Dollar Tree, Inc. — 2023 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good day, and welcome to Dollar Tree Q1 2023 Earnings Call. Today's call is being recorded. At this time, I will now turn the call over to Randy Guiler. Please go ahead, sir.
Good morning, and welcome to our call to discuss results for Dollar Tree's First Quarter Fiscal 2023. With me on today's call are Chairman and CEO, Rick Dreiling, and CFO, Jeff Davis.
Thank you, Randy. Good morning, everyone, and thank you for joining our call. As many of you are aware, Dollar Tree will be hosting its investor conference in 4 weeks on June 21 in Norfolk, Virginia, near our corporate headquarters. The conference will be webcast, and I hope to see many of you at this important event. Our investor conference has been overdue, and we understand the level of anticipation for many investors. I hope next month's gathering will provide each of you a better understanding of the transformation taking shape and the speed with which we are making these changes to increase both our productivity and profitability at Dollar Tree and Family Dollar.
Thank you, Rick, and good morning, everyone. As Rick mentioned, our top line performance was strong in both the Dollar Tree and Family Dollar segments. It was driven by meaningful growth in customer traffic, continued market share gains and an increase in underlying unit growth. Total sales increased 6.1% to $7.3 billion based on comp store sales growth of 4.8%. Traffic increased 5% on a consolidated basis, and average ticket was down slightly. Across the enterprise, our sales mix of consumables increased approximately 200 basis points as customer purchase behavior responded to deteriorating macro conditions.
Thank you, Jeff. We are continuing to execute at a high level and acting with urgency around our business transformation, and I am pleased with our solid start to 2023. We are looking forward to our investor conference next month, where we expect to provide our investors and analysts with a multiyear outlook for the business, including a substantive and comprehensive overview of the key elements of our business. Our team has identified multiple levers to unlock value, and we have strong underlying business momentum that positions us favorably in the current retail and economic environment. We see a path to greater earnings power over the next 3 years and look forward to sharing our plans in more detail next month.
[Operator Instructions] We will take our first question from John Heinbockel from Guggenheim.
So Rick, it's more of a strategic question, right? If I think about your initiatives and then the consumer, do you think that consumable penetration, right, that mix not only will remain elevated, maybe the consumables mix goes higher over time. What's your thought on that? And then mitigating the impact of mix on margin. Private label will help, but maybe talk about where do you think that goes and the opportunity to do sort of ultimately a DG Fresh like distribution initiative, right, to bring down COGS in that area.
Thank you, John. Great question. There's a lot of meat answering that question. The first thing I'd like to say is the strength that we are experiencing consumables has nothing to do with weakness in our discretionary. The fact that we are responding to the needs of the consumer, which is the shift towards consumables, is a really significant step forward for us and that we're introducing consumable products, especially on the Dollar Tree side, that the consumer is responding to.
We will take our next question from Simeon Gutman from Morgan Stanley.
I wanted to ask about Dollar Tree Plus, I also wanted to ask about the $1.25 price point at Dollar Tree. Can you talk about, I guess, the trade-off here of maybe accelerating a move to higher price points given some of the higher cost pressures, given some of the margin headwinds? Just the trade-off, given how the consumer is behaving and then maybe speeding up Dollar Tree Plus rollout to more stores?
Yes, 2 good questions there. We are very excited what we're seeing with Dollar Tree Plus, and our intent is to move that along as fast as we can. The same thing with the $3, $4, $5 frozen food. The change in the basket when those items goes in is significant.
If I could just add to that. One of the things that the merchant team is really focused on the whole situation is always making sure that they're giving more value in relation to the market at every price. And while some of our prices in relation to where we were previously embracing the dollar at a higher price point, continue to have that price separation and value separation against other competitors in the marketplace.
We will take our next question from Edward Kelly from Wells Fargo.
So first on shrink. Just quickly, could you just walk us through the surprise there? I would think that shrink would be tied to, like, a year in inventory count, so I'm just curious as to what happened there.
This is Jeff. I'll take the first part of the question regarding shrink. When we gave our guidance for the year, we had approximately less than 10% of our stores have taken their inventories for the year. And while we did see some elevation in that shrink, that was embedded in our guidance for the year. As we move through the course of the quarter, we saw a pretty rapid increase in the level of shrink that was being experienced by the stores. And as Rick has said, we were seeing that across all strength classes, which was really out of the normal for us. That's the reason why we needed to make the adjustment.
