Dollar Tree Inc . (NASDAQ:DLTR) reported its financial results for the third quarter, falling short of earnings expectations. The company's earnings per share (EPS) came in at $0.67, significantly below the forecasted $1.06. Despite a 3.5% increase in total net sales to $7.6 billion, the market reacted negatively, with the stock dropping over 16% in pre-market trading.
Key Takeaways
- Dollar Tree's EPS of $0.67 missed the forecast of $1.06.
- Total (EPA:TTEF) net sales rose by 3.5% to $7.6 billion.
- The stock fell by 16.14% in pre-market trading.
- Dollar Tree's multi-price stores contributed significantly to sales.
- Family Dollar segment showed improvement in operating income.
Company Performance
Dollar Tree reported a 3.5% increase in total net sales, reaching $7.6 billion. The company continues to expand its multi-price 3.0 format, converting 720 stores in the third quarter, which now account for 30% of its total net sales. Despite these efforts, the company's EPS fell short of expectations, reflecting ongoing challenges in the retail sector.
Financial Highlights
- Revenue: $7.6 billion, up 3.5% year-over-year
- Earnings per share: $0.67, down from forecasts
- Adjusted operating income: $343 million, a 14% increase
- Adjusted operating margin: 4.5%, up 40 basis points
Earnings vs. Forecast
Dollar Tree's actual EPS of $0.67 fell short of the forecasted $1.06, representing a miss of approximately 36.8%. This significant gap highlights ongoing challenges in meeting market expectations, contrasting with previous quarters where the company had been more aligned with forecasts.
Market Reaction
Following the earnings report, Dollar Tree's stock experienced a sharp decline of 16.14% in pre-market trading, dropping from $81.65 to $68.47. This movement reflects investor concerns over the company's ability to meet earnings expectations despite positive sales growth. The stock's performance is also notable given its 52-week range, with a high of $151.22 and a low of $60.49.
Company Outlook
Looking ahead, Dollar Tree expects fourth-quarter net sales to range between $8.1 billion and $8.3 billion, with full-year net sales projected at $30.7 billion to $30.9 billion. The company anticipates low single-digit comparable sales growth and has provided adjusted full-year EPS guidance of $5.31 to $5.51. Strategic initiatives, including the continued expansion of the multi-price format, remain a focus.
Executive Commentary
Interim CEO Mike Creighton emphasized the company's value proposition, stating, "Value always resonates with the customer." He also highlighted the importance of retail fundamentals, noting, "Retail fundamentals are the key to unlocking value." Creighton remains optimistic about Dollar Tree's competitive advantages and strategic direction.
Q&A
During the earnings call, analysts inquired about Dollar Tree's strategies for mitigating potential tariff impacts and the performance of the multi-price rollout. Executives addressed margin challenges and discussed future leverage opportunities, providing insights into the company's strategic focus and leadership transition.
Risks and Challenges
- Supply chain disruptions, including a tornado-destroyed distribution center.
- Pressure on lower-income customers affecting sales.
- Continued market saturation and competitive pressures.
- Potential impacts of tariff changes on product pricing.
- Navigating economic uncertainties and consumer spending shifts.
Full transcript - Dollar Tree Inc (DLTR) Q3 2025:
Conference Operator: Greetings, and welcome to the Dollar Tree Q3 20 24 Earnings Call and Webcast. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. 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, Bob.
Bob LaFleur, Senior Vice President, Investor Relations, Dollar Tree: Good morning, and thank you for joining us today to discuss Dollar Tree's Q3 fiscal 2024 results. With me today are Dollar Tree's Interim CEO, Mike Creighton 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 ks filed on March 20, 2024, our most recent press release and Form 8 ks 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 Q3 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, Mike 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 one question. I'd now like to turn the
Mike Creighton, Interim CEO, Dollar Tree: call over to Mike. Thanks, Bob, and good morning. I want to welcome everyone to today's call. This is my first time speaking to you as Interim CEO, following our recent leadership transition. I'm honored that the Board has named me to this role at a critical time in our transformation.
To all our stakeholders, please know that I take this responsibility very seriously and with great humility. I also want to thank Rick Dreiling for his leadership and the support he provided to all our associates and leaders. From all of us at Dollar Tree, we wish him the very best. As an organization, our top priorities remain accelerating the growth of Dollar Tree and finalizing the strategic review to identify the optimal ownership structure for Family Dollar. Executing against these objectives is the first priority for this leadership team and our Board.
Throughout the strategic review process, we have maintained our operational focus and driven meaningful improvements in Family Dollar sales productivity and profitability. Our ultimate goal remains positioning both banners for long term success and unlocking value for Dollar Tree shareholders. At the Dollar Tree banner, we're converting stores to our in line multi price 3.0 format, opening new stores and improving the in store experience through renovations and customer service enhancements. We believe there is ample runway ahead for Dollar Tree to meaningfully grow its square footage over a multi year horizon. Value always resonates with the customer and that is why our business model has stood the test of time across decades and multiple economic cycles.
We have made good progress on store conditions and operations, but there is more work to be done. At the end of the day, retail fundamentals are the key to unlocking value at Dollar Tree, and I'm confident that we have the right team in place to deliver improved merchandising execution and store standards. One of the things that originally attracted me to Dollar Tree was its culture and clear understanding of what we do and who we serve. We offer unparalleled value and convenience for our customers and our scale provides us with a unique competitive advantage through our procurement power and distribution reach. We empower our associates and support their career aspirations or as we like to say, this is a career, not a job.
And it is my responsibility to ensure that every aspect of our culture supports this goal. From the many stores and DCs that I've visited in my 2 plus years at Dollar Tree and from the time I've spent here at home in the store support center, it is clear to me that our leadership team and dedicated associates are aligned and our objectives are in focus, position Dollar Tree for sustainable growth and create value for our fellow shareholders. While I've already talked to many of you in the investment community, I look forward to getting to know many more of you in the days and months ahead. With that, I'd like to share our Q3 highlights and update you on several of our key initiatives. As a reminder, we said that 3rd quarter results were in line with expectations when we announced our leadership transition in early November.
