Dollar Tree Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 22, 2022

Key Takeaways

  • Dollar Tree delivered a 6.5% enterprise comp in Q3—the best since the Family Dollar acquisition—with an 8.6% rise at Dollar Tree and 4.1% at Family Dollar.
  • Family Dollar’s material price investments achieved parity with competitors, driving a 4% comp sales increase and the segment’s first quarterly traffic gain in three years.
  • The shift to a $1.25 price point at Dollar Tree fueled a 9.3% consumables comp, and the rollout of the $3–$5 “Plus” assortment reached nearly 30% of stores.
  • Inflationary pressures lifted SG&A by 170 basis points and cut Family Dollar’s gross margin by 100 basis points despite a 240 basis-point gross profit gain at Dollar Tree, with more margin headwinds expected.
  • Inventory rose 31.1% year-over-year due to inflation and price-point expansion, cash fell to $439 million after $397.5 million in buybacks, and full-year EPS is now pegged to the lower half of the $7.10–$7.40 range.
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Earnings Conference Call
Dollar Tree Q3 2023
00:00 / 00:00

There are 15 speakers on the call.

Operator

Welcome to the CVS good day and everyone. Welcome to the Dollar Tree Third Quarter Earnings Call. Today's call is being recorded. At this time, I would like to turn the call over to Randy Guiler, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good morning, Welcome to our call to discuss results for Dollar Tree's 3rd fiscal quarter 2022. With me on today's call are Chairman, Rick Dreiling President and CEO, Mike Watinski and CFO, Jeff Davis. Before we begin, I would like to remind everyone That various remarks that we will make about our 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 risks and uncertainties, and our actual results may differ materially from those included in these forward looking statements.

Speaker 1

For information on the risks 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 ks filed March 15, 2022. Our Form 10 Q for the most recently ended fiscal quarter, our most recent press release and Form 8 ks and other filings we make from time to time with the SEC. 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. Following our prepared remarks, Mike 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 1.

Speaker 1

I will now turn the call over to Rick.

Speaker 2

Thank you, Randy, and good morning, everyone. In my short time here, I have been incredibly impressed with the team's overall enthusiasm And willingness to accept and embrace much needed change. As I stated last quarter, we are making change happen to create long term shareholder value And enable the next waves of profitable growth for Family Dollar and Dollar Tree. The company is moving at a rapid pace. We have done a remarkable job of rebuilding our executive team And with retail thought leaders that are subject matter experts and eager To be part of this transformational journey that we have embarked on.

Speaker 2

In a short period of time, All of our C suite positions have been filled as well as new leadership roles Dedicated to a number of key areas including diversity, sustainability, compliance And communication. Last quarter, we shared news of the material price investments made at Family Dollar. These actions got on price parity with key competitors and widened our Spread to grocery and drugstores. Customers are recognizing this commitment to value, Which contributed to a 4% comp sales increase and the segment's first Quarterly traffic increase in 3 years. The teams are focused on improving store standards.

Speaker 2

They are committed to clean them up, straighten them up and fill them up. Improving sales productivity is a vital component of the Family Dollar turnaround and we are extremely focused on driving sales per square foot, Unit sales growth and transaction count growth.

Speaker 3

We are

Speaker 2

a company with more than 15,200 stores. But the way I prefer to look at this is that we are really 2 growth companies With 8,100 plus stores each, both Dollar Tree and Family Dollar are unique businesses With 2 different go to market strategies, having 2 distinct large segments Provides us flexibility like none other in value retail. And both Dollar Tree and Family Dollar Have extraordinary opportunity for growth and improvement over time. We are Prioritizing our areas of growth and we are moving with urgency. The new management team is in house.

Speaker 2

We've taken aggressive action on price. The advertising and marketing cadence has been enhanced. We are in the midst of a cultural transformation throughout the organization designed to enhance our associate And customer experience. Store standards are improving. Years of sales Productivity opportunities are ahead of us and work on supply chain and technology initiatives We'll enhance us to achieve our ultimate goals.

Speaker 2

I know many are eager to learn more About all of our plans, including the timing, the magnitude and the expected returns. These details will be shared at our Spring Investor Day in a more structured format As our new leadership team has assembled more time together, we are entirely committed On taking the right steps to transform this organization for the long term. On behalf of our directors, I want to thank each of our associates for their commitment, Dedication and effort, especially for their willingness to embrace much needed change. This is a journey that I am thrilled to be part of. I'll now turn the call over to Mike.

Speaker 4

Thank you, Rick, and good morning, everyone. Thank you for joining us today. As you have seen, in recent months, We've announced a number of executives have joined Dollar Tree. I'm excited about the caliber and quality of the leadership team we now have in place. This team will lead our company through the next evolution of growth.

