Dollar Tree - Earnings Call - Q1 2021
May 28, 2020
Transcript
Speaker 0
day, and welcome to the Dollar Tree, Inc. First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Randy Guiler, VP, Investor Relations.
Please go ahead, sir.
Speaker 1
Thank you, Shannon. Good morning, and welcome to our call to discuss Dollar Tree's performance for the 2020. On today's call will be CEO, Gary Philbin Enterprise President, Mike Wojcinski and CFO, Kevin Wampler. Before we begin, I would like to remind everyone that various remarks that we will make about future expectations, plans and prospects for the company constitute forward looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors included in our most recent press release, most recent eight ks, 10 Q and annual report, which are on file with the SEC.
We have no obligation to update our forward looking statements, and you should not expect us to do so. At the end of our prepared remarks, we will open the call to your questions. Please limit the questions to one and one related follow-up, if necessary. Now I will turn the call over to Gary Bilbin, Dollar Tree's Chief Executive Officer.
Speaker 2
Thank you, Randy. Good morning, everyone. First, from all of us, our report today is against the backdrop of the COVID-nineteen impact across our country. Our hearts go on to all those affected. Today's Q1 report reflects a number of accomplishments and comments during a quarter that was impacted unlike any other due to the effects of COVID-nineteen.
First, our results around the core businesses of both banners speak to the resiliency and strength of both Family Dollar and Dollar Tree in the communities we serve. The investments we have made in our Family Dollar business in our H2 stores and assortment have been highlighted during this critical time. Second, we took quick action to protect individuals with enhanced cleaning protocols to keep their facilities clean and sanitized. We encourage social distancing guidelines as recommended by the CDC and provided PPE PPE supplies, including masks and gloves. Additionally, we have installed more than 50,000 plexiglass shields at store checkouts.
Third, our efforts to get the right products to the distribution centers and stores have been the key priority for merchants across both banners. We've worked closely with vendor partners to support and streamline shipments of needed essentials. And finally, all of this could not have been accomplished without the leadership of our teams across 48 states and five Canadian provinces. Their efforts have been remarkable, and it is humbling to see the dedication they have for their teams and for their communities. I could not be more proud of all these and the many other accomplishments against the COVID nineteen crisis that's impacted our country and company.
Family Dollar's comp of 15 and a half percent reflected the initial impact of household stocking up on basic goods in March related to the disease. The Consumables side of business delivered a 17 plus comp and was strong throughout the quarter. On the discretionary side, comps were positive up to research, and then we saw an acceleration through the end of the quarter around the home and other discretionary categories, resulting in a discretionary comp of just under 9% Operating income for Q1 improved two thirty basis points despite the impact of selling record volumes of lower margin consumables and incurring the additional costs related to COVID-nineteen. Dollar Tree's comps decreased 90 basis points, driven by the impact on Easter selling and our party business in general from the executive orders for shelter in place mandates.
The combined impact of the party, candy and Easter categories negatively affected Dollar Tree's overall comp by four ninety basis points. Following Easter, discretionary comps were nearly flat for the remainder of the quarter. Operating margin was 9.2%, reflecting a negative top line comp and the heavier consumable mix along with COVID costs. All COVID costs related all related COVID costs incurred for wage premiums and for frontline associates, guaranteed sales bonuses for field management and supplies for keeping our facilities safe totaled just over $73,000,000 And now I'll turn the call over to Mike.
Speaker 3
Thank you, Gary, and good morning. Before I get into the details regarding our Q1 performance,
Speaker 4
I want to share
Speaker 3
a little bit about the associates and their remarkable work and dedication. I want to thank our teams for all they accomplished each and every day for the last nine weeks. Our entire leadership team is inspired and very much appreciative of their individual commitments and their collective team efforts across Dollar Tree and Family Dollar in our stores, in our DCs, and in our store support center. I am very proud of the dedication of all associates. Regarding Dollar Tree's response to COVID nineteen, our company took aggressive and decisive actions early on to protect our teams and our shoppers.
In early March, we activated our business response team led by risk management and human resources with representation from each functional area in the company. The group worked around the clock to assess the situation, develop policies and procedures, and take action where necessary. I would like to recognize the leadership and efforts of our business response team to support our frontline workers. Steps we've taken to provide clean and safe environments include, our store associates are practicing social distancing as recommended by the CDC, and we continue to ask that customers also follow these guidelines. Guidelines.
We dedicated the first hour each morning to serve at risk customers. We continue to provide store teams with hand sanitizer and cleansing and cleaning supplies for high frequency enhanced cleaning protocols. We close stores at 8PM to provide associates adequate time for cleaning the store and restocking shelves with essential high demand products. We supply personal protective equipment, including nonmedical face masks and gloves for associates to wear during their shifts. We have implemented associate health screenings to ensure that we are minimizing the potential for exposure.