In Q3, our Dollar Tree and Family Dollar merchandising efforts produced tangible results and sales came in at the high end of our outlook range. Total net sales got a big boost from our non comp stores with Dollar Tree non comp sales contributing over 3 times more revenue this year. This reflects the increased pace of Dollar Tree store openings overall and the especially strong out of the gate performance of the $0.99 only portfolio. Dollar Tree's comp improved sequentially over Q2, driven by market share gains and positive trends in both traffic and ticket. Family Dollar's comp also improved sequentially with its first positive discretionary comp since 2022.
Turning to the current environment and tone of business, customers continue to seek value and many are focused on buying for need and buying closer to the time of that need. We continue to see evidence of belt tightening, particularly among lower income customers and to a lesser extent among middle and higher income families with young children. While this dynamic remains a discretionary headwind, it does create some opportunities across both banners in consumables as consumption data shows lower and middle income households are increasingly shifting more of their spending toward food at home. Given these trends, it's worth reminding everyone of the strong value proposition we offer at Dollar Tree. A customer that walks in to a typical Dollar Tree store will find over 90% of the products in the store priced at $1.25 So we offer a powerful solution for customers looking to stretch their dollar.
Moving on to Dollar Tree's multi price rollout, we converted another 7 20 stores to the 3.0 format in the quarter, bringing the total number of converted stores to approximately 2,300. The converted stores produced approximately 30% of Dollar Tree's total net sales in Q3 and continue to produce comps nicely above our portfolio average. The multi price 3.0 stores in aggregate produced a 3.3 comp in the quarter with a strong 6.6 consumables comp and a modestly positive discretionary comp. Importantly, comps at these stores are being driven by traffic and ticket in roughly equal proportion. Focusing in on some Q3 category highlights at our 3.0 stores, we saw a 7 comp across our full seasonal assortment, including a 10 comp for Halloween specific products.
Looking out to the balance of the year, we expect to convert an additional 300 to 400 stores to the 3.0 format by the end of Q4. This will put us a bit below the 2,800 figure we provided last quarter, but we are taking our time to ensure that each store is ready for conversion before we give it the final green light. To reiterate what I said last quarter, it's better to get the conversion done right than to get them done fast. That being said, including converted and newly opened stores, we will have approximately 3,000 multi price 3.0 stores open and operating by year end, including most of the former $0.99 only stores. And speaking of the former $0.99 only stores, we are just about done with the integration of this portfolio.
To date, we've converted and reopened 158 stores as Dollar Tree and should finish up the remaining handful of stores by the end of this month. The strong initial sales performance of these stores confirms our original optimism about the quality of these assets and their locations across California and the Southwest. Stepping back and looking at our real estate efforts more broadly, we are well on our way towards meeting our full year goal of opening 600 to 650 new stores. Through the end of Q3, we've opened 567 new stores with over 85% of those coming under the Dollar Tree banner. Year over year, we have increased our Dollar Tree store base by over 7% and still see a long growth runway ahead of us given the growing market resonance of multi price.
In supply chain, our team continues to do outstanding work in the face of challenges related to our DC in Marietta, Oklahoma that was destroyed by a tornado. The biggest challenge is elevated stem miles across our network. On top of that, absorbing 158 new 99¢ only stores within a relatively concentrated geography required additional resource allocation. While our newly reopened DC in West Memphis has helped to relieve some of the network pressure, additional measures are needed to restore the network to peak efficiency. To this end, we are working to add new capacity to our network, including replacing the capacity we lost in Marietta.
Unload times continue to improve at the stores using rotocarts out of our DCs in West Memphis, Matthews, North Carolina and here in Chesapeake. In Q3, our proactive steps to reduce shrink delivered year over year improvements at both banners, particularly Family Dollar. While the expansion of multi price at Dollar Tree has necessitated some stepped up shrink mitigation efforts, we still saw modest reduction in shrink during the quarter. Now let me recap some of the operational highlights from the quarter. On a consolidated basis, net sales increased 3.5 percent to $7,600,000,000 and adjusted diluted EPS was 1.12 dollars Looking at performance by banner, Dollar Tree segment comp increased 1.8% on a 1.5% increase in traffic and a 0.3% increase in average ticket.
This was Dollar Tree's first positive ticket comp since Q4 of 2022. Dollar Tree's Q3 consumable mix was 49.9%, a year over year increase of 150 basis points. Mix had been shifting towards consumables by over 200 basis points in each of the previous 4 quarters, so this is clearly a step in the right direction. Consumable comp was 6.2%, which came on top of an 11.1% comp. Snacks, beverages and candy were the best performing categories.
Discretionary comp declined 1.8%, reflecting consumers' ongoing focus on needs based purchases. Discretionary comp was modestly positive at the multi price 3.0 stores in the quarter. Hardware, electronics, healthcare and personal care were our best performing discretionary categories with additional strength seen in Halloween and textiles at the 3.0 stores. Our soft discretionary demand was consistent with trends we saw across the broader retail industry during the quarter. Based on Nielsen data, Dollar Tree's consumables market share gain accelerated in the quarter with growth in dollar volume outpacing the industry by 4.80 basis points and unit volume outpacing by 280 basis points.
Before moving on to Family Dollar, let me take a moment to comment on Dollar Tree's recent performance in the context of broader market trends. Given Dollar Tree's particular consumer product and price point mix, its comps are running below our long term run rate expectations. We attribute this to the unique challenges our customers are facing at this point in the economic cycle, which might not necessarily be aligned with the cycle timing at other retailers. Whether looking at comps or store growth, we believe our multi year results stack up well against any retailer in the country. With a 2 year comp stack of 17%, our consumable business is as strong as ever, but that is only half of Dollar Tree's business.