Speaker 4

We are committed to transforming our culture, Meeting our shoppers and associates needs, improving store productivity and efficiencies, and delivering improved long term operating results. I am pleased with the team's efforts to deliver solid results for the quarter. Our 3rd quarter sales performance reflects the timely execution of merchandising initiatives to drive our consumables business in this uncertain and inflationary environment. Same store sales for both segments improved from the prior quarter and delivered sequential monthly improvement throughout the quarter. Shoppers are responding to our new value proposition at Family Dollar and Dollar Tree as we focus on driving both traffic and store productivity.

Speaker 4

With the exception of Q1 and Q2 of 2020, at the initial onset of the pandemic, our 6.5% enterprise comp Represents our best quarter since the Family Dollar acquisition. By segment, the comp was comprised of an 8.6 percent increase for Dollar Tree and a 4.1% increase for Family Dollar. In recent quarters, we refined our strategies at both Dollar Tree and Family Dollar to focus on the traffic driving consumables side of the business. Our transition to the $1.25 price point has enabled our merchants to greatly enhance value for our shoppers. For the 2nd consecutive quarter, our consumables comp outpaced the discretionary comp at Dollar Tree.

Speaker 4

The team delivered a 9.3% comp on consumables with key contributors being in food and beverage, snack and cookies, and candy. Family Dollar consumables increased 4.7% on a comp basis, despite the ticket headwinds related to our price actions In Q2, shoppers are clearly recognizing the greater value and are responding to our enhanced advertising initiatives. Importantly, at both Dollar Tree and Family Dollar, we saw an acceleration in comp performance throughout the quarter with October being our strongest month. We have a number of key sales driving initiatives to drive productivity. For Dollar Tree stores, we are Continue to exceed the customers' expectation for value, our merchants do a tremendous job of effectively managing the ever changing assortment Wow's our shoppers.

Speaker 4

Expanding our $3 $5 offering into more stores, we ended the quarter with our Plus assortment in nearly 30% of our Dollar Tree stores and we'll continue to aggressively expand this initiative in the years ahead. We are currently refining our $3 $5 assortment as our team operates in an environment of continuous improvement based on learnings. We are developing our frozen assortment to meet our shoppers' family needs as they are looking to save money by dining at home. We are aggressively expanding our offerings of protein, pizza, breakfast items, and family sizes at price points that meet their budgets. We will continue to focus on winning the season.

Speaker 4

Dollar Tree is a destination for shoppers looking to celebrate holidays, events and seasons. Our offering will be better than last year, but not as good as next year as we continue to improve our assortments. Family Dollar from a pricing perspective is in the best position in more than a decade. Now that we have taken action to reestablish price parity, We are committed to maintaining our competitiveness. Other Family Dollar initiatives designed to improve sales per square foot, unit sales and transaction count Include improving our store layouts through improved adjacency flow, adding linear square footage, Expanding immediate consumption DSD categories and optimizing the beverage and frozen food offering.

Speaker 4

Developing private brands, we are in the process of growing and improving our private brand performance by providing shoppers more choices A broader offering of quality products at a greater value. Over time, we believe this will enhance customer loyalty as well as our margin profile. We are refining our marketing effectiveness to provide customers with convenience, value, variety and an improved shopping experience. We have evolved our print advertising calendar and format to be more relevant to our customers to drive their visit frequency. We are also in the process of relaunching our smart coupon program designed to improve quality, availability, clip rate and redemptions.

Speaker 4

In this changing and dynamic environment, we feel we are implementing the right plans to drive sales productivity, enhance margins And improve efficiencies to enhance the long term benefits to each of our stakeholders. In October, Jeff Davis joined Dollar Tree as our new CFO. Jeff brings more than 30 years of financial leadership to the organization With much of his experience coming from large retailers, including Walmart, J. C. Penney and Darden, Jeff is very much focused on value creation through strategic growth and strategic decision support, As well as value preservation through governance and efficiency and operations.

Speaker 4

Jeff has been in the company for nearly 2 months, He is making a difference already. I'll now hand the call over to Jeff to provide more color on Q3 and what's ahead of us.

Speaker 5

Thank you, Mike, and good morning, everyone. I am delighted to join the Dollar Tree team at such a pivotal time. I've been in my seat for almost 8 weeks and I've experienced tremendous energy and excitement across the entire organization As the team is in embracing change. While the company has been around for decades, I believe we are in the early phase of Significantly improving our long term operating performance. In October, I had an opportunity to meet several of you at store visits Since Mike and Rick already covered our 3rd quarter sales results, I will now move directly to the discussion of operating income.

Speaker 5

Unless otherwise stated, all 3rd quarter comparisons are against the same period last year. To supplement my comments, We are introducing a quarterly presentation on our website at corporate. Dollartree.com/investors, which outlines several key operating metrics. We hope you will find this additional information helpful to better understand our business. Operating income increased 22.8 percent to $381,300,000 Or 5.5 percent of total revenue, a 70 basis point improvement in operating income margin.