We've installed plexiglass guards at the check lane in all stores to assist in protecting shoppers and our cashiers. Stores are now equipped with contactless payment through tap to pay with Visa, Mastercard, Apple Pay, and Google Pay. We are committed to meeting or exceeding all relevant local and state requirements. By taking these steps, we have been able to keep all stores open as an essential business. Also in March, we announced our plans to hire 25,000 new associates, a target which we
Speaker 2
have exceeded. Our stores play
Speaker 3
a valuable role in the communities we serve, and we are dedicated to both serving customers and being an employee of choice, especially in this critical time of need. Now to our first quarter performance. Sales grew 8.2% to $6,200,000,000 Consolidated same store sales increased 7%, and we delivered an EPS of $1.04 For the Dollar Tree segment, our 90 basis point decline in sales was materially impacted by weakness in party, candy and Easter seasonal categories. We were well prepared for the Easter season with products in stores and set during February following our strong Valentine's season. As stated in our March 31 business update, Dollar Tree had a 7.1 comp increase for the first eight weeks of q one, but was beginning to see a material drop off due to traffic and the initial shelters in place as we approached Easter.
In March, seeing in the overnight, there was a hyper focus on stocking up consumables. As concerns spread, schools, church services, weddings, and parties were canceled and widespread stay at home orders were mandated. We saw a material decline in demand for many of the seasonal and discretionary products related to celebrations and large gatherings. As Gary mentioned, the combination of party category and Easter seasonal product negatively impacted Dollar Tree's Q1 comps by approximately four ninety basis points. For the quarter, the consumables delivered a positive 9% comp and the discretionary side of the business was down nearly 9%.
Prior to the slowdown, our Valentine's seasonal category comped over 4% with a strong sell through. Categories that performed well included household consumables, food, personal care, and crafts. We continue to see great traction in our stores with the new Cracker Square program. We added the Cracker Square assortment to more than 2,400 Dollar Tree stores in quarter one. Our customers are responding to the new offerings and the great values.
For the quarter, Dollar Tree's comp transaction count was down 11.7%, while comp average ticket increased 12.2%. As consumers in general have been shopping less but buying more, a trend that has been seen across retail. Interesting, our consumables versus the discretionary mix. Through Easter, it was 55% consumables. For the period following Easter through quarter end, there was fifty-fifty balance.
And for the first four weeks of Q2, we've seen a shift to 55% discretionary. Regarding Family Dollar segment sales highlights for the first quarter include, the team delivered a 15.5% same store sales increase on top of a 1.9% comp in q one a year ago. This was comprised of a 17.1% increase in average ticket, partially offset by a 1.4% decline in transaction comp. The sales strength was broad across geography, each zone delivering a comp increase of 13 to 19%. Regarding cadence of comps to the quarter, February was slightly positive.
We had an extremely strong March with customers stocking up on consumables. As provided in our business update, the family dollar comp was 14.4% through the first eight weeks of the quarter. The team delivered great results in April with strength in many of our discretionary categories. The consumable side of the business delivered a 17 plus percent comp and discretionary comp was just under 9%. We continue to be very pleased with the performance of our H2 stores, with comps continuing to outperform the chain average by 10 plus percent.
Speaker 2
Regarding real estate for the enterprise during
Speaker 3
the quarter, we completed more than 350 projects, including 99 new stores, 21 relocations, 220 Family Dollar h two renovations early in the quarter, and 14 store closings primarily at the end of the lease term. We ended the quarter with 15,370 stores. I'm very proud of our leaders throughout the organization, including our store and field leadership teams, our merchant teams, our distribution center and supply chain teams, and our store support center team. I will now turn it to Kevin to provide more detail on our first quarter performance.
Speaker 2
Thank you, Mike, and good morning. Consolidated net sales for the first quarter increased 8.2% to $6,290,000,000 comprised of $3,210,000,000 of At Camidol and three point zero eight billion dollars at Dollar Tree. Enterprise same store sales increased 7%, and on a segment basis, comps for Camidol increased 15.5% and Dollar Tree decreased 0.9%. Overall, gross profit increased 3.9% to $1,790,000,000 Gross margin of 28.5% compared to 29.7% in Q1 twenty nineteen. Gross profit margin for the Dollar Tree segment decreased to 31.9% compared to 34.5% in the prior year's quarter.
Factors impacting the segment's gross margin performance for the quarter included merchandise costs, including freight, increased approximately 140 basis points. Dollar Tree saw a 4.2% shift in mix to lower margin consumables from higher margin discretionary merchandise related to the soft Easter selling season and pandemic demand. Higher costs from the impact of incremental $18,000,000 of tariff costs and higher freight costs were partially offset by improved markdown. Markdown costs increased approximately 40 basis points, resulting from increased seasonal markdowns to the lower Easter sell through. Distribution costs increased approximately 30 basis points, primarily due to higher payroll costs and depreciation.
DTE payroll costs included approximately $3,500,000 or 10 basis points of hourly premium paid for all hourly DTE associates for hours worked since March 8 and guaranteed sales bonuses. Occupancy costs increased approximately 30 basis points due to loss of leverage on the comp sales decrease in the quarter, and shrink increased approximately 25 basis points based on unfavorable inventory results and an increase in accrual. Gross profit margin for the Dollar Tree segment improved 60 basis points to 25.4% during the first quarter. The year over year improvement was due to the following: occupancy costs decreased approximately 105 basis points as a result of leverage from the comp sales increase and the increased expense in the prior year related to the acceleration of amortization of right of use assets from store closures. And shrink decreased approximately 30 basis points, resulting from an increase to the accrual rate in the prior year quarter and improved inventory results in the current year.
