Good day, and welcome to the Dollar Tree, Inc. 2Q 2022 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to hand the conference over to Randy Guiler, VP of Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to our call to discuss results for Dollar Tree's Second Fiscal Quarter 2022. With me on today's call are Executive Chairman, Rick Dreiling; President and CEO, Mike Witynski; and CFO, Kevin Wampler. Before we begin, I would like to remind everyone that various remarks that we will make about our expectations, plans and prospects for the company constitute forward-looking statements under the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, and our actual results may differ materially from those included in these forward-looking statements. For information on the risks and uncertainties that could affect our actual results, please refer to the Risk Factors, Business, Management's Discussion and Analysis of Financial Condition and Results of Operations sections in our annual report filed March 15, 2022; our Form 10-Q for the most recently ended fiscal quarter; our most recent press release and Form 8-K; and other filings we make from time to time with the Securities and Exchange Commission. We caution against reliance on these forward-looking statements made today, and we disclaim any obligation to update or revise these statements, except as may be required by law. Following our prepared remarks, Mike and Kevin will take your questions. [Operator Instructions] I will now turn the call over to Rick.

Thank you, Randy. Good morning, everyone. Mike and I and our new Board have been together for just over one quarter now. As planned and expected, change is underway, and we are moving at a fast pace. We are entirely focused on taking the right steps to transform this organization for the long term through growing and improving Family Dollar and Dollar Tree. We are 90 days further down the road from our last earnings call, and the opportunity and action steps needed continue to become more clear. Our main priorities are our associates, the distribution network and supply chain, Family Dollar's pricing and the value proposition in both segments, store standards and technology. Additionally, and Mike will go into more detail, we have a great deal of work underway to improve the company's culture, designed to build an environment of accountability, empowerment, courageous leadership, transparency and fostering two-way dialogue. And we are orchestrating these changes in one of the most unique and dynamic environments I've experienced in my retail career. Inflation is at its highest in decades as shoppers are experiencing higher costs related to food, fuel, rent and more. Supply chains have been strained and inconsistent. Inventory levels are higher across retail, and consumer shopping patterns continue to zig and zag. Let me be very clear. We are not here to take half measures or to defer high return capital and operating investments in order to manage earnings. We are honed in on taking steps necessary to seize the great opportunity for us and deliver to our shareholders, our associates and our customers the great company they deserve. And by executing on this commitment, we'll deliver the greatest possible risk-adjusted returns to our shareholders. We'll not waver from this strategy. You will hear from Mike and Kevin later…

Thank you, Rick, and good morning, everyone. Thank you for joining us today. We are dialed in today from our Annual Field Leadership Summit. More than 1,000 leaders, including every district manager in the company, have gathered for several days to learn, collaborate and focus on all things Family Dollar and Dollar Tree. This is our first large in-person meeting since 2019. The energy and excitement here makes me and each of us more inspired than ever. We will transform our culture and company, and we will do this together. Rick just mentioned that we are moving at a fast pace. The theme of our leadership summit is, in fact, Lead with Speed. I want to publicly thank all of our participants for their commitment, dedication and focus while attending this great event. I'm proud to be part of your team. At these meetings, we typically talk about our company's strategy and share proof points of our collective successes. But this year is different. This year, I'm speaking to our leaders about something no less important than strategy. It's our company's culture. Every retailer has a playbook when it comes to strategy. But what sets the winning companies apart is their culture. Just as Rick mentioned, we are committed to developing a culture of accountability, empowerment, courageous leadership, transparency, and fostering two-way dialogue. We have recognized and acknowledged to ourselves that we have substantial opportunity for improvement in this respect. We have the courage to address this head on, and we would deliver the culture necessary to provide our associates, the customers and the shareholders the greatness they deserve. Also at this summit, our field leaders got their first look at the initial holiday buys purchase for the new $1.25 price point. We are all excited by the compelling and…

