Earnings Labs

Dollar Tree, Inc. (DLTR)

Q1 2025 Earnings Call· Wed, Jun 4, 2025

$97.86

-0.14%

Key Takeaways · AI generated
AI summary not yet generated for this transcript. Generation in progress for older transcripts; check back soon, or browse the full transcript below.

Same-Day

+9.08%

1 Week

+6.31%

1 Month

+17.80%

vs S&P

+13.70%

Transcript

Operator

Operator

Greetings, and welcome to the Dollar Tree First Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the call over to your host, Mr. Bob LaFleur, Senior Vice President, Investor Relations for Dollar Tree. Thank you. You may begin.

Robert LaFleur

Analyst

Good morning, and thank you for joining us today to discuss Dollar Tree's First Quarter Fiscal 2025 Results. With me today are Dollar Tree's CEO, Mike Creedon; and CFO, Stewart Glendinning. 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 26, 2025, 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 2025 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, Mike and Stewart 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.

Michael Creedon

Analyst

Good morning, everyone. Thank you for joining us today. Let me begin my comments by thanking our associates and leadership team for their efforts in delivering a strong first quarter result. In Q1, we delivered upside across every key metric and results exceeded the outlook we provided. Our expanded assortment strategy is having the intended impact of driving incremental traffic, ticket and comp. We also continue to grow the Dollar Tree footprint, recently celebrating the opening of our 9,000th store located in Plano, Texas. As excited as we are to reach this milestone, we're just as excited about the growth runway ahead of us. Turning now to our Q1 results. We are pleased with our performance. Amid increasing volatility, we remain focused on the things that are within our control, and our results demonstrate just how much progress our teams have made in areas like rolling out our expanded assortment, improving store conditions and achieving strong sell-through of seasonal merchandise. Q1 comps and net sales both exceeded the high end of our outlook range, driven by a strong Valentine's Day and Easter. Additionally, the revenue contribution from noncomp stores was up nearly 90% year-over-year, led by ongoing strength in the former 99 Cents Only portfolio. Adjusted EPS from continuing operations came in $0.01 above our outlook range at $1.26, reflecting strong sales and ongoing focus in expense management. Dollar Tree's 5.4% comp was nicely balanced with traffic up 2.5% and ticket up 2.8%. Category performance was strong across the board, with consumables comp up 6.4% and discretionary comp up 4.6%, our highest discretionary comp since Q4 of 2022. We always start with our customer. And today, our customers need us now more than ever. Each week, more shoppers across a diverse range of economic and demographic backgrounds are responding to…

Stewart Glendinning

Analyst

Thank you, and good morning. As Mike mentioned, our latest results reflect continued top line momentum and strong margin performance. Solid execution of our multi-price strategy and expense management has delivered upside relative to our internal expectations and the Q1 outlook that we previously provided. Unless otherwise noted, I'll focus my prepared comments on Dollar Tree's continuing operations. First quarter adjusted EPS from continuing operations was $1.26, which exceeded the high end of our outlook range of $1.10 to $1.25. Turning to results from continuing operations as compared to the same period of last year, our revenue increased by 11.3%, driven by a 5.4% comparable store sales growth and a 7.4% increase in square footage from last year. Adjusted operating income was $388 million, a 1.4% increase from last year. Adjusted operating margin declined 80 basis points, driven by a 20 basis point increase in gross margin, offset by a 100 basis point increase in the adjusted SG&A rate. The gross margin improvement came from lower freight costs, improved mark-on and lower occupancy due to sales leverage from the strong comps. Our SG&A rate was negatively impacted by higher depreciation related to investments in our stores, wage-related payroll increases, general liability claims and utility costs, partially offset by lower stock compensation expense and less temporary labor related to our 3.0 conversions. Our adjusted effective tax rate was 26.1% compared to 24.6%, reflecting increased tax expense for share-based payment awards. Adjusted net income was $270 million compared to $268 million. Moving on to the balance sheet and free cash flow. Total inventory increased $247 million or 10% to $2.7 billion on higher mark-on and inventory receipts as we expanded our multi-price assortment. We ended the quarter with $1 billion in cash and cash equivalents. On the cash flow statement for continuing…

Michael Creedon

Analyst

Thanks, Stewart. History has shown that we have the resilience to emerge stronger from periods of economic uncertainty, and that strength comes from the dedication and adaptability of our associates. In today's rapidly evolving environment, we see a meaningful opportunity to build on that foundation by enhancing our merchandising efforts and further elevating the value we deliver to our customers. Thanks to the hard work and commitment of our teams, I'm confident in our ability to meet customers' needs with our exceptional value proposition, including multi-price and to navigate whatever near-term challenges we may face. Finally, with the sale of Family Dollar set to close here shortly and Dollar Tree setting off on its new journey as a stand-alone business, we think it's appropriate to provide the Street with a refreshed view of our long-term strategy and financial outlook. So we're planning to host an Investor Day in New York on October 15. We'll provide all the invitation details a little closer to the event. And with that, we're ready to take your questions.

