Good morning, and welcome to the Dollar Tree Fourth Quarter Earnings Call. This meeting is being recorded. At this time, I would like to hand the call over to Randy Guiler. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to our call to discuss Dollar Tree's Fourth Quarter and Fiscal 2022 results. With me on today's call are Chairman and CEO, Rick Dreiling; and CFO, Jeff Davis. 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 for 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 indicated in these forward-looking statements. For information on the risks and uncertainties that could affect our actual results, please see the risk factors, business and Management's Discussion and Analysis of Financial Condition and Results of Operations sections in our 10-K filed March 15, 2022, our 10-Q for the most recently ended fiscal quarter. Today's press release and 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, Rick and Jeff will take your questions. Given the large number of those that would like to participate, I ask that you limit your questions to one. I will now turn the call over to Rick.

Thank you, Randy, and good morning, everyone. I apologize that I'm a little horse. I'm coming off of COVID and the good news is I'm fine. I will review the highlights for quarter 4 fiscal 2022 and will provide an update on current priorities. Then Jeff will detail our financial performance and expectations for 2023. For the quarter, we delivered $7.72 billion in sales, an increase of 9%, with enterprise comp growth of 7.4%, operating income of $618.1 million, leading to a quarter 4 EPS of $2.04. Our sales performance for the fourth quarter was a continuation of momentum from quarter 3. Same-store sales growth of 8.7% at Dollar Tree and 5.8% at Family Dollar represented comp accelerations on a 1-, 2- and 3-year stack basis. This improved performance and market share gain is not simply happening by itself. It's the result of lots of hard work and good work by our store and merchant teams as well as the early fruits of our price, labor and store investments. And I truly believe we are just getting started. I have been in retailing for half a century. And I've been fortunate to play a leadership role in multiple transformations. I am incredibly excited by and energized to be part of the path ahead for Dollar Tree. We have an exceptional team assembled, and I cannot overstate the amount of positive transformational change occurring in this business. We are committed to enhancing store productivity as we focus on developing our people, tools and technology to fuel accelerated growth. And that we do this while simplifying operations, improving the supply chain and innovating our merchandising strategies to better support our associates and to better serve our shoppers. Given the team's relevant prior experiences, we know exactly what to do to drive improved…

Thank you, Rick, and good morning, everyone. Unless otherwise stated, all fourth quarter comparisons are against the same period a year ago. In addition to my comments today, a supplemental slide deck that outlines several of our key operating metrics is available on our Investor Relations website. Operating income increased 6.8% to $618.1 million or 8% of total revenue a 20 basis point decline in operating margin. This was compared to a 70 basis point improvement in gross profit margin, which was more than offset by SG&A. Gross profit increased 11.6% to $2.39 billion. The Dollar Tree segment gross margin improved 110 basis points, primarily from higher initial mark-on, lower freight cost and sales leverage, partially offset by product mix, product cost inflation and higher costs for markdowns, shrink and distribution. Family Dollar's gross margin increased 20 basis points. This quarter represented Family Dollar's first improvement in gross margin in the last 7 quarters. The improvement was driven by higher initial mark-on, lower freight cost and leverage on occupancy, partially offset by mix, markdowns, shrink and higher distribution costs. SG&A as a percentage of revenue increased 80 basis points to 22.9%. The increase is due to a $23.9 million noncash store impairment charge along with elevated repairs and maintenance as part of our commitment to improve store and DC standards. Investments in store and distribution center hourly wages, and inflationary costs across several expense categories. Corporate support and other expenses were consistent at 1.4% of revenue. Net income was $452.2 million, and EPS was $2.04 in comparison to $2.01 a year ago. Moving to the balance sheet. My comments will reflect balanced comparisons at the end of Q4 2022 versus Q4 2021. Combined cash and cash equivalents totaled $643 million compared to $985 million. Inventory increased 24.8%, primarily from unit…

