Hello, and welcome to the Dollar Tree Q4 2023 Earnings Call. [Operator Instructions] At this time, I'd like to turn the call over to Bob LaFleur, Senior Vice President, Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining us today to discuss Dollar Tree's fourth quarter results. With me today are Dollar Tree's Chairman and CEO, Rick Dreiling; and CFO, Jeff Davis. Before we begin, I would like to remind everyone that some of the remarks that we will make today about the company's expectations, plans and future prospects are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward-looking statements. For information on the risks and uncertainties that could affect our actual results, please see the risk factors, business and management discussion and analysis of financial condition and results of operations section in our annual report on Form 10-K filed on March 10, 2023, our most recent press release, and Form 8-K, and other filings with the SEC. We caution against reliance on any forward-looking statements made today, and we disclaim any obligation to update any forward-looking statements, except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations of those non-GAAP items to the most directly comparable GAAP financial measures are provided in today's earnings release available on the IR section of our website. These non-GAAP measures are not intended to be a substitute for GAAP results. Unless otherwise stated, we will refer to our financial results on a GAAP basis. Additionally, unless otherwise stated, all comparisons discussed today are for the fourth quarter of fiscal 2023 or against the same period a year ago. Please note that a supplemental slide deck outlining selected operating metrics is available on the IR section of our website. Following our prepared remarks, Rick and Jeff will take your questions. [Operator Instructions] I'd now like to turn the call over to Rick.

Thanks, Bob. Good morning, everyone. This past year, our organization made meaningful progress in the ongoing transformation of our core business, which includes building a foundation for sustainable growth. While I have been Chairman and CEO for a year now, we are still in the early stages of this transformation journey. We're off to a good start and we remain focused, and we are excited about the remaining transformation work that lies ahead of us. You've heard me say that sales per square foot, transactions and units are among the most important benchmarks in retail. I am pleased to report that we are seeing growth across all three, and momentum is building across the business. We are making progress on the operational objectives of our transformation. And in some areas, we are seeing positive results earlier than we expected. While the transformation process is dynamic, we remain focused on delivering against our core growth objectives and as always, navigating through the challenges we encounter along the way. As I previewed on our last call, we are also taking decisive steps to strengthen the Family Dollar brand and better position it to achieve its full potential. We took a thoughtful and deliberate approach to address underperforming stores by considering each individual store's performance, local operating environment, and our broader need for scale and operating efficiencies across the portfolio. As part of the portfolio review process, we have identified approximately 600 Family Dollar stores that we will close in the first half of fiscal 2024. Additionally, approximately 370 more Family Dollar, and 30 Dollar Tree stores will close at the end of each store's current lease term. We believe rationalizing these unprofitable locations will help to unlock meaningful value at the enterprise level. Collectively, we estimate that net sales loss from the…

Thank you, Rick, and good morning. I will first discuss our fourth quarter results. After which, I'll provide some details on the financial impact of the portfolio optimization, and close with our fiscal 2024 and Q1 outlook. As I discuss our fourth quarter results, where applicable, I will focus on our non-GAAP adjusted results. A reconciliation between GAAP and non-GAAP is provided in our earnings release. Also, as a reminder, our Q4 and full year 2023 results include an extra week of operations, which gave us an incremental $560 million in revenue and $0.35 of EPS for the quarter and the year. In the fourth quarter, the Dollar Tree and Family Dollar segments increased traffic, unit volume and market share despite persistent headwinds from an unfavorable sales mix and reduced SNAP benefits. Looking at the business on a consolidated basis, net sales increased 12% to $8.6 billion. Adjusted operating income was $749 million, a 21% increase from last year. Adjusted operating margin increased by 70 basis points, driven by a 220 basis point increase in adjusted gross margin, and offset by a 150 basis point increase in adjusted SG&A rate. Adjusted gross profit increased 20% to $2.9 billion. Adjusted gross margin improvement was driven primarily by lower freight costs, occupancy cost leverage from the extra week, and higher vendor allowances, partially offset by product cost inflation, unfavorable sales mix and elevated shrink. Adjusted SG&A expenses increased primarily from ongoing labor investments, higher incentive compensation, unfavorable general liability claim development and depreciation, partially offset by leverage from additional sales from the extra week. Our adjusted effective tax rate was 23.1% compared to 23.4%. Adjusted net income was $556 million, and adjusted EPS was $2.55, which includes the $0.17 per share negative impact, primarily from unfavorable general liability insurance claims. Before I…