Operator

Operator

[Operator Instructions] Our first question comes from the line of Michael Lasser with UBS.

Michael Lasser

Analyst

Given the about $110 million of unanticipated cost between the $70 million in gross margin and the $40 million in SG&A that you will incur in the second quarter, what will be the offset that Dollar General is able to achieve in the back half of the year such that you're able to hold the guidance consistent with what you expected previously? And then on top of that, the only thing that we can say will be constant this year and into the next couple of years is going to be change in volatility. And given how dynamic the environment is and given how your guidance, it does seem like your model is going to be a little slower to react to some of this change such that it could create some more earnings volatility. Why is that wrong?

Michael Creedon

Analyst

Thanks for the question, Michael. First, I'll address the volatility. We believe that over the past years, we've really created a more nimble and flexible company that's able to address the volatility when given enough time. If you look at the first round of tariffs we faced that we started planning for, we were able to offset 90% of that first 10%. And then when you look at where we sit today over the course of the year, we're able to offset those tariffs as well and mitigate those cost pressures using our 5 levers that we are able to absorb it and take care. And so when I look at it and say, there's a near-term piece of that, where you have product flowing in that comes in at a higher tariff rate, Stewart outlined that in his comments. But over time, we're able to make the adjustments, leveraging our multi-price, leveraging country of origin, sometimes choosing not to sell a product and respeccing and negotiating with our suppliers. So we feel that we're more flexible today than we've ever been. And given the right amount of time, we're able to offset those pressures.

Stewart Glendinning

Analyst

Yes. Thanks, Mike. Maybe I'll just jump in and just add a few extra comments on the first part of the question. Yes, look, I mean, we've highlighted $110 million, so we're going to take in the second quarter. We wanted that to be clear for you. Clearly, we've got mitigation strategies Mike has spoken to. And in any normal year, the back half of the year is a bigger part of the year, which gives us the ability to recover. It's probably also worth noting that in the first quarter, we came in ahead, and there is some benefit that will sweep from that quarter into the full year results. And finally, I'd point to the fact that we had a very strong set of comps in the first quarter, and we're guiding to another set of strong comps in the second quarter. So the business itself is performing very well.

Operator

Operator

Our next question comes from the line of Edward Kelly with Wells Fargo.

Edward Kelly

Analyst · Wells Fargo.

So Dollar Tree has successfully operated at a 35% to 36% gross margin for a very long time before you had multi-price point. Are you telling us today that you expect to be able to maintain that level of margin despite current China tariffs at 30% over time. And as part of this, can you talk a bit more about the importance of the various levers of mitigation, especially pricing, and what the rollout of that pricing looks like, such that when do you expect you could be back at that level of margin?

Stewart Glendinning

Analyst · Wells Fargo.

Yes. So let me just jump in quickly on the gross margin side. I mean, we've given you guidance for the year. So clearly, we believe that we are in a position this year to deliver that gross margin. Some of that strength is coming through, as you mentioned, is freight. But we think our merchants have done a terrific job of getting the right assortment. And they're very focused on making sure that the kind of margins that we deliver to the business are not by accident. These are products that are chosen specifically for the performance that we expect.

Michael Creedon

Analyst · Wells Fargo.

And then when you look at the 5 levers, they have to be used in harmony. It's not one outranks the other. It really is taking all 5 of them, and we order them appropriately. We'll first work with our vendors and negotiate. We'll look at respeccing. We've spent the last several years really improving our ability to move country of origin. Sometimes we'll choose not to sell it. And then finally, Ed, yes, we leverage multi-price to be able to make sure that we deliver what our customer wants and needs always starting with the customer, and they're the ones that get to vote in terms of us exceeding their expectations and delivering that value convenience and discovery.

