Greetings. Welcome to the Dollar Tree Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Robert LaFleur, Senior Vice President, Investor Relations. Thank you. You may begin.

Good morning and thank you for joining us today to discuss Dollar Tree's Second Quarter Fiscal 2024 Results. Before we begin, I'd like to let everyone know that our CEO and Executive Chairman, Rick, has been under the weather for the past few days and his voice has not yet fully recovered. He's here listening to the call today and sends his regards, but has asked our Chief Operating Officer, Mike Creedon, to step in for him today. At the end of our prepared remarks, Mike will join our CFO, Jeff Davis, for the Q&A session. We wish Rick a speedy recovery and I know he looks forward to chatting with you all again next quarter. So, with that, 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's discussion and analysis of financial condition and results of operations sections in our Annual Report on Form 10-K filed on March 20th, 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 second 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, Jeff and Mike 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 one question. I'd now like to turn the call over to Mike.

Thanks, Bob. Good morning, everyone. This is Mike Creedon. I'm Dollar Tree's Chief Operating Officer and I'm happy to pinch-hit for Rick this morning. When Rick first joined Dollar Tree as Executive Chairman and again last year when he became CEO, he told you that he came here to lead a transformation with the primary goal of helping this company realize its full potential. He's also said that transformations are rarely easy or linear and that is especially true for a company as large as ours that is navigating through one of the most challenging macro environments we've ever seen. That said Rick and all of us on the senior leadership team believe very deeply in this transformation and the positive impact we're having in the areas we control. We also believe very deeply in the importance of providing the high-quality, low-cost products that individuals and families need in a convenient and comfortable shopping environment. We are also committed to serving the communities where we operate. And most importantly, we are aware of the awesome responsibility we have each and every day to serve our customers, associates and shareholders. Clearly, we are not pleased with our second quarter results or having to revise our full year outlook. But this updated outlook reflects how the challenging macro environment continues to pressure our customers. It also reflects some revised financial estimates that we will discuss shortly. That said, we will also talk about several areas where we are performing well and where our transformation initiatives are taking hold. And I will share where we are heading as a company and why we are still so excited about our future. So, let's get started. Sales came in towards the low end of our outlook range. Family Dollar's comp was in line, but Dollar…

Thank you, Mike, and good morning. I'll start off by discussing our second quarter results, after which I'll provide some comments on our third quarter and fiscal 2024 outlook. Where applicable, I will focus on our adjusted results. A reconciliation of our non-GAAP adjusted results is provided in our earnings release. Second quarter results obviously fell short of our expectations. Our adjusted EPS of $0.67 was $0.38 below the midpoint of our June outlook. Of that $0.38, $0.30 was attributable to the general liability adjustment, while the remaining $0.08 was attributable to the flow-through from the sales shortfall, mostly in the Dollar Tree segment. As Mike indicated, Dollar Tree's comp softness was primarily on the discretionary side of the business and reflected the increasing effect of macro pressures on the purchasing behavior of the Dollar Tree's middle and higher income-customers. Our original second quarter outlook did not anticipate those pressures migrating to Dollar Tree's customer base to the degree that they did. Turning to the business results on a consolidated basis. Adjusted operating income was $218 million, a 24% decrease from last year. Adjusted operating margin decreased by approximately 90 basis points to 3%, reflecting an 80 basis point increase in gross margin, offset by a 180 basis point increase in adjusted SG&A rate. Gross margin improvement came primarily from lower freight costs, partially offset by unfavorable sales mix and higher occupancy costs. Adjusted SG&A increased primarily from the general liability adjustment, higher depreciation, temporary labor for Dollar Tree's multi-price rollout, higher utility costs, and sales deleverage, partially offset by lower incentive comp cost. Our adjusted effective tax rate was 24.2%, compared to 24%. Adjusted net income was $143 million and adjusted diluted EPS was $0.67. Let me take a step back and offer additional details around the general liability…

