Dollar Tree - Earnings Call - Q3 2026

Transcript

Speaker 2

Welcome to the Dollar Tree Q3 2025 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to Bob Lafleur, Senior VP of Investor Relations. Thank you. You may begin.

Speaker 0

Good morning, and thank you for joining us to discuss Dollar Tree's third quarter fiscal 2025 results. With me today are Dollar Tree CEO Mike Creedon and CFO Stewart Glendinning. Before we begin, I would like to remind everyone that some of the remarks that we will make today about the company's expectations, plans, and future prospects are considered forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward-looking statements.

For information on the risks and uncertainties that could affect our actual results, please see the risk factors, business, and management's discussion and analysis of financial condition and results of operations sections in our annual report on Form 10-K filed on March 26, 2025, our most recent press release, and Form 8-K and other filings with the SEC. We caution against any 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 discussions today refer to our results from continuing operations, and all comparisons discussed today for the third quarter of fiscal 2025 are against the same period a year ago. Please note that a supplemental slide deck outlining selected operating metrics is available on the IR section of our website. Following our prepared remarks, Mike and Stewart will take your questions. Given the number of callers who would like to participate in today's session, we ask that you limit yourself to one question. I'd now like to turn the call over to Mike.

Speaker 1

Thanks, Bob. Good morning, everyone, and thank you for joining us to discuss our third quarter results. It's great to be with you again. When we recently gathered in New York for Investor Day, I said this was the start of a new era for Dollar Tree: one company, one brand, one focus. Our energy is now directed towards strengthening and growing the Dollar Tree business. We delivered a high-quality quarter accompanied by mid-single-digit comps, above-outlook earnings, and strong end-of-quarter momentum heading into the holidays. These results speak to our disciplined execution and focused strategy. Let me start by framing the quarter at a high level, and then Stewart will take you through the financial details. First, I'd like to highlight the strength of our discretionary business, which showed its first positive year-over-year mix shift since Q1 of 2022.

We believe this strength illustrates how our exceptional value proposition, including our growing multi-price assortment, is resonating with our shoppers by helping them meet their needs and desires in the budget-constrained environment that many consumers find themselves today. The three pillars that define Dollar Tree are value, convenience, and discovery. Those are not slogans. They're how we win. They describe a brand that offers customers compelling values across a variety of price points that help them do more with less, in stores that are easy to shop and full of surprises worth discovering. While the consumer landscape remains uneven, the underlying story remains consistent: all consumers are seeking value. Marrying that value-seeking behavior with convenience and discovery is the intersection where Dollar Tree thrives.

The evidence is clear: Dollar Tree continues to gain share and attract new shoppers while continuing to serve its large and loyal base of core customers. Today, we serve an increasingly broad spectrum of shoppers, from core value-focused households to middle and higher-income shoppers who are making deliberate choices about how and where they spend. We had three million more households shop with us in Q3 this year compared to Q3 last year. Approximately 60% of these incremental shoppers came from higher-income households, those earning over $100,000. 30% from middle-income households, those earning between $60,000 to $100,000. With the rest from lower-income households, those earning under $60,000. Importantly, Q3 spending growth was broad-based across all income sub-cohorts, including households earning below $20,000. To us, this demonstrates that Dollar Tree isn't just for tough times or for those with limited resources.

Dollar Tree is for smart shoppers across all income brackets where value, convenience, and discovery matter. At the same time, higher-income households are trading into Dollar Tree. Lower-income households are depending on us more than ever. For example, the average spend for lower-income households grew more than twice as fast in the third quarter as the average spend for higher-income households. Part of this reflects the fact that higher-income households are typically earlier in their customer lifecycle with us. The data clearly shows that our core customer remains loyal and deeply engaged. She's balancing her household budget carefully and continues to count on Dollar Tree for essentials and, increasingly, for the seasonal and discretionary items that bring joy to her and her family. Over time, our goal is to inspire the same level of loyalty in our newer, higher-income customers that we see in our core customers.

