, we have to not confuse marking down stale inventory with promotional activity.

Speaker 2

And I think that's really, really important. So stable environment, I would say it's not irrational and maybe CSD.

Operator

Thank you. Next question today is coming from Chuck Grom from Gordon Haskett. Your line is now live.

Speaker 8

Good morning, Chuck. Good morning. Hey, good morning, guys. Thanks very much. So, Rick, on the new multi price rollout, can you talk about the transition once the 3rd party specialists have actually done the reset?

Speaker 8

In other words, what's the risk and you talked about the new discipline that store managers and employees are going to need to acquire post those specialists during the initial reset? And then for Jeff, how much of the SG and A deleverage in the Q1 was from the resets. And I think you guys have outlined $23,000,000 of expenses this year. Can you just talk about the phasing of that? Thank you.

Speaker 2

Yes, Chuck, again, a couple of great questions. First one, I'll take. We have grown up in an environment in this company where everything is the same price point. So it doesn't matter where it goes and it doesn't matter what the customer does with the product if they decide they don't want it. Now what we have to do is and what we're doing is we're introducing the multi price SKUs into the category that they belong in.

Speaker 2

We're not just putting them in the center of the store. So you have to create a section quite frankly that bears prices, so the consumer knows how much they are. And when the consumer changes their mind, that product has to get back into the right spot on the shelf. And that's all about teaching our associates how to handle that product in regards to stocking it and then what to do with it when they condition the store. Now it's a very comparable discipline, but it's not something that we've had over the years.

Speaker 2

We're doing all kinds of things to manage that. We put a shelf label literally on the outside of the case that allows the associate to put the product on the shelf, put the shelf tag on the shelf. But believe it or not, we also have to teach the people in the warehouse when they pull the item, they have to pull the right item because they're used to pulling one item that has the same price and in regards to the stores inventory, it stays true. But now the difference is, if they're pulling a multi price point item, it has to get there as it was supposed to be selected.

Speaker 4

And then Chuck, with respect to the SG and A margin deleverage, if you will, there's really 3 components. You called out the temporary labor was 3rd component was just sort of deleverage as a result of the lower comp. The one thing to recognize with the temp labor, in the first stores that we opened up, there's a learning curve as to the how to go about it, the number of crews that were actually allocated, how working with the store leadership teams. We continue to make progress on that in the subsequent stores that we're rolling out. So sort of the initial headwind that we had in the Q1 here, we would expect that to moderate over time.

Speaker 4

But as we had mentioned earlier, we definitely thought that the impact of using this 3rd party labor to do the in line conversions was going to cost us approximately $0.23 of EPS for the year.

Operator

Thank you. Our next question today is coming from Seth Sigman from Barclays. Your line is now live.

Speaker 5

Good morning. Hey, thanks. Good morning. Hey, I want to talk about shrink, hasn't come up a ton. It was a headwind this quarter, but I think that was expected.

Speaker 5

Just curious how that played out with some of the mitigation efforts, any signs of stabilization given that you didn't change the guidance for that? And then I guess a question on gross margin overall. The improvement was a little bit more limited this quarter. I'm just curious was that mix or something else, if you could just help us with that? Thanks so much.

Speaker 2

Yes. I'll take the shrink question, if that's okay.

Speaker 4

Sure.

Speaker 2

I think the efforts we've put in place for the first time I can honestly say the shrink trends that we have, while they still are not good, they're not getting away from us anymore. We're definitely tracking in the right direction. But I want to reinforce shrink is still a problem, but it's not deteriorating like it was last year. We feel very good with the initiatives we put in place. I also think it's fair to say that we were ahead on the shrink curve that we were calling it out and we were taking steps that people now are taking around us.

Speaker 2

Our self checkout exposure is basically nothing. So we don't have to revisit that. We have started eliminating high shrink SKUs. We started that about a year ago. And we've also placed things behind the check stand counters where we can control them.

Speaker 2

So I'm pleased we are not out of the woods, but at least I can tell you that it has stabilized.

Speaker 4

Yes. I've just to put out maybe a little bit of finer point on it. Our expectation for the first half of the year was that we were going to have about $0.30 to $0.35 of headwind across shrink and mix. And that was predominantly going to be on mix. The what we're seeing is that our performance is in line with that.

Speaker 4

We're actually seeing some slight improvement against it, but we're still early in the year. So as Rick has said, the investments that we were making and we did a lot of that on the Family Dollar side first as a proof of concept and now rolling some of those self help opportunities across the Dollar Tree banner also. As it relates to gross margin, the gross margin pressure really from Dollar Tree was really more as a result of consumable mix by not having that discretionary Easter complement in our overall performance for the quarter is what really put pressure on the gross margin. On the Family Dollar side, very healthy improvement in gross margins overall of 40 basis points. So notwithstanding the impact of Easter, we're very happy with where we're trending as it relates to our gross margins.

