Bob LaFleur of Dollar Tree welcomed everyone to the company's Q2 2023 Earnings Conference Call and Webcast. He reminded everyone that some of the remarks made during the call are considered forward-looking statements and could be subject to risks and uncertainties. He also mentioned that the company will discuss certain non-GAAP financial measures and provided reconciliations to the most directly comparable GAAP measures.

Rick Dreiling welcomed all callers to the investor conference and outlined the key growth strategies in place to reach their goal of $10 or more EPS by 2026. These strategies include improved merchandising, store operations, supply chain, and IT infrastructure. He also reported that units, transactions, and sales per square foot are all moving in the right direction.

In the past two quarters, both Family Dollar and Dollar Tree have seen positive unit growth in consumables, with Family Dollar seeing four consecutive quarters and Dollar Tree two. Traffic was up 3% at Family Dollar and nearly 10% at Dollar Tree, and sales per square foot were up 4% and 6%, respectively. Consolidated sales increased 8.2%, with 6.9% enterprise comp growth and $287.8 million of operating income. Dollar Tree's comp was 7.8%, driven by 9.6% more traffic and a modest offset from average ticket. Family Dollar's comp was 5.8%, with 3.4% more traffic and 2.3% average ticket growth. Despite the challenging macro environment, traffic and new customers have increased, and the shift to purchasing consumables reflects the current economic environment.

Dollar Tree and Family Dollar are well positioned to capture a larger share of the market as they offer value to consumers of all income levels, particularly in the food and consumables categories. They are expanding their private brand assortment to drive growth, which is already showing encouraging results with increased penetration, units sold, and comps. They are also focused on bringing in new customers to drive traffic and market share.

In the past year, Dollar Tree and Family Dollar have added nearly 5 million new customers, with a high percentage returning to visit multiple times. This has resulted in strong market share gains, with both segments outperforming the market in terms of unit volume growth. Dollar Tree is on track to reach their target of 4,900 stores by year-end, with Family Dollar completing planogram resets by November. They are also making progress with their Emerging Formats, having completed 271 H2.5 renovations and opened or converted 90 Family Dollar stores under their rural combo format. They are on pace to open 600-650 new stores this year.

The company is making progress on multiple fronts, including renovations of 1,000 Family Dollar stores by the end of the year, temperature control upgrades in distribution centers, Rotacart delivery testing, and new store and inventory management systems. Additionally, employee turnover and store vacancy levels have improved due to investments in wages, benefits, and elevated standards. Finally, there has been an improvement in late openings and early closings, which could add 1.5 points to the overall comp.

In the second quarter, the company generated strong top-line results across both segments due to an increase in customer traffic, unit volume and market share. There was no increase in promotional intensity and more gross profit dollars were made than the previous year. The company is investing in stores, IT, supply chain, and their people in order to continue their successful performance. The energy from the meetings with the field leadership was positive, as they are the key to a great customer experience.

Operating income for the consolidated level decreased 43.1% to $287.8 million, driven by a 220 basis point decrease in gross margin and a 130 basis point increase in SG&A expenses. At the business segment level, Dollar Tree's operating income decreased 27.8% to $397.8 million, with a 400 basis point decline in gross margin and a 110 basis point increase in SG&A expenses. Family Dollar's operating income decreased 78.5% to $11.8 million and operating margin compressed 140 basis points.

In the second quarter of 2023, gross margin decreased by 30 basis points and SG&A expenses increased by 110 basis points due to wage investments, minimum wage increases, utility costs, and repairs and maintenance costs. Inventory decreased by 1.7% but was still elevated due to early imports. Capital expenditures were $425.4 million, and free cash flow improved by $40.5 million compared to the same quarter of the previous year. For the first six months of 2023, free cash flow improved by $157 million, mainly due to lower merchandise inventories and the timing of accounts payable.

In the second quarter, the company repurchased approximately 700,000 shares for $99.9 million and had $1.6 billion remaining under the share repurchase authorization. They also established a new commercial paper program to issue unsecured notes with maturities up to 397 days, with an aggregate face amount outstanding at any time of $1.5 billion. For the third quarter and the balance of 2023, the company expects a shift in sales mix, unfavorable shrink trends, higher diesel fuel prices, improved sales performance, and incremental ocean freight savings. They do not see any systemic or structural issues that would have a lasting negative impact on their multi-year outlook.