Thanks, Mike, and good morning. For the quarter, consolidated net sales increased 6.7% to $6.77 billion, comprised of $3.57 billion at Dollar Tree and $3.19 billion at Family Dollar. Enterprise same-store sales increased 4.9%. Comps for the Dollar Tree segment increased 7.5%, and Family Dollar same-store sales increased 2%. At both banners, the increase in average ticket more than offset the decline in transaction count as shoppers continue to consolidate trips as gas prices are significantly higher than a year ago. Gross profit improved 14.2% to $2.12 billion for the quarter. Gross margin was 31.4% compared to 29.4% in the prior year's quarter. Gross profit margin for the Dollar Tree segment increased 500 basis points to 37.4% compared to 32.4% for the same period last year as a result of the net of the following. Merchandise costs, including freight, decreased 455 basis points primarily due to higher initial mark-on, partially offset by higher freight costs and increased sales of lower-margin consumable merchandise. Occupancy costs decreased 50 basis points from leverage on the comp sales increase. Distribution costs decreased 20 basis points from leverage and higher capitalized amounts due to increases in inventory levels partially offset by higher hourly wages and higher DC maintenance and compliance costs. And shrink increased 20 basis points primarily from more favorable results in relation to accruals in the prior year quarter. Gross profit margin for the Family Dollar segment decreased 140 basis points to 24.7% compared to 26.1% for the same period last year. The factors include markdown costs increased 80 basis points due to higher promotional and price action markdowns. Shrink increased 45 basis points primarily from more favorable results in relation to accruals in the prior year quarter. And merchandise costs, including freight, increased 15 basis points, primarily due to higher freight costs…

Thanks, Kevin. As we continue to navigate through this dynamic and somewhat uncertain environment, we are excited about the continued progress at Dollar Tree and the material positive changes beginning to be made at Family Dollar. At Dollar Tree, as it relates to our multi-price offering, the team is continuing to refine the $3 and $5 assortment and testing various concepts to enhance the program and build on the very positive long-term impact from our multi-price offering. For example, test of multi-price frozen foods are driving exceptional sales productivity as the new offering is delivering tremendous value and meeting family portion needs such as frozen meals, pizza and ice cream. At Family Dollar, our Combo Store initiative continues to drive improved store performance at very attractive levels, in line with previous commentary. In fact, we are now exploring various sizes and formats in other markets beyond our rural target locations, pursued in our first iteration of the concept. Some of the initiatives to improve the business will take more time to produce an impact, notably in the supply chain and technology. That said, at Family Dollar, the work being done by Larry Gatta's merchandising and marketing teams has been remarkable and is beginning to be actioned upon more urgently. In fact, we have made a number of enhancements to our H2 strategic store format. We refer to the new version as H2.5. Among the changes made to improve store productivity, customer satisfaction and to better support our store associates through efficiencies include: adding a linear footage, developing seasonal assortments as a focal point, utilizing deeper shelving on key consumable categories to enhance store efficiencies and improve in-stocks, expanding the direct-to-store delivery offering, enhancing space dedicated to snacks and increasing the beverage offering and optimizing the frozen food assortments. At our…

[Operator Instructions] We'll take our first question from Chuck Grom with Gordon Haskett.

Rick, I'm curious, since you joined the company 90 days ago, what have been the biggest surprises for you, both positive and negative? And when you talk about steps to improve the store standards at Family Dollar and the DC network across both banners, can you elaborate a little bit more for us? And do you see any offsets in the P&L to help fund those actions?

Yes, I'll start here and then turn it over to Michael. The positive, I have to tell you, the enthusiasm within the organization, and its willingness to embrace change. The interesting thing has been, there's not a lot of things we're talking about that people, Chuck, aren't shaking their head, yes, let's go get it done. So that, to me, is the foundation of this. And the company has made a major commitment to culture enhancement. In fact, we spent our near whole day just talking about how to manage people and how people need to be managed. And we spent a whole day just listening to people to hear what they're dealing with. Probably on the negative side, the pricing gap was a little bit larger than we thought. And we also believe this is a great time for customer trial, and we want to be right on our pricing. In terms of the supply chain side, we're looking at everything in the supply chain. We are assembling, I think Mike would agree, probably one of the best supply chain teams in the country. We have a lot of distribution centers that need to be updated and modernized. So we're feeling really good on how we're approaching that. The IT side, information technology, I might classify as a little bit bigger surprise in that there's a lot of basic things that the operators and the merchants need and the supply chain needs. So with that, Mike, I don't know if you want to add anything?