Thank you, Jeff. As an organization, we are moving fast. Our operating initiatives are in flight and are gaining steam and the current economic climate is driving more higher income consumers into value retail. We believe we are in the right spot to deliver quality, value and convenience that shoppers need today. The momentum is continuing as both segments are off to a nice start early in quarter 1. Before we move to Q&A, I want to briefly discuss 2 additional contributors to our future success. Information technology and supply chain. In order to unlock the value creation opportunity ahead of us, we must have the right tools and technology in place to support our accelerated growth. [ Bobby Aflatooni's ] Technology Group has a clear vision and they are prioritizing projects that will have the greatest impact on our enhanced performance. Some of the increased speed fueling these projects, our capital expenditures and some are operating expenses. All of the projected spend for this year is captured and included in our outlook. And John Flanagan's supply chain team is doing a great deal of work to enhance efficiency and ensure the stores have the merchandise they need and can upstock it easily. We have identified an approach for eliminating the inefficiency of our current manual case-by-case handling process. This should enable us to more efficiently and reliably get products from our DCs onto our trucks and then into our stores. John has committed to having at least 1 DC up and running on the new process by the end of the year, which much more to come in 2024 and beyond. This will be a big step forward for our organization and especially for our store associates. Also, I would like to pat our DC teams on the back.…

[Operator Instructions] First question comes from Matthew Boss from JPMorgan.

Great. Appreciate all the color, and I hope you're feeling better, Rick.

Thank you, Matt.

So maybe to kick off at Dollar Tree, can you elaborate on the sequential improvement in comps that you're seeing in stores that have now lapped the break the dollar, maybe larger picture, how best to think about opportunities for that concept going forward. Relative to before the decision to break the buck? And then just separately, can you touch on success of the $3 and $5 item introduction?

Yes. The answer, Matt, is let's do the last 1 first, the $3 to $5. We're very pleased. And the key takeaway on that is not only selling the product but the store's ability to manage it the multiple price points and not create confusion for the customer, which is why we've taken the approach that everything is now on the table. So very pleased with that. The improvement, as I look at the improvement, it's not only the sales, but more importantly, the transaction count and what's going on in the basket. And we know that the basket is substantially larger when we get the multiple price points in it. So very -- we're pleased. We're excited. And now that we've cycled it, we're getting a true measure on what's going on.

Yes. No, no, no, absolutely. And then maybe just to switch gears over to Family Dollar. So with mid-single-digit comps now for the second straight quarter, could you just elaborate on the market share gains that you're seeing with the acceleration of the investments. I guess what I'm trying to get to is, is there any visibility that you can share for multiyear return? And any change in the high single-digit long-term operating margin opportunity at Family Dollar?

We'll spend a lot more time talking about that sort of thing at the Investor Day. And while I do not want to be specific, Family Dollar is starting to gain share. And it's also gaining a larger share of the wallet.

And our next question comes from Scot Ciccarelli from Trust Securities.

Good to hear you. I guess a little bit of a follow-up on that second question, which is, I think we all kind of understand the need to accelerate investment in the business. But Rick, you made a comment earlier in your remarks about you plan to achieve in 3 to 5 years, what usually takes a lot longer. So I guess the question is, should we view kind of '23 as a reset or starting point for growth in '24 and beyond? Or just given that list of growing projects you mentioned, could we see investment spending continue to pressure earnings growth in '24 and '25?

Excellent question. I would look at '23 as kind of getting us level set -- and I think the investments we will utilize in '24 and '25 will be more basic. You're always investing in the business, but it won't be anything of the magnitude that we're tackling now.

Got it. And then the second question is just in a lot of retail turnarounds in the past, there's a natural limit to how much change a new management team can induce in a short period of time. Do you think that could be a challenge as you've kind of settled in at the Dollar Tree, Family Dollar operation at this point, Rick?

Another great question. The more time I spend here, I'll make a couple of observations for you, Scot. It's becoming really clear to me the composition of the new team married with the older team, there's a tremendous amount of experience here. And we believe that experience is going to help us drive -- to drive to get things done faster. Then you couple that with an organization the Family Dollar and Dollar Tree organization. I have never seen the willingness to accept change like I'm seeing here. The 207,000 people in this company are dying to be high performers, and they believe in what we're doing. And they're seeing -- are the investments we've made so far in price and wage, store investments we've made in terms of the quality of the facilities, the employees are seeing that they're seeing those changes. They're seeing them in sales and their viewing it as all positive.

Thank you. We'll now move to the next question from Krisztina Katai from Deutsche Bank.