Thanks, Jeff. On behalf of Rick and the entire senior management team, I want to thank our teams for their continued hard work in a very challenging macro environment and for supporting our strategic review of Family Dollar. Our strategic review is looking at the full range of alternatives for Family Dollar with a focus on clearly demonstrating the full value of our two distinct franchises. Despite significant headwinds, our Dollar Tree banners comp remains positive even as they lap two years of extremely strong performance. Our non-multi-price stores were modestly positive this quarter and our newly converted multi-price stores produced a 4.6% comp. This is one of the best multi-year comp performances in all of retail. Most importantly, we have just begun to roll out our expanded multi-price SKUs and we still have thousands of stores to convert to our new format. On top of that, we're opening hundreds of brand new in-line multi-price stores this year and plan to do so for many years to come. In light of all this, we continue to believe that Dollar Tree is one of the strongest platforms in all of retail with many years of strong comp and store growth still ahead of us. Operator, with that, Jeff and I are ready to take questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] One moment, please, while we poll for your questions. Our first question comes from the line of Michael Lasser with UBS. Please proceed with your question.

Good morning. Thank you so much for taking my question. So putting aside what has been happening at Family Dollar, the core Dollar Tree banner has a number of tailwinds, such as multi-price point, freight improvements, and others, yet a series of unexpected items that have indicated to be one-time in nature have consistently been dragging down the earnings of this business. So, at what point can it move past the one-time in nature items and be on a consistent glide path forward? And as part of that, what is an updated realistic operating margin for core Dollar Tree if it is a long-term low-single-digit comp grower? Thank you very much.

Yeah. Good morning, Michael. This is Jeff. I'll take a portion of that question regarding general liability and some of the other elements. You point out, I think, a very valid point. The general liability adjustments we had to take is one that we're not happy with. It's one in which, as I had mentioned in my remarks, it is very complex as a result of how these claims develop over time and having new information around that. We believe that the adjustment that we've taken today reflects not only that historic performance, our current outcomes as it relates to how these claims are developing, but we're also making sure that we're not anticipating any improvement in these claims experience on a go-forward basis. Thus, we feel more confident around the adjustment that we've taken reflects the current liability that is sitting out there for, once again, not only these existing claims, but the claims that have yet to be reported. That's the best way I can respond to that to you to Michael, that we believe we now have this behind us. The second portion of your question, I believe, was around where do we think the operating margins of the long-term operating margins of the business would be. As we continue to drive multi-price and we're going to continue to drive higher gross profit dollars per transaction, we believe that as we move forward and we get beyond some of the higher transformation costs that we're experiencing right now as it relates to some of the IT investments that we're making, supply chain investments, that we'll be able to achieve the outlook that we had provided previously on the longer-term basis for the business. I don't want to give any longer-term view of the business other than what we've already given. In our outlook for the quarter, we said that, once again, Family Dollar, I'm sorry, Dollar Tree is going to be low-single-digits. We said that the, one second here, in our financial let's see if I can find it real quick.

And while Jeff's doing that, Michael, the mix we see too on the multi-price, remember, it comes in heavy consumable first because that's what we could get in the short order. As you look to enter the back half of the year with the holidays, you get that discretionary benefit from the multi-price rollout.

Yeah, I found it here, Michael. I just want to make sure that I quoted this appropriately. As it relates to 2024 outlook, we still believe that the gross margins on the Dollar Tree business will be in the range of 36% and the flow-throughs that we've had previously, we said on a consolidated basis, the SG&A will be approximately 26% and the SG&A outlook on the Dollar Tree segment already reflects the additional costs that we've had as it relates to the approximately 2,800 stores that we're going to convert to multi-price. That's the other headwind that we have currently in the business as we're using third-party labor for that.

Thank you. Our next question comes from the line of Edward Kelly with Wells Fargo. Please proceed with your question.