No, I think Rick said it right. On the store side, I think the biggest thing is, is we're focusing the entire organization from a culture perspective on doing everything that we can do to make our store associates successful and enabling them to run better, cleaner, fuller stores. And we've -- I said -- I shared in my opening that we're here right now from our summit with -- every district manager in the country is here, and we are all aligned behind driving better store conditions. And that's going to entail in your question is, yes, we're going to continue to invest, and as Kevin said, into our property management and in everything we need to, to make sure our store conditions are the way -- to our standards for our customers, and we're committed to do that. And more importantly, our associates are enthusiastic, not only about the culture of supporting them and putting them at the center of everything that we do. But then they see the proof points of we're investing in pricing, we're improving our logistics. Larry is improving the merchandising, and they're seeing better assortment, more linear footage where the customers shop. And then I think Rick nailed it on the supply chain. We're doing everything we can and turning all the leaves over to drive efficiencies and improvements and really ultimately to supply our stores more efficiently with the product they need and when they need it.

And we'll go ahead and move on to our next question from John Heinbockel with Guggenheim Securities.

I want to drill into pricing and investments at FD here, right? So how do you think the maturity of the price investments will play out, right? Immediately, it's deflationary, right, to comp until people recognize the benefit then traffic picks up. How does that play out? Is it more challenging in an inflationary environment to change your price perception? And then do you think most of the investments at FDO will be limited to '22, right? Or do you think there's a bunch that -- other than just a wraparound, a bunch that will occur in '23 as well?

Yes. Thanks for the question. And like I said earlier, the time is right, right now. And the reason we really looked at it is because we saw new customers shifting our way. In this inflationary environment, we think it's a perfect time to really change the customer's perception and what they're seeing in our stores because we're getting new customers and new eyes in our stores and our existing customers. They're feeling pressured like they never have before. And in this inflationary environment, with the customer's wallet stretched, our consumers are relying on our stores to meet their budget goals. And we're seeing good demand trends. So this was really an ideal environment to begin to move more quickly than we previously anticipated to more fully meet the customers' value expectation, close the pricing gaps and win them as customers long term in this inflationary budget. We think the time was right. We -- initially, we talked about it in our outlook, and we were going to do this over time, starting with, of course, our KVIs, the known value items. But then just as we saw the dynamic environment, the pressure on our customers and the inflation, we decided that now is the time to win these customers for the long term and get it right. And to your question, it's now. It's -- we are -- like I said, we are in the best price position in over 10 years to the competitive market. So we're there. Now it's just managing it from here. And getting right on our promotions. And Larry is going to continue rocking the H2.5 in the assortment. So we're in a great place right now.

And we'll go ahead and move on to our next question with Matt Boss from JPMorgan.

So at the Dollar Tree banner, what was the cadence of top line trends during the second quarter? Any color on August or just drivers of confidence in holding high single-digit performance in the back half? And then on Dollar Tree banner gross margin, could you just touch on any puts and takes in the back half of the year to consider and how you're thinking about multiyear gross margin at the Dollar Tree banner?

