Hello, and welcome to the Dollar Tree Q1 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure 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 First Quarter fiscal 2024 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 sections in our annual report on Form 10-K filed on March 20, 2024, 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 these 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 for the first quarter of fiscal 2024 are 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. Given the number of callers who would like to participate in today's session, we ask that you limit yourself to 1 question. I'd now like to turn the call over to Rick.

Thanks, Bob. Good morning, and thank you for joining us on our call today. I'd like to begin my remarks today by extending my heartfelt gratitude to members of our Dollar Tree community following the devastating tornado in Marietta, Oklahoma. While the tornado destroyed our Dollar Tree distribution center there, I'm especially thankful that no one was injured in our facility. I am also extremely proud of the resilience displayed by our team members in the aftermath of this tragic event. Fortunately, our distribution network is flexible and while we expect to absorb incremental operating costs, we believe we will keep store level disruption to a minimum. The leadership team at Dollar Tree is also highly sensitive to the wider impact of this disaster on our associates, their families and the broader Marietta community. With this in mind, we set up a temporary site at a local hotel to help support our associates in their time of need. We brought in food and other essential supplies such as batteries, chargers, diapers and toiletries. Our associates have access to over $200,000 a in immediate response grants and mental health services. For everyone impacted by the recent situation in Marietta, I want to thank you for everything you've done during this difficult time. It's during these periods of adversity that the strength and character of our organization shines through. Whether it's dealing with natural disasters or important strategic decisions, our associates and the communities they serve are always top of mind. As I'm sure you saw in our announcement earlier today, we are initiating a formal review of strategic alternatives for the Family Dollar business. The decision to explore strategic alternatives includes evaluating how each separate banner might appeal differently to different sets of owners. It also includes evaluating whether accelerating Dollar…

Thank you, Rick, and good morning. I will start by discussing our first quarter results, after which I'll provide comments on our Q2 and fiscal 2024 outlook. Where applicable, I will focus on our adjusted results. A reconciliation of non-GAAP adjusted results is provided in our earnings release. Let's begin by looking at the business on a consolidated basis. Net sales increased by 4.2% to $7.6 billion. Adjusted operating income was $436 million, a 3% decrease from last year. Adjusted operating margin decreased by 45 basis points reflecting a 30 basis point increase in gross margin, offset by a 75 basis point increase in adjusted SG&A rate. Gross margin improvement came from lower freight costs, partially offset by unfavorable sales mix and elevated shrink. Adjusted SG&A increased primarily from temporary labor for Dollar Tree's multi-price rollout, higher depreciation and amortization and sales deleverage. Adjusted Q1 SG&A this year exclude $17.5 million of severance and other store closure costs and a $2.5 million reversal of a legal accrual. Q1 last year excluded a $30 million legal accrual. Our adjusted effective tax rate was 24.2% compared to 23.3%. Adjusted net income was $312 million, and adjusted diluted EPS was $1.43. Moving to our business segment results. Dollar Tree's net sales increased 5.9% to $4.2 billion. Operating income decreased 3% to $522 million. Operating margin decreased 110 basis points, driven by a 10 basis point increase in gross margin offset by a 120 basis point increase in SG&A rate. Gross margin improved primarily from lower freight costs. This was partially offset by unfavorable sales mix and elevated shrink. SG&A expenses increased primarily due to temporary labor for the multi-price conversions, higher depreciation and amortization and sales deleverage. Family Dollar's net sales increased by 2% to $3.5 billion. Adjusted operating income was $51 million,…

Thanks, Jeff. We are pleased that we delivered first quarter adjusted EPS results towards the high end of our outlook range. At Dollar Tree, we overcame some Easter softness and remain focused on rapidly rolling out our next generation of multi-price stores. At Family Dollar, we are taking the difficult but necessary steps to position the business for long-term prosperity. Change is never easy, and I couldn't be prouder of our 200,000 associates across Dollar Tree and Family Dollar for their ongoing commitment to their communities and the customers that they serve. I am truly honored to lead and be part of 1 of the best teams in retail. Operator, with that, Jeff and I are ready to take your questions.

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

So I wanted to start with Dollar Tree. You've maintained the mid-single-digit comp guidance for the year. Q1 was obviously a little bit softer. Can you just help us what underpins the confidence around that? And then, Rick, as it relates to this concept, obviously, there's a lot going on with multiple price points, you're accelerating growth. Can you give us a little bit more perspective on how you see the future of this business? What do you think the earnings growth profile is here over a multiyear basis and the real opportunity?