Yeah. Hi, guys. Good morning. So I want to just take a step back given the, I guess, the overhangs and the questions that investors really have at this point. As you think about multi-price point at Dollar Tree, how confident are you that some of the weakness we've seen recently is just macro as, opposed to push back on the multi-price point strategy? I know you have the conversions that are doing well, but I think $3 and $5 are in many more stores. Just curious, just like what you think consumers are really saying there? And then you had optimism around Q4. So, when do you think you can start to turn the corner? And then the other thing is Family Dollar, and I don't know what you can say, but is there anything you can tell us around your confidence in your ability to come to some resolution in that business that is accretive to shareholder value? Thank you.

Yeah, and it's Mike. I'll take the first one. We said we're still in the early innings of multi-price and I'll tell you that we like what the customer is telling us with multi-price. So we're surveying our customers, we're listening to them. They're telling us with their comps. I highlighted how strong our multi-price stores are performing compared to stores that just have the $1.25. And we're really growing traffic. We're adding new customers and our customers are letting us know that they like the product. And then when you look to the second half, we really think they're going to like the discretionary product. So we've seen it as our stores have set. Our associates are our customers and our associates are telling us they love this multi-price product. They're excited about the holiday season and all that. So we'll continue to learn as we go. We've made changes. As I mentioned in my prepared remarks, we're a couple of hundred stores behind where we are. That's because we want to be better. We want to get it right when we roll them out. And so, we took the approach. We added some, call it, milestones or stop gates to say, we're not going to convert a store unless that store is ready to be converted, so we can improve what the customer sees when they come in and the overall performance of the multi-price stores. And then, Jeff, I'll let you talk to the FD strategic.

Yeah. Just a couple of things to add to that. If you think about the Dollar Tree segment, last year this time, we added over 2 million new customers. We're now lapping that. We continue to add beyond that. So it is absolutely resonating with the customer. If you think about the fact that we continue to maintain our market share in this environment at a time when we're actually seeing customers contract their spend, it's not that we are seeing, it's a combination of things. So we're seeing contraction of spend. We're not seeing necessarily a loss from a competitive standpoint. So we continue to add new customers, maintain market share, continue to resonate with the customer when Mike had spoken about the new in-line conversion stores, that multi-price delivering 6%-plus comps in consumables and even positive almost a 3% comp in discretionary. So very, very favorable for us. As it relates to Family Dollar, we're excited about what we're seeing in Family Dollar also. From a standpoint of we're starting to actually see some discretionary improvement, we believe we're beyond the biggest headwinds that we've had with respect to the customer with SNAP. We're continuing to see improvement in shrink. We've invested in people time, technology and systems on the Family Dollar side and this proof points are really starting to deliver and improve shrink results there. The customer is resonating with a number of the resets that we've had. It's just that customer right now is under some of the more significant budget pressures and they're working through it. And when we're seeing that customer use all tenders, not only that may be government assistance, but also using credit where it makes sense.

Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Hi. Good morning, everyone. Mike, I wanted to start with Dollar Tree. Thinking about multi-price rollout, can you remind us what's the timing of the rollout? Why can you go quicker and if labor is a constraint, does it make sense to hire your own? And then was there any rhyme or reason for the first 1,600 stores, so thinking about what the results could look like further downstream as you get further along the way?

Sure, Simeon. So there's two pieces to this. One is the bandwidth of our own internal team to get these stores done with both the new store openings we're doing, renovations we're doing, and the multi-price rollout. That's why we really leaned on third-party to take off as much as we could and go as quickly as we could. The other gating process is, as we turn our distribution network on with multi-price that then feeds the stores that we convert. So there is a little bit of a gating factor in terms of the product coming in, the DC being set for multi-price and being able to service those stores. So we'll do when you look at it, we set a couple of hundred behind this year. So instead of 3,000, that's 2,800 or more. But then there's another 300 new stores that open up multi-price as well. And you'll see a similar cadence each year as we go through to all stores that we can put multi-price in. So it's really a question of our own bandwidth to process it and then our ability to work with vendors to get it into our DCs and get it out to the stores. I'll tell you, Simeon, when we do the execution right, the only challenge we have is keeping up with the product, because the customers love it.