Yes. Thanks for the question. And as I shared, it was pretty stable throughout the summer at Dollar Tree on our comp, 6.5% to 8.5%. And remember that -- and Dollar Tree really does well around the seasons. And in the second quarter, the biggest season is graduation. And you heard Kevin say we were really impacted by helium supply in one of our largest categories. That really has a halo effect over party. So largest category, most profitability for Dollar Tree. So that was one of the impacts. On the good news, the other big season is lawn and garden, and lawn and garden season was one of the top 5 categories. So when we had the product, our customer is responding very, very well. And then the other categories that did well is, as Kevin said and I said, the shift to consumables, and our merchants reassorted and reinvested in the consumable items to drive traffic. The other top 5 categories, again, were beverages, candy, snacks and cookies and food. So our customers are responding very, very well. And early in -- it's really early into Q3, but we see so far this month trending better than Q2 at Dollar Tree and Family Dollar both. And as you think about the margins in the back, where we're at -- as Kevin shared, our inventory is up. But remember, this time last year, we had thousands of containers at origin, meaning it wasn't even at our system. It wasn't even at the origin yet. So now all that is in our system. We're getting our seasonal on time. And it's also -- remember, our merchants at Dollar Tree bought for the back half at the $1.25. The product is amazing. All of our district managers, regional directors, all of our field associates are here with us right now. And they see the exciting items, and they're thrilled. A, we've got the product when we want it; and B, newly assorted $1.25 will blow the market away, and our customers are going to respond well. And we're very excited about it. Kevin can kind of touch on some of the margin puts and takes in the back half.

Yes. As you look at it, Matt, obviously, as we talked this year, freight, which was a big headwind last year, and to the first half of this year, we said it would still be a headwind as we annualized last year rates, and we've said that into the back half, then it starts to level out. We still see that. Obviously, with -- if diesel continues to move down, that will be helpful as well. But again, I think as you look at the Dollar Tree gross margin rate, I think Q3 will be a little lower than Q2, but then you'll see it pop back a little bit in Q4, which is highly discretionary quarter for us. So that's kind of the trend you'll see. As I think about the multiyear gross margin, as you think about it, again, looking to build traffic, looking to -- as we build the -- again, really changing the stores. We now have 2,000 Dollar Tree Plus stores as we look at, again, continuing to further the assortment of the $1.25 price point. And then would look to see that the freight rates do start to come down and have an effect in next year. So there are some things that will play into that. A little early to really talk specifically. But I think those are kind of the moving pieces as we see them.

We'll go ahead and move on to the next question from Robby Ohmes with Bank of America.

I was hoping we could get a little more color. I think you mentioned trade down. And maybe some more discussion about the environment. The transactions were up at Walmart, Target and warehouse clubs. And I was just curious why the transactions are so much stronger versus being down at Family Dollar and Dollar Tree and if we should expect some improvement in the transactions.

Yes. We expect improvement in our transactions, especially as -- the pricing moves that we've made, the assortment changes that Larry Gatta and the merchants are making and bringing in some new adjacencies and our seasonal product that we have ready. Just a little pressure -- as you said, our customer is pressured like none other. And the good news is, is we're excited. We see third-party data that we do have a lot of new customers coming into both banners over last year. And the majority of them are at a household income of $80,000 or higher. So we feel good about that. We also see a huge shift from cash into credit, which tells us the customer is pressured. And then inside the store, when they get in there, we've seen in the industry where private brands have outpaced national brands for 24 weeks in a row now, 24 weeks in a row. That hasn't happened in the last 5 years, that private brands has outpaced national brands. And that's the customer trying to stretch their dollar and manage their budget. And Larry and the team are working hard on our private brands, and we're seeing the same change inside of our store. And then they're even making decisions on form and function. We see them moving from liquid to powder detergent. We're seeing them even go without softener -- liquid softener in detergents. They're just choosing not to have softener. And those are the things that our customers are -- and the decisions they're making. And we think right now, with the price investments and the changes that Larry is making and our new assortment at Dollar Tree, we're in a wonderful position to meet their needs in 16,000 stores conveniently located where they don't have to drive far. We'll meet their needs, and we're excited about it going forward.

We'll take our next question from Scot Ciccarelli with Truist.

Scot Ciccarelli. So I wanted to revisit the question that I actually asked last quarter. So we know that, in general, retail turnarounds take longer, costs more than what people generally expect. And last quarter, when I asked about that, your comment was that for the investments for '22, it was all embedded in your outlook. So given the change this morning and the fact that you've now had more time to evaluate the improvements that need to be made, do you have a better view of how much more investment may be needed to get Dollar Tree and Family Dollar where you want them from an operational and technological standpoint?

