Dollar Tree, Inc. — 2023 Q2
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Hello, and welcome to the Dollar Tree Q2 2023 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Bob LaFleur, Senior Vice President, Investor Relations. Please go ahead, sir.
Good morning, and thank you for joining us today to discuss Dollar Tree's second quarter 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 are about the company's expectations, plans and future prospects and are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995.
Thanks, Bob. I'd like to welcome all of you that have joined our call this morning. I am sure that many of you had a chance to attend our investor conference in June. I hope the information we presented was valuable to you and that you left the event with a better understanding of the key growth strategies that we have in place to deliver $10 or more EPS by 2026.
Thank you, Rick, and good morning, everyone. In the second quarter, we continued to generate strong top line results across both segments, driven by growth in customer traffic, unit volume and an accelerating market share. We continue to have a favorable view of the current operating environment. Our top line performance was not driven by any material increase in promotional intensity.
continued shift in sales mix and unfavorable shrink trends over the balance of the year, our utility and repairs and maintenance costs related to the national heat down, higher diesel fuel prices.
We have not included any assumptions for incremental share repurchases; depreciation and amortization should be in the range of $845 million to $850 million; net interest expense should be approximately $25 million for the third quarter and approximately $110 million for the full year.
Thank you, Jeff. We remain very pleased with the progress of our transformation in these early stages and remain confident in the 3-year road map outlined in June. For those of you familiar with my operating philosophy, the immediate focus of any retail turnaround is growing sales. From that perspective, we are succeeding.
[Operator Instructions] Our first question is coming from Mike Lasser from UBS.
So with the knock on the transformation at Dollar Tree has been that it's just going to take a lot more heavy lifting, a lot more investment than what was originally anticipated. And the fact that your sales are trending better than what was expected is a good sign, but it does not seem like the profitability is flowing through. So, a, do you have a good handle right now on all of the ins and outs of the different considerations with the profitability. And b, as you look towards the next 12 months, there's going to be a benefit from lower supply chain costs. Is that going to flow through? Or will you use that as a source of further savings to then reinvest that back in the business to drive the $10 of earnings several years out.
Yes, Mike, 3 really good questions. First off, is the lift heavier than we thought it was going to be. I would say no. When we all got in on this, we knew what we were facing. I do think what we're trying to do, because of what has to be done, we are moving much faster than I thought we would. And when you move fast, it takes a little more expense, it takes a little more effort, it takes a little more push. And so is the lift heavier? No, it's the same. But what we're trying to do is move as fast as we possibly can.
Yes. There's a couple of additional items, Michael. We -- as it relates to the flow-through, and we tried to call us out -- it's really a situation where our sales mix is an area that, as you see across the retail landscape, people are moving more into consumables, and that we're not immune to that. The other area that we talked about was shrink and the ongoing progression there. Those are the 2 more significant items from a gross margin basis that are really impacting us and addressing the flow-through or restricting the flow through.
Our next question today is coming from Edward Kelly from Wells Fargo.
I wanted to dig in on the core Dollar Tree gross margin this quarter. If we think about the 33.4%, it's obviously a step back versus where you were in Q1. I was hoping that you could talk a little bit more about the incremental pressures? And then how we think about the back half, you had previously talked about a 36%, 37% gross margin for the year. Obviously, that's coming down. So thoughts there.
Yes. Great question again. What's happening in Dollar Tree as we were responding to the needs of the consumer. You go back a year ago, we did not have nearly the number of consumable SKUs that we now have in the store. Saying all that, our discretionary business on the Dollar Tree side was slightly up. But what -- when I think about quarter 3, particularly or quarter 4, we're going to be in a much stronger position on the margin due because of the change in the mix, we think is going to happen. And that's because quarter 4 is a very seasonal quarter for us with Christmas and Halloween and all of that. So I remain bullish on it. I do believe, Ed, that we are responding to the customer and sales takes care of everything eventually, and the 2-year stack in Dollar Tree is just outstanding. So I remain very, very bullish on where we're going with the margin.
And Ed, the other thing I would add to that, hopefully, I hope don't sound like a broken record here, but -- unfortunately, the headwinds we're having in shrink are muting our margins right now. When you get a chance, you have an opportunity to take a look at the supplemental presentation that we have, you'll see that shrink is continuing to be -- restrict our margins by about 75 to 80 basis points on a year-over-year basis. We are taking the appropriate actions, we believe in the organization to start to address that. As you know, shrink is a sort of a trailing indication because stores are shrinking over the course of the year. And as you're adding new actions to reduce it, it takes time for those things to actually take hold. But between the sales mix and the shrink once again, this is one of the things that have been muting the margin.
Your next question is coming from John Heinbockel from Guggenheim Securities.
Rick, my question is multipart, really revolved around the $3, $4, $5, right, frozen and cooler. So can you maybe talk about the experience you're seeing because that clearly has to be lifting consumable comps. Your thought on the rollout, not just to all stores, but then expanding doors, right, getting to more than 3 doors today. But on the rollout and then the impact that that's having on traffic, that is hitting discretionary, right? And then ultimately, do you think that, that should -- it should hurt gross but the increased ticket, right, should positively impact expense control over time. So maybe your thought on that as it impacts the Dollar Tree P&L?
Yes. Another effort that we're working really, really hard on. In regards to the number of cooler doors, we're going to go from 3, I believe, 10 or 12 is the plan. We'll have a door that is a $1.25, couple of doors will be $3, $4, $5, and we're actually looking as we look at the multi-price point to expand that even more. The interesting thing is when a frozen food item goes into the basket, the basket actually gets larger. So your point about driving traffic, driving transactions is spot on. The other interesting thing, when we went to $3, $4 and $5, that allowed us to offer a family serving versus at $1.25, where it's just a single serve. So again, much more appealing to the actual -- to the consumer.