Thank you. Our next question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question.

Great. Thanks. So, Mike, at the Dollar Tree banner, could you elaborate on the softening progression of same-store sales in the second quarter? And any change in trends that you've seen so far in the third quarter? And then just larger picture, I guess, maybe could you speak to performance versus plan in the roughly 80% of your doors at Dollar Tree outside of the 1,600 converted stores? I think you cited these as flattish comps this quarter. But pre-pandemic, 2017 to 2019, Dollar Tree banner comps were pretty consistently in that 3% run rate. Just how best to think about the difference in the core doors relative to pre-pandemic performance?

Sure, Matt. Good morning. So, first, in terms of the trends, I think it's a little bit of the, I call it, the who, the how, and the what. The who is the income level. While we saw in Family Dollar early that the low-income pressured shopper, we saw that drift up and materially drift up in the second quarter as the middle income, the greater than $125,000, that person started feeling the pressure as well from the macro environment. And then the how, they shifted to buying for need versus buying for want. And so really that showed in our discretionary mix, leaning towards consumables. And then finally, the what. This started with sensitivity on big ticket items and has come all the way now to us as people have maybe changed how they celebrate a party this summer, fewer guests, fewer parties. They're really tightening their belts and the macro economy is driving them to behave a bit differently. And so when we look at all those things together, that really pressured us. As you look then at how we exit and where we go, I'll tell you, Q2 is always one of those quarters where there's really no holiday. All you have is 4th of July, whereas Q3, we get back to school and Halloween. And then when you look at Q4, you get that harvest, you get Christmas, and really that demands you go to Dollar Tree. It's we help people celebrate their lives and so that gets our people coming in. So those were the trends. And as we look out, I think, Jeff would say, our current trends reflect our overall forecast right now. And then finally, on the core doors, I mean, I would tell you, I still think, yes, they were in that 0.5%. But you look at some of the two-year stacks, when you really look at the multi-year performance of these stores, I think, it's some of the best in retail. And as we roll out the multi-price, we really feed that thrill of the hunt and we get it to more doors. They come in for the thrill of the hunt on the multi-price and we get to sell the rest of the store. So I really think we end up getting that boost to the core from the rest from the rollout of multi-price.

Thank you. Our next question comes from the line of John Heinbockel with Guggenheim Securities. Please proceed with your question.

Hey, Mike, couple of quick things. When you look at those 1,600 stores, can you touch on volume, right, in that comp, right, the unit throughput, the multi-price point penetration? And then when you think about consumable, right, so at Dollar Tree, the consumable share gains, right, kind of flattened out a little bit. Do you think that's more, it's more you, do you think it's the competition? And what's the plan for I know you want to get to eight of 10 doors multi-price point. I think you're at three today. What's the plan now to get there, go faster, go slower? What's the thought?

Yeah. So, to the first one, as we roll out the 1,600, right now, you get that mix, where early on, it's consumable and then we go into the full kind of set for this year that gets into the discretionary. And we'll get to like 15% penetration in the store in terms of the multi-price penetration in the store. And then, John, on share gain, I mean, we're growing. Our unit market is growing. Our dollar market's growing. We are taking share in a belt-tightening environment, but we continue to be incredibly relevant to the customer. And I would say, we continue to be needed by the customer as they adapt to the macro conditions. And then in terms of where this could go, you have a steady rollout. We continue to learn from the rollout, and a big part of why we're behind 200 stores on the rollout was we simply won't convert a store that's not ready to convert. It's something we learned from the early rollout. There was this tendency to kind of, hey, we can muscle through this. And when we saw, remember, Rick talked about 50% absolutely, 25% are in line and 25% are behind. In order to try to influence that, we changed our process to say, we're not going to muscle through, we're going to make sure a store is ready to convert and ready to realize the full potential of the multi-price when we execute it. And we'll continue to learn from the rollout and make changes as we go.