These benefits were partially offset by merchandise costs, including freight, that increased approximately 55 basis points, primarily due to a 1.6 mix shift to lower margin consumable merchandise as a result of pandemic demand and higher freight costs, partially offset by improved initial markup. Distribution costs increased approximately 15 basis points due to increased payroll costs at the DC. These costs included approximately $2,700,000 or 10 basis points related to the hourly premium paid for all hourly DC associates for all hours worked since March 8 and guaranteed sales bonuses. Consolidated selling, general and administrative expenses improved 40 basis points to 22.7% of net sales. For the first quarter, the SG and A rate for the Dollar Tree segment as a percentage of net sales increased to 22.7% compared to 21.2% in 2019.
The increase was primarily due to approximately 145 basis points in payroll costs comprised of the following: Store hourly payroll increased approximately 120 basis points due to the store hourly premium paid to all hourly associates beginning March 8. The premium paid totaled $30,000,000 for the quarter. Field management payroll increased approximately 15 basis points due to loss of leverage from the decrease in comparable store net sales and $800,000 of guaranteed bonuses paid. Store sales bonus expense increased approximately 10 basis points as a result of $2,700,000 of guaranteed bonus payout. Store supply costs increased approximately 10 basis points as a result of the installation of plexiglass guards and incremental cost for PPE.
Inventory service expense decreased approximately 10 basis points due to the postponement of inventories from March 15 the end of the quarter. The SG and A rate for the Family Dollar segment improved approximately 170 basis points to 19.9% compared to 21.6% for the 2019. The improvement was primarily due to the leverage on stronger same store sales. Payroll expenses improved 65 basis points driven by leverage from the strong comp. Store hourly premium pay totaled $22,200,000, and guaranteed bonuses totaled 1,600,000.0.
Occupancy costs improved 55 basis points. Operating expenses decreased by approximately 40 basis points, resulting primarily from reduced advertising and travel as a percentage of sales, and depreciation and amortization expense decreased approximately 10 basis points. Additionally, corporate and support shared service expense as a percentage of sales improved 20 basis points, primarily related to leverage on stronger sales in the current year and cycling store support center consolidation costs from the prior year. Operating income was $365,900,000 compared with $385,000,000 in the same period last year, and operating income margin was 5.8% compared to 6.6% in last year's quarter. The current year's quarter included $73,200,000 in COVID-nineteen related expenses.
Nonoperating expenses totaled $40,700,000 comprised primarily of net interest expense, and our effective tax rate was 23.9% compared to 22.1% in the prior year's first quarter. The company had net income of $247,600,000 or $1.04 per diluted share, which included $73,200,000 or $0.23 per diluted share of incremental operating costs for COVID-nineteen related expenses. This compares to net earnings of $267,900,000 or $1.12 per share in the prior year quarter. Combined cash cash equivalents at quarter end totaled $1,760,000,000 compared to $539,200,000 at the end of fiscal twenty nineteen. Outstanding debt as of 05/02/2020, was approximately 4,300,000,000.0 included $750,000,000 drawn on our revolving line of credit.
Inventory for Dollar Tree at quarter end increased 4% from the same time last year, while selling square footage increased 7.2%. Inventory for selling square footage decreased 3%. The team is actively managing the mix of inventory to rebuild essential goods while controlling categories such as party that saw a decrease in demand in the first quarter. Inventory for Family Dollar at quarter end decreased 10.6% from the same period last year, while selling square footage decreased 3.9% based on store closures in the prior year. Inventory for selling square foot decreased 7%.
Our Family Dollar inventory reflects higher than normal out of stock in certain categories. Our merchants, supply chain and vendors are working diligently to improve our position to meet increased product demand going forward. Capital expenditures were $235,800,000 in the first quarter versus $209,200,000 in Q1 last year. For fiscal twenty twenty, we are now planning for consolidated capital expenditures to be approximately $1,000,000,000 compared to our original guidance of $1,200,000,000 Changes to our capital expenditure plan are we now expect to open 500 new stores compared to our original plan of five fifty. These will be comprised of three twenty five Dollar Tree and $175,000 which includes a reduction of 25 planned stores per each banner.
Due to the COVID-nineteen related suspension of our H2 renovation program, we are now planning seven fifty Family Dollar H2s for fiscal twenty twenty compared to our original plan of twelve fifty. Additionally, we've seen a reduction in our capital needs for supply chain based on finalization of projects for the year. Depreciation and amortization totaled $165,500,000 for Q1 compared to $151,200,000 in the first quarter last year. For fiscal twenty twenty, we now expect consolidated depreciation and amortization to range from $670,000,000 to $680,000,000 While we are not providing sales and EPS guidance, I do want to provide a few data points for your modeling. Net interest expense is expected to be approximately $39,000,000 in Q2 and $160,000,000 for fiscal twenty twenty.
The tax rate is expected to be 23.2% for the second quarter and 22.7% for fiscal twenty twenty. Weighted average diluted share counts are assumed to be $238,000,000 shares for Q2 and 237,900,000.0 shares for the full year. As reported on our March business update, the company withdrew our prior Q1 and fiscal year guidance. Due to the continuing uncertainty, we have limited visibility into our future business trends, which results in a wide range of potential outcomes for our 2020 financial performance. We're in a strong financial position and remain confident in our business and ability to drive long term shareholder value.