Then, Ed, on the second part of your question, the first thing I'd like to say is we intend to highlight a lot of that question at the Investor Day, which will give you a little more clarity to how it's going to shake down and how quick it's going to come.
We will take our next question from Scot Ciccarelli from Truist Securities.
Scot Ciccarelli. A lot of your initiatives like expanding cooler doors and frozen foods have been focused on driving consumable sales, and that's obviously the driver to the transaction growth, as you've highlighted. But Rick, like as the consumer behavior starts to stabilize, how do you shift consumers back to buying more discretionary goods? Because in theory, your consumable sales gain should be sustainable. And if we look at Dollar General as an example, like their consumable sales spiked during the great recession, but then consumables continue to become a bigger part of their sales pie every year up until the pandemic. So like, how do you actually change that trend once the consumer starts to normalize?
Another great question. And I would say this, and no offense to anybody prior to me. Somewhere along the line, we have confused value and cheap. Our consumer is looking for value, and value means that -- it's the classic story I can remember years ago, people -- somebody bought a rake in one of our stores, took it home, used it 1 day and it was broken. Well, that was cheap, but that's not value. And how we are going to manage this, we're doing a better job of procuring products and bringing the right selection in.
We will take our next question from Peter Keith from Piper Sandler.
So the transaction comps are pretty impressive and nice to see. I'm curious with the economic backdrop, what type of trade-in/track-down benefit you're seeing? Obviously, you're getting more customers in stores. Is this repeat behavior? Or are you starting to see new customers that you can track behavior on?
We're actually seeing new customers. Our core customer is coming more frequently. Now when they come, they don't spend any more, but they come more often. And what we're now seeing is the trade down in that $80,000 income range, and we're actually beginning to target that consumer, and that consumer is more wrapped up in the consumable business.
And Peter, just to give you a little more dimensionalization. Across both banners, they are averaging about $3 million net new customers over a trailing 12-month period. So you are seeing that customer -- a new customer coming to us. We're seeing that customer shop across the entire store across consumables and discretionary. And as Rick has mentioned, our ability to make sure that we have the right store environment such that they want to come back is an important element for us. That's the reason why we want to continue improving our store standards and delivery and service to those stores.
We will take our next question from Karen Short from Credit Suisse.
Look forward to seeing you in a few weeks. I just wanted to ask a couple of things. So on overall margin structure within the Dollar Tree banner, so is it fair to say as we get through the year, you'll have more benefit from freight? So what we're looking at right now is not necessarily the run rate, but there is a mix shift and then that will be offset a little more impactfully in the second half of the year on freight.
I'll take the second.
Yes. So on the first portion of the question with respect to margins at Dollar Tree, we had stated earlier that our expectation is we'd be able to manage that business over the course of the year to a 36% to 37% gross margin rate. And there's lots that goes into that, of course, not only product costs but shrink markdowns on some other elements.
Then in regards to the question concerning combined warehouses, we're opening on the process of building one in Florida. We had one in Utah, and we actually converted it to Family Dollar only. It's one of those propositions that sounds easy, makes sense but it tends to be a little more difficult to execute. And what John and Mike have done for us is we've have done -- and which we'll share at the Investor Day, we've done a total analysis of the system. And at the end of the day, this really boils down to stem miles and how far away the distribution center is from the stores.
We will take our next question from Matthew Boss.
So Rick, at the Dollar Tree banner, could you speak to the economy that you're seeing between the traffic improvement, which obviously is a nice positive, relative to the average ticket decline that you're experiencing? And then just what are you seeing with recent trends to support the sequential comp acceleration that you embedded in your second quarter guidance at the Dollar Tree banner?
Yes. I don't want to give a mid-quarter guidance here. It's we're only 3 weeks -- 3.5 weeks into the quarter. But I will tell you, I am very pleased with the trends and the transaction counts have not changed.
We will take our next question from Joe Feldman.
I guess I wanted to go back on the consumables mix, I guess, we all kind of understand the environment we're in. And I guess I'm a little curious as to what was different in the quarter than you expected. It seems like it did accelerate the mix pressure. And you also made reference to an earlier question that you were still -- the discretionary business sounded like it wasn't that bad from your perspective. And I wanted a little more color on performance of discretionary, I guess, if you could share it?
Yes. Maybe we'll tag team that, if that's okay, and I'll start.