And then, John, on the Family Dollar side, while the consumable comp did flatten out a little bit, I would say, in contrast, on the discretionary side, we also saw some flattening out of the decline in discretionary, continue to see the resets that we're doing in that particular area where we're focusing on expandable consumption at price points that is very attractive for the customer, given their needs is starting to resonate for us. And these comps, once again, are on top of last year some of the highest comps that we had for the last year.

Thank you. Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Thanks. Good morning. On the stores that have been converted, Jeff and Mike, can you unpack that 4.6% comp lift between traffic and ticket? And then can you also talk about the four-wall profitability of those stores as you've progressed on the rollout? If you pull out the SG&A dollar growth for the entire Dollar Tree banner, ex the general liability, is up 10% year-to-date. Curious how the four-wall profits are looking with the higher cost to roll that multi-price point effort out. Thank you.

Yeah. So, great questions there, Chuck. If I unpack some of these, as it relates to the stores that have converted, and you mentioned the 4.6% comp there, we haven't given the detail between traffic and ticket. As we look at it, overall, it's really being driven by traffic. Ticket here right now is flat at best with the Dollar Tree and it is, in those particular stores also, ticket, if you can imagine the, when you have a multi-price item in the basket, you also still have a number of $1.25 items and it's the increased traffic that's coming in, that basket is staying relatively flat overall, but we're really being driven by traffic. As it relates to the SG&A, I think you very appropriately pointed out. The headwinds in SG&A, other than the general liability, has been as a result of the, what we call, other payrolls, that third-party labor that we're using to implement the stores. We're going to have that this year. We'll have it next year. We had called it out previously as a headwind of $0.20 plus this year as a headwind to our overall EPS. The other area that's impacting our SG&A is absolutely on the depreciation side. And it's the cumulative investments that we've been making, not only in new stores, but in other initiatives as it relates to supply chain and IT. Those investments are starting to level off as we've gone that much further in the overall transformation. And as we move forward, we'll be giving you other estimates as we look forward to subsequent years. But we're not updating any forecast at this point in time.

Thank you. Our next question comes from the line of Paul Lejuez with Citi. Please proceed with your question.

Hey, thanks, guys. On the macro pressures that you cited, Dollar Tree's middle, higher-income consumers, do you think that customer is shopping less overall or you think they're going somewhere else? And I wondering if you think you need to change anything on the pricing side or how fast you roll out multi-price. And then, second, I'm curious if you can talk about whether you're taking any actions behind the scenes to separate aspects of the Dollar Tree and Family Dollar business that might have some sort of P&L impact or if you plan to do that over the course of the year as you think about the strategic review of Family Dollar? Thanks.

Yeah, Paul, I'll take the first one and I'll let Jeff tackle the separation of business. So, this is macro belt tightening. I mean, we see it, we see we're growing traffic. We see the 2.8 million new customers we've added. We hear the feedback on multi-price and that they love that they can get more, we get more share of their wallet, they can, not have to drive somewhere else to fill in the shop. But they're really changing, as you look at some of the discretionary, in Q2, we saw some changes in terms of how they celebrate. And that is just belt tightening by our consumer and one that we feel they need us more now than ever. And so, we'll be there to help them celebrate as they do need the discretionary and go back to a little more celebration and invite more people to a party and doing all the things that really the kind of the holidays demand. Jeff?

Yeah. Just to add to that, one of the things that we do, we try and double-click on a number of different things that we're seeing from our overall customer base based on customer insights. And we continue to see customers buy more, so they're expanding their consumption, and we see individuals who are contracting their spend. Right now, because of this macro belt tightening, you see more people contracting than actually expanding. But that is more the issue, as Mike said, it's belt tightening. It's not, from a competitive standpoint, those individuals net shopping elsewhere. As it relates to Family Dollar and the strategic review, we continue to operate both businesses with the intent of continuing to maximize shareholder value in order to grow both. As we had mentioned earlier, even last quarter, we had decided that we were going to shift some of the investments as it relates to new store openings and some of the renovations, tilting a little more towards Dollar Tree versus Family Dollar. But other than that, we continue to operate the two businesses with the expectation that, once again, we are bullish on both. The question probably didn't go this far, but I think it's probably easiest to address this at this point in time on the strategic review. We are looking at a wide range of operations, including those that would include outside parties and those that would, we should be able to execute by ourselves. And we're very pleased at the progress we're making on that strategic review at this point in time.