I'll now turn the call back over to Gary. Thank you, Kevin. The current macro environment was obviously not contemplated in paying our business for fiscal twenty twenty. Our performance in Q1 validates that Dollar Tree and Family Dollar are important to shoppers in the times of need, especially for their daily essentials. With more than 38,000,000 Americans filing unemployment claims in just the past nine weeks, we believe families need value and convenience more now than ever before.
We have a resilient business model, a very strong balance sheet, an experienced leadership team, and a tremendous opportunity to continue serving customers with those values and conveniences they seek. I cannot say enough about our store and distribution center teams. They have been up to their challenge in being nimble and agile in a quick changing work environment and committed to running the business through an unprecedented time. To recognize our efforts, we have rewarded our hourly store and D. C.
Associates with wage premiums going back to March 8. This investment in our frontline associates has totaled approximately $95,000,000 to this point. Dollars 63,000,000 occurred in the first quarter. We were also pleased to welcome more than 25,000 new associates to the organization during the quarter. Q1 is in the books.
We finished the quarter strong. The momentum has carried into our second quarter. While we are still less than four weeks into the quarter, I am pleased to say our business isn't good at this point. At Dollar Tree, we have seen an improvement on the discretionary side of business. In fact, with the exception of party paper, all discretionary categories are comping positive in q two.
Categories performing well include crafts, kitchenware, lawn and garden, hardware, toys, they're all performing well. We had a strong Mother's Day and school graduation sales. Crafter Square, like Mike discussed, continues to gain momentum and is now available in more than 3,000 Dollar Tree stores. And the balloon business, which was hindered in 2019 by the helium shortage, has bounced back nicely. The comp performance at this early stage in the quarter has returned to a level we are accustomed to seeing from Dollar Tree.
At Family Dollar, we believe the current environment with families staying close to home has provided us an opportunity to showcase improvements we have been working very hard on in recent years. Our investment in the Family Dollar store base with our h two renovations has been a key driver since we accelerated our renovations a year ago. Now with customers and communities needing us more than ever, we are being introduced into a format that has a better shopping experience when they need it most. I'm also pleased with the work of the merchant team and the traction we are seeing on the discretionary side of the business. Our customers have moved from all things essential to more purchases to support their at home and outdoor living.
Discretionary momentum that we saw late in Q1 has certainly continued into the second quarter as well. Q2 is off to a very good start in Family Dollar. That said, we do expect this to continue to be an extremely volatile consumer environment. Factors impacting retail will continue to be evolution of the macroeconomic factors, including unemployment rates, variability in vendor supply chains, being able to meet product demands, volatility in consumer demand related to the crisis, the value and timing of government stimulus, the duration, degree, and geographic breadth of varying shelter in place mandates, the evolving competitive landscape across retail and restaurants, and our incremental cost related to managing the business during the COVID crisis. We continue to focus on making meaningful progress to grow and improve our business for both brands.
We believe we are well positioned in the most attractive sector of retail to deliver continued growth and increased value for our shareholders. The combination of more than 15,300 Dollar Tree and Family Dollar stores provides us the opportunity to serve more customers in all types of markets. Operator, we're now ready to take questions.
Speaker 0
You. Take our first question from Edward Kelly of Wells Fargo.
Speaker 5
Hi, guys. Good morning. I wanted to ask you about the comp cadence. Could you talk a little bit more about the trends that you saw in April, both leading up Easter and then after Easter? And then what we have seen so far at each banner in May?
I know you provided some qualitative commentary. I'm curious if you could provide some more specific color on May and what you have seen to date from a comp perspective.
Speaker 2
Hey, Ed. This is Gary. Let me characterize it this way. Obviously, on the Dollar Tree side, Easter was the April. We So really saw the impact of shelter in place mandates going in, traffic dropped, and Easter was not on anyone's mind going into the holiday.
So the bigger seasonal impact at Dollar Tree was, you know, the Easter holiday basically evaporating. But post Easter, traffic, while negative, moderated. And maybe more importantly, what we saw people buying also changed too, from boarding of essentials moved to some of the other elements of what people were buying around stay at home, which meant children were out of school, so more stationary, more back to school toys for kids. And Family Dollar was maybe slightly a little different, not as big of a holiday effort for Easter at Family Dollar, at least around pure Easter. But the things that get impacted at Family Dollar are things like, when people grow out, it's a family celebration, it's apparel.
But I would describe it the same way. Post Easter holiday, we saw folks get back into buying more of what they needed around at home living and outdoor celebration, I would call it. And with more folks at home, obviously, we're experiencing the essentials spiking of both banners. So as we go into May, while we see, you know, some traffic down, we see baskets go up, and we see the breadth of what folks are buying being expanded beyond clearly beyond the essentials. So we like what we see going into April, and it's carrying on into May.
Speaker 5
All right. And then maybe just a follow-up from the margin perspective, particularly around the core Dollar Tree business. This has been a 35%, 36% gross margin business for a very long time. You've had some headwinds recently. A lot of it seems like it could just be transitory.
Is there any reason to think you can't get back to that range? Can you get back there soon, meaning Q2, Q3, at some point this year?
Speaker 2
Well, I don't have a crystal ball that says what's gonna happen exactly with the macro environment. There's no reason Dollar Tree can't get back to 35 and '36 with what we see on how we're selling our assortment. Even now, unlike how the mixes are occurring at at Dollar Tree, the impacts that we're experiencing from COVID, everything on the supply chain, and it's everything from how we need the DCs to run on the priorities of getting key vendors into the DCs and out the stores, we're spending extra on. When we are buying low value essentials, big q low value, that impacts the cost of the freight coming in and out of our margin as well. And obviously, we're paying the the the current wage premiums.