The other half is discretionary, and these are the categories where shoppers have pulled back the most given the cumulative impact of the economic pressures they feel. Moving on to the Family Dollar segment, comp increased 1.9% with the gain driven almost entirely by traffic. Average ticket was flat after 3 consecutive quarters of declines. Consumables comp increased 1.3%, which came on top of a 6.2% comp increase last year. Discretionary comp increased 3.7%, which was a 540 basis points sequential improvement over Q2.
More importantly, Q3 was Family Dollar's 1st positive discretionary comp since Q4 2022. Children's apparel, electronics and hardware were the best performing discretionary categories. We believe Family Dollar's positive discretionary results are the direct result of our targeted merchandising efforts. In recent quarters, we adjusted our pricing strategy with more emphasis on value and higher frequency purchase items like everyday home essentials. As part of this strategy, we increased the number of items priced at or below $5 We updated our in store signage and shelf strips to better communicate our price value image, and we identified additional ways to optimize our planograms to drive sales and space productivity.
These initiatives are clearly resonating with our core Family Dollar customer, and we are seeing the positive results at the cash register. We are also pleased to report that Family Dollar's renovation and store conversion program is generating positive results. Since the beginning of the program in 2022, we have completed over 1500 projects and year to date comps are up by high single digits at our H2.5 format stores and by double digits at our urban extra small box format stores. As a reminder, these formats feature customized product assortments that better meet the needs of our diverse customer base. For example, H2.5 stores include additional coolers, expanded seasonal offerings and an enhanced shopping experience with customized end caps and space optimization that drive better unit economics.
Lastly, on Family Dollar, we estimate reduced SNAP benefits were a 30 basis point comp headwind in the quarter. While overall SNAP payments were down by 5% nationally in Q3, we think the comp headwinds from SNAP will continue to moderate over the balance of the year. Shifting gears, we have received questions about the potential impact of tariffs in the new administration. While the situation remains fluid and the exact nature, scope and eventual timing of any new tariffs is not yet clear, we are prepared to act on multiple fronts. Rick McNealy and his team of merchants have many years of experience successfully navigating a variety of tariff landscapes.
Back in 2018 2019 when we last dealt with this issue, we were able to mitigate the majority of the potential impact by negotiating lower costs with our suppliers, changing product specs or pack sizes or dropping non economical items. Today, all three of those options are still at our disposal. On top of those, we now have detailed plans in place to shift supply sources from most of our products to alternate countries and multi price gives us additional flexibility on our product assortment. Based on our scale and our past history of navigating through similar challenges, we believe there is a wide range of potential actions that we can take to help mitigate additional tariffs if and when they materialize. With respect to freight, markets continue to be relatively stable, particularly in relation to domestic freight.
On ocean freight, we continue to manage through a fluid environment despite disruptions over the past year in the Red Sea and Panama Canal, as well as the strikes at North American ports. Regarding potential strikes, we're proactively managing our seasonal imports in the event that the East and Gulf Coast ports workers don't approve their tentative contract by the current January deadline. I also want to comment briefly on the proposed Department of Labor overtime rule. Last month, a U. S.
District Court in Texas struck down the proposed rule in a decision that applied nationwide. The court invalidated both phases of the threshold increase, the one from this past July and the pending one for next month. We absorbed the first increase back in July and won't reverse that change. It remains to be seen whether the current administration will appeal the ruling in its waning days or if the incoming administration will revisit the issue, but we are prepared for various scenarios. We remain committed to completing the formal review of strategic alternatives for Family Dollar, which could include a potential sale, spin off or other disposition of the business among others.
The process is moving forward as planned. While good progress is being made by the team, there remains no set deadline or definitive timeline for completion and at this time we can't comment on any specific outcome. We will continue to share updates when we have new public information. The guideposts of the review remain as always to maximize shareholder value through finding the optimal structure for each banner. We have made solid operational progress at Family Dollar over the past few years, even as our core customer was navigating their way through an extremely challenging macro landscape.
We're proud of the work we've accomplished to date and we look forward to the next steps in the review and for the business. Before I turn the call over to Jeff, I'd like to offer a few high level comments about the current tone of business and our outlook for the balance of the year. Jeff will cover this in greater detail in his remarks. Our merchandising teams have laid the foundation for a successful year end holiday season. We're especially excited by our expanded Christmas assortment at Dollar Tree and our ability to deliver exceptional value to consumers at a wider range of price points.
While the response to our expanding multi price assortment continues to be positive, the Q4 got off to a softer start given the election and later than usual Thanksgiving timing. That said, we remain optimistic about December. While there are 5 fewer selling days in total between Thanksgiving and Christmas this year, we should get some extra help from Christmas falling in the middle of the week. Our merchant and operation teams have done an excellent job preparing for the holidays. The stores look great and our merchandise assortment is more compelling than it's ever been.
Even with these moving pieces, we are confident in our ability to deliver low single digit comps in the 4th quarter at both the Dollar Tree and Family Dollar banners. Before I wrap up, I am sure you saw our announcement earlier this morning that Jeff Davis will be stepping down as Chief Financial Officer. The company has launched an external search and to facilitate a smooth transition, Jeff has agreed to remain on board through the filing of our 10 ks. Ideally, we plan to announce a successor prior to his departure. We thank Jeff for his service and appreciate the contributions he has made to the business during his time with Dollar Tree.
With that, I'll turn the call over to Jeff.
Jeff Davis, CFO, Dollar Tree: Thank you, Mike, and good morning. Before I discuss the details of our 3rd quarter results, I want to extend my thanks to our Interim CEO, Mike Creeden our former Chairman and CEO, Rick Dreiling my finance team and the extended Dollar Tree management team. During my time here, I've had the privilege of working with talented colleagues, navigating exciting challenges and celebrating many milestones along the way. I'm proud of what we've accomplished together and I'm confident in this management team and the business strategies that are in place. I remain energized about the future possibilities for both Dollar Tree and Family Dollar.