I wanted to just follow up on the market share Family Dollar. I mean, certainly, it has been challenged over the years, but it does seem that with price and store investments that is actually starting to change. So a question on traffic, which remained negative on a year-over-year basis but also multiyear. So how important is it to inflect positive for the model to work here? And how do you envision arriving there? Like what are the most critical components of the strategy to actually unlock that?

Yes. I mean I think as I reflect on what you're asking here, the most important thing we can do is maintain consistent store standards and execute against our operating model. We have -- we know what to do and I think if you look what's taking place, the consumer is responding to it and they're responding to it in terms of a bigger share of their wallet, they're responding in terms of market share. And all of the initiatives that we are putting in place, Krisztina, are all designed for that store experience. Even if you look at what we're doing with labor, we're not trying to take labor out of the store. We're trying to eliminate work so we could spend that on more customer-facing activities.

That's great. And just a quick follow-up. Again, regarding Family Dollar, but can you just touch on in-stock levels? How is that improving since the new team has been in place? And how far are we from optimal levels of in-stocks?

Yes. I would say one of the key initiatives in this building is the in-stock level at Family Dollar. Several things are happening. A lot of the manufacturers have retailers on allocation. So if you order 100 cases, you might get 65. And that is affecting everybody right now. The other issue we are -- we have discovered, we've had for a long period of time is we use a perpetual inventory system and if that system is not right, if it's not showing the on-hand quantities properly, the system will order product. So we're going through a process now of truing that up but I will reiterate one of the -- and people are tired of me talking about it around here, in-stock is one of our key initiatives.

Right. Thank you so much. Best of luck.

[Operator Instructions] Our next question comes from Anthony Chukumba from Loop Capital Markets.

Good to hear you're recovering from the COVID. So I just wanted to clarify, you talked about those wage investments. Can you just walk through that again? Because I wasn't quite sure, I think you said $2 an hour, but I wasn't sure on the sequencing of that. So I just wanted to better understand that.

Yes, sir. We're doing that market by market. And what we're looking at is not only the hourly wages, which is where the bulk of the investment is. We're also looking at coverage to ensure we have the proper amount of coverage and then we're also looking at what I would call the field team, the store manager and the district manager. We do know, and it's proven that when we have the right wage structure, we increased our retention and our turnover has been pretty astronomical and we're seeing that slow down. We know we get better shrink, we know we get better store standards and we get better morale. And that all leads to better execution, which the customer sees on the shelf when they're in the store. So it's a broad-based approach.

Got it. Look forward to seeing you in June.

We'll now move to our next question from Michael Lasser from UBS.

So Rick, the message today and what it's been for the last few quarters is, look, we're going to burden the cost structure with a lot of investments to get this business to where it needs to be, and we're going to frame and quantify what the return on these investments is going to be at some later date. So could you give at least a framework on what you expect the return on these investments to how you expect them to flow in terms of timing and the nature of how the return on investment is going to look, if it's just sales leverage on fixed cost, it may take quite a bit of time for the enterprise to get back to the operating margin level that it achieved historically. And as part of that, for the $400 million that you're investing this year, how does that break down between those wage investments that are more structural in nature and the maintenance and repairs that are perceived to be more onetime in nature?

Thank you, Michael. This is Jeff. As we think about the returns, and Rick had indicated earlier, there are a number of interdependencies that are related to these investments. So as you can imagine, we are a lot of these investments are complementary to what we're doing with our merchandising and our other store initiatives. Those interdependencies are dependent upon us being able to execute against this against all 16,000 stores, and it will take time through the course of 2023 to accomplish that. We have seen early on at the back half of 2022, some early returns and some tests that we've done. So we're confident that we will have an improvement in returns in future years. But between the interdependency as well as, quite honestly, trying to execute this and what we are all seeing as a somewhat uncertain macroeconomic environment. The combination of these 2 things, we believe that the impacts of this year will be minimal. We're saying it is minimal because it is not any relevant level for us to actually speak any specifics to it at this point in time.

We will now move to our next question from John Heinbockel from Guggenheim Securities.

How are you?

Good, sir.

Excellent. Looking forward to seeing you again. Can you touch on, right, the consumable opportunity at Dollar Tree right? I know historically, it's not been a huge consumable business because of the price point limitations. How do you think about that opportunity, right, in terms of getting MPP rolled out coolers everywhere expanding that beyond right, the 3 coolers. And then when you think about guarding against going too far, right, in terms of either mix or cannibalizing FDO if that's an issue?