Speaker 5

This was led by a 2 40 basis point improvement in gross profit margin, partially offset by 170 basis point increase And our SG and A expense rate, gross profit increased 17.5%. The Dollar Tree segment gross margin improved 5.20 basis points, primarily from higher initial mark on related to the move to $1.25 price point, lower freight costs and sales leverage, Partially offset by greater penetration of lower margin consumable merchandise and product cost inflation. Family Dollar's gross margin declined 100 basis points, largely due to a product mix shift and product cost inflation. We expect to see continued pressure across both segments related to the inflationary cost environment and merchandise mix As our consumable sales are expected to continue outpacing discretionary. SG and A as a Percentage of total revenue increased 170 basis points to 24.4%.

Speaker 5

The increase is Principally related to elevated repairs and maintenance as part of our commitment to improve store standards, Investments in store hourly wages and higher inflationary costs across a number of expense categories, including utilities. Corporate support and other expenses increased 30 basis points to 1.4%, primarily from increased stock compensation expense, Higher incentive comp and professional fees. From a bottom line basis, net income improved 23.1% To $266,900,000 or $1.20 per diluted share in comparison to $0.96 per diluted share last year. Moving to the balance sheet. My comments reflect balanced comparisons to the end of Q3 2022 versus Q3 2021.

Speaker 5

Combined cash and cash equivalents totaled $439,000,000 compared to $701,000,000 The reduction in cash is largely attributed to the repurchase of approximately 2,860,000 shares $397,500,000 in Q3 of this year. Inventory increased 31.1% Primarily from inflationary product and freight costs, expansion of $1.25 in multi price plus inventory and store growth. Also recall last year shoppers pulled forward purchases well ahead of the holiday season concerned about product availability We were chasing trans specific deliveries of discretionary products as our inventory levels dipped well below normal operating levels. This year, shoppers purchasing behavior appears to be more closely timed to holiday dates. Finally, unit counts are at similar levels to October 2019.

Speaker 5

Our inventory is fresh. $391,200,000 in the 3rd quarter versus $295,600,000 last year. For fiscal 2022, we now expect capital expenditures to total approximately $1,200,000,000 As we look to Q4, we see the following affecting our business. We will anniversary a significant number of Dollar Tree stores, Approximately $2,500 in December $3,000 in January, the transition to the $1.25 price point a year ago. We previously experienced an outsized benefit to comps and margins associated to the transition.

Speaker 5

The economy continues to pressure middle and low household income customers, resulting in needs based purchasing. We expect consumables to outperform discretionary, which negatively impacts gross margin. We are cycling advanced child tax credit payments which were distributed mid month from July to December in 2021. On a year over year basis, we are facing higher costs from suppliers related to this inflationary environment. While at Family Dollar, we do have the flexibility to adjust price.

Speaker 5

At Dollar Tree, where we are at a fixed price points, It takes us time to adjust quantities and pack sizes for cost changes which can lead to near term pressure to margins. We will continue to invest in store and DC standards and expect to have higher year over year expenses in repairs and maintenance. In addition to being right on price, we will be right on wage, as it continues to be a competitive market for talent. We are raising our sales outlook for the year. Consolidated net sales for the year are now expected to range from 28 $14,000,000,000 to $28,280,000,000 compared to our previous outlook range of 27,850,000,000 We expect to deliver mid single digit comp sales increase for the year, Comprised of a high single digit increase at Dollar Tree Stores and a low single digit increase in Family Dollar.

Speaker 5

Selling square footage is expected to grow by approximately 2.8% as we are experiencing supply chain delays related to procuring equipment and fixtures for store openings. For Q4, we estimate consolidated net Sales will range from $7,540,000,000 to $7,680,000,000 Based on a mid to high single digit increase in same store sales for the enterprise, At the end of Q2, we expected fiscal 2022 diluted earnings per share to be in the range of $7.10 to $7.40 Due to several factors, including, but not limited to, an acceleration of consumable product mix shift And elevated product cost pressure, we expect to be in the lower half of the previous outlook range. Other considerations for our updated 2022 outlook include the following. We expect consolidated is expected to be $30,000,000 in Q4 $127,000,000 for the year. Our outlook assumes a tax rate of 24.3% for the 4th quarter and 23.7% for fiscal 2022.

Speaker 5

Weighted average diluted share counts are assumed to be 222 point 3,000,000 shares for Q4 and 224,200,000 shares for the full year. Our outlook does not include any share repurchases. As of October 29, we had $1,850,000,000 remaining on our existing share repurchase authorization. I'll now turn the call back to Mike.

Speaker 4

Thanks, Jeff. I am proud of our team's efforts. During a period of material organizational change, a disruptive hurricane through the Southeast And macro uncertainty contributing to the highest inflation in 40 years, we delivered increases of 8.1% in sales, 17.5 percent in gross profit, 22.8% in operating profit And an increase of 25% in EPS. Our results continue to reinforce the relevance of Dollar Tree and Family Dollar To millions of households across North America. As you know, in late June, we announced that a number of executive positions would be changed.

