The operator welcomes participants to the Dollar Tree Second Quarter 2024 Earnings Call and introduces the speakers, Robert LaFleur, Senior Vice President of Investor Relations, and Chief Operating Officer Mike Creedon who is filling in for CEO and Executive Chairman Rick, who is currently unwell. The speakers remind listeners that their statements may contain forward-looking statements and refer to the company's Annual Report and other SEC filings for information on potential risks and uncertainties.

The speaker cautions against relying on forward-looking statements and states that non-GAAP financial measures will be discussed. They remind listeners of the supplemental slide deck and ask for limited questions. The Chief Operating Officer, Mike Creedon, is filling in for the CEO, Rick, and discusses the transformation of the company and the challenges they are facing. However, they remain committed to the transformation and believe in its positive impact.

The company is committed to providing high-quality, low-cost products in a convenient shopping environment and serving the communities where they operate. They are aware of their responsibility to serve customers, associates, and shareholders. Despite disappointing results and a revised outlook, the company is still excited about their future and believes in their transformation initiatives. Sales were towards the low end of their outlook range, with Family Dollar's comp in line but Dollar Tree's lower than expected. The weak demand from Family Dollar's core lower-income customers and macro pressures on middle and upper-income customers have affected their performance. However, they are confident in Dollar Tree's ability to compete and win with their differentiated business model and long-term strategy.

The author discusses the importance of meeting the needs of customers in today's retail environment and how Dollar Tree is focused on providing value and convenience. They also mention that the company's lower-than-expected earnings in the second quarter were due to general liability claims. The team remains focused on controllable factors, such as their multi-price expansion, which has been successful in increasing sales. They have learned from previous conversions and are now prioritizing stores that are ready for conversion to ensure the process is done correctly.

The customer response to the new multi-price format and assortment at Dollar Tree stores has been positive, with a 4.6% increase in comps compared to other formats. The stores have shown strength across both consumables and discretionary items, and the expansion of multi-price offerings is expected to drive growth and increase store economics over time. The company has also successfully reopened 85 former 99 Cents Only locations as Dollar Trees, with plans to reopen the remaining 56 by the end of the year. This achievement required a significant effort from multiple teams and is expected to bring growth potential to these high-quality stores in strong markets.

The company is excited about expanding in California and the Southwest and has received positive reception from the communities. They acquired a portfolio of assets with favorable lease terms and expect the stores to have good economics and synergies. The West Memphis DC has reopened and is now servicing Dollar Tree and combo stores with RotaCarts. The Matthews, North Carolina DC is also delivering to Family Dollar stores with RotaCarts and by the end of the year, four DCs will be providing RotaCart deliveries to over 2,000 stores. The company is collecting data and refining their rollout plans based on what they learn. In IT, they are making progress with modernization initiatives and have transitioned over 9,000 stores to their network infrastructure.

The company has implemented a new infrastructure to support the multi-price rollout, including new equipment and systems. Private Brands are gaining momentum and represent a significant portion of sales. Shrink rates are stabilizing but still need improvement. Net sales and comps increased, with Dollar Tree seeing a shift towards consumables in their sales mix.

In the second quarter, Dollar Tree saw a shift in their sales mix, with a decrease in discretionary demand and an increase in consumables. This was partly due to the timing of their multi-price rollout and the arrival of longer lead time discretionary items. Their consumable comp was 4.7%, while discretionary comp was down 1.9%. Dollar Tree's market share gains also moderated in the quarter, but they attracted 2.8 million new shoppers. In the Family Dollar segment, comps declined 0.1%, with positive comps in the middle month and negative comps in the first and last months. The company has been making efforts to improve their assortment and saw improvements in discretionary comp in Q2. The best performing categories were evenly split between discretionary and consumables, while the bottom-performing categories skewed towards discretionary. Family Dollar's unit and market share remained flat in the quarter.

Family Dollar has seen an increase in new shoppers and is improving in terms of SNAP benefits, with reduced benefits having less of an impact on their sales. Customers can now purchase SNAP eligible products online through Instacart, aligning with their mission to make essential goods more affordable and accessible. The company is prepared to handle any changes in tariffs and has limited exposure to spot rates for ocean freight. They have also absorbed changes to overtime thresholds for salary workers under the Fair Labor Standards Act.