Operator

Operator

Our next question comes from the line of Paul Lejuez with Citi.

Paul Lejuez

Analyst · Citi.

Just a follow-up on Ed's question. Just as far as price points, can you maybe talk about what's happening at the $1.50 price point, and to what extent will that be used as part of the go-forward plan to offset some of these tariffs? And then I'm also just curious about your higher-income consumer, and what price points are they gravitating towards? Are they steering more towards those price points above $2 when they first visit your store?

Michael Creedon

Analyst · Citi.

Yes. In terms of the price points, Paul, we don't see this as a break the dollar moment. We're really focused on what the customer wants from us. And so we're strategic in terms of where we take that price. The 5 levers we have and especially multi-price gives us the flexibility to make sure that if a customer wants that product, we can have that product for them. So this is not necessarily that big switch up the way it was in the past. This is all about us leveraging our 5 leverage and leveraging multi-price to deliver for the customer. I go back to that AUR comment, you're still at an AUR of $1.35 and 85% of the store less than $2. And as far as the higher income customer, we love that we added 2.6 million new customers in Q1. And when you look at the majority of that growth coming above $100,000 income, we believe they're loving the expanded assortment that multi-price provides. So the customer is getting what they want across all income cohorts and yes, the multi-price really resonates with that higher income customer.

Operator

Operator

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

Simeon Gutman

Analyst · Morgan Stanley.

So my first question, can you tell us, Mike, you said the $1 to $1.35 evolution over time. Can you tell us or have you told us what the AUR is in the 3.0 stores and then not related, but regarding the TSA, is whatever you're incurring you're going to get fully reimbursed? Are there is some risk that you spend money and you don't recoup that? Is there something to negotiate within that TSA?

Michael Creedon

Analyst · Morgan Stanley.

I'll let Stewart handle the TSA question. On the AUR, we provide that for -- across the chain. The $1.35 is across the chain. I didn't break that up between the different 3.0, 2.0, 1.0. Stewart, do you want to handle the TSA?

Stewart Glendinning

Analyst · Morgan Stanley.

Yes, absolutely. Maybe just -- I'm going to give you a little bit of an expanded answer just so you can look at the total. I mean we've got a group of people who work in our shared center. Some of those people will go to Family Dollar. They will be conveyed to Family Dollar on the very first day. That cost disappears from our P&L. There will be some people who remain inside of our business and who will perform services for Family Dollar. To the extent that they perform services related to Family Dollar, the cost of their salaries, other benefits and other related costs will all be reimbursed to us by Family Dollar. And at the end of that TSA period, so more of those people will then potentially go over to Family Dollar. After all that said and done, you'll recall in our last call -- last quarter, we're targeting over the medium term to get down to about 2% SG&A as a percentage of revenue.

Operator

Operator

Our next question comes from the line of Matthew Boss with JPMorgan.

Matthew Boss

Analyst · JPMorgan.

Congrats on a nice quarter. So Mike, could you elaborate on the breakdown of your mid-single-digit first quarter comp? And maybe more specifically, I think what stood out is the almost equal contribution from traffic and ticket. Have you seen that balance continue into the second quarter? And if we were to bottoms up build your comp from here, should we expect both traffic and ticket to contribute as we think about the back half of the year and multi-year?

Michael Creedon

Analyst · JPMorgan.

Yes. As I look back -- thanks, Matt. As I look back on -- in Q1, we were very pleased. We got a lot of questions after the last call about the 3% to 5%. And really, we talked about a number of things. The holiday calendar much better this year. Last year was the worst holiday calendar. You have it every 7 years. And so we knew the holiday calendar, especially with Easter later, which allows for better weather for Easter, more outdoor activities, et cetera. And then for us, having that multi-price in the season, remember, we only started multi-price. We just anniversaried it in February. So having multi-price in the assortment really adds to the discretionary and adds to the seasons and the events that are the driver of Dollar Tree. So being able to bring holidays and seasonal events to the table with multi-price just makes it that much more attractive to our customers. As far as the balance, we want to see that balance. We know multi-price drives the ticket. We want to see that expanded assortment, driving people into our stores as well. We want to create a sticky relationship with that customer, such that we can count on them in the future. So we really will strive to balance traffic and ticket as much as we can, knowing that multi-price does have an impact on that higher ticket.

Operator

Operator

Our next question comes from the line of Rupesh Parikh with Oppenheimer & Company.