While the average per-household spend for our higher-income customers is currently lower, even given their higher income, larger average basket size, and ability to spend more, this is a simple function of trip frequency. Because many of our higher-income customers are still early in their relationship with Dollar Tree, their purchase frequency has significant room to grow. Over time, we believe that growing trip frequency among these higher-income customers, given their propensity to build bigger baskets, will be a powerful growth driver for Dollar Tree. This is why our brand promise matters so much right now. We make it easier for customers to do more with less without trading down on quality or experience, and that is what keeps our traffic and baskets healthy in a cautious consumer environment, and with that, let's take a look at some of our Q3 highlights.

Comparable sales increased 4.2%, a nice acceleration from the quarter-to-date trend of 3.8% we shared in mid-October. As the results suggest, October finished strong, driven by momentum in our multi-price assortment and a great Halloween. Our Q3 comp was all ticket-driven as traffic was slightly negative. Discretionary mix improved 40 basis points to 50.5%. Comp increased 4.8% in discretionary and 3.5% in consumables. Gross margin performance exceeded expectations, reflecting strong operational execution and cost discipline. Adjusted EPS of $1.21 was nicely above our outlook, and Stewart will go through the drivers behind this upside in his remarks. We believe these results reflect our sharper focus and more disciplined execution. Multi-price was a key driver of our Q3 momentum. As a reminder, multi-price is a deliberate, long-term, data-driven strategy that began back in 2019 to make Dollar Tree more relevant, flexible, and profitable.

Multi-Price is about evolving our assortment over time to include new, more relevant, and attractively valued items that we could not offer at a fixed price point of $1 or $1.25. Multi-Price is one of the most important strategic shifts in Dollar Tree's modern history, and it's working. As we highlighted at our Investor Day, the roughly 5.5% annual comp we've averaged since breaking the dollar in 2022 is among the very best in all of retail. Those of you who attended our Investor Day may recall a slide from Stewart's presentation where he demonstrated how expanded multi-price penetration in categories like electronics, hardware, and Easter had a meaningfully positive impact on sales and per-unit profitability. We've reproduced a similar analysis on our Multi-Price Halloween Assortment this year, which we've included in our supplemental presentation available on our Investor Relations website.

Our Halloween performance this year is another clear example of the power of multi-price. This year, our Halloween assortment generated over $200 million in sales, an all-time record. But to see the full impact of multi-price, let's go back to Halloween 2022, when multi-price was still in its infancy. That year, multi-price represented about 3% of units sold, 10% of sales, and 7% of merchandise gross margin across our full Halloween assortment. Fast forward to 2025, on a 25% larger base of sales, where multi-price accounted for roughly a quarter of our total Halloween sales and merchandise gross margin, but only 8% of Halloween units sold. We are continually engineering incremental value and profitability drivers into our multi-price assortment. Across Halloween this year, each multi-price item that we sold generated three and a half times more profit than each non-multi-price item we sold.

This is a full-turn higher than Halloween 2022. By combining this increased per-unit profitability with a higher multi-price mix, we were able to generate approximately 25% more margin dollars from our Halloween assortment this year compared to 2022, while selling approximately 10% fewer units. And this is just the positive impact on merchandise margin. It doesn't take into consideration any labor or distribution cost savings that come from handling fewer units. Looking at it this way, multi-price is a powerful growth and profitability driver. It broadens our value proposition and relevance to our customers, allows us to compete more effectively, helps drive cost leverage, and sets the business up for long-term success. More importantly, we are just getting started. Multi-price is not a one-and-done proposition. We expect these dynamics to play out across every holiday and special occasion and strengthen as our multi-price penetration expands.