Operator

Thanks. Our next question today is coming from Christina Catay from Deutsche Bank. Your

Speaker 12

So I wanted to ask you about the supply chain. You've been making a lot of investments there and you have rotor cards that are making store deliveries now as part of your fleet. So can you talk about what are some of the early benefits that you're seeing so far regarding in stock availability, inventory turns? Is it helping reduce shrink in transportation damages? And just how best to think about the overall labor hour savings that you're able to take from the supply chain investments and then reallocate it to store hours?

Speaker 12

Thank you.

Speaker 4

Yes. There's a lot there. Let me see if I can just go down to just a couple of elements. The first DC that we rolled out was Matthews, North Carolina was a Family Dollar DC. It's one in which previously they were delivering to the store off of pallets.

Speaker 4

So now we're doing it off of rotocards. What we're actually seeing is improved delivery time and load time, which is what we were anticipating. We are also seeing a level of reduced damages, as you had mentioned, the way that this product is being handled. And we're also seeing a higher level of associate sort of engagement and satisfaction recognizing that it is helping to improve the way that they do their jobs. The next DC that we just really kicked off is here in Chesapeake.

Speaker 4

It's a Dollar Tree DC. We're seeing a nice once again reduction in unload times. It's allowing us now to get product to the shelf quicker and to basically fulfill some of the outs that we have on the shelf. But overall, the in store in stocks are improving as well as the DC service levels to these

Operator

stores. Thank you. Our next question is coming from Michael Montani from Evercore ISI. Your line is now live.

Speaker 5

Good morning.

Speaker 13

Thanks for taking the question and good morning. I just wanted to ask kind of 2 part thing. One was there's an improvement implied in the back half for EBIT margin of 100 bps plus versus potentially flattish in the front half. So just wanted to see the top couple of drivers of that, that gives you the conviction for that. And then as a follow-up, you all did the incremental acquisition for the $0.99 stores as you mentioned.

Speaker 13

So is it feasible to see kind of $10 plus of EPS power just from core Dollar Tree now as you think out?

Speaker 2

So I'll let you handle the first part of the question. The second part of the question is it's too soon to know that. I'd like to stay away from that for now, if that's appropriate. Go ahead.

Speaker 4

And Michael, as we think about sort of the phasing of our overall EPS for the year. I appreciate your question. It's really kind of can get bucketed into a couple areas. From a top line shrink in

Speaker 8

mix

Speaker 4

is for us, shrink in mix is for us, we believe will be more neutralized in the back half of the year than in the front half. And we once once again that $0.30 to $0.35 of EPS headwind was really on the first half. We also believe that from a SNAP perspective, while SNAP is still within our expectations, in the back half, we think that we may have some tailwinds as a result of the October COLA adjustment that may be available will be available. The question is how much. And then the last component is, if you remember last year, in the back half of the year, we had a couple of footfalls, if you will.

Speaker 4

We had an OTC recall that was about $0.05 of EPS. We had an accrual adjustment that we needed to make on general liability, very specifically around some of the claims that were going back to pre pandemic. That was around $0.17 And then last but not least, as we had mentioned, with the portfolio optimization, we are expecting a $0.15 EPS improvement that is predominantly going to be in the back half of the year. So on balance, as a result of top line acceleration of revenue growth and then some of the softer compares against some of these elements with respect to shrink and SNAP. And then the last components are those footfalls, which we believe were one time in nature.

Operator

Thank you. Our final question today is coming from Priya Uro Gupta from Barclays. Your line is now live.

Speaker 2

Good morning.

Speaker 3

Thank you so much for taking the question. I know it's a bit early in the process, but I was just hoping that perhaps you could talk to us a little bit about how you're thinking about sort of your credit rating with regards to possible considerations for Family Dollar, when the expectation be to try to maintain your existing rating as you consider these various alternatives or would it be to at least maintain investment grade? Thank you.

Speaker 4

Yes. So our investment grade rating is an important element of our overall sort of financial policy, if you will. We believe that it's too early to get out ahead of ourselves as to what a structure may be or the ultimate outcome of the strategic review. But we believe that given the underlying business, the power of the cash flows generated by this business, the growth, and quite honestly, how we basically execute our capital allocation is all in line with keeping us in an investment grade level.

Operator

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.

Speaker 2

Hey, thank you all for taking your time to talk to us today and look forward to catching you down the road.

Operator

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

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