Long term, there's no reason. I don't know that I see it in q two or, you know, in the back half of the year. I I dare make a guess on how the retail environment will be. But what we're buying in the value for Dollar Tree is as great as ever. Might call down craft.
I mean, here's a category that really didn't even live in Dollar Tree last year to any extent. And, you know, our customers have welcomed it wildly in the stores that we put it in. And that's the nature of Dollar Tree. We we find something, we build it, you're on the the new thing, and that that's really the underpinning to what's gonna drive margin. The things that we've got to handle on the expense side, you know, I've always said, given enough time, we'll steer around the rocks.
But the key to Dollar Tree's magic is keeping the magic of incredible value in front of our customer on the product we're selling.
Speaker 5
Great. Thank you and good luck going forward.
Speaker 0
Our next question will come from Chandni Luthra of Goldman Sachs.
Speaker 6
Hi. Thank you. This is Chandni on behalf of Kate McShane. Could you guys talk a little bit more about stimulus in terms of, you know, sort of when did trends start to improve for you post teacher? Like, you know, has that continued?
Because we're only starting to hear we are also hearing from, you know, some customers anecdotally that some customers are only getting payments right now. So could you talk about how you're seeing stimulus impact the business? And then is there a parallel to be drawn, with tax refunds? We we heard, you know, one retailer talk about it. So so do you see, you know, that kind of the tailwinds in terms of, you know, duration, stimulus versus tax refunds?
Thank you.
Speaker 2
Sandra, you were getting a lot of echo on your first question. Was it around how we're seeing the customers with the stimulus check?
Speaker 6
That is correct. So, basically, my question is, you know, is is there a parallel, between stimulus checks and tax refunds?
Speaker 3
Yes. So, yes, we are seeing some impact as the stimulus gets released into the market and the tax refunds, especially on the Family Dollar side. And as Gary described, we saw some nice momentum in our discretionary side of the business with our home and grilling and and clothes. So we we can see a correlation of the stimulus dollars being released and an increase in our basket size.
Speaker 6
Got it. And then if I could get a follow-up. I'm sorry. Go ahead.
Speaker 4
Yeah. We were just wondering what your follow-up your your second question was.
Speaker 6
Yes. So, in terms of your global supply chain, in light of the disruptions this year we've seen and then, you know, with tariffs last year, are there any efforts to kind of realign sourcing globally? Thank you.
Speaker 2
Well, this ripple effect of the COVID impact obviously started in Asia and then has moved into the, US side. And so initially, when we saw the disruption in Asia, you know, part of that was just the, short term effect of factories shutting down right after Chinese New Year. I would say, you know, that rebounded fairly quickly to the point that other than being measured a few weeks late on some shipments, that was something that moderated and now is is not an issue for us. On the domestic side, however, the spike in demand on domestic essentials is something that all retailers are chasing. And, you know, it varies by vendor, it varies by geography, and anything that's related to cleaning, toilet paper, paper towels.
You know, they're all getting better, and we're selling record amounts. It's still something that, we're probably gonna be chasing, I think, into June, and I would guess maybe July with some vendors. But it's getting better week by week, and we see it in our sales. But it's almost shifted more to the discretionary side now. Some of the other things that folks are buying that are imports, we're having to go back and take a look at orders on inbound and up those.
So it's been a, a changing shift in dynamic from when this started, if you go all the way back to the impact to China and supply chain, US domestically, and now what people are buying. And so I think about it almost in those three stages, how we're running our business and where the priorities are.
Speaker 6
Great. Thank you so much.
Speaker 0
And our next question will come from Michael Montani of Evercore.
Speaker 7
Hey, great. Good morning. Just had two questions. The first was on the tariff front. I think initially, there was discussion of around $45,000,000 plus of impact in the first half of this year.
So I wanted to see if 20,000,000 to $25,000,000 is probably about right for 2Q. And then on the COVID expense side, you called out some of the initial labor costs to expect into 2Q. I was hoping to understand if there's additional kind of PP and E, safety equipment run rate that we should be factoring in here, and how normal and ongoing that would be.
Speaker 2
Sure. Michael, this is Kevin. As it relates to the tariffs, again, to your point, we at the beginning of year, we stated the fact that tariffs were an incremental $47,000,000 this year, primarily on the Dollar Tree side. And again, part of it is annualization of List three at 25% and then obviously List four as well. And as we called out $25,000,000 at that point in time, beginning of year, said $25,000,000 in Q1.
It actually annualized. It came in about $23,000,000 $18,000,000 at Dollar Tree and $5,000,000 at Famadol. As we look at Q2, again, we do expect, roughly I think it's a little less than what we probably initially expected. We literally expected it to be around $20,000,000 I think it may be closer to $15,000,000 Part of that is just due to some timing, as we continue to work with supply chain and and what comes in, when. But
Speaker 1
I do believe it'll be
Speaker 2
about $15,000,000 roughly in in q two. As it relates to COVID and, the costs, there, again, obviously, we did have significant costs in q one as we ramped up, PPE supplies. And again, we also did, as Gary mentioned, 60,000 plexiglass shields in our stores, which is probably a bigger cost than the supplies at the end of the day because they put in place in a very rapid order. As we go forward, we are expecting again to incur additional supply costs as we continue to make sure that our stores have the PPE they need, masks, gloves, and accordingly as as to keep them safe and as mandated in many areas, as well as additional cleaning supplies, hand sanitizers in our stores, additional cleaner to for the enhanced cleaning protocols we have on a daily basis in our stores. Again, it's it's hard to predict what what it will be for q two, but it will continue forward.