There was certainly a number of moving parts last quarter. As a result, our reported earnings included a few unexpected items. That said, if you peel away the layers, we produced some very good operating results in a very challenging macro environment. Considering what we accomplished, while continuing to execute upon multiple strategic initiatives, we have much to be proud of. And as I discussed earlier, we are continuing to invest in our risk mitigation, food and product safety and compliance programs in order to keep building on the foundation of service that defines this company. Looking forward, the Dollar Tree segment led by multi-price is exceeding expectations and gaining momentum. In the Family Dollar segment, we are taking the steps, as I outlined earlier, to fortify our base, strengthen our brand and position Family Dollar to achieve its full potential. I couldn't be prouder of our organization and our 200,000 associates across Dollar Tree and Family Dollar for their continued contribution to our success. I am truly honored to lead and to be part of the best team in retail. Operator, with that, Jeff and I are ready to take questions.

[Operator Instructions] Our first question today is coming from Edward Kelly from Wells Fargo.

So I wanted to start -- maybe, Rick, just take a step back and talk about how the company or how you are thinking about the company's outlook and the confidence in the strategy around the individual businesses are evolving. So you take your core Dollar Tree segment, the rollout of multi-price point seems to be going very well. How is your view on the opportunity there changing? And then Family Dollar, obviously, not where it needs to be. What does that say? I'm sure you're not going to throw good money at the bad here. And then as part of all of that, is $10 still in play, maybe you just get there differently? Just thoughts on how things are evolving for you would be, I think, helpful.

Yes. Great question. And hey, I'd like to throw on the table, Jeff and I talked a little longer than normal. And for those of you that are interested, we'll go past the 9:00 straight up, and give you a little more time for questions. As I think about, Ed, there is a -- this is a sum-of-the-parts story at the end of the day. And what's important here is we're very intently focused on creating shareholder value. The Dollar Tree multi-price point strategy is doing significantly better than we thought it would do. The customer acceptance has been off the charts to be frank. Our biggest problem right now is getting enough merchandise into the stores fast enough so the consumer can respond. Family Dollar is a victim of the macro environment out there. If you think about the increase in shrink, which I thought would have moderated, if anything, by now, but it's continuing to accelerate. And then the pressure on the mix. But again, I come back to a well-run Family Dollar is a very, very powerful retail format. And I think what we're doing is making the right decisions to fortify the base in Family Dollar and position it so we can go forward in a more stronger position. Now, in regards to the $10, we continue to believe in the $10 target that we announced, well, I guess, about a year ago, and we're continuing to march toward that goal. However, the macro environment has gotten in our way and we are dealing with high, high shrink numbers. We're dealing with big mix shifts. So it's a little difficult for us to pinpoint that $10 target going forward. We still believe in the target, but we believe the path is to get to $7 in 2024, and we're intently focused on that. But again, we want a positive 2024. And then as we move through '24 and '25, we'll give you more of a handle on the $10.

Our next question is coming from Simeon Gutman from Morgan Stanley.

This is Zach on for Simeon Gutman. Can you provide any additional color on how you're thinking about the comp outlook in '24? Specifically, what are your assumptions for the progression of ticket and traffic throughout the year?

Yes. I mean obviously, our guidance -- we're looking for a strong year, particularly on the Dollar Tree side. And I think as we get into quarter 4, that is our big time of the year in terms of discretionary in Dollar Tree. We believe the initiatives that we're putting in place in Dollar Tree are definitely delivering very positive comp. Family Dollar, as Jeff called out, is going to be a little tougher. And it's driven by the mix shift and it's also driven by, quite honestly, the pressure on the low-end consumer in terms of income and the SNAP benefits. We will cycle through the SNAP benefits as we move towards the end of the year, but we feel very comfortable with our comp outlook.

Your next question is coming from Matthew Boss from JPMorgan.

So two questions. Maybe, could you elaborate on the traffic trends and market share by demographic that you're seeing at the Dollar Tree banner? And just any change in underlying momentum at Dollar Tree quarter to date? And then in light of the portfolio optimization, just your confidence in the go-forward Family Dollar fleet or maybe if you could share some performance across the curve in terms of the store base. And just lastly, potential opportunity to accelerate unit growth at Dollar Tree as you see it, just given the performance.