With that, let's get back to business. As usual, I'll start with a discussion of our quarterly results, and then I'll provide our outlook for the balance of 2024. Where applicable, I will focus on our adjusted results. A reconciliation of non GAAP adjusted results is provided in our earnings release. 3rd quarter adjusted EPS increased 16% to $1.12 Overall results benefited from sequential top line improvement at both banners and positive discretionary trends at Family Dollar.
Turning to the business results. On a consolidated basis, adjusted operating income was $343,000,000 a 14% increase from last year. Adjusted operating margin increased by approximately 40 basis points to 4.5%, reflecting a 120 basis point increase in gross margin, offset by a 80 basis point increase in adjusted SG and A rate. Our adjusted effective tax rate was 23.8 percent compared to 21.8%, reflecting lower workers' opportunity tax credits in the current year. Adjusted net income increased 13% to $241,000,000 Now let's move to our business segment results.
At Dollar Tree, adjusted operating income decreased 3% to $466,000,000 Adjusted operating margin decreased 140 basis points, driven by a 60 basis point increase in gross margin, offset by a 180 basis point increase in adjusted SG and A rate. Gross margin improved primarily from lower freight costs, partially offset by markdowns and higher distribution costs. Adjusted SG and A expenses increased primarily due to higher depreciation and temporary labor for the 3.0 rollout. At Family Dollar, adjusted operating income was $10,000,000 compared to an adjusted operating loss of $66,000,000 last year. Adjusted operating margin improved 220 basis points on a 130 basis point increase in gross margin and a 90 basis point decrease in adjusted SG and A rate.
Gross margin increased primarily from lower freight costs, lower markdowns from the OTC recall last year and lower shrink. Adjusted SG and A rate decreased primarily from lower payroll and lower store supplies. Moving on to the balance sheet and free cash flow. Total inventory was $5,500,000,000 flat to last year, with cash and cash equivalents of $698,000,000 and senior notes of $3,400,000,000 our balance sheet remains strong. Our bank defined leverage at quarter end stood at approximately 2.4 times.
On the cash flow statement, we generated $786,000,000 from operating activities compared to $506,000,000 last year. Capital expenditures were $426,000,000 versus $541,000,000 last year. Our free cash flow improved by $395,000,000 over last year. We ended the quarter with no borrowings under our revolver and no commercial paper outstanding. Year to date, we repurchased approximately 3,300,000 shares of common stock for approximately $404,000,000 which is consistent with our year to date free cash flow generation of $389,000,000 At quarter end, we had approximately $952,000,000 remaining under our existing share repurchase program.
Now let me provide some perspective on our Q4 and full year expectations. The current outlook reflects the following. As Mike mentioned, November comps got off to a slow start. We believe part of this was the so called CNN effect, something we've seen in prior cycles where customers defer shopping trips to closely follow the ins and outs of a national election. Also, Thanksgiving fell in the 4th week of November this year versus the 3rd week of last year.
As such, customers didn't start their Thanksgiving shopping until later in the month. There are also 5 fewer shopping days between Thanksgiving and Christmas this year. However, Christmas falls on a Wednesday this year versus Monday last year, which does help extend the selling season. All of this was factored into our plans and we feel good about our position leading into the Christmas home stretch. With that as a background, for the Q4, we expect net sales will be in the range of $8,100,000,000 to $8,300,000,000 based on low single digit comp sales growth for the enterprise and both the Dollar Tree and Family Dollar segments.
Adjusting for stores closed as part of the portfolio optimization and the extra week in the Q4 of fiscal 2023, we expect 4th quarter net sales for Family Dollar to decline by 10% to 12% on a year over year basis. We expect adjusted EPS will be in the range of $2.10 to $2.30 For the full year, we expect net sales to be in the range of $30,700,000,000 to $30,900,000,000 based on low single digit comp sales growth for the enterprise and both the Dollar Tree and Family Dollar segments. Adjusted for stores closed as part of the portfolio optimization and the extra week in the fiscal 2023, we expect full year net sales for Family Dollar to decline by 3.5% to 4.5% on a year over year basis. Adjusted EPS for the full year is expected to be in the range of $5.31 to $5.51 In the interest of time, I will direct you to our supplemental financial presentation, which is available on our IR website for the remaining details that support our current outlook. With that, I'll turn the call back over to Mike.
Before I go, I want to acknowledge our associates who were affected by hurricanes Helene and Milton.
Mike Creighton, Interim CEO, Dollar Tree: Those in the affected areas faced significant challenges and many of them were personally and directly impacted by the storms. While rightly concerned about themselves and their families, they nonetheless stepped up to serve others. The two storms closed over 1800 of our stores, but within a day or 2, 2 thirds of those stores were back open and serving their communities. The resilience, dedication and commitment of our associates to their communities is inspiring. By quickly reopening these stores to provide essential services to those in need, our associates truly demonstrated what it means to live our values.
Finally, I also want to take the opportunity to thank all of our associates and team leaders during this especially important holiday season. In the face of a challenging and rapidly changing landscape, I am extremely proud of the contributions made by each and every one of our associates. As a result of all your hard work, we expect to turn in a very good year end and a very bright future lies ahead for our business. With that, we're ready to take your questions.
Conference Operator: Thank you. Our first question is coming from Michael Lasser from UBS. Your line is now live.
Michael Lasser, Analyst, UBS: Good morning. Thank you so much for taking my question. I have a 2 part question on your earnings outlook moving forward. The first part is you obviously had some one time items this year that should come back next year. So as you see today, is there anything that should stand in the way for us to simply add the impact of these one time items to your base earnings next year?
And the second part of that question is the 2 wildcards might be anything that happens with Family Dollar. So how should we think about that potentially impacting your earnings outlook? And then tariffs, what's the downside case to your earnings for next year from tariffs? Thank you so much.