Thank you. Our next question comes from the line of Krisztina Katai with Deutsche Bank. Please proceed with your question.

Hi. Good morning and thanks for taking the question. Jeff, I wanted to ask if this challenged consumer backdrop that we've been seeing is changing the way that you view if any incremental investments might be needed in the business, just thinking about the overall value engineering, labor, store standards? And as you see the belt tightening, as you noted, just how do you think about core Dollar Tree's value proposition and how do you see the evolution in the back half, just given peers' greater markdown activity? Thank you.

Yes, Krisztina. As we think about this, we want to manage the business for the long-term. And these are different, in this period of time, where we're seeing some belt tightening, doesn't mean that this is not, this has an impact on the, this sector of this business longer term. The investments that we're making around store standards, the investments that we're making with respect to our rollout of the multi-price, we believe is all core to providing a great experience for the customer, a convenient opportunity and delivering value. So we feel as if, as we work through this, we have a, we're mindful of what the current macroeconomic environment is, but we also understand that we need to remain true to our transformation and how this will deliver value over time.

Thank you. Our last question will come from the line of Scot Ciccarelli with Truist Securities. Please proceed with your question.

Good morning, everyone. So, you guys took some tougher medicine at Family Dollar over the last couple of quarters. And it seems like the profit performance at Family Dollar actually has started to improve a bit once you get through the adjustments. But Dollar Tree seems to keep suffering from additional issues and expenses quarter-after-quarter. Would it make sense to do a harder reset at Dollar Tree and Dollar Tree expectations, whether that's through store closures, fully or permanently resetting labor costs, et cetera. Because I think investors tend to despise the death of a thousand cuts. Thanks.

I think the best way we think about this is, this quarter, we saw a pullback in a higher-income customer. We believe that we are positioned appropriately to meet that customer's needs over time as they're looking for value. We believe our multi-price offering is what's going to give us that support. The investments that we're making as it relates to, once again, store standards and other things that we're doing is part and parcel to making sure that we deliver the experience that the higher-income customer is looking for. We will continue to be diligent and disciplined as we think about those investments on a go-forward basis, but we believe that it is in line with what we need to deliver over the long-term.

Yeah. And as I look at just the new stores we opened, the renovations we're doing, and then when you talk about more than 3,000 stores that we'll touch this year, that is an investment in our store standards. That is making our stores better for our customers. And so we look and we like what that future looks like. We like the ability to kind of touch the chain every year and get back on a track of really showing our customer that we care by bringing in new things that excite them, new things that wow them, and really true to who Dollar Tree is. So, I mean, I look at it and say, our customer needs our business more than ever and we're continuing to evolve the business to meet them where they are.

And the last thing I'll add is, if you think about the 99 Cents store acquisition that we did of leases, yes, we've had some higher-than-expected upfront costs, but we are really excited about these 161 stores that we've been able to acquire. They're in the markets that we believe we need to be in at very attractive overall lease rates. We believe that we have the credibility and latitude to grow very aggressively in these particular areas. These stores are of the size and scale that other stores that we've had in this type of situation have been able to outperform against the broader portfolio. So while there's some short-term pain here as we kind of work through this. We'll be very excited about what this is going to deliver for us once again over the long-term.

Thank you. We have reached the end of our question-and-answer session. I would now like to hand the call back over to management for any closing comments.

Thank you, everyone, for your time this morning, and thank you for all our Dollar Tree and Family Dollar associates out there serving our customers and we look forward to speaking to you again next quarter.

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.