Dollar Tree, Inc. — 2023 Q3
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 Third Quarter 2023 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the conference over to Bob LaFleur, Senior Vice President, Investor Relations. Go ahead, sir.
Good morning, and thank you for joining us today to discuss Dollar Tree's third quarter results. With me today are Dollar Tree's Chairman and CEO, Rick Dreiling; and CFO, Jeff Davis.
Thanks, Bob. I'd like to welcome everyone joining us on the call today. In brief, thanks to the dedication and hard work of our teams and continued execution towards our business transformation, third quarter results were well within our expected range.
Thank you, Rick, and good morning, everyone. In the third quarter, our Dollar Tree and Family Dollar segments, both generated higher levels of customer traffic, unit volume and increased market share. Overall, we generated 5% more gross profit dollars in the third quarter than we did last year as consumers continue to respond positively to our growth initiatives.
Consistent with our prior expectations and the patterns we have seen throughout the year, we expect shrink trends will remain unfavorable in the fourth quarter. Family Dollar comps are expected to remain soft, reflecting the unfavorable macro environment for low-income households, continued discretionary weakness and elevated promotional activity in the market.
No incremental share repurchases. Depreciation and amortization should be in the range of $840 million to $845 million. Net interest expense should be approximately $30 million for the fourth quarter or approximately $110 million for the full year. We are assuming an effective tax rate of approximately 24% for the fourth quarter and approximately 23.5% for the full year.
Thank you, Jeff. Similar to other retailers you've heard from this earnings season, we are seeing more macro pressures than we did earlier in the year, particularly among our lower-income consumers. Nonetheless, I'm encouraged by our market share momentum and am confident in our outlook for the balance of the year.
[Operator Instructions] Our first question is coming from Michael Lasser from UBS.
It's a two-part question. Number one is, given the economic environment that you're facing, seems to be different than what you expected when you offered your long-term guidance earlier this year, how does that influence your thinking about your ability to achieve $10 of earnings by 2026 if the economic environment that is current to date remains the case for the next few years?
I'm going to let Jeff handle that.
I appreciate your question. The first part of your question regarding the longer-term outlook, the economic environment that we're in today, we believe that we're managing through. You see the Dollar Tree and Family Dollar continue to take market share, they're doing well across consumables.
And Michael, let me add a little more thoughts on getting the 2026 number. We remain very bullish on that. And I think as we look into 2024, what's important is the number of initiatives that we've gotten done in just 1 year are really starting to gain traction. .
Our next question today is coming from Simeon Gutman from Morgan Stanley.
It's a little follow-up to the prior question and then maybe a slight second part. If we take again the $1 in freight, should we think about next year, again, without talking about real guidance, the core business should grow plus we get freight? Or you're not endorsing that the core business necessarily grows as we get freight for sure?
Want to take the first part?
You take the freight, and I'll take the second one.
Very good. I think, and the way I was trying to respond to Michael's point from a standpoint of what's the starting point for FY '24 as he was kind of putting together the components, if you assume once again -- I think the view is looking at -- assuming a no growth, no incremental investment year, you would be starting off with a point that would be roughly $6.80 to $7 of EPS, assuming where we believe we'll end this year plus the additional dollar of freight and then once again, the other puts and takes around the 53rd week, which comes off as well as some of those discrete items we had this year as it relates to West Memphis, OTC and general liability.
And then in regards to Family Dollar and when we should start to see the incremental margin, I think as I reflect on where we're at right now, you think about the incremental SKUs, of which the bulk are OTC and HBA, which all carry higher margin rates, now they tend to be a little more discretionary. .
Next question is coming from Paul Lejuez from Citi.
Can you talk about your Family Dollar comp assumption 4Q, just how you're thinking about how it breaks down from a traffic versus ticket perspective?
Paul, I guess the way we think about it, we really -- the balance of the comp has really been between ticket and traffic. It's been pretty consistent in its makeup. It's been around 50-50. What we've seen here more recently is ticket has dropped off as that customer has been a little more challenged.
And Paul, I'd like to add to that, that I -- we look -- we are intently focused on three key metrics: Transactions, traffic, whatever you want to call it, unit growth and sales per square footage -- square foot. And those are the things that we want to report on because I believe that drives comp sales and ultimately, growth in the chain.
Your next question is coming from Edward Kelly from Wells Fargo.
I wanted to ask you, I guess, a two-part question around Dollar Tree -- the core Dollar Tree business. You continue to roll out new price points. Maybe just an update on where you think the evolution of that is going over time? And how we should think about the timing of rollout of those price points?
Great question. Let's start with the price points. We have Rick McNeely and his team have done an outstanding job of introducing new price points. And you have to remember, Ed, we have to buy these things almost a year in advance in order to get them into the stores. And we're starting to see them arrive. We've actually done a test on Halloween and a number of stores with multi-price candy, and we're really, really excited with what happened with that.
And Ed, just to add, in the prepared comments, we had mentioned the fact that a lot of the growth that's happening in Dollar Tree is actually coming from that higher-income customer, where we're attracting 4.3 million new customers on a year-over-year basis. A lot of these customers are in that income demographic of $125,000 or greater, and we're capturing that basket.