Mike Creighton, Interim CEO, Dollar Tree: Thanks, Michael. I'll let Jeff handle the one time and the FD and then I'll jump in on the tariffs. But Jeff? Yes.
Jeff Davis, CFO, Dollar Tree: Good morning, Michael. On the one time, as we had discussed last quarter, those items would be added back to sort of a base level for going into FY 'twenty five. And then as it relates to the 2nd part, which was around Family Dollar. As it relates to Family Dollar and the strategic review, we're not giving any guidance as to what that might how that might impact us in 2025 at this point in time. There are a number of factors that you had mentioned we'd have to work through, but it would be inappropriate for us to make any discussions or points of adjustment at this point in time.
Mike Creighton, Interim CEO, Dollar Tree: And Michael, on the tariffs, it's still unclear what will make its way to policy. But we managed through this before, Rick McNealy and his team in 2018 2019. They did a very good job of mitigating the vast majority of the impact with only a few levers to pull. Back then, the choices were they could change some of the specs on the product, they could negotiate furiously with our suppliers or they could eliminate the product altogether. They still have all three of those levers to pull and yet we add to it now, we've done a tremendous amount of work over the years looking at alternative countries of origin.
Our China Plus One strategy basically backs up our key categories so that we could move if we needed to. And then finally, we've got multi price. Multi price gives us the ability to flex where we need to, if a certain product becomes something that we've got to move in the market to be competitive.
Conference Operator: Thank you. Next (LON:NXT) question is coming from Edward Kelly from Wells Fargo (NYSE:WFC). Your line is now live.
Michael Lasser, Analyst, UBS: Hi. Good morning, everyone.
Mike Creighton, Interim CEO, Dollar Tree: Mike, I was hoping, can you talk
Michael Lasser, Analyst, UBS: a little bit more about the softness that you mentioned in November? I know you started the year, you were pretty optimistic around Q4 and I think a lot of that was around the seasonal product for holiday. So have you seen that bounce post Thanksgiving? And I guess the question that I'm really trying to get at is how much optimism is in the forecast for an improvement off of November? Can you just try a little bit more help related to all that?
Mike Creighton, Interim CEO, Dollar Tree: Sure, Ed. One of the keys we're seeing is, and I mentioned it earlier, our customer is focusing on their needs. And we see that in our consumables. I mean, it's an incredible, the growth we've seen in our consumables, both Dollar Tree and Family Dollar. And when you look at the multi price, and we ran a 6.6 in consumables on Dollar Tree multi price.
So the customer is clearly buying for need and she is also buying what we call closer to need. So we saw this in Q3. As you saw a cadence built, as we got to Halloween, which occurred at the end of the quarter, you could see the strength with which she showed up in terms of buying at the end. We ran a in multiple, we ran a 10 comp for Halloween specific products. So that buying for need and then buying closer to need.
And then as you look at Q4 and how it unfolds, we saw it with Thanksgiving. I mean, it came at the end. I always take the foil pans, which are such a key component of Thanksgiving for us. The last week was just incredible. So we see her getting closer and closer to the need.
And then what we're trying to do in terms of the balance of the rest of the quarter is really balancing that, okay, there's 5 fewer days, yes, But there are also you've got more days before Christmas when you move it to the middle of the week. And so we have a wide range in the Q4, but that contemplates that balance of her buying for need and then buying closer to the need and how that unfolds, especially with the 5 fewer days. But the set is fantastic, especially when you look at the holiday set, what we're seeing in toys, what we're seeing in trimming hard, trim a gift, trim a tree. We really like the cadence we're seeing of the customer as she navigates through this holiday.
Michael Lasser, Analyst, UBS: Thank you.
Conference Operator: Thank you. Next question is coming from Matthew Boss from JPMorgan. Your line is now live.
Michael Lasser, Analyst, UBS: Great. Thanks. So Mike, maybe could you speak to customer demand trends across income cohorts best you can decipher out? Any notable trends you're seeing between consumables and discretionary? And just for perspective, were comps at the Dollar Tree banner positive in November?
And then, Jeff, on the conversions, I guess, is there a way to elaborate maybe on top line and margin performance versus your initial plan? And just the mindset for further slowing the rollout this year and what the expansion looks like for next year?
Mike Creighton, Interim CEO, Dollar Tree: Yes. I'll take the first part and Jeff to take the margin. When you look at the customer cohort, our low end customer is definitely pressured. We see that. We see that she is clearly focused on consumables.
We see a rise in the Eat at Home, which helps us and you see that in our consumables comp. And then the low the middle income and even the higher income is still feeling some pressure. And basically, when you look at a year ago, they were cutting out big purchases, TVs, things like that. If you look at early part of this year, they started eating more at home and cutting going out. Now they're reducing some parties and we see that or the party is not as big and they don't invite as many people as they did.
So we're seeing that throughout. But I think when you look at the share we're taking and you look at Dollar Tree and Family Dollar as an answer for this customer, as they're pursuing need and closer to need, we like what we're seeing from that customer. The shift is tough. It is really tough to start the year when you have Thanksgiving later and all those days are comping against days from last year that are different in the calendar. It's look, it happens every 6 years.
It's one of the things that we have to deal with. And it definitely is a reason for the soft start. But when we double click and we look into fall and Thanksgiving sell through, When we double click on some of the early subcategories for Christmas, we believe that we're set up really well for the Q4 and our guidance implies that we'll hit that low single digit in both Family Dollar and Dollar Tree.
Jeff Davis, CFO, Dollar Tree: Yes, Matt, as it relates to the conversions, we've talked about this in prior quarters, but if you think about our stores as being a little bit of a bell curve, we've got the stores that are far exceeding our expectation with respect to multi price across not only consumables, but discretionary and some of those that are laggards. But as we think about on the quantum of the business, it is absolutely meeting our expectation. What we're really excited about, Mike has been talking about it is, as we've been transitioning now into the time of the year where discretionary is a much more important complex for our customer purchases, We're actually seeing a customer really lean into our multi price and that's something else that's very attractive to us. The merchant teams have done an extraordinary job of going out and sourcing and determining how to bring good value to our customers. From a margin perspective in the Q3, we actually saw the impact of multi price being more muted than what we thought it would be, meaning that the margins came in stronger for us.