Rupesh Parikh

Analyst · Oppenheimer & Company.

So just going back, I guess, to the sales and comp guidance for the year. You guys beat on -- you beat the high end of your Q1 comp guidance and you also guide to the high end of -- high end for Q2. Just curious why the reiteration of the guidance versus maybe raising it? Does it reflect conservatism or maybe some high-level thoughts on why you maintain the range?

Stewart Glendinning

Analyst · Oppenheimer & Company.

So Stewart here. Look, in the last quarter, we got a bunch of questions about how could we put out such a range and somebody actually had the audacity to say, we're putting down a range that we wanted the Street to -- that the Street wanted to see. And I'd say we were really pleased to see that the quarter turned out as strongly as it did, and we're pleased to see that, that strength, we believe, will go through the second quarter. And I wouldn't -- there was no reason to take it up given that we still think that, that's a good range for the year. But we did want to make sure that for the second quarter, a quarter in which we were going to see some higher costs because of the current tariff and some investments in store that you'd be able to see that this was being done in concert with a very strong performance from the business. And for that reason, we wanted to make sure you realize that we would be towards the upper end of the range.

Operator

Operator

Our next question comes from the line of Chuck Grom with Gordon Haskett.

Charles Grom

Analyst · Gordon Haskett.

A couple of questions for me. Just on multi-price. Can we talk about how the 1.0 and 2.0 stores are comping so far in the first quarter? And then, Stewart, on the SG&A guide for the year, you took it up pretty significantly. It looks like about $40 million of that or 20 basis points is here in the second quarter. But can we talk about the overall increase and the factors driving that?

Michael Creedon

Analyst · Gordon Haskett.

Yes. Just in terms -- Chuck, in terms of the different formats, it gets tougher and tougher as we convert more and more of the chain over, but what we saw in the first quarter was our 3.0 continue to be our strongest performance. But the entire chain, the 1.0 to 2.0 have all lifted. So if you look at the kind of gaps between them, they get a little bit tighter, but only because the 1.0 and the 2.0 are performing stronger and our full multi-price 3.0 store, which we continue to invest in, covered 500 stores. Those continue to be the strongest performers. And then, Stewart, in terms of the SG&A, do you want to take that?

Stewart Glendinning

Analyst · Gordon Haskett.

Yes, absolutely. I think that if you look at SG&A, broadly, the cost increases follow the kind of cost increases that we shared last quarter. But the biggest one of these -- on the biggest 2, if you just looked at them by a long shot, is store payroll and depreciation. And what you're seeing in the balance of the year is that increased investment in store, which we think will have a good payback. When you go back to last quarter, we said that we would have 50 to 80 basis points on the year, and now we're saying it's 100 to 110. So just think about that as the uplift in the range. And as I said, I think this is really a big spend in a manner that we expect to have a good return.

Operator

Operator

Our next question comes from the line of Scot Ciccarelli with Truist Securities.

Scot Ciccarelli

Analyst · Truist Securities.

A follow-up question on the $70 million impact on COGS from the 145% tariff. You seem to be talking about it as kind of a onetime-ish item, but still guiding the full year to the same net income. So I guess my question is, are these costs you guys have to eat and somehow you're making it up later in the second half on an operational basis, so that's an ongoing benefit? Or are you somehow calling back those specific dollars in the back half?

Michael Creedon

Analyst · Truist Securities.

Yes. I'll go first here. I think you've got to look at how we deploy our toolkit and our 5 levers. When you think about negotiating, when you think about respeccing, especially country of origin, those take a little more time. When given the right amount of time, we're able to mitigate these costs as we did with the first 10%, as we will do with this 30% and 10% over the course of the year. In the near term, as you work all 5 levers, there is a period of time where you get some near-term disruption. So that's what you're seeing from us. Stewart, I don't know if you want to add anything?

Stewart Glendinning

Analyst · Truist Securities.

Yes. I mean -- to go to some of the specifics, I mean, this is not about all onetime and all and no ongoing. This is sort of a mix of both, right? We have some costs, which because of timing will be onetime. We've talked about the investments we're making in store. We don't believe that those will be enduring. So think about that as sort of more of a bubble in this year that perhaps has some decline next year. The tariffs, we don't know. We're assuming that those will be ongoing. So the actions we're taking in the back half are a bit of both. Some of it is clawback of onetime and some of those changes that we're making, you will see will provide enduring benefit to the business.

