Good day, and welcome to the Dollar Tree, Inc. Second Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Randy Guiler, VP, Investor Relations. Please go ahead, sir.

Thank you, Shelby. Good morning, and welcome to our call to discuss Dollar Tree's performance for the second fiscal quarter of 2020. With me on today's call will be our President and CEO, Mike Witynski; and our CFO, Kevin Wampler. Before we begin, I would like to remind everyone that various remarks that we will make about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors included in our most recent press release, most recent 8-K, 10-Q and annual report, which are on file with the SEC. We have no obligation to update our forward-looking statements, and you should not expect us to do so. At the end of our prepared remarks, we will open the call to your questions. Please limit your questions to 1 and 1 related follow-up question, if necessary. Now I will turn the call over to Mike Witynski, Dollar Tree's President and Chief Executive Officer.

Thank you, Randy. Good morning, everyone. I'm very pleased with the company's second quarter results announced this morning. Our store and distribution center teams have done a remarkable job of serving customers through an incredibly dynamic time in retail. Their continued efforts to ensure we are providing a clean, safe shopping experience, along with great value and convenience our stores offer, contributed to our solid operating performance for the quarter. Our team delivered an earnings per share increase of 44.7% compared to prior year's quarter. These results for the enterprise were comprised of a 7.2% same-store sales increase, a 180 basis points improvement in gross profit margin and a 130 basis point increase in operating profit margin. Same-store sales increased 11.6% at Family Dollar and 3.1% at Dollar Tree. It's a new day at Family Dollar. In early March, on our Q4 earnings call and following our December leadership realignment, I spoke about the challenge and opportunity to turn around discretionary side of the business at Family Dollar. Our focus is on greater values and sharper price points with an enhanced focus on meeting the basic needs of our customers. It's all about sourcing more of the items customers want to buy. Our team's efforts are paying off as Family Dollar delivered a record 28.9% same-store sales increase and discretionary for the quarter. Our realigned and focused merchandising team is demonstrating how they can be nimble and opportunistic to drive sales, loyalty and repeat visits at Family Dollar. Examples of this included, following on the success we experienced at Dollar Tree, we have now completed the rollout of Hallmark-branded greeting cards to all Family Dollar stores. We are capitalizing on great brand name closeout opportunities, which is a relatively new approach at Family Dollar. We introduced what could be the…

Thanks, Mike, and good morning. For the second quarter, consolidated net sales increased 9.4% to $6.28 billion, comprised of $3.18 billion at Dollar Tree and $3.1 billion at Family Dollar. Enterprise same-store sales increased 7.2%. And on a segment basis, comps for Family Dollar increased 11.6% and for Dollar Tree increased 3.1%. Overall, gross profit increased 16.2% to $1.92 billion. Gross margin improved 180 basis points to 30.5% compared to 28.7% in Q2 of 2019. Gross profit margin for the Dollar Tree segment decreased approximately 10 basis points to 33.7% when compared to the prior year's quarter. Factors impacting the segment's gross margin performance included distribution costs increased 70 basis points, primarily due to higher payroll costs and depreciation. This includes the start-up expenses of the 2 new distribution centers that Mike mentioned as well as approximately $6.7 million or 20 basis points of COVID-related expenses, primarily premium pay bonuses and health screening costs. Shrink increased approximately 15 basis points based on inventory results and an increase in the accrual rate. These cost increases were partially offset by improved merchandise costs, including freight, which improved by approximately 65 basis points. Dollar Tree saw an improvement in merchandise mix, lower freight costs as a percentage of sales and improved markdown, partially offset by an incremental $8.2 million of tariff costs. Occupancy cost decreased 15 basis points due to leverage on the comp sales increase in the quarter. Gross profit margin for the Family Dollar segment improved 390 basis points to 27.2% in the second quarter. The year-over-year improvement was due to the following. Merchandise costs, including freight, improved 190 basis points, primarily due to improved merchandise mix. Discretionary sales, driven by government assistance and improved assortment, comped up 28.9% for the quarter, increasing total discretionary sales to 26.2% of the business…