And a lot of that is that once again that mix and the discretionary versus the consumables is what we're seeing.
Conference Operator: Thank you. Next question is coming from Rupesh Parikh from Oppenheimer. Your line is now live.
Various Analysts, Analysts, Various: Good morning. This is actually Erica Eiler on for Rupesh. Thanks for taking our question. So I wanted to dive a little bit deeper into Family Dollar. So traffic picked up.
You talked a lot about the positive inflection discretionary. So can you talk about your confidence in being able to sustain the momentum on both these fronts?
Mike Creighton, Interim CEO, Dollar Tree: Sure. Yes. It was a really nice quarter at Family Dollar. And one of the things I mentioned in my remarks earlier is that we feel that, yes, you've got some of the snap that you're sun setting over time, but it's still an impact. We feel the actions we took and the team took to really improve the discretionary, move a little bit on the discretionary side to the, if you will, the consumable side of discretionary, the things that people will buy more often and buy each year or each quarter within the discretionary.
We feel that that's set and the resets that we've done to the stores, targeted end caps that really provide the customer with what they need, we believe those are long lived. We believe that the actions we're taking today help us as we go through. And then the changes to the stores, when you over 1500 renovations now, our 2.5s, which is our latest and greatest format, I mean, the comps are fantastic and really fueling it. And then the XSBs, which is this urban smaller footprint store is resonating incredibly well with the customer. Those changes are long lasting.
Those are the ones that really help us.
Conference Operator: Thank you. Next question is coming from Jihan Ma from Bernstein. Your line is now live.
Various Analysts, Analysts, Various: Thank you very much for taking my question. I wanted to ask on the multi price side of things. I think last quarter you mentioned more mid single digit comp list for the Q1 and Q2 conversions. Can you talk about the cadence of the multi price rollout, how the Q3 conversions compare to the Q1 and Q2? Has there been some sort of a deceleration given that we're seeing a more low single digit comp sales lift this quarter?
Thank you.
Mike Creighton, Interim CEO, Dollar Tree: Sure. First of all, the customer response has been incredibly positive to multi price. If you look, the basket has 5 more units in it. It's nearly double the value of a traditional Dollar Tree basket, and we're seeing more trips from the customer in terms of our typical customer, which means they're really embracing that treasure hunt of what they'll find on the next visit via multi price. In terms of the cadence, not all conversions are created equal.
When you're going if you look at Q1, the vast majority of those stores were going from what we call a 1.0. So just $1.25 They don't have Dollar Tree Plus. They don't have the 3, 4, 5 coolers. And so they're going from a 1.0 all the way to a 3.0. And we look at Q2, that was kind of balanced across the 2 cohorts, going from a 1.0 to a 3.0 versus a 2.0 to a 3.0.
When I look at the Q3 and this is where the decel comes in, we were 75% coming from a 2.0 to a 3.0. And as we look out, we have to convert them by distribution center. And so when you pick a distribution center that's heavily geographically weighted on Ohio or Pennsylvania and New York, you also tend to hit maybe some of our harder geographies and you hit stores that already have Dollar Tree Plus. So what we've done is we look out over next year is we're really trying to balance that out so that we keep a perspective of that 1.0 to 3.0 and 2.0 to 3.0 in terms of the balance. One of the things I'm most encouraged by though is as multi price unfolds, the stores from Q1 continue to be our strongest, Q2 second strongest and then Q3.
So the longer they're on multi price, the more the customer finds it and the more the customer shops it and the better the experience is. And then finally, one of the when you look at some of the geographies of going from 1.0 to 3.0 as we did in Q1, they got the very best of the learnings of Dollar Tree Plus from the last couple of years. And so as we go back, we now take those Dollar Tree Plus learnings and we revisit other Dollar Tree Plus stores and we're upgrading. We're taking some categories out or some SKUs out and we're adding in ones that resonate better, categories that were a bigger hit or SKUs that really resonated with our customer and help them. So this is we're 9 months into this.
This is still test and learn, but we like what we're learning and we love what the customer is experiencing and the feedback that they're giving us.
Conference Operator: Thank you. Next question today is coming from John Heinbockel from Guggenheim Securities. Your line is now live.
John Heinbockel, Analyst, Guggenheim Securities: Hey, Mike. Couple of things. If you can talk about the performance of the non-three point zero, right? So I think they comped about 1, which is a little bit better than last quarter. And that gap versus the 3.0, right, is the which maybe like 200 plus that's is that is the gap, if you segregate it, is it entirely multi price point items that are driving that gap?
And then the last thing, right, it's working as well as it is. How can you accelerate the process, right, of without letting execution slip, right, because you'd like to get chain wide done here probably in the next 18 months, no?
Mike Creighton, Interim CEO, Dollar Tree: Yes. So, John, it's 1st, in terms of the non three point zero performance, it's not just about the base stores. We'll get to those. We'll convert them. I think one of the keys in accelerating the non 3.0 is in what we're doing going back to Dollar Tree Plus, which has been in place for several years now and refreshing that.
We take whole sections and refresh them and really like the results that we're seeing. In terms of the and yes, we did see one of the we always measure our gap in terms of how are multi price comparing to the chain. And one of the reasons that gap closed is the chain got better. Dollar Tree Plus, definitely, those base stores got closer to multi price, which is encouraging. And then there is 2 ways to accelerate.
The first is in the conversions themselves. And you will see we slowed that conversion. Part of that is just from an execution standpoint. We introduced some milestones where we said our district manager has to sign off in a store 4 weeks before we go live. And then a regional director, our next level up, has to sign off on a store 2 weeks before.