Yes. And Bobby is -- that's a great question. And our team is forming right now. And I think from an OpEx perspective, we're going to continue to invest in labor where we need to. And there will be payroll investments going forward. For this year, as far as we can see with the dynamic markets going on, it is embedded in our forecast. From the IT and supply chain, I think those are the 2 big ones. And what Bobby is looking at right now, the good news is, and I think Rick mentioned it, Bobby knows every one of our systems. And he knows exactly what he needs to do because he's done this before at other retailers, and he's worked with the 2 executives in supply chain and merchandising. So Bobby is working really hard. And I will owe you that number probably up in the spring when we have our Investor Day because that is going to be a longer-term outlook, and the majority of it is going to be in CapEx. And then the same thing with supply chain. We're looking at what is the best way to deliver to our stores, what's the most efficient way to use our network to deliver our Combo Stores, our Dollar Tree Plus stores and, of course, our traditional Dollar Tree and Family Dollar stores. And John is working on that now and modeling it out, and we'll probably have more information on the spring as the -- as we have more knowledge from the 2 leaders. Our CFO that we just announced is going to be coming on board and will certainly have a say in it and will want to look at it. But those are the 2 big investments. But in our OpEx and in our forecast, from a repair and maintenance and store conditions perspective, we have those embedded in, and we will probably come back to you if there's any other longer-term initiatives that will impact that.

We'll move on to our next question from Simeon Gutman with Morgan Stanley.

It's Simeon Gutman. For Mike and Rick, this is maybe more theoretical on timing and sequencing. It looks like '23 may end up being more transitional, and that's part one of the question. Is that fair? Because some of these price investments will continue and then we're going to lap some of the multi -- or the breaking the buck at the tree. So if that's a fair assumption, how do you think about maybe speeding up investments, layering -- leaning in, I guess, for '23 to clear the path for '24?

Yes. And in theory, I think you're right. But our pricing investment is in, and then we're just going to manage that going forward on that side of it. I think we will lean in on our investments on supply chain and IT, but these are things that take time just because of the amount of systems that you are touching. And as Rick said, it's our -- as our store and retail systems, as our supply chain systems and then our merchandising systems. So that will take time, and we will stage that over our capability. And then the supply chain will be -- as we roll out and open new distribution centers, that's when we will continue to rightsize our network and make decisions going forward. So we will continue to move with speed that will give us the highest return as quick as possible.

We'll take our next question from Kate McShane with Goldman Sachs.

It looks like the elasticity response improved again sequentially with the $1.25 change. Just wondered what your expectation for the response is for the second half and if that's changed meaningfully from what you were thinking when we last spoke to last quarter.

Yes. No, I think the biggest change is the dynamic of the marketplace and the huge shift from discretionary to consumables, not the shift about our $1.25. We did some in-depth customer research and customer intercepts about Dollar Tree at the beginning of the quarter. And we really wanted to dig into our brand and the assortment and in-store experience. And I was shocked. Not one of them brought up price. Not one of them brought up the $1.25. They were all focused on clean, new assortments, seasonal and the service of the -- what they have when they're in the stores. So I think the customers move beyond that because as we tested early on, they understand value more than ever. And in today's dynamics, they see that $1.25 is an exceptional value. That's why all these new items and consumables are all taking off. And why I'm excited about the back half -- and to your point, the second quarter did not really have any big season. Dollar Tree is all about the seasons. We change like the leaves on the trees. Well, in the summer, the leaves aren't changing because you've got lawn and garden and then you've got graduation, and graduation was impacted by helium. On the back half, Kevin said we've got 2,000 -- 2,100 actually, Dollar Tree Pluses that we didn't have. So that's going to be -- that's exciting about the back half. And then our inventory. We've got all of our seasonal inventory at $1.25. And they will rally around this seasonal merchandise, just like they did in the first quarter with Valentine's and Easter. We expect some exciting things and great response from our customers because we're in a great inventory position. The value is spectacular. And then on the basic side, we've answered that on the consumables that we didn't have last year at this time. So I'm pretty excited about the back half of Dollar Tree.

We'll go ahead and move on to our next question from Scott Mushkin with R5 Capital.