The company expects consolidated net sales for the third quarter to be between $7.3 billion to $7.5 billion, with diluted earnings per share in the range of $0.94 to $1.04. For the full fiscal year, the company is expecting a mid-single-digit increase in comp store sales across both segments and the full enterprise, with a range of $30.6 billion to $30.9 billion in sales. The company is also expecting 220.6 million diluted shares for the third quarter and 221 million diluted shares for the full year, and depreciation and amortization in the range of $845 million to $850 million. They are making investments to meet their long-term growth objective of $10 or more of EPS by 2026.

Rick Dreiling is pleased with the progress of the transformation and is confident in the three-year roadmap. He is focusing on growing sales and providing convenience, value, variety and a great shopping experience to customers. 87% of the population of the Continental United States lives within a five mile radius of one of their stores. He is confident that their long-term earnings potential can be realized within the timeframe they have communicated and that their improving top-line performance will put them in a strong position relative to the competition.

Rick Dreiling states that the lift of the task is not heavier than expected, but the company is trying to move as fast as possible. He is optimistic about the margin targets and believes that top-line growth will help achieve these goals. He also believes that the supply chain improvements will come from a combination of cost savings and increased retail execution.

In Q2, Dollar Tree's core gross margin was 33.4%, which was a step back from Q1. This was due to a shift in sales mix towards consumables, shrink, and an accrual adjustment for general liability claims from 2019 and 2020.

Rick Dreiling and Jeff Davis are both optimistic about Dollar Tree's margin in the fourth quarter of the year due to the seasonal increase in sales. They believe that responding to the needs of the consumer will help to improve the margins and that the two-year stack in Dollar Tree is very impressive. However, they acknowledge that headwinds in shrink are currently impacting the margins.

Rick McNeely and his team are taking actions to reduce shrink and address product cost pressures, which should abate over time. John Heinbockel asked about the impact of the $3, $4, $5 frozen and cooler rollout on consumable comps, traffic, discretionary items, gross margin, and expenses. The rollout is expected to lift consumable comps and increase ticket, which should have a positive impact on expense control.

Rick Dreiling discussed the company's efforts to increase the number of cooler doors from three to 10 or 12, offering a variety of price points to appeal to consumers and bring back ice sales. He also mentioned that the Rotacarts would be delivered to Dollar Tree stores to reduce the time spent unloading trucks. In response to a question about monthly trends, competitive landscape, and performance in urban, suburban, and rural locations, Dreiling did not provide further details.

Rick Dreiling reports that traffic and discretionary sales at Dollar Tree have been steadily increasing, with traffic up 9% in the second quarter and discretionary sales up 3.9%. He also comments that the competitive environment in regards to pricing is very rational right now.

Jeff Davis discussed the investments being made to improve wages and store standards, as well as CapEx investments for a Rotacart rollout, trailers, lift gates, IT capabilities and systems. He also mentioned that the rate of inflation and sales mix will affect the level of comp needed to be delivered. Customer traffic was up 3.4% on the Family Dollar side, and consumables were up 11%, which is driving traffic.

Jeff Davis explains that the company is on track with its planned spending for its transformation, and that they are even leveraging against their original forecast due to the strong sales performance. He also mentions that the expenses this quarter also take into account an accrual adjustment that needed to be made.

Jeff Davis explains that the shrink and mix of their products has advanced further than expected, but is being offset by their sales momentum and additional freight opportunity. He also mentions that there is some inflationary components in utilities and fuel, which is reflected in their guidance for the back half of the year.

Jeff Davis has not provided an exact answer to what is assumed in the back half of the year regarding mix and shrink, but he has stated that it is still a headwind for them in the third quarter. Rick Dreiling adds that they are taking a defensive approach to shrink, introducing new formats such as moving certain SKUs to behind the check stand, locking up cases, and discontinuing certain items. They have also taken approximately 70-75% of their stores and inventories and should be through most of them by the end of the third quarter.

Rick Dreiling reported that Family Dollar is about 40-50% done with rolling out higher shelf heights across the chain, and expects the project to be completed by the end of the year. He also reported that the $0.07 increase was in the corporate line.

Rick Dreiling and Jeff Davis discussed the progress of the Family Dollar and Dollar Tree side, the H2.5 remodels, and the general liability claims. They both reported that the shelf profile raise will allow for more cooler doors and refrigerated items, and the claims were split evenly between both banners. The teleconference and webcast concluded with Rick Dreiling thanking the participants.

This summary was generated with AI and may contain some inaccuracies.