And again, that's one of those unknowns and one of the reasons why we really can't give guidance going forward. Michael, I would just add, the biggest lion's share of that once you get past these initial expenses is obviously the wage premium. Our folks are on a biweekly pay cycle in advance of each one. We give them our announcement that it's continued. Right now, we are out to mid June with our associates on wage premium so they can plan around that too.
That's where we are right now.
Speaker 7
Thank you.
Speaker 0
And our next question will come from Paul Trussell of Deutsche Bank.
Speaker 8
Good day. And good execution in a in a volatile and challenging marketplace. First
Speaker 0
question is
Speaker 8
on Family Dollar. Maybe just touch a bit more detail on what you're seeing there. Should we think that two q is more or less in line with one q results? Also, what's the feedback been from customers as they've returned to the format potentially for some for the first time in a few years and and how you plan to keep those customers there. Also, just curious on any updates on the h two front and how you feel about your inventory and overall merchandise assortment, especially on the discretionary side, which you were planning to kind of change over the issue?
Thank you.
Speaker 2
Well, let me start and have Mike chime in on some of the what we've seen on the categories. You know, I I think Family Dollar has responded maybe even better than we might have thought going into what we didn't know what was ahead of us, and our customers came in and shopped the store hard because it's when you think about it, it's convenient, it's value, it's value. And with the early and quick work we did, I think we also got credit for being a safe place to shop with all of our protocols in store. And I think we were recognized for that, both with some of our internal measurements that we saw. I think we we also saw more folks sign up for our Family Dollar app, which was a pretty good signal that we're gaining some new folks for the first time, into the store.
So I think early on, we got, know, we folks needed us. I think it has moved to some recognition on even some of the early work we've done on assortment and having in stocks. Now I would tell you our supply chain, we're pretty capable on supply chain around the world, but we are stressed on domestic supply chain like lots of other folks on essentials. And we we send the the essentials to stores every week. It used to last about two hours.
I would tell you now it's probably lasting between a day and a half to four days depending on who's getting what amounts. But as much as any has done on maybe our folks that have risen to the occasion in their neighborhoods and communities, and, you know, we can when I just see the amount of thank yous that come into our stores, It's anecdotal, but I can only tell you folks that really count on the Family Dollar banner during this time. I think what's interesting are some of the category sales. I'll let Mike give you some color on that.
Speaker 3
Yeah. Gary described in his comments that, you know, at first with the huge demand in the for those first three weeks, it was very weighted heavily towards the consumable side and the cleaning products and paper products. And post Easter, it shifted to at home. Our apparel business is very strong. Soft home, housewares, home decor, toys, and hardware.
And the good news is you asked about our inventory position going into the year. We were very strong in inventory position on the on those categories. So we were able to maintain the good in in stock position, for the back half of the first quarter. But now we're now we're as Gary's saying, the good news is we're we're replenishing those sales. And as you heard from me in the on March 4, talk about at Family Dollar, those were the categories that we're gonna work really hard on to turn around our discretionary business with basic products with sharper price points and trying to get it into our stores in in our sets in our h two.
And and that's what we're replenishing with now. So we felt sold through our inventory. What we're buying now and the changes of our replenishment, as you heard from Gary, it is selling just as fast as we are bringing it in. So the good news is we're we're chasing that product, and it's turning fast. And the product that we are buying now with our new disciplines is turning, the customers are reacting to it.
I would would say one other piece of the pie that we didn't plan on, but it's starting to show up is in the closeout business.
Speaker 4
We believe there's gonna be a lot
Speaker 3
of value at Family Dollar and Dollar Tree for closeouts going into the the next several months.
Speaker 2
And if I apologize about h two, obviously, hard to look at at March and the pandemic effect. But I would say this, as we got post Easter, h two has continued continued to have a 10 lift even during this time. And it's interesting that as you get into the April time frame post Easter, our rural H two, where we have most of them, outpaced urban locations. And that's entirely surprising when you think about some of the hotspots that affected the urban locations more than rural. So we're still pleased with the H2.
Think just in time. I think back to 02/2008, it's a different crisis, but that's about the time Dollar Tree was getting to our prototype the way we wanted it. I don't think that's dissimilar to the 1,500 H2s that we have out there that are helping us drive the business now.
Speaker 8
That's really helpful color. My follow-up is just to get any other comment that you can provide as it relates to guidance. I know that you're not giving anything specifically, but anything else that we should keep in mind as it relates to 2Q for the balance of the year on some of the items you've mentioned were impacted in the first quarter, things like the merchandise costs or markdowns, and and other pressures?
Speaker 2
Paul. It's Kevin. I think as we think about it, in Gary's comments, alluded to the fact that the Dollar Tree business mix has become what we call more normalized. And so obviously, do believe that as we look at Q2, that can be a positive compared to Q1. I think another item continue to think about is, as we look at diesel fuel costs for Q1, they were down on average about 12% year over year.