And they have the power to say no, yes. They have the power to say we need some support to make sure we're ready or change or whatever reason they might have. And so it does slow us, but we believe that done right is better than done fast there. And that's not our only means of accelerating. We also have the opportunity to go back in and look at the SKUs that are working for us.
We're several years into Dollar Tree Plus. We're only 9 months into Multi Price 3.0. Going back and looking at what resonated with the customer and how do we change going forward, how do we change a season, how do we change in every day. And then finally, and this kind of goes to the rollout cadence, yes, we leverage 3rd party. You see that in our SG and A, but there's also an org capacity that we're managing through.
And one of the reasons we slowed in Q3 is we had all those 99 onlys that opened in Q3. That taps on a lot of the same resources in terms of our store setup crews, the leadership that goes out and works for these stores. And so we shifted rightly. We wanted to get those $0.99 only stores converted as quickly as we could so that we didn't let a customer forget about us. If we can flip those in 30 days or 60 days, that's far better than 90 days or 120 days.
The longer you're closed, the more likelihood is the customer will change their habit. We put a ton of focus on getting those stores open. As you saw, we have almost all of them now open and converted. And now we can kind of put some resources back towards that multi price rollout in 2025.
Conference Operator: Thank you. Our next question today is coming from Simeon Gutman from Morgan Stanley (NYSE:MS). Your line is now live.
Jeff Davis, CFO, Dollar Tree: Hey, good morning, everyone. Mike, I have a follow-up on multi price. The 5.1 that we talked about the prior quarter versus the 3.3, Are you saying those are apples to apples or not necessarily given timing of 1.0s and 3.0s? If it is apples to apples, is it because some of the old 1.0s that got converted are seeing inherent or slowing? Or is it that the new 3.0s are not as impactful as they were when they were initially rolled out?
Mike Creighton, Interim CEO, Dollar Tree: Yes. So the 5.1 was just how did the Q1 conversions perform in Q2. That's what that was. And as I roll that out to Q3, Simeon, those Q1 conversions continue to be the strongest performing than Q2 and then Q3 in that order. So the longer they're on, the better they perform.
And the going from a 1.0 to a 3.0 to use our power loss, dollars 1.25 is a 1.0, dollars 1.3 plus is a 2.0, multi price in line is a 3.0. The stores that went from 1.0 to 3.0 have the biggest, biggest bang. We see them because they're getting everything, if you will. And so then we go back to stores that just have Dollar Tree Plus and we take the learnings of what's working, what's resonating the most and we go upgrade those stores. And physically, the cost we have for resetting the store, we get that once.
Yes, it plays out because of the conversions over 18 months or 2 years, but we don't have to go back and change hardware in that store. We don't have to add steel. We do that once and then Rick and his team can go and make sure we have the best assortment that's resonating the most with the customer. And so as you look at that cadence, yes, our Q3 were the softest. They had the fewest amount of 1.0 all the way to 3.0.
And I also think there's some geography mix in there. If you look, I mentioned in Q2 call, we saw California really resonate well with multi price. Florida, we expect to resonate well. We did have some execution issues. I was really pleased to see them kind of have a stronger Q2.
And now as we look at the Q3 sets, we are more in our kind of Midwest area and it doesn't have the same pop that we saw in California and now in Florida.
Conference Operator: Thank you. Next question is coming from Kate McShane from Goldman Sachs. Your line is now live.
Various Analysts, Analysts, Various: Hi, good morning. Thanks for taking our question. Mike, just given your new position, I wondered if you could talk to anything that you might want to accelerate or change with the investments or the strategy? And can you talk about some of the leadership changes you announced recently for Chief of Dollar Tree Stores and President of Family Dollar Stores?
Mike Creighton, Interim CEO, Dollar Tree: Sure. Yes. I've been here more than 2 years now. My family and I absolutely love the area. It is a great community to be a part of.
I've gotten to know the founders here of Dollar Tree, gotten to know a lot of people, our kids go to school together, those types of things. So I've really embraced this company, this culture and its future. And so that has been just amazing and very humbling. So I'm excited about that. In terms of the changes, our focus is on the successful execution of the Family Dollar strategic review and setting up Dollar Tree for a multiyear kind of next chapter, if you will.
That's my focus. That's what the boards charge me with. And when we look at pluses and minuses of that, we're going to continue to test and learn. We're going to continue to make enhancements to the business and what resonates the most with our customer. And we're always going to start with our customer and work our way back.
That doesn't change. So multi price is a perfect example of that. It's amazing what resonates and what doesn't. And we'll continue to kind of work that to make sure we're relevant for the customer. But it's exciting what we see.
The increased trips, the bigger basket, really like to see how the customer is responding to it. And then in terms of the leadership changes, both Jossy Conrad and Jason Nordeen have been here a year now, have both had a big impact on store standards, big impact with our associates. And it just as I looked at the next chapter, as I look at the next 5 years for Family Dollar, the next 5 years for Dollar Tree, I wanted to make sure we had the folks that were best suited to that role. So Jason's prior role at Pilot Flying J fits really well with Family Dollar, the convenience element of it, the high consumables element of it. Jossy Conrad is the first to say she is one of our biggest customers.
She is a crafter. She resonates incredibly well with the team. And so I think these changes position us really well for that next chapter of Family Dollar post review and Dollar Tree go forward.
Conference Operator: Thank you. Next question today is coming from Chuck Rall from Gordon Haskett. Your line is now live.
Michael Lasser, Analyst, UBS: Hey, guys. This is Ryan Folger on for Chuck here. I just wanted to ask on it, it didn't come up this quarter, but there's been the general liability claims a couple of times in the past. Is that something that you'd expect to see going forward in FY 'twenty five and just sort of how that may progress going forward? Thank you.
Mike Creighton, Interim CEO, Dollar Tree: Jeff, I'll let you handle that. Yes.