Yes, sir. I'll take the first part and you can add the second part. The confidence I have in Dollar Tree as we move through the year is the impact of multi-price point. We continue to see trade down customers into that brand. I love the traffic -- and the multi-price stores, Ed, are out-comping the stores that have no multi-price in them, and they're outcomping the stores that have the valley of multi-price. We continue to be pleased with where we're going with consumables, and we also see nothing but upside in regards to the basket as we introduce these new items. So I'm very, very bullish on the Dollar Tree side. And by the way, just for a reference point, the basket, when there's a multi-price item, and it is 2x larger than our normal basket. And they also multi-price is driving more trips into the stores. And you've heard me repeatedly talk about transactions are 1 of the key drivers of the future.

Just to maybe add a couple more points on the multi-price before going into longer-term profitability. On the multi-price, we mentioned that we had roughly 10% of the stores that have been converted to the in-line conversion. That happened over the course of the first quarter those stores are still ramping up. We will still continue to roll that out for another 2,000 stores in the rest of the year that ramp-up will give us some additional sort of tailwind, if you will. On top of that, our comps, I don't know if you've noticed, and you probably have by looking at some of the things that we've published before, but our comps actually get to be a little softer in comparison in the back half of the year versus the first half of the year with the second quarter being our most stringent sort of compare. The second part of your question, I believe, was with respect to how we're thinking about the long-term profitability of the enterprise and the brand. And we continue to be very encouraged by what we're seeing across both banners. The multi-price offering is allowing us to drive sales and volumes to drive greater profitability. We continue to deliver from a standpoint of higher freight cost. We believe that there's opportunity across the Family Dollar brand to continue to drive greater gross margins as we continue to drive continued improvement in private label as well as the OTC and HBA. The combination of these things will allow us to drive greater gross profit dollars in the organization as we continue to drive greater discipline in our expenses along the way. So the outlook that we have for the year, we feel very confident in. There's the opportunity to manage through some of this. So at this point, we really don't have any additional outlook considerations to provide other than the fact that we continue to remain on the numbers that we've given you so far.

Our next question is coming from Michael Lasser from UBS.

My question is a 2 parter on the strategic process. If you are not able to sell Family Dollar what is the plan B? And as a way to help us frame what the ongoing earnings power of the business could look like, can you give us a sense of how much the corporate overhead is allocated to Family Dollar and what the dissynergies might be if you were to divest the Family Dollar business.

Michael, thank you for the question. It's too soon in the process for me to say what's going to happen or exactly what all the alternatives are. So I'd like to stay away from that and come back to my original comment that I promised to keep you all updated. In terms of how the corporate overhead is basically, I think in terms of 50-50. I would also look at you and say that the business, the supply chain, merchandising and retail are all pretty much separate. There is some legal, HR, the basic functions are a little intertwined, but the most important pieces are not. Jeff, I don't know if you have anything you want to add to that?

I think that covers it.

Your next question today is coming from Matthew Boss from JPMorgan.

So a couple of questions, 1 near-term, 1 multiyear. So at the Dollar Tree banner, near-term, just thinking about the 2% to 4% comp guidance for the second quarter, what trends have you seen post Easter? Maybe if you can comment on quarter-to-date just to provide some confidence around the 2% to 4% relative to the first quarter. And then multiyear, Rick, could you just elaborate on the acceleration strategy at Dollar Tree? Maybe speak to the acquisition? Is there any ceiling to consider in terms of annual unit growth and just how you're thinking about long-term saturation for that concept?

Yes. A couple of great questions there. Do you want me to take the first question?

Yes, I'll let the first one, I'll take the second one.

So Matt, the guidance that we gave of 2% to 4% comp for the Dollar Tree banner coming out of Q1, we're in line with that guidance that's the reason why we've provided it. As we came out of that Easter period, and we had mentioned in our prepared remarks that in the absence of 8 to 10 day period, we actually pretty much through the course of the quarter, had a comp that was pretty reflective of a mid-single-digit comp -- I'm sorry, a low to mid-single-digit comps. So I think we're still in line with that as we move into Q2.

And in regards to the long-term future of the company, you look at $0.99, the acquisition there totally reflects Matt our commitment to the Dollar Tree franchise and the fact that we think that there are opportunities there to grow the business even more. The acquisition in California to be very frank, is going to generate returns above our average in the overall chain. And we are very excited about these stores in terms of the real estate that we were able to acquire in the term we have on them. And as we've said on many occasions, a well-run Dollar Tree is an exceptionally powerful retail format. And we are committed and I actually think I'm going to say this, multi-price is attracting a higher-income consumer into that box. And I think we have a lot of really good things moving together right now.