Yes, yes.
If you go back to the last earnings call, we did call out that we were starting to see a shift in shrink and the drive towards consumables. Now there's absolutely no doubt over the last 12, 15 weeks that call out has accelerated. And I think the consumer is feeling the real pressure now of a lot of things that have taken place. We've had change in SNAP benefits, tax returns are smaller than this time last year, all the stimulus is out of the system, and all of that is taking root. And the consumer now is more focused on needs and buying to those needs as close as they can versus wants, and that's the shift we've seen. Now we think that shift is going to continue for a while. We don't particularly believe it's going to get any worse. I can't remember the second part of the question.
I was just asking discretionary. Yes.
Yes. The reason I bring up discretionary, I think it's really important. Really important. Our discretionary business is still good, and the fact is we've strengthened the consumables side. So we shouldn't be making the assumption that our low-cost pertinent discretionary items are no longer wanted or needed by the customer. It's that they're buying more consumables.
Yes. I was just going to add a little -- provide a little dimension on the acceleration of consumables.
We will take our next question from Michael Lasser from UBS.
One of the hallmarks of your and your team tenure in the previous retail situation is that you would consistently underpromise and overdeliver and generate consistent and reliable performance. This experience has been colored by surprises due to factors like reinvestment and unanticipated costs such as shrink and mix. At what point do you think Dollar Tree is going to get into the cycle of greater consistency? Is it realistic that, that could happen in the second half of this year?
So I'll take the first part, let Jeff handle the second. Underpromise, overdeliver, I think, has been the mantra of my career, and I cannot deny that. But I will make a couple of comments.
The only thing I would add to that is that we are very confident that we will be able to deliver double-digit EPS. And the actions to get there, we are embarked upon currently. As Rick has said, we are confident in what we're doing. You're starting to see some of the results from a top line perspective. The components of how we get there and the time frame that we get there would be best illustrated when we get to the Investor Day, and we don't want to take anything away from that period of time. But we are confident the double-digit EPS is in our near-term horizon.
I think on the price point, [indiscernible]?
Multi-price.
I'm sorry. The specific question on multi-price?
Yes. Could you say it again, sir?
Yes. So you have alluded to testing several times on this call, incremental price point. The interpretation is that those are above $1.25, but below the Dollar Tree Plus price point of $3 and $5 items. So if you could elaborate on that test, it will be super helpful.
Yes. To answer your question, at this stage of the game, north of $1.25 and less than $5. That is a correct assumption. That doesn't mean that's where we're going to land when this is all said and done. But yes, we are -- that was -- that's very fair, between $1.25 and $5 is where we're at right now with no duplication of the SKU.
We will take our next question from Krisztina Katai from Deutsche Bank.
Just wanted to quickly follow up on some of the increased pressure points on margins. Could you just talk about how you see the promotional environment evolve from here? And I know you said that currently, it's still very rational. But in case some of the larger players do pick up price investments, can you just talk about how much you can potentially lean on to your vendors, better source? And I think, Rick, you said that you view shrink as something that is cyclical. But can you just talk about some of the steps that you can take right now to mitigate it?
Yes. I'll talk about the promotional environment. I'll reinforce that it's very stable right now. And I will also tell you this, we are generating, on the Family Dollar side, vendor relationships we have not had in a very, very long time in this banner. And those vendor relationships are driven by our ability to execute on the commitments we make to the vendor and the manufacturer. And it is -- and that's how you get the incremental support for incremental markdowns in case you have to go to battle in print.
Yes. On shrink, it's a multifaceted sort of approach. You definitely start off with a sense of merchandising, where there's opportunities for us in some situations to how you display items, what restrictions you have and how that banner is displayed. And those are the types of things that we don't particularly care for because we know that, that impacts sales, but it's an inevitable portion. We introduced new technologies within the store, how we monitor and alerts. We take such steps quite honestly in working more closely with local law enforcement to the extent that there is elevated levels with systemic communities.
Krisztina, I'd add one last thing, too. Shrink tends to fall into certain categories. And in our higher shrink stores we're actually exploring, do we need the same assortment as a low shrink category store? So those are the kinds of things we're looking forward. To Jeff's point, we're looking at everything right now to mitigate the problem.
Now, I will hand over back to Randy Guiler. Please go ahead, sir.
Thank you for joining us today, and we hope to see you at our investor conference on June 21. Have a good day.
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