Next question today is coming from John Heinbockel from Guggenheim.
Two quick things or -- maybe the first one is not as quick. But on your [ FTL ] review, can you talk philosophically, right, how you're going to attack that? Because on the one hand, you'd want to dedicate more resources to the stores that have the most potential, but you also don't want to cut back too far from a descaling or deleverage perspective. So maybe talk about that, the opportunity to convert all of those to Dollar Tree. Does that exist?
Well, let's go with the easy one. The Dollar Tree cooler doors, we should have done within the next couple of years.
Next question is coming from Matthew Boss from JPMorgan.
So a couple of questions from my side. Maybe first, Rick, on mid-single-digit comps at the Dollar Tree banner, what do you think is the best breakdown beyond this year to think about between traffic and ticket? At Family Dollar, Rick, what was the comp in October? Have you seen any change in November?
Yes. I mean, let me -- let's start with the promotional landscape, and I'll take that, Jeff, if that's okay, and let you put the color around it. .
There was a question regarding the Family Dollar comps. The Family Dollar comps during the course of the quarter, they softened as we went through the quarter. We started off with a nice pace.
And the one thing I'd add to that, Matt, while we think -- we saw things soften in October, I'm knocking on wood here thank God, we had our initiatives in place because while it softened, it could have been a lot worse. And I'm very pleased how we got ourselves through that quarter.
Next question is coming from Kate McShane from Goldman Sachs.
We wanted to ask specifically about Dollar Tree. We know you noted that you saw a broader range of income shopping at Dollar Tree and it contributed to your Q3 comp growth at the higher end. We wondered with regards to the lower end, just what you're seeing specific to the Dollar Tree banner?
I would say -- I mean, I would look at you and say, Dollar Tree has always had a broad appeal. And I think what we're seeing, what we're focused on is the fact that we're seeing a trade down in the Dollar Tree. I would say, the customer base is essentially the same. There's been no erosion in the lower-income strata, but the growth, undoubtedly, is coming from the higher income, $125,000 a year.
I reflect back on this, for Dollar Tree, had a very strong consumable performance but also better than a 1% comp in discretionary and still showing growth on a -- it's a sizable growth on a year-over-year basis in discretionary.
Next question is coming from Krisztina Katai from Deutsche Bank.
So my question is on Family Dollar. Understandably, there was some weakness with the low-end consumer. But how are you planning to address the softer-than-planned top line at Family Dollar to get it back on track towards mid-single digits? That is a big part of the profitability inflection, so how do you think about your current pricing position relative to your peers?
Yes. In regards to the top line, in regards to our pricing position, so first thing I would say, our pricing in Family Dollars as good as it's ever been. And we measure our pricing on a full book basis and what we call key value items. And key value items are the most sensitive items out there.
Just to add one final point. With respect to the work that Larry and his team is doing in private brands is something that's really important for us. The ability to drive greater value for that customer, give [ her ] other options, this is something that we're really just fully getting implemented here in the fourth quarter, going into '24.
Next question today is coming from Chuck Grom from Gordon Haskett.
On the Family Dollar store optimization, I'm just curious how, why the comp and profitability gap exists today across the fleet?
Yes. Chuck, the first question, I would rather not comment at this stage of the game as the process is underway and we have started it. And I will disclose more of that as we get -- when we get into the March call. But let's say this, obviously, it's an opportunity for us that we intend to address head on.
And then, Chuck, I think your question is around Q4 and as we think about gross margins, let me take it Dollar Tree first. We would expect our margins to continue to expand in gross margins in the fourth quarter, largely driven by additional freight, the mix shift, a stronger mix of discretionary as you would normally have more seasonally.
Next question is coming from Scot Ciccarelli from Truist Securities.
This is actually Josh Young on for Scot. On the shrink issue, obviously, it's been a big margin headwind this year. As we think about '24, where do you guys think you are in terms of dealing with it? You've talked about some of the mitigation efforts there, but curious if you think we're still in the early innings or do you think you're starting to make some substantial progress on dealing with the problem?
Yes. I would say we're in the early innings, but I do feel we're making headway. The deal is that we take a physical inventory once a year. So if you make these improvements, these adjustments, you still have to wait in order to see them -- see the fruits of your labor.
Our final question today is coming from Peter Keith from Piper Sandler.
I just want to circle back on the deflation theme because that seems to be something that's percolating out for 2024. Rick, you mentioned your customers have a little bit more money. But is it possible that deflation could be negative for the banners, thinking about maybe less fill-in trips and maybe more competition?
So on the Dollar Tree side, all it will do is enhance the margin because you basically have a fixed price point, so we end up getting the goods cheaper. So I can say that it could be a benefit. It might have fixed the top line a little, but it should be a benefit.
It also gives the opportunity for that customer to take those dollars. And our customer today is limiting their purchases, maybe more in consumables, less in discretionary. The additional disposable income that they would have would allow them to pick up an additional discretionary that they didn't have before.
Yes. And again, I'd add, if we do have deflation, it allows us to invest more in the value of the product and actually give the consumer something a little bit additional.
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.
Thank you all very much for taking the time, and look forward to talking to you soon.
Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.