Next question is coming from John Heinbockel from Guggenheim Securities.

This is actually Anders Meyer on for John. So I just wanted to touch on the cooler resets. So overall, how have they been progressing? What has been the overall impact to comps? And upon completion, how do you size the sales opportunity with this product?

Yes. I mean the cooler work we're doing is basically on both franchises incredibly pleased with what's going on in the Family Dollar banner. We're pooling the number of cooler doors up to approximately 30. And it is driving incremental sales into the store overall. And the consumer is moving more to refrigerated and frozen product. Now on the Dollar Tree side, we now have 5,700 stores that have multi-price frozen food in them. We've expanded the assortment in 1,900 stores and to be very frank, one of the big surprises for us is frozen and refrigerated in the Dollar Tree banner. The multi-price unlock that category and you have to think about it. You go into a Dollar Tree, you can buy a pizza for $4 or $5 that feeds a family of 4. And that is a very powerful statement. So very pleased continuing to push it. It's where the consumer is going and both banners are chasing it.

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

I want to ask about Family Dollar, but be respectful if you can't answer, I'll put a second question about Dollar Tree in as well. I wanted to ask if the EBIT that we see in the P&L, I think it's going to get a little bit better. You're going to run rate a little bit better from what the leftover stores look like. Can you tell us if there's a big distribution call it, among the 7,000 remaining Family Dollar stores, a wide range of profit outcomes or if they're relatively concentrated. And then are you able to share what the average life of the leases are in that portfolio? And then have you talked about or can you share what the lease break costs could look like?

Let's see if I can take a few pieces of that.

And then I'll take the couple.

Some of this, of course, we aren't in a position to share, but I can tell you that as you look at the remaining portfolio of stores, you still have a sort of a distribution of profitability across those stores at a much higher level than what you would have had before we closed the nonperforming stores. We had already indicated also that for the year, you should expect about $0.15 of additional profitability -- increased profitability coming from those closed stores and $0.30 of EPS on an annualized basis. Our leases that we enter into are normally somewhere between 5 to 10 years on average. At any one point in time, approximately 10% to 12% of those leases are being renewed on an annual basis. And that's about what I can really share with you at this point with respect to the lease obligations.

And the 1 thing I would say as you reflect on this announcement is the fact that we have not lost faith in Family Dollar and the progress it's making. The team has done a great job of implementing many initiatives that are designed to drive the long-term growth. What we're wrestling with and trying to figure out is we have 2 different brands at 2 different stages of where they're at in their development. And while we want to accelerate Dollar Tree, we want to position Family Dollar's transformation where it has the chance to grow. And by looking at them differently that might provide more acceleration for both brands long-term.

Next question today is coming from Rupesh Parikh from Oppenheimer.

So just going back to your commentary on multi-price point expansion. We've been in some of your newer locations with the new product. Just any surprises in consumer behavior that you're seeing in store, what type of consumer feedback are you guys seeing with those -- with that expansion? And then just want to get a sense how the consumables versus discretionary mix is playing out versus expectations within those locations.

Yes. A couple of great questions. Our biggest problem with multi-price right now is we can't keep it on the shelf. The consumer is responding to it. The consumer likes it. And I think it's going to be -- I don't think, I believe, truly believe it is going to be a very powerful piece in our ongoing future. You will see, as we move through the calendar year, as you guys know, we have to buy multi-price products, seasonal product more than a year in advance as we get into the holidays, you're going to see more multi-price show up on the discretionary side. I am pretty positive for the first time, we'll have an inexpensive Christmas tree in our stores that will probably have Christmas lights that will go with all the Christmas decorations we sell. In regards to consumables, multi-price points, again, are driving what's going on with our consumable share. And what we are committed that we are not raising the price or introducing like items we are bringing in different SKUs, which broadens the appeal of the assortment to the consumer.

I had just 1 other point. with multi-price, as we're looking at those stores that have had this in-line conversion, the mix of discretionary and consumables is more in line with what we would have seen historically with a heavier balance on discretionary than consumables. So we like that balance in that the multi-price is not only driving consumables, but it's also lifting the discretionary basket also.

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

Just a follow-up on that last comment. What is the change that you see in terms of traffic versus ticket in the multi-price converted stores. That's my first follow-up. . And second, I'm curious what you're seeing in the promotional landscape. What do you see in 1Q versus your expectations, but also curious what you assume for the rest of the year and what you've seen -- based on what you've seen year-to-date on the promotional landscape out there.