Over time, our customers will let us know what the right multi-price mix ultimately is, but we're confident that it's meaningfully higher than where we are today. So let's take a look at some broader merchandising highlights from the quarter. Discretionary categories accelerated through the quarter with standout performances in party and home decor. Consumables were steady, led by household cleaning, personal care, snacks, and cookies. Seasonal performance was strong, particularly towards the end of the quarter. We planned the inventory carefully, had strong in-store execution, and are pleased with our sell-through. Those wins are proof points for our merchandising strategy and ever-changing, more relevant assortment that drives trip completion and, more importantly, enhances profitability and margin performance. Today, with a wider assortment of multi-price merchandise and restickering largely complete, 85% of the items in our store are still priced at $2 or below.

Offering a broad range of price points while staying firmly grounded in value preserves the integrity of the Dollar Tree brand. We believe time, convenience, pack size, and quality are all part of our customer's value calculation, and so is an expanded range of products that address a wide range of shopping occasions. When a customer can fill a basket with snacks, cleaning supplies, home decor items, and seasonal products all at a great value, that's when the Dollar Tree magic is on full display. Q3 results were also powered by strong execution in our stores, supply chain, and support functions. At Investor Day, Jocie Conrad spoke about our commitment to simplify work, elevate standards, and empower our people. In Q3, we saw measurable improvement in these key areas. On store standards, we've rolled out new tools and training that simplify store routines and improve accountability.

The results are visible with cleaner aisles, stock shelves, and faster checkouts, with more to come. On associate engagement, our Race to Gold initiative continues to gain traction. As we've increased our investment in training and career progression, we've seen continued improvement in turnover. In supply chain, the network is performing at a very high level. Service levels and in-stocks coming out of this year's peak season are among the highest we've seen, and our planned increases in distribution capacity over the next several years should allow us to unlock even greater operating efficiencies and distribution cost savings. In technology, we continue to modernize our back-office systems and upgrade store infrastructure. These investments are simplifying work and enabling smarter decision-making in merchandising and replenishment. All of this comes down to one thing: making it easier for our teams to deliver a consistently great experience for our customers.

With the Family Dollar sale behind us, we are already seeing measurable improvements in our culture and performance. We are fully aligned behind one brand, one set of priorities, and one mission, with leadership and investment focus concentrated on growing Dollar Tree. Every decision across product, stores, technology, supply chain, and people is aligned to strengthening one business. That alignment brings speed and accountability. Teams test, learn, and scale faster, and we now measure progress across a single set of metrics directly tied to creating shareholder value. We are moving forward with purpose, clarity, and conviction, guided by the five strategic priorities we laid out at our Investor Day. Surprise and delight our customer with an expanded, more relevant assortment. Manage expenses with agility by controlling the cost of the goods we sell and managing our SG&A with discipline to drive operating leverage and profitability.

Create a strong connection with our customers with cost-effective, quick-return, data-driven marketing. Open more stores and improve the condition of our fleet. And finally, improve the in-store experience for our customers by raising the bar on our store standards. At the foundation of these priorities are a fast, flexible, and efficient supply chain and disciplined financial management that focuses on high-return investments and smart capital allocation. And at the forefront of our success is our people, the more than 150,000 associates who show up every day to serve our customers, support their colleagues, and strengthen the communities where we operate. They are the reason we do what we do and the driving force behind every decision we make. As you heard me emphasize at Investor Day, we manage this business with a focus on what I call the say-do ratio, making clear commitments and delivering on those commitments.

This mindset builds trust and accountability across the organization, and we believe that maintaining alignment between what we say and what we do is how we deliver consistent performance over time. In summary, we are pleased with our Q3 results. We're building a stronger foundation for the future, and we're confident about the direction we're heading. With that, I'll turn it over to Stewart. Thanks, Mike, and good morning, everyone. Q3 comp sales increased 4.2%, and adjusted EPS was $1.21. Both our comp performance and our adjusted EPS were ahead of the expectations we shared in mid-October. The 40 basis points of Q3 comp acceleration between the middle and end of October was driven by a late but strong performance in Halloween sales on the back of a deeper multi-price assortment and excellent execution across our stores. Dollar Tree's seasonal assortment and value resonated strongly with shoppers.