Speaker 4

I am proud to share that by mid November all seats are filled and we are very confident in the outstanding team we have built. All additions have been successful leaders throughout their careers and bring new fresh perspectives and will enhance our progress. In addition to the executive changes, last week we announced new leaders for several key areas of the business, including diversity, sustainability, Compliance and Communications. I am very confident in the team we have developed and that it will enable us to accelerate progress On our transformational journey, in the months ahead, we will be refining and prioritizing our plans We will provide you with more transparent and comprehensive view into the opportunity ahead of us and the path to get there. Before we transition to Q and A, I want to sincerely share my gratitude to our associates, especially in Florida and the Carolinas For their efforts during Hurricane Ian at the end of September, their efforts through the preparation for And the recovery from this devastating storm was critical to countless families and communities we serve.

Speaker 4

In many cases, our Dollar Tree and Family Dollar stores were among the first to reopen to assist customers with products they needed most. Thank you to each of you. Operator, we are now ready to take questions.

Operator

Thank you. We will take the Question from line Matthew Boss from JPMorgan.

Speaker 6

So maybe first question, at Family Dollar, could you elaborate on the drivers of sequential improvement as the quarter progressed? How much do you think more so of this is tied to the macro or the value trade down behavior versus what inning do you think Your company specific initiatives are in today at Family Dollar.

Speaker 3

Yes. Thanks for the question. I think it's a combination Of everything that you're seeing going on, the pressure on the customer, and then our merchandising team The investment we made in getting our prices right to be at parity in the marketplace And then as well as writing more impactful ads and more frequency of our ads. So I think Stronger promotion, stronger base pricing, and then the work on the assortment in our H2-five, I think is meeting the overall macro impact that the customer is seeing on the pressure that They have to try and meet the budget each and every day.

Speaker 7

I think that as

Speaker 3

a customer, We're seeing continued pressure. As I've shared, we're seeing more customers come into our segment. And once they're in our segment, these are the majority of the customers are at $80,000 and higher household income. But even once they're inside the store, we're seeing shifts in their behavior where they're very consumable and needs based focused to Try and make that budget work and stretch it over the month. We're seeing your private brands now for 39 weeks in a row Have outpaced National Brands, 39 weeks in a row.

Speaker 3

We have not seen that prior 5 to 7 years, where private brands were outpacing National Brands, but it's now been 39 years in a row or 39 weeks in a row, I'm sorry. And then we're seeing 1st of a month business is getting stronger. We're seeing our SNAP and food stamp business is growing, and we continue to Credit is outpacing debit. So we do see that shift in the customer coming into our segment. And then when they're in our They are shifting into the consumables and needs base to make their budget happen.

Speaker 3

And I think the work that our merchants are doing are absolutely aligned in helping Drive meeting their needs when they're in our store.

Speaker 6

Great. And then just at the Dollar Tree banner, what's your Overall assessment to date on breaking the box overall. And can you speak to sequential trends with traffic To the banner that you're seeing or what's been the reception to Dollar Tree Plus for the rollout of the $3 $5 SKUs across the assortment?

Speaker 3

Yes. I'll start with the $1.25 I think overall, our traffic has been very stable, and we saw a Slight improvement in Q3 in traffic, but what was more important is throughout 2020 2021, Our consumable sales continued to decline quarter after quarter because of the product availability and the assortment We just couldn't provide for the customer at that dollar price point. Once we move to the $1.25 Throughout this year, our merchant teams have worked hard at bringing in that new assortment, and we have absolutely Change that trend instead of declining business and consumables, it's now accelerating and leading the growth. And I believe over time that will continue to drive traffic into our stores on Dollar Tree. So what I'm really excited about is for the Q2 in a row, consumables have outpaced our discretionary business, And it was 9.3%, 9.4% comp sales, but discretionary is still doing well at over 8%.

Speaker 3

So we like the business and the reaction we're seeing from the customers based on us being able to have a better assortment at greater values On products they need, and I think as we continue to provide that, that will help stabilize our traffic in the long term going forward. On the $3 $5 we're seeing great response from our customer, especially on the seasonal side of the product. And that's where we think we can continue to refine and grow that business. And then as well, you've also heard us, We're on the frozen food part at the $1.25 with the cost Pressures, it's even hard for us to get a great value assortment at $1.25 So we've moved to multi price products In our frozen foods set, it's easier to communicate to our customers and our associates because it's door by door. And our and that assortment, as I've shared, the customers are responding greatly.

Speaker 3

And again, This is our frozen business for the last 18 months was in a decline because of the same pressures we were seeing on the consumables, And now we've completely reversed that. Where we have introduced the multi price $3 $5 items, Customers are responding well, and we see strong growth in our sales there. So I think between the two of those things, the consumable side and then the Frozen side, over time, we will continue to drive traffic doing that. And then on the discretionary side, Proven by our continued growth on an 8% comp, the customers still see the value in our Seasonal, party, toys, crafting, and that continues to be strong. So I like the trends we're seeing overall.