Next question is coming from Paul Lejuez from Citi.
Curious if you could talk about the monthly trend for each segment. Also curious to hear about performance in urban versus suburban and rural locations. And anything that you would say in terms of the competitive landscape that you see changing out there from a pricing perspective?
Yes. Great question. As I look at the flow across both banners through the quarter, it was pretty consistent all the way through. We started off strong, and it remained strong through the balance of the quarter.
Our next question is coming from Matthew Boss from JPMorgan.
Great. So maybe a 2-part question, Rick, at the Dollar Tree banner, could you elaborate on the traffic trends? It seems like that's the real positive progression here. Any change in momentum that you've seen in August? And maybe just speak to market share trends that you're seeing by category at Dollar Tree. And then, Jeff, on the expense front, I guess, is there a way to think about the progression of the foundational investments that you've been putting in place as we think maybe beyond this year? It seems like store standards and wages, maybe 2 of the more stickier initiatives. Or maybe just ask differently, what do you see as the comp that we need to leverage fixed costs maybe next year in the model?
I'll take the first part, Jeff. Matt, the traffic is steadily increasing in Dollar Tree. Our traffic was up 9% in quarter 2. Really, really pleased with that. Your other question is discretionary was still up in Dollar Tree. It was up 3.9%. The consumables though, were up over 11%, which is our way -- and remember, consumables drive that traffic. And we have, by unlocking that price point -- and as we continue to unlock the price point, it's going to open up more opportunities for us to bring in really powerful value items. So pleased with customer traffic. In fact, I'll throw this in. Customer traffic was up 3.4% on the Family Dollar side. So we are seeing movement now with the customer base.
And as it relates to the investments that we're making, they're really twofold. So you have expense mix investments as well as CapEx. As we think about the expense investments, I think you're spot on with respect to the wage and store standard elements. There's a few elements that also transcend into our supply chain as we need to increase and improve the standards in our DCs. We're right on track with respect to how we thought they would play out over the course of this year and then as we think about going into next year.
[Operator Instructions] Our next question is coming from Simeon Gutman from Morgan Stanley.
Wanted to just clarify and then ask the follow-up, all in one. The higher expenses this quarter, parsing it out between inflationary pressures being a little bit higher? Or are you spending more than planned or than you thought? And then bigger picture, the $10 in 2026, a long way to get there gives you flexibility. I don't think you've said it's ratable in any way. It may not be linear. What happened with expenses show that you're not afraid to spend back into the business. So curious where you're tracking. I'm sure you have your own plan and where '24, I know it's an early look, may land in terms of that run rate of expenses?
Great question. And I'm glad that I got this question finally. One of the things that if you take a look at this quarter and the pace that we're on, we are right on our outlook that we had anticipated with respect to the level of spend in the transformation. And we are actually leveraging against our original forecast, given this strong sales performance. This is also taking into account once again, unfortunately, this accrual adjustment that we just needed to make.
Our next question today is coming from Kelly Bania from BMO Capital Markets.
I just wanted to go back to the shrink and mix and just be clear about the magnitude that is maybe coming in different or the same versus your expectations. And also how those 2 factors are planned for the second half. And also just related to the shrink, what kind of margin investment at all do you see necessary to combat the shrink headwind? And is that in your long-term plan?
Great. Thank you, Kelly. There's a few things here. As we think about shrink and mix, it has definitely advanced a little further than what we had anticipated in our guidance that we had given last quarter. Having said that, we believe that there are other more favorable items that are helping to offset against that. One, in our sales momentum; Two, we are seeing additional freight opportunity as it relates from an ocean perspective. But as it relates to shrink and mix, we had mentioned earlier that we had about $0.55 in total expected as an adjustment to our comp -- to our earnings, and that was going to be spread pretty evenly between shrink and mix. Of that $0.55, about $0.15 of that was actually incurred in the first quarter. So that remains -- that gives you a $0.40 for the back for Q2 through Q4.
So -- and I'd like to add 1 thing, if I can, Jeff. We are now taking a very defensive approach to shrink. And it's taken us a quarter, but we have several new shrink formats that we'll introduce in the back half of the year. And it goes everything from moving certain SKUs to behind the check stand. It has to do with some cases being locked up. And even to the point where we have some stores that can't keep a certain SKU on the shelf just discontinuing the item. So we have a lot of things in the works that's going to roll forward. You had a question about the mix. Is that correct?
And what's in the back half assumption?
She's asking specifically what's in the back half assumption, which I have not provided.
Yes. Okay. Fair enough.
So let me -- what I gave was a pretty widespread answer. If you think about the balance of the year, in Q3, what we've said and really in the back half of the year, Q3 sales mix and shrink continues to be a headwind for us. We've taken approximately 70% to 75% of our stores and inventories. So we'll be through the balance of most of those stores by the end of the third quarter. So sales mix and shrink continues to be a little bit of a headwind for us.
Your next question is coming from Chuck Grom from Gordon Haskett.
My question is on Family Dollar. I was wondering if you could speak to the progress on rolling out the higher shelf freights across the chain? And then just one for Jeff. On that $0.07, which banner was that in? Or was that in the corporate line?
Yes. In regards to the 78-inch profile, we hope to have that complete towards the end of the year. I would say we're probably maybe 40% or 50% done. While we're doing the Family Dollar side, we're also going to do the Dollar Tree side. So we're making progress on it. And the H2.5 remodels, all of those have the new shelf profile in. And by the way, the shelf profile raise allows us to add more cooler doors and refrigerated.
Yes. And on the journal liability claims, it was across both banners, and the best way to think about it was pretty evenly split.
We 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.
No, thank you all for your time and look forward to talking to you soon.
Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.