Operator

Operator

Our next question comes from the line of Seth Sigman with Barclays.

Seth Sigman

Analyst · Barclays.

Obviously, a very strong quarter. I am curious specifically on conversions. I just wanted to go back to that. I think you mentioned 150 basis point lift this quarter. I'm not sure if that's exactly apples-to-apples with prior disclosure, but does it seem like that lift is moderating? Any more perspective on that? And then as you think about what happens after the first year of the conversion, how do you think these stores are going to comp? Do they continue to outperform?

Michael Creedon

Analyst · Barclays.

Yes. In terms of the conversions, as I did say, it tightened a bit, but not because of the overall strength of the 3.0 stores. They continue to perform incredibly well. But our 2.0 and our 1.0 stores are also improving. And what gets harder and harder is we convert more of the store. And then our learnings from 3.0, we will deploy in other stores. So if you think of the seasons and you think of multi-price 3.0 stores getting the Easter expanded assortment, every store got that. There's elements of multi-price now that goes into every store. And so we're seeing great results from the 1.0 and the 2.0. But in reality, the more we convert and the more we take our learnings of this expanded assortment across the entire chain, the harder it gets to kind of break them down. And then in terms of how they perform over time, we continue to see that the longer you're on multi-price, the stronger your comps perform. We just hit an anniversary in February. We'll continue to take the learnings and apply them across the chain. And we're really pleased -- most importantly, we're pleased with what the customer is seeing and saying in terms of voting with their footsteps and with their basket.

Operator

Operator

Our next question comes from the line of Zhihan Ma with Bernstein.

Michael Creedon

Analyst · Bernstein.

Might be on mute. All right, we'll go to the next question, operator.

Operator

Operator

Our next question comes from the line of Kate McShane with Goldman Sachs.

Katharine McShane

Analyst · Goldman Sachs.

We wanted to ask a little bit more about inventory and the composition of inventory. Of the 10% increase, can you talk to how much of that increase with dollars versus units? And just how you're thinking of managing the inventory into the second half just given a lot of the disruption that has come as a result of tariffs, if you're experiencing any kind of delays or any kind of disruption and how you feel about second half being in stock?

Stewart Glendinning

Analyst · Goldman Sachs.

Well, let me pick up on the numbers and Mike can talk about the quality of the inventory for the back half. But look, we haven't really broken down inventory by units. We did say, obviously, you can see it in the financials that we're up about 10%. There's a little bit of tariff impact in there. Obviously, as you think about stuff that's been received, we did have some period where we were getting hit with 145% tariffs. All that early tariff money is actually sitting in the inventory. So there's a piece of that in there. But we're not going to comment on the actual units. I can probably also say, by the way, that to the extent that multi-price as increases its penetration in our inventory, then you can assume that there are fewer units because the dollars will add up faster with multi-price items than they would with $1.25 items.

Michael Creedon

Analyst · Goldman Sachs.

Yes. And just in terms of quality and availability, Kate, I mean our global sourcing team and our merchant team are just incredible. It is amazing to me how they're able to navigate so well. And we believe we've got a unique opportunity here as these new customers find us. 2.6 million new customers found us in Q1, and we want to create a great first impression for that customer, and we want to create a sticky relationship with that customer for years and years to come. And so as a result of that, that great first impression needs to be product that they love on the shelf, somebody there, ready to check them out in a timely manner. We're committed to making sure our customer has a great experience, both for the customers that shop us all the time and have been with us throughout our history and those new ones that are finding us today and seeing the exciting thrill of the hunt that Dollar Tree provides better than anyone. So I'm pleased with how well we've navigated that, and we're going to work incredibly hard to make sure we make a great first impression.

Stewart Glendinning

Analyst · Goldman Sachs.

One other thing, Mike, I just comment on and Kate, I should have mentioned this earlier, but part of the inventory increase also relates to the fact that we have 496 more stores this year than we had last year. So naturally as the company grows, so the inventory will follow.

Operator

Operator

Our next question comes from the line of John Heinbockel with Guggenheim Partners.

John Heinbockel

Analyst · Guggenheim Partners.

Mike, 2 related things. Where are we on the journey to multi-price point freezer/cooler, right? Because I think the plan was to get to 80% of doors 3, 4, 5 eventually. Where are we there? And then what's your philosophical thought on regional pricing versus national pricing, either at $1.25 or multi-price?