Our EPS improvement versus expectations was largely driven by freight, higher discretionary sales mix, and SG&A. With that, let's go over the details of our third-quarter results. Q3 net sales increased 9.4% to $4.7 billion. Consistent with our expectations, Q3 comp growth was primarily ticket-driven as traffic was slightly negative. Average ticket growth was supported by increased multi-price penetration, particularly across our Halloween assortment and the pricing actions we began rolling out last quarter. Importantly, strong execution around merchandise cost, tariff mitigation, freight, and operating expenses helped drive profitability. Q3 gross margin expanded 40 basis points to 35%. Drivers of this improvement were merchandise margin, successful execution of our five merchant levers, renegotiation, re-engineering, shifting country of origin, discontinuing, and targeted price changes, all contributed to our ability to manage increased costs from tariffs.

Freight, import and inbound freight rates were favorable versus prior year, with lower spot market utilization and better container flow-through at our DCs. Domestic transportation costs were also favorable. Mix, discretionary and seasonal categories, particularly Halloween, were stronger than expected, increasing the realized mark-on. Markdowns. As part of the ongoing strategic initiative to increase shelf productivity that we outlined at Investor Day, we identified and wrote off various slow-turning SKUs. This will create room for more productive items and help optimize storage space utilization in our stores and DCs. The total impact to Q3 earnings was approximately $56 million, or approximately $0.21 of EPS. We believe we will see increased sales and profits per store going forward as we bring in new items or reallocate shelf space to existing but faster-turning products. Shrink. Overall, shrink was higher than last year, but in line with our expectations.

These drivers, taken together, drove the Q3 gross margin performance. At the Dollar Tree segment level, our Q3 adjusted SG&A rate increased 160 basis points to 26.2%, driven by higher store payroll related to wage increases and restickering, general liability claims costs, and DNA from elevated store investments. These were partially offset by sales leverage. As a reminder, we do not expect costs related to restickering and other price-related activities to be repeated next year. Also, the wage-related payroll increases this year were expected and planned. Looking forward to next year, we expect wage growth to moderate. As we discussed at Investor Day, on a go-forward basis, our goal is to grow Dollar Tree segment SG&A per store below the rate of inflation, while reinvesting selectively in high-return initiatives that enhance the customer experience and the long-term profitability of our store base.

We believe this will result in future SG&A cost leverage. Adjusted corporate SG&A should be considered net of TSA income because of the costs we carry in order to service the Family Dollar transition. Using this lens, our adjusted corporate SG&A rate, net of the $24 million of TSA income, leveraged 80 basis points to 2.4%, a positive step toward our goal of reducing corporate SG&A to 2% of sales by fiscal 2028. Adjusted operating income increased 4.1% to $345 million. Our operating margin contracted by 30 basis points to 7.3%, reflecting the offset between the gross margin expansion and SG&A deleveraging, partially driven by cost headwinds such as restickering that will not repeat in 2026. Keep in mind our comments with respect to anticipated SG&A leverage next year at both the Dollar Tree segment and the corporate level.

Net interest expense and our adjusted tax rate were broadly in line with expectations. Adjusted EPS from continuing operations increased 12% to $1.21. Moving on to the balance sheet and free cash flow. Inventory was down $143 million, or 5% versus prior year, while sales increased by 9.4%. Our store count increased by 4.5%, and we ramped up our DCs in Ocala and Odessa. This reduction reflects our focused efforts to increase inventory turns and improve shelf productivity. We ended the quarter with $620 million of commercial paper notes outstanding and $595 million in cash and cash equivalents. On the Q3 cash flow statement, we generated $319 million in cash from operating activities and had capital expenditures of $376 million. This resulted in negative free cash flow in the quarter of $57 million. Year to date, we've generated $88 million of free cash flow.