Yes. Dollar Tree, the fastest-growing demographic is north of $125,000 a year in income, which brings a lot more firepower to the store, to be honest with you. And I think, quite honestly, I think that attraction is the multi-price point, and the fact that we've been able to increase the variety of product in the store. And I think the interesting thing about Dollar Tree, the lift is pretty universal across all the operating markets. It's not like the Northeast is strong and the West is weak, it's where -- that boat is lifting pretty even all the way up. When I look at the potential for Family Dollar and the optimization, again, it's a sum-of-the-parts story. And there are many opportunities in Family Dollar to maximize shareholder value. And what we intend to do, we know how well Dollar Tree is performing. As we said on our call, we're going to shift our focus to opening more Dollar Trees than we historically have done in the past. And quite frankly, it's been driven by the work on the coolers, and it's being driven by the multi-price point, that's made the box more viable. But I think the rationalization of the portfolio was a natural step. And now what we could do by eliminating a bunch of underperforming stores, which take the bulk of the district managers' time, we can now focus them on the stores that are doing better.

If I may add just one additional point. If you think about the Family Dollar segment, one of the things that we're really proud of is that we continue to take market share across units, dollars, traffic. So what we're doing there within this banner is working for us. We have found that we are under a little more pressure with our particular higher penetration in lower income customer segment. But we believe the other merchandising and operating actions that we're taking will allow us to further unlock the value of this remaining portfolio of stores that we have within the Family Dollar brand.

Your next question is coming from Chuck Grom from Gordon Haskett.

Just a couple for me. Jeff, can you unpack the margin guide by banner? I'm just trying to isolate if you're still anticipating another year of a loss at Family Dollar. And then Rick, just bigger picture, when you look -- with input prices dropping, can you talk about how your merchants are adding more value, particularly at the Dollar Tree and particularly at that $1.25 price point?

Can you take the first one?

Yes. So on Dollar Tree, for example, on the margin, we're guiding to 36% to 36.5%. That's a combination of a couple of things. One, as we continue to roll out the multi-price offering, that is going to place a little bit of pressure on us from a margin rate perspective, but you're really going to like the dollars that's going to be driving with units. We do anticipate -- we had mentioned that we're anticipating about another $0.80 to $0.90 of freight that's going to be more heavily realized on the Dollar Tree side. And as I've mentioned, we'll expect to see about 60% of that in the first half of the year. So the margin on the Dollar Tree side is going to be sort of led by additional freight and then offset partially as a result of the roll out of the 3,000 stores and multi-price and further penetration in some of the other stores. But all in all, a very healthy 36% to 36.5% gross margin. And listen, Dollar Tree also is not immune to some of the issues we're having with shrink as well as the overall mix impact across the business. A little more profound when you get to the Family Dollar side of the business, while they will have a modest impact on the freight because we do import there also, but the impact there is really on the shrink and mix, offset by or actually lifted by further penetration of our private label product as well as our opportunity within OTC and HBA, which are normally higher margin opportunities for us.

And the only thing I'd add to that, Chuck, especially on the Dollar Tree side. When input cost goes down, the fact that we have fixed price points allows the Dollar Tree team to reengineer the product and bring a greater value to the table. And that's how that franchise has been built over the years. And so it's $1.25, it might stay $1.25, but it brings more value to the table, to the consumer.

Our next question today is coming from John Heinbockel from Guggenheim Partners.

I wanted to focus on the multi-price point journey, right? So going from 3 doors to 8, how do you think you'll attack that, right, 3 to 8 all at once in certain stores or staggered? How long do you think it will take to kind of replanogram Plus, the old Plus, right, into the categories? And then do you have a view -- like multi-price point penetration, when do we get to 10%? That seems like a fair mile marker.

Yes. Great questions. First thing I'll say to you, John, is we will stagger the rollout. I like to spread an initiative over time. That way, it turns into a gift that keeps on giving. So that's kind of our first plan on that. The penetration, I would say right now, if Rick McNeely was in the room, the demand is insatiable from the customer. I like the 10% number that you threw out. We're going to be -- we were 8.8% in quarter 4. So yes. I think it is -- right now of all of the things we're doing, and I got Jeff shaking his head, I would call it the gift that keeps on giving right now. And we're just really pleased with it.

And then I believe that the last part of the question, if I'm hearing it correctly, is about the timing of doing the replanograming, if you will, of the Plus section. First of all, we don't planogram. So that's an easier part to look at this. But as we think about doing some reconfiguration of the store to bring in the multi-price in line with other products, we're starting to do that this year, and that's the 3,000 stores that we expect to deliver this year.