Speaker 6

Great color. Best of luck.

Operator

Thank you. We will take the next question from line Scott Ciccarelli from Trist.

Speaker 6

So can you talk about the consumable versus discretionary mix of both banners? It seems like there's a concerted effort to focus more on consumables. Obviously, that helps with traffic, but is margin dilutive. So I guess the question is, how do you guys expect to manage that balance, number 1? And then number 2, When would you expect the mix pressures to start to ease?

Speaker 6

Is there like, I guess, a certain target you're kind of shooting for?

Speaker 3

Yes. And you're right. Right now, we're meeting the needs where the customer is taking us, and we are improving that assortment. And I'll speak to Family Dollar. Larry Gotta and the merchants have done a wonderful job at really improving that assortment and that Pricing for that customer where they need us, and it's all in that consumable and DSD related product.

Speaker 3

And we've done that not only in our base pricing, but our promotion pricing and then also in the linear footage dedicated to it, our resets in our 2.5%. So you're right. I think our biggest goal to drive improvement on the Family Dollar side is to get More sales per square foot in our boxes, and the first thing is driving it with consumables and being right on that. But the team is also at the same time really working on discretionary to be right on seasonal and home to meet their needs. But really, it's the consumable driving That trade over more than our effort and the works that we're doing on the merchandising side.

Speaker 3

And then on the Dollar Tree side, just as I have shared, I like what I've seen the last two Quarters where one is up 9.5%, the other one is 8%. That's a great balance. And I think as we continue to provide that value on the consumable I think over time, we like when both are fifty-fifty, 50% say discretionary, 50% Consumables and then as they grow over time, I think like Dollar Tree historically has always grown low single digit comps With a combination of traffic and units in the basket, and I think once we settle and cycle through that, Providing that effort on the consumable side, we'll get back to that normal cadence that we've seen in the past.

Speaker 6

So just from an earnings algorithm perspective, and I'm not asking specific guidance for next year, is it fair to assume kind of lower gross margins, but maybe more SG and A leverage on kind of a go forward basis, maybe than what we've seen historically, just given the mix shift?

Speaker 5

Yes, this is Jeff. Absolutely from a standpoint of given the mix shift and some of the other cost pressures, margin is much more under pressure. But given these increase in revenue, the opportunity to leverage our SG and A It's definitely there.

Speaker 6

Got it. Thanks, guys.

Speaker 3

And I would just say too, the other thing is, as Family Dollar continues to prove their execution And drive market share in these products in DSD and National Brands and then even in our Private Brands. Vendor rebates and allowances will follow that because we're executing better, and Larry's team is really working hard on trying to drive that. So it's really even the mix within the mix. As consumables grow, there's levers that we can pull with allowances and rebates And then mix in the private brands as that consumer shifts too, that should help with some of the margin pressure too.

Speaker 6

Very helpful. Thanks guys.

Operator

Thank you. We will take the next question from line of Joe Thielman from Telsey Advisory Group. The line is open up. Please go ahead.

Speaker 8

Yes. Hey, guys. Good morning and thanks for taking the question. Wanted to ask you just to go a little deeper on the private brands, where do you see the most opportunity like what maybe categories and where That you're focused on and where you think you can drive some incremental improvement quickly?

Speaker 3

I believe across the board. And Larry's team, we have staffed up. We've brought in additional experts in this area on the private brand for Family Dollar, On the OTC and Health, over the counter drug and health is where we're going to be focused and leaning in first. And of course, on the paper side of it, we think there is opportunity. And then just on the everyday food side.

Speaker 3

So those would be the 3 big areas. And I think Larry's team, we're organizing around it. We're looking at the brands and driving penetration by category comparing to Rest of the market. And we've partnered with a 3rd party broker to really help accelerate that. So those would be the 3 big areas, and it's a huge

Speaker 8

That's great. Thank you. And if I could follow-up with maybe a bigger picture question. I think Rick had said in his prepared remarks that he views the company as kind of 2 really strong growth companies Under One Roof and which I guess is not too different from the past, but it does imply that there's 2 different go to market strategies, which we know and ways of doing business. So I'm wondering how do you guys leverage The scale of the overall company and the operations and like has anything changed with that strategy to have these combined fulfillment centers and Purchasing power being stronger, maybe you can just give a little more color on that?

Speaker 2

I'll lead with that, if that's okay. Hey, what I would say is the things that how we go to market, how we face the customer Between the two banners are totally different. 1 is basic consumable retailing, the Family Dollar side. 1 is Consistent everyday low price, one price point. The leverage, the beauty of the Combination is all of the backside things that the consumer doesn't experience, the accounting, the HR, The legal and that's where all those synergies exist.

Speaker 2

Even on the supply chain, how we

Speaker 9

deliver to the stores,

Speaker 6

How we look at this model?