Jeff Davis, CFO, Dollar Tree: Maybe that's a little bit of a sore spot for us here because we've spoken about it so many different times. Hey, listen, we believe that the adjustments that we've taken this year addresses the portfolio of claims and the progression of those claims. We do an evaluation twice a year, once in April and then a second time in October timeframe. We believe we're well positioned based upon the adjustments that we've taken. As we move forward into the future years, it all depends on the number of claims and severity of claims.
And what we're doing from a safety and security basis with our stores, how we're helping train our associates how to deal with different situations should help mitigate some of the challenges we've had in the past. But at this point, it would be, I think, inappropriate for me to start talking about 2025. But as we think about what the claims that we have on the books today and how they've progressed that the reserves that we've taken adequately reflect what that liability would be.
Conference Operator: Thank you. Next question is coming from Christina Catay from Deutsche Bank (ETR:DBKGn). Your line is now live.
Various Analysts, Analysts, Various: Hi, good morning, Mike and Jeff. Thanks for taking the question. So I wanted to ask on margin. Obviously, we saw nice gross margin improvement, but SG and A saw deleverage and you cited higher depreciation and some of the temporary labor associated with the 3.0 rollout. So maybe can you quantify the impact of these 2?
And then when do you expect these temporary labor costs to normalize? And what is the long term SG and A leverage opportunity as the 3.0 rollout matures? Thank you.
Mike Creighton, Interim CEO, Dollar Tree: Jeff, why don't you take the first?
Jeff Davis, CFO, Dollar Tree: Yes. So there's a couple of elements to this. If we think about, 1st of all, from a temporary labor perspective, the temporary labor is associated with the multi price rollout this year being the 1st year and then over the next 18 months to 24 months, we'll complete that. So you would expect that that would be a headwind on a declining basis over the next 18 months to 24 months. As it relates to the depreciation, the depreciation reflects the quantum of the investments that we've been making over the last couple of years as it relates to new store growth, the investments we've been making in supply chain and of course in our IT system cost.
If you take a look at our asset investments, they're actually starting to moderate. Last year, it was about $1,800,000,000 to $1,800,000,000 to $1,900,000,000 to $1,900,000,000 dollars 3 of that was $1,200,000,000 This year, we believe will be roughly about $1,800,000,000 And as we now kind of hit a sort of a high point and as that will moderate as we go forward, the expectation is that the depreciation, the increase in depreciation on a period over period basis should start to moderate. Unfortunately, where we are in this cycle, given that our customer purchasing behaviors with respect to consumables versus discretionary, some of the headwinds that we've had more recently as it relates to shrink and how and mix, how that's been playing out. I've mentioned before that in this economic cycle that we needed approximately a low single digit, maybe a low single digit plus comp in order to leverage the business. And coming in at just shy of 2% this quarter on the Dollar Tree side, you saw that there was some deleverage as it relates to the SG and A.
Our expectation is that we will continue to be disciplined in our investments. We'll be disciplined in our spend. We'll increase productivity where we can such that as those sales start to come in at the higher margin rates that we'll be able to flow more of that to the bottom line.
Mike Creighton, Interim CEO, Dollar Tree: Yes. The only thing I'd add is these investments that drive the depreciation, the investments we've had to do, the investments we want to do, the cost comes right away, the benefit, the returns come over time. I think new store openings, I'm incredibly excited about the pace with which we're opening new stores now compared to in the past. And the real benefit of new stores comes in that year 2, year 3, year 4 before they reach kind of the maturity of the enterprise, both in sales and in their profitability. And so you get that over time, that benefit.
And that's a great example of you hit the cost now, the depreciation over time, but the real benefit and the accelerating benefit is a little delayed. Then the second thing I'll just say on the leverage is, and I've been in small box for a while, small box math is a beautiful thing. The more sales you can drive through that box, the better you're going to leverage, because you get to a point where you need so many people to open the store and close the store, but you can increase the sales and not have to increase a ton of the payroll. And that's really where the leverage comes. So our focus is on retail fundamentals that will drive those sales per box.
Conference Operator: Thank you. Our final question today is coming from Seth Sigman from Barclays (LON:BARC). Your line is now live.
Seth Sigman, Analyst, Barclays: Hey, good morning everyone. Thanks for taking the question. I wanted to follow-up on the margins. I think you raised the benefit from lower freight costs by about $1 to $1 for the year. It seems like that's more than the total guidance change.
So I'm curious if you could maybe frame for us what the offsets to that are in the guidance at this point? And then specifically on the gross margin in terms of the acceleration that you've built in here into the Q4? And maybe just remind us of some of the key drivers for that. Thanks so much.
Mike Creighton, Interim CEO, Dollar Tree: Sure. Jeff will
Conference Operator: answer that.
Jeff Davis, CFO, Dollar Tree: Yes. I'll take the first part. Yes, we did increase the expectation of the freight benefit, as you had mentioned by approximately a dime on the top end. There are certain offsets that we would have had during the course of the and really that dime is for the second half of the year, it's not just for the Q4. We didn't quantify because there was a number of puts and takes.
But if you can imagine, when Mike was in his prepared remarks speaking to the storms that we had, there were certain costs that we incurred associated with that. It was $0.02 to $0.03 associated with markdowns and other costs to return the stores back to their normal operating format. There are a couple of other expenses associated with some of the balance sheet accruals that we've taken most importantly. We have been running short of what our overall annual plan was going to be with respect to sales. And we take a look at our inventories.
We want to make sure that we're taking the right markdowns on them to address those liabilities. We did so during the course of the quarter such that we make sure that that is appropriately reflected. So that starts to offset a portion of the additional freight costs. But all in all, as we think about the balance of the year and what the opportunities are across the business, the guidance that we've given reflects all those puts and takes.
Mike Creighton, Interim CEO, Dollar Tree: Thank you. We've reached the
Conference Operator: end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.
Mike Creighton, Interim CEO, Dollar Tree: Thank you for your time today. Look forward wishing everyone a very happy and healthy holiday season. Thanks so much.
Conference Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation.
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