The next phase of the proposed salary threshold increase is set to go into effect on January 1st, but there is uncertainty about whether it will be implemented. The company is exploring options to mitigate the impact of the change. They are also making progress on their strategic review of Family Dollar and are committed to updating shareholders when it is complete. The company has adjusted their sales outlook to reflect the current consumer landscape and have confidence in their ability to meet their objectives. The adjustment also includes costs related to the 99 Cents Only portfolio and general liability exposure. Jeff will provide more details on the financial forecast.

The speaker begins by discussing the company's second quarter results and providing comments on their third quarter and fiscal 2024 outlook. They mention that they will focus on adjusted results and provide a reconciliation of non-GAAP adjusted results. The second quarter results fell short of expectations, with adjusted EPS of $0.67 being $0.38 below the midpoint of their June outlook. This was primarily due to a general liability adjustment and a sales shortfall in the Dollar Tree segment. The speaker then discusses the business results on a consolidated basis, including a 24% decrease in adjusted operating income and a 90 basis point decrease in adjusted operating margin. They attribute the decrease in adjusted operating margin to an increase in gross margin and adjusted SG&A rate. The adjusted effective tax rate was 24.2% and adjusted net income was $143 million, with adjusted diluted EPS of $0.67. The speaker then explains the details surrounding the general liability adjustment made in the quarter.

The company has taken an $84 million charge against their previous outlook due to the increase in estimated liabilities for general liability claims. These claims have become more volatile in recent years, making it difficult to predict their outcome. The company relies on third-party actuarial assessments to evaluate accruals for open and unreported claims, but the claims have continued to develop unfavorably. At Dollar Tree, adjusted operating income decreased by 13% and adjusted operating margin decreased by 190 basis points, driven by a decrease in gross margin and an increase in adjusted SG&A rate.

Adjusted SG&A expenses increased primarily due to the general liability adjustment, higher depreciation, temporary labor for the multi-price rollout, higher utility costs, and sales deleverage. At Family Dollar, adjusted operating loss was $3.6 million, compared to adjusted operating income of $11.8 million last year. Gross margin increased primarily from lower freight and occupancy costs, partially offset by unfavorable sales mix, higher distribution costs, and markdowns. Adjusted SG&A rate increased primarily from higher depreciation and amortization, the general liability charge, and sales deleverage. Inventory decreased by 4% or $228 million, and the company received $70.8 million in insurance proceeds related to inventory loss and property damage. Cash and cash equivalents were $570 million, and long-term debt was $3.4 billion, with a bank-defined leverage of 2.5 times. The company generated $307 million from operating activities and had $501 million in capital expenditures. Free cash flow improved by $60 million over last year.

In the third quarter, the company returned $91 million to shareholders through share repurchases and has $952 million remaining under the repurchase program. The company is taking a more conservative view on comp sales for the rest of the year due to macro factors affecting customer sentiment. There are also one-time integration costs related to the 99 Cents Only lease acquisitions, which were not anticipated in the previous outlook. These costs will negatively impact EPS in the third and fourth quarter. However, the initial sales performance of the converted and reopened stores is exceeding expectations, leading to a positive outlook for the long-term prospects of the portfolio.

The company is expecting higher D&A expenses in the second half of the year due to increased costs for projects and delayed vendor invoices. However, there are positive trends in discretionary mix at Family Dollar and performance at converted 99 Cents Only stores. Net sales for the third quarter are expected to be between $7.4 billion to $7.6 billion, with adjusted EPS in the range of $1.05 to $1.15. For the full year, net sales are expected to be between $30.6 billion to $30.9 billion.

The company is adjusting its full year net sales and adjusted EPS outlook for Family Dollar due to store closures and other factors. The revised outlook is lower than previously expected, with the majority of the decrease coming from a second quarter shortfall and higher costs for the 99 Cents Only portfolio. The company is conducting a strategic review of Family Dollar and remains positive about the performance of its Dollar Tree banners and newly converted multi-price stores.

The company is optimistic about their future growth potential due to the rollout of multi-price SKUs and the conversion of stores to the new format. They also plan to open new stores for many years to come. The operator then takes questions from analysts, with the first one asking about the core Dollar Tree banner's earnings and potential for growth. Jeff Davis responds, acknowledging that unexpected one-time items have been dragging down earnings, such as the general liability adjustments. He mentions that they are not happy with this and explains that it is a complex issue due to the development of claims over time and new information.

The company has made adjustments to reflect their current claims experience and does not anticipate any improvement in the future. They are confident that this adjustment accurately reflects the current liability for existing and potential claims. The company expects to achieve their previously provided outlook for the long-term operating margins, but does not want to give any additional long-term views. They expect Dollar Tree to have low-single-digit growth and will see a mix shift towards discretionary items in the back half of the year due to the multi-price rollout.