So with -- the first part of the question is, we see traffic increase in the multi-price stores to the tune of about approximately 3%, and we also see the ticket goes up about 55 bps. And again, it's soon. Again, I want to come back to, we're building a new muscle. I would look at you and say, off the top of my head, I'm guessing the old retailer in me. 50% of the stores are probably outperforming our expectation, maybe 25% are right on it and 25% have opportunities.

And look, we're definitely seeing the customer right now buying a little bit more on promotion. And it's not that there is more promotional activity, but what the customer is actually buying is items on promotion.

And I think what's important on the promotion thing is that Jeff is in my office every Monday asking me what's going on in the promotional landscape, we have seen nothing irrational at this time. And I think that's really important. And what we are seeing is maybe incremental movements on CSD, soda pop and 2-liter pop. And that is a very easy traffic driver. But I always remind everybody I talk to, we have to not confuse marking down stale inventory with promotional activity. And I think that's really, really important. So stable environment, I would say it's not irrational and maybe CSD.

Next question today is coming from Chuck Grom from Gordon Haskett.

So Rick, on the new multi-price rollout, can you talk about the transition once the third-party specialists have actually done the reset? In other words, what's the risk and you talked about the new discipline that store managers and employees are going to need to acquire post those specialists doing the initial reset. And then for Jeff, how much of the SG&A deleverage in the first quarter was from the resets? And I think you guys have outlined $23 million of expenses this year. Can you just talk about the phasing of that?

Yes. Chuck, again, a couple of great questions. First one, I'll take. We have grown up in an environment in this company where everything is the same price point, so it doesn't matter where it goes, and it doesn't matter what the customer does with the product if they decide they don't want it. Now what we have to do is -- and what we're doing is we're introducing the multi-price SKUs into the category that they belong in. We're not just putting them in the center of the store. So you have to create a section, quite frankly, that bears prices, so the consumer knows how much they are. And when the consumer changes their mind, that product has to get back into the right spot on the shelf. And that's all about teaching our associates how to handle that product in regards to stocking it and then what to do with it when they condition the store. Now it's a very comparable discipline but it's not something that we've had over the years. We're doing all kinds of things to manage that. We put a shelf label literally on the outside of the case that allows the associate to put the product on the shelf, put the shelf tag on the shelf. But believe it or not, we also have to teach the people in the warehouse when they pull the item, they had to pull the right item because they're used to pulling 1 item that has the same price and in regards to the store's inventory, it stays true. But now the difference is if they're pulling a multi-price point item, it has to get there as it was supposed to be selected.

And then, Chuck, with respect to the SG&A, margin deleverage, if you will. This is really 3 components. You called out the temporary labor was absolutely the largest component. The second component was higher depreciation and the third component was just sort of deleverage as a result of the lower comp. The 1 thing to recognize with the temp labor in the first stores that we opened up. There's a learning curve as to the -- how to go about it the number of crews that were actually allocated, how working with the store leadership teams. We continue to make progress on that in the subsequent stores that we're rolling out. So sort of the initial headwind that we had in the first quarter here, we would expect that to moderate over time. But as we had mentioned earlier, we definitely thought that the impact of using this third-party labor to do the in-line conversions was going to cost us approximately $0.23 of EPS for the year.

Our next question today is coming from Seth Sigman from Barclays.

I want to talk about shrink. It hasn't come up a ton. It was a headwind this quarter, but I think that was expected. Just curious how that played out with some of the mitigation efforts, any signs of stabilization given that you didn't change the guidance for that? And then I guess a question on gross margin overall the improvement was a little bit more limited this quarter. I'm just curious, was that mix or something else? If you could just help us with that?

Yes, I'll take the shrink question, if that's okay. I think the efforts we've put in place for the first time, I can honestly say the shrink trends that we have, why they still are not good they're not getting away from us anymore. We're definitely tracking in the right direction. But I want to reinforce, shrink is still a problem, but it's not deteriorating like it was last year. We feel very good with the initiatives we've put in place. I also think it's fair to say that we were ahead on the shrink curve that we were calling it out and we were taking steps that people now are taking around us. Our self-checkout exposure is basically nothing. So we don't have to revisit that. We have started eliminating high-shrink SKUs. We started that about a year ago. And we've also placed things behind the check stand counters where we can control them. So I'm pleased we are not out of the woods, but at least I can tell you that it has stabilized.