And our goal, John, is get the multi-price point in the aisle where it belongs rather than being in the center of the store. We think it's more shoppable and the consumer will trade up.

Our next question today is coming from Michael Montani from Evercore ISI.

Just wanted to ask, first off, two questions related to the store closures. I guess, number one, is there additional opportunity that we should be thinking about here in terms of rebannering in addition to the closures? And then number two, I wanted to see your thoughts around the potential to recapture some of that $700 million of revenue, given the proximity to the other stores.

Two great questions. As far as rebannering, we've already looked at a modest number of stores that we intend to do that in. And as we move through the portfolio, we will continue to research that. The one thing we want to be very careful of is, number one, the proximity to another Dollar Tree. And number two, we want to be careful that we don't distort the Dollar Tree brand. So it's a little more complicated than just standing up saying, change them all to Dollar Trees and move forward. But it's a very good question that we're actually looking at as we speak. And what was the second part of the question?

Recapturing sales.

Yes, recapturing the sales. I think we feel pretty bullish about that. A lot of these stores that were rationalizing out of the system were built on top of another store. And there is the opportunity for us to take back some cannibalization. And I think it's a matter of time. And of course, we're going to continue to build new stores next year.

Our next question is coming from Kate McShane from Goldman Sachs.

I wondered if we could ask about the supply chain, the changes that you've been making, and how it's impacted inventory levels and turns.

I mean, I'll speak to half that question, and let Jeff do the hard part. The fascinating thing -- depends on how many cases a store gets in an order to determine how many hours of savings there are. But I can tell you this, we've reduced our unload time to approximately 1 hour, which will benefit us long-term majorly, especially in terms of store standards, in stocks, which should lead to higher transactions, and the rest will be history having been through it. And in regards to inventory?

Yes. So from a supply chain basis, one of the things we've been very focused on this past year is, not only in stock in the stores, but how we get in stock in the DCs. So working with our supplier partners to make sure that we're getting the merchandise at a timely basis according to the POs that we've placed. We've actually seen some good improvement in that area, which has benefited us ultimately in having our inventories in store at the time that we need to. The fourth quarter is just an example of that, where last year, we had a little bit more supply chain disruption. The year before this year, we were able to have the merchandise in-country, in DC, in our stores, and that helped us with our overall sell-through, which ultimately helped us on our inventory levels at year-end because we were able to flow that through versus not having any inventory at the right time for the customer. But I believe, overall, the other actions that we're taking with respect to some of our systems to give us better visibility into where our inventories lie and where our needs are across the network will allow us to further improve on our in-stock positions.

And Kate, if I -- I'd like to call out, Mike Kindy, who's been with me for years, he's driving the supply chain now. And again, you raised a very good question. Mike is working on 2 things: the inbound service rate, which is getting the right inventory here at the right time; and then the outbound service rate, which is shipping what the stores are drawing. And we've had trouble with that, to be frank, over the years. But again, it's another example of improvements we're making.

Our next question today is coming from Paul Lejuez from Citigroup.

Two questions. Just curious what's driving the average ticket lower at Dollar Tree, even as you add the higher price points? And how do you think about enrolling in those high-priced items, the eventual impact on the average ticket at Dollar Tree? And then second, and sorry if I missed this, but what's the cash cost of closing the 600 stores of Family Dollar? And maybe if you can talk about the locations of those stores. Are they concentrated in certain geographies? Any common threads other than just not earning their cost of capital?

I'll let you manage the second part, which is the hard part. The -- what we're seeing is the reason our average ticket is down, I think it's because we're seeing more trips. People are coming more often. I think eventually, that will probably shake itself out, but it's all driven by the frequency of which the customer is coming in.

Just to top that off also, what we've seen is that when a customer has a multi-price item in their basket, their basket many times is as much as 2x the average basket. So as it relates to the variety that we're asked that we're providing, it's definitely giving us a larger basket. But as Rick has said, the additional traffic, people are coming more often and their basket is just on average, lower. As it relates to the stores that we're taking action on, from a geography standpoint, there's really no real concentration across the country. It's pretty much reflective of our overall fleet demographics, if you will, across the country. As it relates to the cash cost of closing these stores, on a cash basis, we'll actually be neutral to actually accretive in closing these stores. And it really comes from the fact that from a P&L perspective, you pick up the idea that you no longer have to carry the rents, but the stranded costs associated with the ongoing cost of running the dark store is going to be less than if you were operating the store. And net-net, you would actually pick up just a little bit of cash versus if we were running these stores and operating them under a loss position. Over time, that actually gets better as these stores start to run off whatever remaining portion of their lease. So the cash requirement is reduced pretty substantially over the next 3 years.