Thanks, Kevin. I could not be more proud of the overall team's performance for the second quarter. As I stated earlier, it is a new day at Family Dollar. Family Dollar delivered a 13.6% comp for the first half of the year, and operating margin has improved 350 basis points from the first half a year ago. We have seen nice momentum thus far in Q3. Dollar Tree had a good quarter with sequential improvement in both sales and margin, following a very challenging Q1. Aside from the food category, we saw comp improvement in every line of the business in the second quarter. I believe we are at the right spot at the right time. We have a business teams consolidated into one store support center. Our leadership teams are aligned, focused and energized. Our support teams are receiving consistent direction and are acting with enhanced clarity, focus and speed. Our merchant teams are doing a tremendous job of adapting and reacting to evolving customer trends, and our store operators are focused on running great, clean, safe stores. At Dollar Tree and Family Dollar, we have a tremendous opportunity to drive sales, enhance gross margins and leverage our cost structure, each contributing to operating margin improvements over time. We are a growth company in the most attractive sector in retail, opening more stores, renovating stores, improving our efficiencies, generating significant free cash flow, focusing on our customers and running great businesses. I truly believe the best is still ahead of us. Before we go into Q&A, I would like to just share that our thoughts are with all of our families and communities and our associates that have been with and are being impacted by Hurricane Laura that is passing through the Louisiana and Texas area right now. Operator, we are now ready to take questions.

[Operator Instructions] We'll take our first question from Matthew Boss with JPMorgan.

Mike, congrats on the new role. Maybe while early, any change in the key areas of focus as we think about Dollar Tree and the Family Dollar banners? And maybe specifically, how are you thinking about multi-price points at Dollar Tree? Where do we stand today? And what key metrics are you looking forward to potentially scale this initiative?

Matt, thanks for your interest. Regarding the multi-price point at Dollar Tree, we are very interested and excited about the opportunity. We're going to -- especially as we moved into the more discretionary and wow factor that Dollar Tree is known for, we're seeing good response from our customers as we provide exciting products for them. And we're going to continue to watch it, not the key metrics that we're watching. We're going to continue to watch, are our customers responding to a favorably? Are we getting more productivity out of that 4-wall box? So we want sales per square foot to go up. And we want to enhance our margins. I mean, those are the 3 things that we'll be looking at to determine if it's successful as we continue to enhance it. On the Family Dollar side, we will continue. We think that, that 11.7% comp is -- just confirms that our customers are appreciating the investment we're making in our H2. They're responding favorably. And Rick and the merchant teams, too, that 18 months ago, we focused a lot on rolling out the H2. In the last 6 months, with Rick in charge, he's really working on refining that the H2 assortment. As you always have continuous improvement, we're looking at adjacencies, SKU count. How do you expand in discretionary side? So while we're rolling out that H2, the merchants are working on that continuous improvement that will get us more sales per square foot and more margin by getting our discretionary mix stronger.

Great. And then, Kevin, at the Dollar Tree banner, what's the best way to think about the gross margin headwinds versus tailwinds in the back half of the year, maybe relative to the second quarter? And then as we think about the 35% to 36% banner gross margin long term, that I think you are very confident, with any constraints to getting to that level next year, that we should think about?

Thanks for the question, Matt. I think as we think about it, obviously, we saw things balance out in Q2 a little bit. And again, we saw some nice improvement in our overall margin. Again, discretionary mix grew in Q2 and balanced things back out from where we were in Q1. As we look to the back half of the year, I believe we're set up for a strong discretionary run. I think, as Mike mentioned early on, we're seeing good sales in Fall Harvest and Halloween, which bodes well, and we'll continue to build the categories back up on the food and essential side. But as I look at it in general, I think as we talked about, maybe our biggest headwind as we go to the back half is our distribution costs. We talked about it being up 70 basis points in Q2. And again, what we did have in there is start-up costs for 2 new buildings, which is the first time in a long, long time, many, many years, we've had 2 buildings opening up at the same time. So there are a lot of start-up costs that go into that and add to that. But again, I think that's where the pressure is. Shrink is -- continue to be a little bit stubborn, but I do believe we can get our arms around that. And -- but -- so I think really, as I look at it, if we can drive some additional sales, create some more leverage, we feel pretty good about the natural product margin side. The commodity side of the business still feel like it's in a pretty good place. Our buyers completed their July trip in a sense from here in the states, but feel good about the way that trip went and how that will affect us as we continue to go forward. So I think that's kind of how I'm thinking about the second half in the Dollar Tree segment.