Speaker 2

So all of those synergies are still there, but what we're doing a much different, what I would think not only difference, but better job is with how we're facing the consumer, realizing that 1 is more promotional driven and then again one is more concerned with everyday excitement value. Michael, I'll turn it over to you on that.

Speaker 3

No, I think you stated it right. Well, the customer facing side is We're leveraging, but on the backside, we'll be leveraging all the opportunities we can as one organization.

Speaker 8

That's great. Thanks. That's a helpful response. Thanks, guys, and good luck with this quarter.

Operator

Thank you. We will take the next question from line John Heinbockel from Guggenheim. The line is open now. Please go ahead.

Speaker 10

Hey, guys. Couple of questions on Family Dollar merchandising. So, one, given the size of the box, how do you think about Product breadth versus depth, that fundamental tension, and do you need to accelerate Cooler capacity is part of the process. And then lastly, I know you're working on supply chain, right, to try to improve out of stocks. How quickly do you think that begins to impact the business, right?

Speaker 10

Is that kind of 6 months out, a year out, Maybe not that long. Thoughts would be great.

Speaker 3

Yes. So I'll start with the breadth and depth of Family Dollar. Again, Larry and his team is going category by category, and he's already made changes in our new H2.5, But that will be a continuous improvement throughout this next year. As him and his team apply that discipline and strategy to each category, We will be bringing in more SKUs where it makes sense to help meet the needs of the customer and comparing it to Rest of the market and where we've done that in the categories that he's done so far, we're seeing great results in it. And I think that's why we're excited about our 2.5.

Speaker 3

We're also using our linear space more. We're putting in more shelves inside the box, and then we can go vertically higher And the gondolas, the rolls of shelving that we have right now, and again, that allows us to bring in more assortment into the store And getting more sales per square foot. The cooler is absolutely an improvement. And every time we remodel a store, we want to bring in more coolers, Both coke, cool beverage and frozen beverage because that's where the customer is moving to and it's a convenience item And it's meeting their needs. So there is room for continued expansion there.

Speaker 3

And Larry's and his team has even Really looked at a reset for the whole frozen food set and we've rolled that out going into this back half of the year. So that's going to be a continuous improvement side. And on the supply chain, I would say we're constantly looking at the enabling our supply chain, as Rick said, to try and drive efficiencies And making it easier for our stores. And we're seeing improvements right now on things that we're doing in our supply chain. So I think it's you'll see it now throughout the next 2 to 3 years on how do we continue to refine Our supply chain is a key enabler to drive the efficiencies and make it easier for our stores to get the product in the stores more efficiently.

Speaker 11

Okay. Thank you.

Operator

Thank you. We will take the next question from the line of Edward Kelly from Wells Fargo. The line is open now. Please go ahead.

Speaker 7

Yes. Hi, good morning, guys. I wanted to ask about the Dollar Tree gross Margin, you've hinted at the past that this potentially could be higher than 36% over time. I think if I Try to sort of like look at where your run rating now based upon the commentary around a little bit of incremental pressure in Q4. Maybe your run rating sort of high 35% range, just thoughts around that.

Speaker 7

And then Think about next year, you do get a big freight benefit likely. How do you think about Investing that versus letting that flow through. And I ask that question because the consensus is probably in the high 37% range For next year, and this sort of all boils down to what do you think the right margin is for this business To provide value to customers,

Speaker 6

while also delivering for shareholders.

Speaker 5

Yes. Thank you for the question. If we think about our margins right now and as we think about it move forward, it's really driven by what the Customer is really leading into and buying. So right now, we're seeing a little more of a rotation into our consumables Versus our discretionary, but yet you're seeing good growth on both sides. We like the balance of that.

Speaker 5

We're doing a number of things To continue to provide value to the customer and maintain that margin rate as best we can, recognizing right now that we are still under Some level of product cost pressures, as well as from a freight component, but still being able to deliver, as you said, Hi, mid-30s types of margin rates. As we move forward, we will continue to Look to deliver value to the customer across both of those broad categories of discretionary and consumables. We believe that a number of things that we're doing with the multi price point will allow us to lean into the discretionary Even more and hopefully continue to balance out that end of the business also. So it's really a combination of the 2 And it depends on how the customer is in their behaviors and their needs and we are able to Provide them across that broad continuum.

Speaker 6

Okay. Thank you.

Operator

Thank you. We will take the next question from the line of Michael Lasser from UBS. The line is open now. Please go ahead.

Speaker 9

Good morning. Thanks a lot Jeff, just within your last answer, you mentioned a mid-30s percent gross margin moving forward for the Dollar The Dollar Tree banner has $500,000,000 of costs that were negatively impacted From all the significant amount of freight and transportation over the last few years, especially container costs. Container costs are now Back to where they were in 2019 levels. So understanding that there could be some mix pressure as the consumer focuses on consumables, Why would you not get a more significant benefit to Dollar Tree's gross margin from the significant decline In freight costs moving into next year, should we interpret that to mean that you have to make more sizable investments in Dollar Tree In order to maintain the sales productivity of that banner, especially now that you see how those stores that were early To raise prices last year are performing once they elap that? Thank you very much.