The company is confident in their 2024 outlook, with expected gross margins and SG&A costs. They believe that recent weakness in sales may be due to macro factors rather than pushback on their multi-price strategy. They are optimistic about Q4 and are seeing positive results from their multi-price stores. The company is also surveying customers and listening to their feedback, which has been positive. They are also hopeful for a resolution in their Family Dollar business that will benefit shareholders.

The company is experiencing growth in new customers and positive feedback from existing customers about their products. They are also anticipating a successful holiday season and are continuously making improvements to their stores. In the Dollar Tree segment, they have added over 2 million new customers and maintained market share despite a decrease in customer spending. The multi-price product has been successful, with 6%+ comps in consumables and almost a 3% comp in discretionary. They are also seeing positive results in Family Dollar.

Dollar Tree is seeing improvement in shrink and customer satisfaction due to investments in people, technology, and systems. The company is rolling out multi-price in 1,600 stores, with a focus on quickness and efficiency. The rollout is being aided by third-party contractors, but there is also a gating factor in terms of product delivery and distribution center readiness.

Mike Creedon, CEO of Dollar Tree, discussed the company's second quarter performance and trends. He mentioned that while they were expecting 3,000 new stores to have multi-price options, they were only able to add 2,800 due to bandwidth and vendor constraints. He also noted that when executed properly, customers love the multi-price options. During the call, an analyst asked about the softening of same-store sales at the Dollar Tree banner and any changes in trends. Mike explained that the decrease was due to a shift in their customer base, with middle-income shoppers also feeling the pressure from the current economic climate. This led to a shift in buying behavior, with customers focusing more on essential items rather than discretionary purchases. Mike also mentioned that the performance of the core Dollar Tree stores, excluding the 1,600 converted stores, was flat compared to pre-pandemic levels.

The speaker discusses the performance of Dollar Tree stores, including a decrease in sales due to economic pressures and changes in consumer behavior. They mention upcoming holidays that may boost sales and the potential for increased sales through the rollout of multi-price items. They also mention the performance of core stores and the impact of consumable products on sales.

Mike Creedon discusses the company's plans to increase their multi-price point offerings in stores, with the goal of reaching 8 out of 10 doors. He also mentions the company's growth and share gain in a tough market, as well as their cautious approach to converting stores to the multi-price model. The company will continue to learn and adapt as they roll out the multi-price model.

Jeff Davis, CEO of Family Dollar, discusses the company's recent performance on a conference call. He mentions that while the consumable comp has flattened out, there has been a slight decline in discretionary spending. This is due to the company's focus on expandable consumption at attractive price points. The comps are on top of last year's strong numbers. A question is asked about the stores that have been converted to the multi-price point model and Davis explains that the 4.6% comp lift is being driven by increased traffic rather than ticket sales. He also addresses the increase in SG&A costs and the impact on four-wall profitability.

In paragraph 26, the speaker discusses the headwinds in SG&A, specifically in relation to third-party labor and depreciation. They mention that these investments are starting to level off as they continue with their transformation. The speaker also mentions that they are not updating any forecasts at this time. In response to a question about macro pressures, the speaker states that they are seeing belt tightening among their middle and higher-income customers, but they are still growing traffic and adding new customers. They also mention that there are no plans to separate aspects of the Dollar Tree and Family Dollar businesses at this time.

The speaker acknowledges that customers have tightened their spending, but believes that this is due to belt tightening rather than shopping elsewhere. They also mention that they are shifting investments towards Dollar Tree and continue to operate both businesses with the expectation that they are both valuable. They also mention that they are bullish on both businesses.

The company is conducting a strategic review of their operations, including potential partnerships and internal capabilities. They are pleased with the progress being made. The caller asks about potential investments in response to the current challenging consumer environment and the company emphasizes the importance of managing for the long-term and remaining true to their transformation. The call ends with a final question from another caller.

The questioner asks if it would be beneficial for Dollar Tree to make a bigger change in order to improve its profit performance. Jeff Davis responds by saying that they believe they are positioned well to meet the needs of their customers, including higher-income customers, through their multi-price offering and investments in store standards. Mike Creedon adds that the company is investing in new stores and renovations to improve the customer experience and show that they care.

The speaker discusses how their business is evolving to meet the needs of their customers. They mention the acquisition of 161 stores and the short-term costs involved, but express excitement for the long-term benefits. They thank their employees and conclude the call.

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