Michael Creedon

Analyst · Guggenheim Partners.

Yes, John, great questions. In terms of the freezer/cooler, it is a significant part of our multi-price strategy. That being said, freezer/cooler is in every store. We've got restricted leases in some. We've got some areas where it isn't the right option for the demographics that we have there. We do play with the doors. So you may see in some areas, [ $7.25 ] doors and then a 3, 4 and 5. In other stores, you'll see [ six $3 ] doors and then [ two 4s and two 5s ]. So we do play with that as part of the demographics and where we best fit with the customer. And then in terms of zone pricing, as we look out into the future -- I call it zone pricing. As we look out into the future, we believe that there is an assortment play here. It isn't one size fits all, where you can provide a very compelling relative value is a little bit different in California than that may be in Kansas. And so as we look out to the future and becoming more nimble and leveraging this expanded assortment to meet what our customer needs which, as we know, does vary a bit. I believe that's on the edges, primarily, we're a retailer that people love for its consistency. And so we'll keep doing that. But there is an opportunity here to take our expanded assortment and meet the specific demographics of a certain area. It's a great point.

Operator

Operator

Our next question comes from the line of Peter Keith with Piper Sandler.

Peter Keith

Analyst · Piper Sandler.

Mike, as you're pushing deeper into multi-price with more stores. Are you finding any need that you have to invest more in labor? And on a related note, too, do you see any opportunity to invest more in advertising to drive some of the awareness of new items coming into stores?

Michael Creedon

Analyst · Piper Sandler.

Yes. So first of all, as we go deeper into multi-price, the way we put ours, if you will, into the store is based on sales. And so we've been very pleased to see that the performance in sales, these stores are earning their hours. And when I say earning their hours, we're not having to put in place something above and beyond to deliver multi-price. We have that initial reset costs that we continue to go, but look at that as a onetime cost per store. And then after that, the sales are really strong, and they're earning their labor, which we just love to see. In terms of advertising, it's incredible to me to see on TikTok and see on Instagram. I mentioned this, I think, on the last call, but Dollar Tree dinners, unbelievable, 12 million views. So we look at that and say, we've never had to advertise at Dollar Tree. We believe very strongly in our community and in our word-of-mouth, but we know that we've changed the inside of the store, and we are looking at how we can enhance, how we can capture the social impressions that are occurring and how we can take to the next level making sure everyone knows, across all income levels, what is so exciting inside of Dollar Tree.

Operator

Operator

Our next question comes from the line of Robby Ohmes with Bank of America.

Robert Ohmes

Analyst · Bank of America.

Great quarter. I wanted to just follow up on the seasonal as a driver. It looked like it crushed it in the first quarter. In the second quarter, is it -- is the impact of seasonal expected to be just very similar to what it was in the first quarter? That would be my first. And the second question is just and it's kind of been asked already. But just more info on the 100,000 customer you guys are bringing in, like, where were they shopping before? Who do you think you're taking it from?

Michael Creedon

Analyst · Bank of America.

Yes. So Robby, Q2 for us is the -- if you look at our comps traditionally, that's your weakest quarter. You don't have the big drivers. Dollar Tree is all about the seasons and the holidays, the celebrations. Q4, you get Thanksgiving and Christmas. In Q1, right out of the gate, Valentine's Day and Easter and Mother's Day and grads. Q2, you get a little red, white and blue. But until we get to back-to-school, in Q3, you don't have that real, you have to go to Dollar Tree. So Q2, from a seasonal standpoint is typically the weakest. You see that in the balance of discretionary and consumables. And so for us, that is traditionally a weaker quarter for us, and we would expect that to continue. But as you look at multi-price and what we're changing inside the store, we're shifting those dynamics, and we're really giving the customer a reason to come see that expanded assortment 12 months out of the year. And so really excited to see how that plays out this Q2 in only the second -- the first anniversary of what we had in multi-price. And then in terms of this higher income cohort customer, we're really happy to see them. And we want to make sure we delight them, exceed their expectations and create a sticky relationship with them. And we believe that while we help with our pack sizes, we help with our incredible value, every shopper live their lives better across all income cohorts, we are now attractive due to multi-price, due to our expanded assortment to everyone across every income cohort.

Operator

Operator

Our next question comes from the line of Zhihan Ma with Bernstein.

Zhihan Ma

Analyst · Bernstein.