Speaker 5

As I look at this, there is definitely the opportunity as freight rates Start to turn back around. That we are on contract. Most of our business we do is on contracted carriers versus Spot rate, so there is going to be a little bit of a lag in that timeframe. And at this point, we are not giving any guidance for 2023 as of yet. But to the extent that we continue to see the freight rates and the other trans Pacific rates coming down and staying down that will be reflected in our longer term contract rates.

Speaker 5

We will then have the opportunity to balance that with giving back to the customer as well as the shareholder. But having said that, that's only one component. The other component is underlying product costs. And right now, there is as much pressure and many times in the product cost, Underlying vendor product cost as there is in freight. So, we have to balance the 2 and definitely keep an eye on, In my mind, how we create value for the overall organization is balancing that in being priced right in the marketplace for our customer, As well as providing a higher return to our shareholder.

Speaker 9

So, if I could just follow-up on that, Jeff. As of November 2022, you have 3 12 stores that are now anniversarying the rollout of the $25 price point from last year. Are those stores comping positively in the range with the rest of the Dollar Tree

Speaker 5

Yes. So we're in the new quarter here. We're not going to give you interest quarter guidance. And it's really early for us to tell. So, I think that when we release our 4th quarter Results will be able to tell you a little bit more about that.

Speaker 9

Thank you very much and good luck.

Operator

Thank you. We will take the next question from the line of Michael Montani from Evercore. The line is open now. Please go ahead.

Speaker 12

Hey, good morning. Thanks for taking the question. Just wanted to ask first off, if I could, on the SG and A side, if there's a level of comp that you feel you need For natural leverage into the Q4 and into 2023, in order to lever some of the expenses there? And then a follow-up.

Speaker 5

Yes. Michael, it's a good question. It's one in which What would be a natural level to leverage in normal circumstances versus what we are doing, As we had mentioned earlier, a good focus continued focus and commitment around elevating our store standards, Investing in not only store standards, but our wage rates for our stores, we're and the combination of the We have been making some Material Investments. But if you look over a period of time, we've been able to leverage our SG G and A, if you will, on about a 2% to 3% comp.

Speaker 12

Okay. Thank you. And then if I could just follow-up on CapEx. The past few years, it was trending around $8 a foot and this year, it looks like it could be north of $9 So given some of the inflationary Components there and the investments you all are making, is that kind of the right baseline that 9 plus to build off of or we think of this as maybe some more catch up that could subside?

Speaker 5

Yes. Once again, Don't want to give any guidance beyond 2022 other than what we've provided. The investments that we're making this year in technology and Supply chain on top of our normal base is what's really driving the increase. And we believe it's the right thing to do as we set up for the right

Operator

Thank you. We will take the next question from the line of Chuck Groom from Gordon Haskett. The line is open now. Please go ahead.

Speaker 11

Hey, thanks very much. Jeff, on the implied 4th quarter guide, can you help us think about the segments where you see more margin compression relative to the 3rd quarter? It looks like you're Anticipating operating margins to be down about 30 basis points or so. They were up about 70 basis points in the 3rd quarter on a similar comp. So just Just wanted to hold our hands on the segment for 4Q a little bit.

Speaker 5

Yes. We Historically, we have not given guidance necessarily on a banner basis. We look at it in total. The pressure that we are seeing is once again the continued rotation in the consumables and how the customer is responding there, As well as we know that we are continuing to see other inflationary cost pressures across the P and L. But all of this is more was anticipated back when we gave our earlier guidance.

Speaker 5

It's really the product mix Shift that is the predominant sort of driver of our sort of direction around the lower half Of the range.

Speaker 3

And the continued pressure on cost.

Speaker 11

Okay, great. And follow-up question for Rick and Mike. Obviously, the price investments a few months ago were smart. I'm curious when you think out over the next couple of years and the Big levers you can pull to improve productivity. I guess, what should we be thinking about?

Speaker 11

Mike, you touched on a little bit in terms of Raising the gondola heights, adding coolers, but I guess maybe a little bit of looking inside the playbook on what to expect?

Speaker 2

Yes, I would say that Go ahead, Michael. Yes, I couldn't say go ahead, brother. I'm sorry. Bye bye.

Speaker 3

What Rick opened up was to clean it up, fill it up and straighten it up. I think Getting the product filled in our stores and better store conditions more consistently for our customer is one thing. I think that private brands is another big leverage. I think the work that Larry and the team are going to do yet that we We're really at the beginning of that, doing a better job on the category by category assortment that our merchants need and being priced right. I think those are the big levers inside our store to really keep driving the overall sales per square foot of our buildings.