Yes, just to put maybe a little bit of finer point on it. Our expectation for the first half of the year was that we were going to have about $0.30 to $0.35 of headwind across shrink and mix and that was predominantly going to be on mix. What we're seeing is that our performance is in line with that. We're actually seeing some slight improvement against it, but we're still early in the year. So as Rick has said, the investments that we were making -- and we did a lot of that on the Family Dollar side. First is a proof of concept and now growing some of those self-help opportunities across the Dollar Tree banner also. As it relates to gross margin, the gross margin pressure really from Dollar Tree was really more as a result of consumable mix by not having that discretionary Easter complement in our overall performance for the quarter is what really put pressure on the gross margin. On the Family Dollar side, very healthy improvement in gross margins overall of 40 basis points. So notwithstanding the impact of Easter, we're very happy with where we're trending as it relates to our gross margins.

Our next question today is coming from Krisztina Katai from Deutsche Bank.

So I wanted to ask you about the supply chain. You've been making a lot of investments there. You have rotacarts that are making store deliveries now as part of your fleet. Can you talk about what are some of the early benefits that you're seeing so far regarding in-stock availability, inventory turns is it helping reduce shrink and transportation damages? And just how best to think about the overall labor hour savings that you're able to take from the supply chain investments and then reallocate the store hours?

Yes. There's a lot there. Let me see if I can distill it down to just a couple of elements. The first DC that we rolled out was Matthews, North Carolina. It was a Family Dollar DC -- it's 1 in which previously they were delivering to the store off of pallets. So now we're doing it off of rotacarts. What we're actually seeing is improved delivery time on low time, which is what we were anticipating. We are also seeing a level of reduced damages, as you had mentioned, is the way that this product is being handled. And we're also seeing a higher level of associate sort of engagement and satisfaction, recognizing that it is helping to improve the way that they do their jobs. The next DC that we just really kicked off is here in Chesapeake. It's a Dollar Tree DC we're seeing a nice once again, reduction in unload times. It's allowing us now to get product to the shelf quicker and to basically fulfill some of the outs that we have on the shelf. But overall, the in-store in-stocks are improving as well as the DC service levels to these stores.

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

I just wanted to ask kind of 2-part thing. One was there's an improvement implied in the back half for EBIT margin of 100 bps plus versus potentially flattish in the front half. So just wanted to see the top couple of drivers of that, that gives you the conviction for that. And then as a follow-up, you all did the incremental acquisition for the 99 Cent stores, as you mentioned. So is it feasible to see kind of $10 plus of EPS power just from core Dollar Tree now as you think out.

So I'll let you handle the first part of the question. The second part of the question, it's too soon to know that. I'd like to stay away from that for now, if that's appropriate. Go ahead.

And Michael, as we think about sort of the phasing of our overall EPS for the year, I appreciate your question. It really kind of can get bucketed into a couple of areas. From a top line perspective, we talked about multi-pricing the acceleration of that as we continue to roll out the in-line conversions. You also have shrink in mix is for us we believe will be more neutralized in the back half of the year than in the front half. And we -- once again, that $0.30 to $0.35 of EPS headwind was really on the first half. We also believe that from a SNAP perspective, while SNAP is still within our expectations. In the back half, we think that we may have some tailwinds as a result of the October cola adjustment that may be available -- will be available this question is how much. And then the last component is, if you remember last year, in the back half of the year, we had a couple of foot faults, if you will. We had an OTC recall that was about $0.05 of EPS. We had an accrual adjustment that we needed to make on general liability, very specifically around some of the claims that we're going back to pre-pandemic, that was around $0.17. And then last but not least, as we had mentioned, with the portfolio optimization, we are expecting a $0.15 EPS improvement. That is predominantly going to be in the back half of the year. So on balance, as a result of top line acceleration of revenue growth, and then some of the softer compares against some of these elements with respect to shrink and SNAP and then the last components are those foot faults, which we believe were onetime in nature.

Our final question today is coming from Priya Ohri-Gupta from Barclays.

I know it's a bit early in the process, but I was just hoping that perhaps you could talk to us a little bit about how you're thinking about sort of your credit rating with regard possible considerations for Family Dollar? Would the expectation be to try to maintain your existing rating as you consider these various alternatives? Or would it be to at least maintain investment grade.

Yes. So our investment-grade rating is an important element of our overall sort of financial policy, if you will. We believe that it's too early to get out ahead of ourselves as to what a structure may be or the ultimate outcome of the strategic review. But we believe that given the underlying business, the power of the cash flows generated by this business, the growth -- and quite honestly, how we basically execute our capital allocation is all in line with keeping us in an investment-grade level.

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

Thank you all for taking your time to talk to us today and look forward to catching up down the road.

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