Yes, great question. I think as I reflect on the consumables, the $3, $4 and $5 frozen food is a perfect example of there is a -- there's an appetite for it in the stores. I do think it's a balance, but I will say this, consumables drive transactions. And what we have to figure out is how to get a consumable item and a nonconsumable item in the basket together and grow the basket. And that's the challenge right now. So as we look at consumables, John, it's going to be a very selective approach. Hey, this sounds silly, but we introduced Bread into Dollar Tree over the last quarter. We put Ice in Dollar Tree over the last quarter, and they're doing very, very well. And we've done it without offsetting the mix in the store. So it's a methodical process. But I think what's important here is that it's nothing but opportunity if we can manage our way through it.

Our next question comes from Paul Lejuez from Citi.

Hi everyone, this is Brandon Cheatham on for Paul. I want to dig in on the freight cost. Just curious if you can expand on why wouldn't that be a benefit in real time spot rates are below where you contracted. I just want to imagine you'd be able to go back to your business partners and negotiate something that looks a little bit more like the freight costs that are being experienced on the spot market. So just curious if you can expand on some of the dynamics there and the timing of that benefit this year and next year?

Yes. So there's a couple of pieces to this. First off, our teams are always going back to our supplier partners and looking for ways to reduce our costs where that is available. And to the extent that later they are and given our volumes and sort of our scale to the extent that we can do so, we'll take advantage of that. But part of the challenge also for us is that a large portion of our contracts, about 60% of all the contracted business that we have for any particular year right now. About 60% of that is long-term charter or contracted rates. And that's the reason why those contracts and charters do not roll off until starting late 2024 or 2025. The other element of this is that we capitalize our freight into our inventory cost. So in any one particular year, to the extent that our inventory is turning, let's say, 4x, you've got that portion that is going to roll over to the next year as part of your capitalized cost. So the combination of those things, so it's going to be the timing of contract expiration and renegotiation. It's going to be the carryover from 1 year to the next are the 2 reasons why for us, we have more of a back-ended loaded benefit of freight in 2023 that we'll be carrying over into 2024. But then also, you have a further continuation of freight cost reductions as those other contracts roll off.

That's very helpful. Best of luck.

Our next question comes from Kelly Bania from BMO Capital.

Wondering if we can just talk a little bit more about the operating expense investment in particular, the wages. How much of the $430 million is wages and you called out the $2 increase in your labor rates. Just curious if you can help us understand where this brings your average, your starting wage how would that compare to peers once this is implemented? And does this bring you in line with peers or get ahead of the rest of the industry?

I appreciate your question because I realized I didn't answer the $430 question earlier, so I apologize. Of the $430 million, about 2/3 of that is related to wage and wage-related items. The delta, if you will, is around setting the store standards, what we're doing in sort of standards that we're doing IT, what we're doing in our supply chain. As it relates to our wage rates of $2, it definitely brings us more competitive in the marketplace as it closes the gap. We believe that, once again, it's not only closing the gap on hourly wages, but then it's also for us collectively bringing us more competitive as it relates to the field leadership teams. We haven't provided any sort of average hourly rate, but it is about a 20% increase over the course of the 2 years that $2 would represent.

Okay. That's very helpful. And just another one on freight. The comments you provided are very helpful, but you've outlined sort of $2 in freight really over the next couple of years. I guess the question is, would that be a -- would that reflect a full recovery of the significant increase in freight costs that you've had over the last few years? Or is that assuming only a partial recovery.

It would only be a partial recovery. There's a number of factors to this. One, freight rates have not gone back to 2019 levels in its entirety. Also, as you think about freight, there are really 3 components of freight and everyone seems to want to focus only on the transatlantic portion. But there's import and -- I'm sorry, inbound and outbound freight also, which is ultimately included in all of this. And those particular rates you have not seen a significant reduction or return back to 2019 as driver costs, chassis costs, fuel, all those components continue to be at more elevated rates versus 2019. So as we look at these freight cost reductions in its entirety, we do not -- we're not forecasting this is going to recover that which we would have seen in comparison to 2019.

Thank you. We'll now move to -- apologize please go ahead. We will now move to our next to Joe Feldman, Telsey Advisory Group.