Speaker 2

Yes. And the only thing I would add to that is we are especially on the Family Dollar side, we are under skewed And we are under skewed based on how we ship product to the stores. We tend to ship only in case Tax versus Eaches for the higher margin slower term merchandise. If you look at our cooler commitment, we are under cooler for lack of a better phrase In our Family Dollar stores and probably our Dollar Tree stores. So there is lots of upside by managing the SKU days.

Speaker 6

Great. Thank you.

Operator

Thank you. We will take the next question from line Kelly Bania from BMO Capital. The line is open now. Please go ahead.

Speaker 13

Hi, good morning. Thanks for taking our questions. I was wondering if you could just help us give us a little more specific magnitude of the product Cost inflation you're seeing on the consumables versus the discretionary side of both businesses. And just As you work with suppliers, are you seeing any light at the end of the tunnel in terms of the product cost inflation front?

Speaker 5

Yes, Kelly. Maybe the best way to describe the support dimension to it is, If you take a look at our inventory, if you take a look at our inventory on a year over year basis and in my prepared remarks, I had mentioned that part of the inventory increase was as a result of last year, the cupboards being fairly bare last year as a result of You know, customer pull forward in the holiday and then us chasing goods. But even if you step back from that, About 40% to 45% of our increase in inventory on a year over year basis It's as a result of product vendor product cost increases. There's another roughly 20 That is as a result of higher freight costs associated with those inventories. So, Jess, those two components represented about roughly 60%, 65% of the increase in the cost of our inventory.

Speaker 5

And that's what is now embedded in our inventory and then of course will be rolling through with respect to margins on a go forward basis In which we have been dealing with over the course of the year. Yes, as it relates to our merchant teams Continue to be, I think, very resourceful and looking at different suppliers, negotiations, working with them Allowances working with them across other ways to get support on the Business. And then, of course, one of the things that is really important to us and Mike had mentioned is, we are leaning into It's private brands and the opportunity to blend that more into our offering. Our customers Looking for that opportunity and it gives us more margin protection.

Operator

Thank you. We will take the next question from line of Simon Gutman from Morgan Stanley. The line is open now. Please go ahead.

Speaker 14

Hey, good morning, guys. It's Simeon Gutman. Following up on this freight question, I wanted to ask maybe a different way. So is part of it You know that the timing of contracts means that we don't see a lot of the savings in 'twenty three or are you just reserving the right to Figure out how to plan the business. There will be savings, but you're not sure of how to reinvest or use the savings yet?

Speaker 5

Yes, I think you are spot on. As it relates to the freight, Those contracts and the way that we would recognize it is more of a forward look. So it would be into a 2023 year. And then as that freight as we negotiate those new freight costs, we see those freight costs Coming down, it would run through our inventory turns.

Speaker 14

Okay. So I guess it's a 23 into 20 4 phenomenon where the real savings builds up, is that the right way to interpret that answer?

Speaker 3

We should see in the back half of the 23, we should start to It's about a quarter drag. We turn our inventories 4 times a year. So it's usually about a quarter drag once we start appreciating the lower Rates, then we can see that in our product as it's coming through.

Speaker 14

Okay. And then just my quick follow-up on the traffic on Dollar Can you talk about, I'm sure this has been asked, but why like multi year, I think it got a little better this quarter, but structurally it's been down for this past several years. Can you talk about that? And then why shouldn't the right algo be you get price, but traffic is either flat or it could decline because It's hard to understand why the traffic has structurally been weaker over the last several years. Thank you.

Speaker 3

Yes, I would just say this. I think it's a lot due to our assortment that we provided for our customer and the majority of that was on the consumable side. And then just during the pandemic, our customer, it was we weren't high consumable driven and high discretionary where When they had money in their pocket, trips were consolidated in 2020 2021 and they were buying High ticket items to decorate their homes, decorate outside and Replacing a lot of things inside their house, that's not what Dollar Tree is at our single fixed price point. So 2020 2021 were okay for us. But when we saw the consumable side of the business, That assortment go away.

Speaker 3

That was impacting our traffic. That's why I'm really excited about going forward. The last two quarters now, we're seeing that consumable sales come back, 9.4% comp and third Sales come back 9.4 percent comp in 3rd quarter, and we see that continuing, especially on the consumable. And then on the Frozen side of the business, we do see that traffic starting to settle back into what Dollar Tree has been known for, that low single digit Traffic increases with ticket increase to have a nice go forward balance between the 2 and continuing to balance our mix Between consumer and discretionary, I think that's ahead of us and that's what the work that the team has been doing in the last two quarters we're seeing evidence of it.

Speaker 14

Thank you. Good luck.

Operator

There are no further I will hand it back over to your host to conclude today's conference. Thank you.

Speaker 1

Thank you, Caroline, and thank you for joining us for today's call. Our next quarterly earnings conference call to discuss both Q4 and fiscal year end results is tentatively scheduled for Wednesday, March 1, 2023.

Speaker 14

Thank you and have a

Speaker 6

good day.

Operator

Thank you for joining today's call. You may now disconnect.

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