As a reminder, the fourth quarter is our highest cash-generating quarter because of normally high levels of sales and because our capital expenditures skew towards the first three quarters of the year. In Q3, we purchased 4.1 million shares for $399 million, including excise tax. Subsequent to quarter end, we repurchased an additional 1.7 million shares for $176 million. Year to date, we've completed $1.5 billion of share repurchases, or approximately 16.7 million shares at an average price of $90 per share. This represents approximately 8% of the shares we had outstanding at the beginning of the year. Our liquidity remains healthy, our balance sheet remains flexible, and we have ample capacity to fund our growth and return significant capital to shareholders. Our capital allocation priorities remain unchanged. Number one, invest in growth. Number two, maintain a strong and flexible balance sheet. And number three, return capital to shareholders.

Looking ahead, we expect Q4 comps will come in between 4% and 6%, which should support net sales of $5.4-$5.5 billion and adjusted EPS in the range of $2.40-$2.60. On a full-year basis, this would raise our comp outlook to between 5% and 5.5% and our adjusted EPS outlook to $5.60-$5.80. The underlying assumptions incorporated into our full-year outlook are as follows: net sales of approximately $19.35-$19.45 billion, gross margin expansion of approximately 50-60 basis points, reflecting sustained favorability in merchandise margin, freight, and occupancy leverage, with some offset from markdown and shrink. Dollar Tree segment SG&A deleverage of approximately 120 basis points, primarily driven by higher store payroll related to wage increases and restickering and to a lesser extent, facilities costs and DNA.

Corporate SG&A costs, we expect corporate SG&A net of $55 million of TSA income to decrease by approximately 3% year over year. Net interest expense of approximately $85-$90 million, which is about $10-$15 million below our prior outlook. An effective tax rate of approximately 25%. Shares outstanding of approximately 206.4 million, reflecting our share repurchase activity through December 2nd. We remain on track to meet our full-year CapEx target of $1.2-$1.3 billion. We understand that at this point, many of you are shifting your attention to next year. As is customary, we intend to give a detailed outlook for 2026 on our next earnings call in March.

With that said, I will remind you of the directional outlook we provided at our Investor Day, where we outlined an algorithm for adjusted EPS to grow at a 12%-15% CAGR through 2028, supported by underlying EPS growth of 8%-10%, with the balance being driven by the unwind of certain discrete items, mostly affecting 2026, with some residual carryover into 2027. To review the underlying details of the algorithm, I direct you to our Investor Day presentation, which is archived on our IR site, and we will give you more specifics and any updates next quarter. To wrap up, we're executing well against the roadmap we shared with you in mid-October. Each day, we continue to see tangible proof that the fundamental appeal of this business, value, convenience, and discovery, is resonating with customers and translating into strong financial results.

With that, I'll turn things back over to Mike. Mike. Thanks, Stewart. Let me wrap up by putting Q3 in the broader context of where we are and where we're going. When we shared our roadmap at Investor Day, we said this transformation was about focus, consistency, and accountability. We believe Q3 was a strong proof point that our strategy is working. We delivered above-market comps, expanded gross margin, and continued to make meaningful cultural progress across the organization. Today, Dollar Tree is a pure-play value retailer with the scale and focus to compete at the highest level. Post Family Dollar, we have clarity of purpose, and our teams are responding with renewed intensity. As we look to Q4, the setup is solid.

Halloween was great, and our Thanksgiving and Christmas assortments are resonating with our customers as we remain focused on consistently delivering unbeatable wow value and the thrill of the hunt experience. As 2025 winds down, let me wrap up by saying first to our associates, thank you. Your dedication, creativity, and pride in the work you do are what makes Dollar Tree special. To our customers, thank you for your trust and loyalty, for choosing us for the moments big and small that matter the most in your daily lives. And to our shareholders, thank you for your continued confidence and partnership. With that, Stewart and I are happy to take your questions. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press Star 1 on your telephone keypad.