Sorry about the cutoff just out. So a longer-term question on your philosophy around global sourcing, which has been really an underpinning for your success in the past. Now that we're in a deglobalized environment, I guess that's how it looks like from here, does anything change from a strategy and philosophy perspective? And specifically on China, how important is China to you today? And do you expect that to change going forward?

Michael Creedon

Analyst · Bernstein.

Thanks, Zhihan, no problem at all. The -- if you're committed to delivering value, convenience and discovery, and that's thrill of the hunt discovery, so surprising the customer. If you're committed to delivering that, as we are, then global sourcing is critical to providing that. And for us, it's the lowest landed cost. So we -- our global sourcing team will look and find that lowest landed cost. And we look at all countries as partners that can help us deliver that lowest landed cost. And in different years, that shifts a little bit in terms of the country of origin and where we put our biggest bets and our biggest weight, but just know that it will always be to deliver the lowest landed cost because that's how you then turn around and deliver that value to the customer.

Operator

Operator

Our next question comes from the line of Kelly Bania with BMO Capital Markets.

Kelly Bania

Analyst · BMO Capital Markets.

Just wanted to go back to the incremental costs in Q2 that you called out. And just to make sure I understand how much is due to the extreme 145% tariff level during that period. I think there was a comment also about store investments. And I just wanted to also understand what is driving the SG&A, the $40 million in SG&A there? And I guess, in addition, can you just talk about what are the drivers for the gross margin expansion that you are calling for in the second half?

Stewart Glendinning

Analyst · BMO Capital Markets.

Okay. So Stewart here, let me take both of those up. So first of all, as it relates to the tariffs, a big -- there was a big impact in the second quarter from those few weeks of 145% tariff. That money really adds up at that rate. But it's comprised of both the higher rate and the lower rate that we see now. To be honest, the tariff area is very complicated to calculate. And it's the reason why we've been so explicit in the guidance just because using average rates to try to get there and understanding the timing of how this works through the inventory is very difficult. So it's a big component of the second quarter. And the $200 million for the year is a good estimate. When we look at the SG&A costs, those, as I mentioned, you should think about those as seeing those in the second, third and fourth quarters, but we would expect those to start to unwind next year so that we don't think these are higher cost that we live with forever. We do have a range of commercial efforts in our stores as we look for strong execution and a strong back half, we're putting -- we're putting more store hours and more labor in to accomplish that. And we've done it knowing that we think we're going to see a strong payback. The second thing was the drivers for the gross margin, and I spoke to that in an earlier question, but the big drivers for the gross margin pickup in the back part of the year are similar to what we saw in the first quarter with some benefits expected from freight with some offset coming from shrink and markdown.

Operator

Operator

Our final question this morning comes from the line of Joe Feldman with Telsey Advisory Group.

Joseph Feldman

Analyst

Wanted to ask with regard to the inventory, can you share a little more color about how you're planning it for the balance of the year and where you are in terms of presumably, back-to-schools probably landed at this point, but kind of how the staging for the holiday -- through the end of the year for holidays? And what are those kind of breakpoints time-wise, when you need to have the goods and how you're just planning for that? And again, just your inventory levels for the balance of the year?

Michael Creedon

Analyst

Yes, Joe, as I look at planning out, I'll go back to we want to create that great first impression. And so our merchant teams and our global sourcing teams are focused in quite crazy times, our focus on making sure our customers find those products on the shelf. So yes, back-to-school already in hand. We -- before you know it, you'll be setting Halloween and then Christmas in the stores. And so we have brought in freight early. Certainly, as you look at what our stores are being asked to do, we're putting some extra hours there to make sure they can execute this. If we have a very traditional flow of product, this is not a traditional year, and we are definitely seeing some of that product flow early, which we want to make sure we process well, and so we've invested in some -- in the stores to make sure that the great moments for Dollar Tree, which are the back-to-school, the Halloween, harvest, Thanksgiving and Christmas that we exceed our customers' expectations with great product on the shelf. So we're -- it's a keen focus of ours, and we're looking to make sure we get product in so that we can satisfy that demand from the customer.

Operator

Operator

Thank you. Ladies and gentlemen, we have come to the end of our time for questions. I'll turn the floor back to management for any final comments.

Michael Creedon

Analyst

Yes. Thank you all for joining the call today. Great questions, and look forward to talking to you soon. Thanks so much.

Operator

Operator

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.