Matt, just to give a little color, too, on your question, getting to the 35% to 36%. We absolutely believe we can get to that range that we historically have. As Kevin said, we like the mix that can drive us there. And if you really look at our initial markdown from a product and mix perspective, we're in great shape. Our pressure is from the shrink and the DC costs. We know where it is, and we're going to get after those areas.

We'll take our next question from Michael Lasser with UBS.

On the Family Dollar side, first, why do you think the spread between Family Dollar and its largest competitor in terms of comps expanded this quarter versus where it had been in the last several quarters? And as part of that, your consumable business was very good that drove gross margin expansion. Are you going to give some of that back? And this is not a realistic gross margin to expect that we should be modeling moving forward?

Michael, thanks for the question. We're very proud of and like our 11.7% comp growth and especially a record 28.9% growth on the discretionary side. We're seeing that on the Family Dollar side, based on the information that we're getting from third parties and internal, that we captured 15% new customers during the quarter. Our discretionary market share gains were 3x what the market was on the discretionary side of the business. And with our 250,000 new sign-ups on our smart coupons, we are getting new customers engaged. So we like our comp sales growth. And all the things that our merchants and the Rick McNeely and the team are focused on are the right things. They're responding. And that focus to sharper price points, basic items and having what customers need when they're in our store, we think, is working.

Okay. And my follow-up is, you provided some comments around what you've been seeing early into the third quarter, which is important because there's still a lot of folks, who are out of work, and you guys provide great value to them, but yet their unemployed insurance has -- or their enhanced benefits have worn out. So you mentioned that Dollar Tree is off to a good start. Is it cool if we assume that, that business has accelerated from where it was last quarter? Just given that you've addressed some of the out of stocks and other issues in that in the consumable categories? And should we also assume that Family Dollar is seeing similar trends to what you reported in July?

Yes. We believe we like the third quarter, and we think the third quarter is starting just like we ended the second quarter. We've got strong comp store sales. We like the mix on both sides of the business. And as Kevin said, early indicators on fall and Halloween are strong, and we think we're well positioned for that. We think, based on what we're seeing from the customer, since they're spending more time at home, they want to decorate their homes and invest in their homes more. So we're seeing those categories. So how -- we may be different, but with them spending more time at home, they're going to decorate that home since they're there. And we're seeing that in our sales.

We'll take our next question from John Heinbockel with Guggenheim.

And Mike, let me start with your thoughts on Dollar Tree, right, and the discretionary business over the next, I don't know, 6 to 9 months, right? Because in '08, '09, you did see an acceleration on trading down as the recession took effect. What's your outlook when you think about Dollar Tree in the next couple of quarters? And are the merchants doing anything differently in anticipation of some trading down benefits?

Yes. Thanks, John, for the question. And I think we're well positioned on with our -- everybody is staying at home right now. Our Crafter's Square that are -- that we rolled out the first quarter, the 2,400 stores now and more than 3,000 stores. Our customers are responding very, very well. So our merchants are continuing to rebuy that and fulfill the drive and the demand in that category. And on the consumable side, we see -- every week and each period, we see the replenishment side getting better as vendors start to drive capacity. So we're -- we like the mix of sales going forward, and I think we're going to be in a good position in the back half of the year. And going into next year, especially when the customers are going to need us most, with the unemployment, the extra benefits going away and the unemployment rate where it is, we believe we're in a great position as we were in '08, '09, '10.

All right. And then maybe secondly, you talked about the 2 DCs at Dollar Tree. So maybe a thought on where we are in co-mingling distribution, right, between the 2 banners. And I assume those 2 are going to be Dollar Tree-centric only, but where do we -- are we moving closer to more co-mingling to try to get the distribution cost down? Or is that a ways away?