They started at the beginning of Q2, down 25%. Now it's a small piece of the of the overall freight rates, but that's helpful. The other thing I would mention is we began the year with the expectation that we would see increases in our import freight and with our contract that begins in May, we didn't see the increase maybe that we thought we would see. So I think there's a little benefit in the back half related to that as we go forward. So a lot of moving pieces.
I think distribution costs, I think you look at that, I think there's gonna continue to be pressure on our buildings. The throughput is very high right now, as you can imagine, we try to get our inventory, our essential inventory caught up and along with the normal business. So I think there could could be a little pressure if we continue there. I think company's working on a lot of things. And and as always, you know, I think we did a good job of controlling expenses in general in q one.
And I think we'll obviously have a huge focus to continue to do that as we go through the year, no different than every any other year, try to keep that SG and A growth at a very reasonable point.
Speaker 0
We'll take the next question from Peter Keith of Piper Sandler.
Speaker 4
Hi. Thanks. Good morning, everyone. Gary, you had commented that Dollar Tree is now running, I guess, in May at a level you're accustomed to seeing. So the two questions on that is, would that imply kind of an up low single digit run rate for the quarter?
And then secondly, just thinking about the exposure to sort of party and celebrations, is Dollar Tree being negatively impacted at this point because there's still fewer get togethers and potentially fewer celebrations?
Speaker 2
Let me answer the second one first. Clearly, we did see the impact of shelter in place. Obviously, parties took a bigger tip to that. But I think the resiliency of our customer and just the creativeness that we've seen out there with the drive through birthday parties, what's been happening in graduation. We actually comped on graduation balloons last week, which I thought was just remarkable
Now party is a big category for us. We we split it into, you know, our celebration and papers. So the celebration is actually doing quite well right now. Party papers, we called out before, is the piece that's lagging. On the other hand, craps.
You know, a category that we didn't talk about a year ago is now a significant category in dollars. The comp is something that, customers have responded to, And I think it sort of speaks to, you know, families are trying to figure out how to entertain themselves with the the magic of products that you can buy for a dollar at Dollar Tree and even a Family Dollar with toys some of the home essentials there too. Anything related kitchen, bathroom, bedroom, outdoor living. I mean, I I sort of put into those buckets. So, you know, that's how I think about it.
And then, you know, we're we're we're early into the quarter. I I think what we want to call out on the what we see at Dollar Tree was, you know, it's a new normal. But but it certainly, at least in terms of their categories that we are seeing respond, feels a lot more like what we're used to. Now we don't have any huge category or maybe celebrations, holidays until we get to the back half, really. Right?
We go from, you know, Memorial Day to outdoor grilling to back to school, whatever that's gonna tend to be in the early fall. You know, after Easter, you know, we like what we see. We're not having the same kind of impact on the seasonal side that we have all focused on one week in April with Easter. So I think that also lets us sort of spread our opportunity out there in the store and what we merchandise and what we put on display. And I think what we're encouraged with is the things that our customers needed.
They have found in both stores and have bought at elevated levels now really Family Dollar starting with the April time frame, and now it seems like Dollar Tree is getting back to its normal cadence.
Speaker 4
Okay. Thank you for that. I want to ask a separate question and maybe asking you and the team to put your economist hat on, which I know can be a little bit dangerous. But it's on the the federal unemployment benefit that's being paid out right now of, $600 per week. That that present time is set to expire at the July.
And, obviously, no one can predict what'll happen. But if that were to expire, do you view that as a notable negative, to the business and and maybe to the spending power of
Speaker 2
your core customer? Or or conversely, does
Speaker 4
it allow you to, pick up some share with your value offering?
Speaker 2
Hey. This is Mike. We think about
Speaker 3
it as if that goes away, that
Speaker 2
we will be in
Speaker 3
a great position as a valued retailer when people are unemployed and they don't have that source of income. They will need value more than ever. And, we should be in a great position, to provide that form.
Speaker 2
Yeah. It's not it's not 2008 for all the obvious reasons, and it's, what our customer has right now is money in their pocket. That's that's obviously a tailwind for anybody that has doors open. In 02/2008, folks lost jobs too, and they needed us and they found us. And I think that's some of what we're planning for as we take a look into our crystal ball here back half of the year and the twenty one year.
Speaker 4
Okay. Sounds great, guys.
Speaker 1
Thanks a
Speaker 2
lot and good luck.
Speaker 0
Our next question will come from Michael Lasser of UBS.
Speaker 9
Good morning. Thanks a lot for taking my question. Gary, what percent of Dollar Tree sales relate to gathering? Presumably, party is a big piece of that, but it extends also across seasonal and discretionary as well. Did you say it's 10% of sales, 20% higher than that?
Speaker 2
Well, that's a tough one. I mean, I I would just point on sort of what we've seen is that we've seen, you know, if we just take a look at Easter, what was impacted was obviously the pure Easter product. Along with that party and candy was the 490 basis points impact for that holiday. I think it's it spreads a little more out once you get past that big holiday. I I think, you know, party is where we've obviously made it one of our key categories.
And it's sort bifurcated into what people can buy right now for celebration. Hey. Parties or, birthday parties are still going on. They're just happening in a different way. Graduations are still going on.