Our next question today is coming from Peter Keith from Piper Sandler.

I wanted to dig into the SNAP headwind of negative 5% on Family Dollar. Could you quantify how you got to that math? Because if I'm doing the math myself, I look at about a 35% decline in SNAP for the quarter on about 7% to 8% of sales is about a 2.5% headwind overall.

Yes. The way we're looking at this, once again, it depends on the -- your assumption on the penetration of our customer. But as we take a look at what that SNAP customer means for us and how we've been looking at the sort of contribution on a year-over-year basis, that's how we derive the 5%.

Our next question is coming from Joe Feldman from Telsey Advisory Group.

I wanted to ask, what -- as you guys are looking at the Family Dollar stores that you're closing, I was just kind of curious, like what part of the transformation strategy work that you guys have done in the past year or so, I guess, do you feel won't work in those stores? Like, was there something that you just felt like -- I guess it's a lost cause, for lack of a better term? But maybe you could just share some thoughts around that where maybe like help the other stores that do continue to run and what works there that didn't work in these stores.

Yes. Another really good question. I would look at you and say the initiatives have worked in every store. The problem is the magnitude of the lift. And I think also as we looked at these stores, it was their location, the competitive environment, the quality of the facility, the proximity to the competition. There was many, many, many factors. And we have had in the past a real estate strategy that wasn't really, really focused on maximizing value. And what we've done now is pick stores that we don't think have a long-term future, and more importantly, hopefully, we'll be able to transfer some sales from this closed store into one of our operating stores. So I mean, it's a pretty thorough process. And the important question is, why didn't they get the lift from the initiatives of the other stores that we're keeping, obviously, which is the bulk of the portfolio. It has to do merely with a lot of other extraneous factors.

Yes. And just to add back, I think actually, Paul had a portion of his question I didn't answer that was on this very topic. Many of these stores were operating unfortunately at a level that the operating loss of these stores was pretty substantial. And even with the lift of some of the initiatives, while we're starting to mute the level of loss, we were still significantly below what we consider to have a reasonable return. Especially when we think about the additional investments that we would want to make in these stores as it relates to store standards, as it relates to just a number of other things, that it just wouldn't be able to carry a return on the additional investment for these stores. A lot of this is driven by the fact that over time, rents shrink and a number of other exogenous sort of factors has driven the store to a point where, unfortunately, they're just operating at a very significant loss.

Our next question is coming from Brad Thomas from KeyBanc Capital Markets.

Rick, I was hoping you could talk a little bit on the Family Dollar side about the consumables category. And I was hoping, you could talk a little bit about the competitive landscape, how you're feeling about pricing and some of the opportunities to drive share going forward?

Yes. On the consumables side and Family Dollar, as we have gotten our mix right inside the store in terms of the SKU count, remember, we discontinued 1,000 and added 2,000 for a net of 1,900 and change. We're very pleased with what we're seeing in terms of movement. We've made the consumable mix more relevant. And add to that, the emphasis that we have placed on private brands. And now you have a national brand equivalent item that the consumer can purchase. And I think our consumable mix, to be honest, is the best it's been in Family Dollar, hearkens back to my old days as a grocer. In regards to pricing activity out there, the market continues to be relatively stable. I would even say, the promotional activity on the weekly flyers is relatively stable. It's not like we're seeing anything that's really wild. And I think our pricing position for Family Dollars is as good as it's ever been.

Our next question is coming from Scot Ciccarelli from Truist Securities.

This is Josh Young on for Scott. Could you guys just clarify what are you going to do with the inventory at the stores slated for closure? So in other words, are there discounts which may boost sales and hurt margins? Or will inventory just be shifted to other stores? And is that all captured in your guidance?

Yes. So first of all, it is captured in our guidance. And the way that we'll do this is, given the announcement of the timing of the store closure, we'll run a series of different discounts to help move through the inventory. Also, as part of the impairment that we've taken, we've also already accounted for an impairment of that value of inventory at some level in order to ultimately realize the sale.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Thank you all very much for your time today, and looking forward to talking to you again in the near future.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.