I had a question about the investments that you guys are making, you've outlined both the Dollar Tree side, the Family Dollar side. As you think of store improvement, presumably, it's more on the Family Dollar side, but I'm just curious how you balance the investments between the 2 and how you decide where to allocate to each brand and where you feel there's more need for store improvement. Is it -- because it sounded like Dollar Tree actually could use some store improvement, too, which I think I was a little surprised by, but maybe you could address that issue?

Yes, I'll take that, Jeff, and then you can jump in. The first thing I want to say is we believe in the long-term earnings power of both banners and we think there's potential there, and I look forward to sharing that with everybody on the Analyst Day. I think if we are honest with ourselves, which we are, the facilities in both banners need work in terms of the quality of the gondolas, floor care, ceiling care, lights, I can go down the list that applies to both banners. I think when you look at the difference between the 2 banners and what shows up in one versus the other, in terms of store standards is Dollar Tree has no planograms in it. So it's incredibly easy just to put stuff on the shelf. And a lot of sins get covered up when you do that. Family dollar, every square inch of that thing when we get done by the middle of the year, we'll be playing to grant. And out of stocks, rusty shelves and more problems show up when you have a planogram based merchandising strategy. So I would look at you and say, both stores have a tremendous amount of opportunity. Both banners have a lot of long-term earnings power. So it's really not a balance. It's more about getting it done in both.

Got it. Got it. That's helpful. And Rick, you had mentioned earlier that you're seeing that trade down or trade in from higher income consumers, which I know we've all heard about and are seeing it as well. But how does the health of the consumer factor into your forecast this year? And how you see the consumer health playing out? That would be great.

Yes. I mean what we're seeing is the consumer making $80,000 a year is trading down. And that's -- timing is everything. We're doing better on so many fronts with a long way to go. They're having an experience they can relate to. But as far as planning for that in our outlook, no, we don't do that.

Got it. Okay. Good luck this quarter.

We will now take our next question from Simeon Gutman from Morgan Stanley.

Two-parter on Family Dollar. First, on the comp, we would have expected it to be more traffic than ticket given some of the price investments. It's the opposite. So maybe related to that last question to diagnose how the customer is spending and maybe give us a peak on the basket composition? And then second, it's a little bit of a twist on what was asked before. There is a step change that should happen in Family Dollar with EBIT and margin. Your comps are inflecting. Obviously, the business isn't really generating a lot of profit. I know there's a lot of assumption in that, but curious what's the assumption that needs to happen for the profit that you have to keep comping at this rate? Or there is some profit or is there some profit unlock?

So in terms of the composition of the basket, like every other consumable retailer, we're seeing the shift toward more consumables. I do think that -- So the basket is increasing.

So there's 2 things, if I could maybe add to that. One, as it relates to the -- one, quality of merchandising, the opportunities we're presenting. But also from a pricing perspective, the work that we've done, there's been a multipoint reduction against the market, if you will, in our pricing to gain parity as Mike -- excuse me, as Rick has said, with respect to our competitive sets as well as widening the gap of grocery and convenience. So the combination of those 2 things is very encouraging for us as it relates to improved traffic as well as being able to drive still ticket at those lower prices on a year-over-year basis. And then as it relates to Family Dollar and its ability to generate greater levels of profitability, there is somewhat of a step function that's going on right now with these accelerated investments. And it's more exacerbated against Family Dollar P&L because of its overall unit economics versus that of Dollar Tree, as you well recognized. We believe that as we continue to drive greater productivity from a top line perspective, improve -- simplify our stores and its operating procedures such that we can further leverage off of the existing base that we're building up. We believe that we will be able to drive higher levels of profitability. The last piece is from a margin perspective, gross margin perspective, the things that Larry is doing, we're talking about from a private label additions that, that will also help us from a gross margin. So top line sales, gross margin improvement and then leverage against some of these expenses that we are now incurring over the longer period of time.

If I could add one thing. I think the key takeaway on what has been said is there is no structural problems with either [ Van ]. It's all fixable, and we know how to fix it.

Thank you, ladies and gentlemen. We have reached our allotment time. I will turn it over to Randy Guiler for final comments.

Sure, Dave, thank you very much. Thank you for joining us on today's call, and have a good day. Take care.

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