They're just happening in a virtual environment. The things that get sold with that, now we're starting to see selling close to the same rates we saw before. The party paper is a little different. That's that goes to some gift giving and some other things that, I think, you know, catch up over time. It's just a slower burn.
That's sad. It's it's, yeah. You just take a category like stationary. You know? It means kids are home.
It was parents trying to teach virtually or online, and they needed school supplies. And so a category like that picked up. I mentioned craft, but you go down the discretionary line. People are still buying now, I think, on a normal cadence of what they have been used to on their, say, a normal shopping trip. You know, what we're just seeing is they're coming in shopping with intent.
You know, the folks aren't coming in to buy a soft drink and a candy bar. They're coming in because they have a need. And right now, Tree and Family Dollar filled up void for them.
Speaker 9
Thank you. And my follow-up is on the Family Dollar gross margin. It is up year over year, but against a really easy comparison, particularly on a two year basis. So how should we think about the trajectory of the gross margin at $300? Understanding that EMIC might have had some issues in the first quarter.
But what's it going to take to be able to get this business back to twenty six percent to 27% gross margin? And how quickly is it realistic to expect that that's going to happen?
Speaker 2
Yeah, Michael. I think as far
Speaker 3
as the
Speaker 2
timeline, and that's maybe the harder part of the equation there, I think, obviously, we're very happy with where we're headed. Now obviously, the h two renovations are a big part of that, and just the overall work that the merchant team is doing on the discretionary side of the business also plays a big role in this. And again, you know, I think our opportunity here is to get more people in the store, show them the assortment and the reassortment, and, you know, get them excited about their Family Dollar store that they shop. And I think so the opportunity is there. I think, again, obviously, increased volume always helps, but I think changing our trajectory of mix potentially plays a bigger role on an overall basis.
We want to sell more consumables, but we obviously want the discretionary categories to play a bigger role. And then there's other things that we have to do a better job with. We've talked about shrink the last couple of years, and it's not where we want it to be in our Family Dollar stores. And we have work, and the team is working hard, but it's there's more work to be done there, even though we saw some improvement in q one. I think if you look at other line items in there, you know, obviously, markdowns have been heavy the last couple of years.
I think we feel better about that as we get through this year. We talked about q one being more markdowns originally when we went into the plan because of the fact that, we'd be working on a discretionary re assortment. But I think we've moved through that, you know, with the with the sales that we've seen. So I think going forward, we have this opportunity, and I think, the team is working hard to, you know, make that consumer realize that it is a new assortment, a new mix, and I think it'll be exciting to them.
Speaker 9
Can I just clarify one thing? One of your competitors reported this morning, and they noted that they've seen a moderation in their comp trends in recent days. Have you seen the same thing?
Speaker 2
I don't think that's something that we would we would comment on, Michael.
Speaker 9
Okay. Thank you very much, and good luck with the upcoming period.
Speaker 0
And our final question will come from Paul Edwards of Citi.
Speaker 3
Hey. Thanks, guys. I'm curious on the Family Dollar side if you had any idea about the number of new customers that may have come into the network over the past several months? And then second, just to go back to the Dollar Tree gross margin, curious, if we take mix out of the equation, if maybe you can talk about the gross margin within categories relative to themselves on a year
Speaker 4
over year basis where you're
Speaker 3
seeing increases and decreases. Thanks.
Speaker 2
Well, for the that I got mentioned, you know, I would tell you anecdotally, we see from our, folks in the field that just tell us, you know, they're they're seeing new customers coming in coming in. The data point we do track is on customer feedback that we see folks who identify themselves as new customer. And on a week in week out basis, we see the number of folks that actually sign up for the first time using the Family Dollar app, which we saw as Python as people were looking for essential. So, you know, that that sort of vectors in on me to us that we've had an opportunity here to showcase our h two stores, but also just improvement in our store base at Family Dollar. So that's a positive with my book.
For Dollar Tree, on the margin mix, when you think about that four ninety basis point shift, I I guess you already start there. Mean, that was the low point of us losing you know, that amount of business on a key holiday in the discretionary business, and we're getting that back to normal now. And I think if you're asking a question around, you know, we always think we got mix and and mark on. Well, mark on is just fine. And when we take a look at categories like craft now that are comping, outside the norm, that's gonna be a help.
So as we get back to a more normal mix, the mark on is just fine. And then to Kevin's point, the things down the line that still deserve our attention, we do have to do better on shrink. You know, we're willing to spend more in our DCs right now to get essentials to our stores. That's probably gonna be with us through at least q two, if not past that. And, you know, when you're bringing in essentials, that does have an effect on the fact that you're paying, you know, basically the same freight on lower value trailers of bleach or paper towels or whatever it is compared to the normal mix.
Those are sort of near term and short term things that the way I'm thinking about it. But we're in a different place on mix right now, and we would expect Dollar Tree's gross margin to get the help from those that I called out. Got you. Thank you. Good luck.
Speaker 0
And I'd now like to turn the conference back over to Randy Guiler for any additional or closing remarks.
Speaker 1
Thank you, Shannon. Thank you for joining us for today's call and especially for your continued interest in Dollar Tree and Family Dollar. Our next quarterly earnings conference call to discuss Q2 results is tentatively scheduled for Thursday, 08/27/2020.
Speaker 0
That does conclude today's teleconference. Thank you all for your participation. You may now disconnect.