Yes, that's a great question. As you've seen, our DC costs are outpacing where we want them to be. So part of that is we do have a longer-term strategy to leverage our network. Currently, we are -- we have 1 co-banner DC in our St. George, Utah. But keep in mind, in the last 2, 2.5 years, every DC that we've opened or opening it with systems and the capability of co-bannering just as we have these 2. So we are starting out these 2 because that's where the growth historically has been on the Dollar Tree side, so we've been feeding that growth. But down in the Ocala business and the Texas, they are going to be capable of co-bannering. And in that long-term plan, we will be moving to that.

We'll take our next question from Scot Ciccarelli with RBC Capital Markets.

Scot Ciccarelli. Can you provide some more color just regarding some of the supply shortages you highlighted, especially on the Dollar Tree side, and how you think that inventory flow will change as we get kind of further through the back half?

Yes, Scot, thanks. And I would say on both sides, it's -- on the consumables side, it's really anything to do with paper and cleaning. So specifically, paper towels as people continue to enhance their protocols at home or wherever they're at with cleaning, any chemical with a kill claim, any hand sanitizer, there is still a lot of pressure on meeting the needs of the customer. But we do see the bath tissue, for instance, that is starting to improve. And actually, we can have that tissue on the shelf for more than just a couple of days. So I would say, throughout the back half of the year, we will see improvement in our in-stocks and those highly consumable items. But we are -- we have been communicated from vendors that this is a longer term -- there will be pressure on the back half of the year from our manufacturers.

And Mike, do you guys have a -- I'm sorry. I was going to say, do you guys have an estimate for what the potential sales impact was or headwind that you faced during the quarter from these supply shortages?

Yes. No, we -- not at the top of my head, we do not.

We'll take our next question from Robby Ohmes with Bank of America.

Mike, I was hoping you could give a little more color on Dollar Tree and kind of what's going -- what you're seeing there. So the one question would be just the stimulus impact with some things rolling off at the end of the quarter and into this quarter. I know Dollar Tree is a much broader income demographic than Family Dollar. Anything you're seeing in the type of customer and how they're responding? Are you seeing some impacts on the stimulus side with the lower income customers buying less? And then the other question is just, can you help us, for yourselves and for the industry, think about this big decline. I think you guys said 16% decline in transactions at Dollar Tree. Like how are you guys thinking about the transaction comp playing out in the back half and how should we think about that?

Yes. Thanks for your question, Robby. So in Dollar Tree, we believe that the first half of the quarter in May, as we stated, was supported by the stimulus and the extra benefit dollars out there. But the great news is as those went away and as customers needed value and convenience and safety, they continue to shop at Dollar Tree and at Family Dollar. So we feel good about our comps towards the end of the quarter and going into the third quarter. And from the basket and transaction size, we are still seeing -- they are shopping with a purpose. When they come in, they are shopping and getting definitely driven a higher basket. So we think that will continue as we go into the fall as people continue to practice social distancing in the safety protocols as they should.

And Mike, as other stores came back online, because you guys obviously were a necessity retailer that's been open, but any changes you've had to make from a marketing standpoint or any pressures you've seen on either Family Dollar or Dollar Tree related to some of these other stores coming back online?

Yes. We have not seen any noticeable difference. As I stated, at Family Dollar, our discretionary business, as customers came over other competitors opened up, we -- the market grew on the discretionary side but Family Dollar grew 3x back. So we're seeing that as competitors are opening up and more stores are opening, we did not see a noticeable difference in our traffic and/or basket.

We'll take our next question from Chuck Grom with Gordon Haskett.

Mike, congrats on the new position. My question is on Family Dollar. You talked about 15% new customer acquisition, I believe, in the quarter. Just wondering if you could just give us that metric for the first quarter. And then looking ahead, I'm curious what steps you're taking to retain those shoppers and cultivate those relationships over the next few quarters and even into next year.

Yes. Thanks, Chuck. I do not have that number for the first quarter. I think we can grab that, and Randy can get back to you. Regarding what we're doing to retain them is, a, provide a great shopping experience. Now more than ever, all the surveys and what we hear from our own customers is safety, cleanliness and convenience of getting in and out is very important to them, and then provide them what our strategy is on that. On the consumables side, we want to have the products that are looking for on the shelf. And on the discretionary side, our teams are continuing to work on those sharper price points with great value on basic needs. And we think doing those things and providing that when they're in our store, we'll keep retaining them. And then along with -- we like the increase of 0.25 million people signing up for our smart coupons. We think that we're going to be able to enable us to speak to those customers and watch what they're buying and keep driving basket size with them.