So I just wanted to get into a little bit more about labor, some of the comments you said about labor and the labor competition and what kind of pressure that might put on you as you try to get that more where you want it to be.

Yes, Scott, and thanks. Early on, we shared that we're investing over $195 million, just under $200 million in our payroll, the majority of it in our store associates and some of it in our DCs. We feel really good where we're at in our distribution centers. We've got all of our roles filled compared to this time last year where we didn't have open positions. We are continuing to invest in markets in the stores and at retail stores, and we will continue to do that where we see the need. Looking out over the back half of the year, where we need to make adjustments is already in our forecast. So it's a dynamic environment. Now people are coming back to work a little bit just because of what's going on in the economy. So I think that's going to shift a little bit, but we will continue to invest where we need to. And so far, in the next 6 months, looking for the rest of the year, we have what we need to invest in the forecast.

We'll take our next question from Michael Montani with Evercore ISI.

Just wanted to dig into a little bit further, if I could, the top kind of 2 to 3 drivers of traffic for both banners moving forward and kind of what the realistic time line to anticipate the shift. Obviously, there's pricing actions you're doing at Family Dollar, but then prices have gone up at Dollar Tree. So just kind of talk about, if you could there, Rick and Mike, what gives you the confidence and what's the time line to get those things turned up?

Well, go ahead.

Yes, I was just going to say, I just got done saying the excitement on the Dollar Tree side. Our assortment and the investments we've made into the new $1.25 on the consumable side is driving traffic. And just to put that in perspective, we haven't seen that kind of improvement in consumables, which drives traffic since pre pandemic. So that's our investment, and that's how we're driving traffic, along with the unbelievable assortment coming up that they're going to see inside our store for the seasons coming up. Unlike anybody else, Dollar Tree -- the $1.25 is the best value, the best wow and the most excitement. And then on the Family Dollar side, this pricing, again, we just put ourselves in a position to be the best price to the market in over 10 years. That alone will drive traffic, not even mentioning what Larry Gatta and the merchants are doing with enhancing our H2.5 with a tighter assortment, more meaningful prices, take advantage of more linear foot, so getting more product on the shelf that the customer is looking for. And then getting seasonal upfront and center. So I'm really excited about the moves that we've made. Now as you know, it takes time for the customer -- we've got new customers coming in that are recognizing it. And then over time, we will see and get credit for being priced right, better assortment, better position on the Family Dollar side. And Larry's -- and I mentioned purposefully on marketing, we've got 4 great marketing perspectives going on with our digital marketing, with our print ad, and Larry is really working on exactly what do we need to advertise that the customer responds to that drives traffic. So those are all the levers that the merchants and Larry are pulling on the Family Dollar side, and I'm just thrilled about what we got going on, on the Dollar Tree side to keep growing.

And our last question comes from Michael Lasser with UBS.

So Rick, you've been around the value retail space for a long time. Presumably, you came in and over the last 90 days, you said, look, we need to get Family Dollar price perception at a better spot in order to realize the full potential of this asset over the long run and we have this opportunity because Dollar Tree gross margins are expanding, and we can use that expansion to fund investments at Family Dollar. So now the question is, with Dollar Tree exiting this year at a 37% to 38% gross margin rate and Family Dollar exiting this year with a low 20s gross margin rate, can Dollar Tree sustain the 37% to 38% gross margin rate over the long run? And can you rebuild Family Dollar's gross margin rate over the long run in order to generate a suitable return on these investments?

I think the answer to that is we're very comfortable with where we are on the gross margin in Dollar Tree for the back half of the year and going forward. And I will say we are working our way with the vendor community, with vendor support, and we anticipate that the Family Dollar margin will improve over time.

And with that, that does conclude our question-and-answer session for today. I would now like to hand it back over to our presenters for any additional or closing remarks.

Great. Thank you, Ali. Thank you for joining us for today's call. Our next earnings call for Q3 is tentatively scheduled for Tuesday, November 22. Thank you, and have a good day.

With that, that does conclude today's call. Thank you for your participation, and you may now disconnect.