That's helpful. And then just bigger picture, like the Dollar Tree guys purchased Family Dollar 4 years ago, it's been a little bit of a struggle over the past few years. Just curious what you think needs to get done, not near term, but just bigger picture to fix the Family dollar business to narrow the gap with Dollar General to improve margins. Just what do you think needs to get done.

I think it's a new day at Family Dollar. And I think the direction that this team is focused on right now, under Rick McNeely and the merchants, they are bringing clarity, focus on the right things, getting the right products. And I think it's evident by retaining more customers and driving an 11.7% comp and a 28.9% comp in our discretionary business. So I think those are the right things. And I think structurally, in our organization, we are all in one building now under one leader. And I think we've got the right leaders in place that can drive this strategy. So it's not only what is your focus on your strategy, but having the right people in place that can drive and execute that. And I'm more confident than ever that we've got the right team on the merchandising and the operations side to execute what we need. And I also I think as we -- with the 2 companies coming together, the discipline that Dollar Tree has and buying that wow and driving that cost and bringing that value into products, so embedded in our culture, we've also moved some people. So as we look at our structure, we have cross-pollinated some leaders. So we've got a great leader driving our discretionary side of the business that had many, many years of experience in Dollar Tree. So it's a combination of all being in one building, having a great strategy that our customers are responding to and then getting the right people in the chairs to execute the work.

We'll take our next question from Paul Trussell with Deutsche Bank.

I wanted to go back to the discussion around EBIT margins. This quarter has -- came with some elevated expenses, right, particularly on the Dollar Tree side related to labor and other issues with the stores. If you are comping in the 3-plus percent range going forward, Kevin, how should we think about the ability to leverage overall expenses in the third quarter and second half? And just thinking about how to think about that go-forward algorithm of the business and ability to really flow down to the bottom line.

Okay. Thanks, Paul. Yes, I think, obviously, to your point, if you -- obviously, we have invested in our associates around safety and premium pay. And obviously, from the standpoint, we do believe it's made a difference between, as Mike mentioned in his comments, attendance, turnover, various things that we think help us run a better store and hopefully keep people coming back, even though traffic doesn't really show -- it was really pretty stubborn in that 15% negative on the Dollar Tree side. Sans the COVID costs, obviously, operating income would have been up, EBIT would have been up. As we go into Q3, we put an 8-K out a few weeks ago that premium pay would continue for the first 4 weeks of August at a cost of about $18 million. And basically, that's less than it was. So we have lowered what the premium amount is. In our 10-Q that was filed this morning, we noted that, that premium pay will continue additional 4 weeks. And I think realistically, for any modeling, you should assume that it will be in place for the 13 weeks of the quarter of Q3. Again, we're going to also continue to obviously have expenses like anybody else for PPE and cleaning and sanitizing supplies. So that being said, it will be a headwind. It will be hard for -- I don't necessarily expect that Dollar Tree will show an improvement year-over-year in operating income or EBIT in Q3 because of that. So we've made that decision as a company that it makes all the sense in the world to reward these frontline workers and go through that. Now it will not last forever. And so these costs at some time -- at some point in time, will fall away. As we…

And just wanted to also ask about your cash priorities and thought process. You do have an elevated amount of cash on the balance sheet today versus usual levels this time of the year, although some of that is related to what's drawn on the revolver. Just help us think about how are you thinking about leverage, store openings and remodels and share repurchases, which I think has been about a year since you've been engaged in that.

Yes. So obviously, to your point, we did preemptively draw on the revolver in Q1 with the uncertainty of the pandemic. We've paid back $250 million of that $750 million draw. So at some point in time, we'll pay that $500 million back as well. The other thing we have due February 1, 2021, the $300 million legacy Family Dollar notes come due. So the plan would be to extinguish those notes at that point in time. That being said, we'll still have a nice cash position even with that. Obviously, we always want to support growth, and we continue to grow through new stores, renovations, supply chain technologies I spoke to. So those things will continue. We do have a share repurchase plan authorization out there. We have $800 million authorized and outstanding as we sit here. Obviously, we kind of put the brakes on that with the pandemic, but as things settle. Again, there's obviously some uncertainty as we go to the back half. Will there be a rebound in the pandemic as we get into the fall and the flu season that comes with winter? So we'll keep our eye on those type of things and make some decisions as we enter the new year.

We'll take our next question from Kelly Bania with BMO Capital.

I wanted to just go back a little bit to H2 remodels. It sounds like from a top line perspective, they continue to perform well. Wondering if you can expand a little bit more on the margin performance you're seeing there relative to the other stores. And is there any opportunity to kind of reaccelerate the remodels there? Or is there any logistical headwinds in accelerating that? Maybe you can just touch on that a little bit.

Yes. Kelly, thanks. I'll throw it to Kevin for the margin. But from a perspective of accelerating, so we're trying to do as many as we can given the current environment of travel restrictions and COVID restrictions in the state. So we've -- we're going to do 750. But absolutely, as soon as the states open up in the locations, and it's safe and we can get our third parties and our teams in there to do the remodels, we will absolutely open that back up and accelerate that.

Speaking to the margins, obviously, as you look at the H2 model, there's some various components, right? So you have additional freezers and coolers, which is lower margin goods. More impulse/media consumption, which is a little bit higher margin. And then, obviously, an emphasis on seasonal. One of the things Mike spoke to earlier was the fact Rick and team really looking and continuing to improve that overall model, looking at the space we dedicated to discretionary. And how do we provide a probably even better discretionary assortment and relevant assortment within that box? But we like overall -- obviously, we'll get a nice sales lift. We get a nice overall driving more profit dollars at the end of the day. And then, obviously, it is our intention to drive a higher overall rate of profitability out of those stores. And we obviously are seeing that, but we think there's even more we can do with it.

We'll take our last question from Karen Short with Barclays.

Just a couple of questions on COVID cost. So you did call out that $18 million that will continue -- that we should assume continues for the whole quarter. Wondering if that also applies to the $4.5 million in manager bonuses. Should we assume that that's in place for the quarter? And then wondering if you could give the split between the Dollar Tree and the Family Dollar banner on those 2 components. And then I had one other follow-up.

Okay. From an overall standpoint, from a banner perspective, the Dollar Tree segment incurred $76.6 million in Q2 and Family Dollar incurred $57.1 million, and, again, the vast majority of that being payroll costs at the end. And between -- and mainly stores, but obviously, there's a component there of DCs, which we broke out within the detail we gave you earlier today. So you have that piece of it. As far as the $4.5 million of manager bonuses, that does not continue necessarily directly. Those were above and beyond. And as we go forward, that does -- will probably not take place. But again, it's a very fluid situation. And so it's always open for change. But at this point, we do not expect that to necessarily continue.

But take the $18 million and allocate it the same way between the $76 million and the $57.1 million that we saw throughout the quarter.

Yes. I think that's reasonable because what you have to remember is we just -- we have an hour -- a larger hourly workforce population in the Dollar Tree banner than the Family Dollar banner.

Great. Okay. And then, I guess, I'm still not totally clear what the message would be on the takeaway on Family Dollar comps in the current quarter. I know you said it's still solid. So should we assume that they are continuing at the level that we saw for the entire quarter in 2Q or too soon to tell? Or -- I mean, just curious if you can be a little more clear on that.

Well, I think, Karen, as you think about it. So I think within the prepared remarks, we spoke a little bit about the cadence of comps for Family Dollar and the fact that the lowest quarter -- or excuse me, the lowest month within the quarter was roughly 8.5%. And the easiest way to think about it is there's been little degradation from that trend coming out of July.

This concludes today's question-and-answer session. I would now like to turn the call back over to Randy Guiler for closing remarks.

Thank you, and thank you for joining us on today's call and especially for your continued interest in Dollar Tree and Family Dollar. Our next quarterly earnings conference call to discuss Q3 performance is tentatively scheduled for Tuesday, November 24, 2020. Thank you, and have a good day.

This concludes today's call. Thank you for your participation. You may now disconnect.