A confirmation tone will indicate your line is in the question queue. You may press Star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. We ask that you please limit yourself to one question. One moment, please, for our first question. Our first question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question. Great. Thanks. And congrats on another nice quarter. So maybe two parts. Mike, could you elaborate on drivers of the same-store sales acceleration that you saw in October, speak to comp trends that you've seen in November that support the 4%-6% quarter comp guide?

And then, Stewart, could you just help break down gross margin expansion opportunities in the fourth quarter and how best to think about gross margin puts and takes maybe at a high level for next year? Yeah, sure, Matt. As we looked at how the quarter unfolded, the Halloween was just a great finish to the quarter. It did come, as we see in times like this, people buying for need and a little closer to need. So it came a little later, but it came incredibly powerfully, and it came with a record number. If you go back, Easter performed that way. A great Easter, a great Halloween. And our setup for Thanksgiving and Christmas is just fantastic. So we really look at what we've done with multiprice and how the assortment's gotten better.

Our customer across all incomes is really resonating with that and providing just fantastic seasons for us. We feel really good about our guide on the four to six. Matt, let me pick up on the gross margin for the fourth quarter and then just talk a little bit about next year. First of all, as we think about the fourth quarter, the same kind of levers that you saw in the third quarter, we detailed some of that in our supplementary materials as well as in my prepared remarks, are going to be drivers in the fourth quarter. You will see a very powerful fourth quarter on the back of those drivers. If you look at next year and just think about next year, freight is a benefit, certainly in that fourth quarter it came through in the third quarter.

As you look to next year, both freight and markdowns are the areas that we'll be watching. If you think about how we operate our business, we buy to a margin. And so when we set up our goal for next year, we shared with you that we said we would be equivalent to this year's margin plus or minus 50 basis points, and that's the place that we're targeting. There may be continued benefit in freight as we move into next year. There is some belief that perhaps on the freight side, we'll see a tightening of capacity later in the year, and we are watching the potential shortage of drivers. But understand that the reason I bring up the targeted Gross Margin is because we use those Five Merchant Levers to achieve that margin. So I think the margin you can take to the bank for next year.

The second piece is to refer back to the Investor Day materials that we had, and in our recent Investor Day, we shared with you an algorithm that said we would achieve high-teens improvement next year. That's on the basis of that same gross margin achievement and based on some of the discrete items that we're expecting to see in the coming year, so we're set up well for next year, and I think that probably gives you the main drivers. Thank you. Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question. Good morning. Thank you so much for taking my question. It's on traffic, and obviously, this was the first decline in traffic that Dollar Tree has experienced in a while.

To what degree is that as a result of some of the legacy households pushing back on the price increases that have been taken in the last couple of quarters? And if that's the case, does that give you any pause on your ability to achieve this high teens EPS growth next year in light of the prospect that you might have to make some investments in order to recapture those households that are just dissatisfied with the pricing changes? Thank you so much. Yeah, Michael, we really see traffic as a mix between some internal activity, namely the restickering, and some broader retail trends. We don't see it as a pushback from our customer. And if you look at our performance in the quarter, we had great growth across all income cohorts, and our core customer really had our highest comp.

So we look at it and say we saw the traffic decelerate in that August-September timeframe. That was the peak of our restickering, those red stickers. That was the peak distraction for us. And then it was good to see traffic strengthen towards the end of the quarter, really on the backs of that Halloween and that great strength in Halloween. So we believe there was some broad-based retail traffic decel around back to school, some of the sticker shock around back to school. But as we got into the real core of what Dollar Tree does and does, we think, better than anyone, we saw the strength in our Halloween, and we're very excited about what Thanksgiving and Christmas and all the seasons can do for us. Thank you. Our next question comes from the line of John Heinbockel with Guggenheim Partners. Please proceed with your question.

Mike, two quick ones. When you think about traffic or a divergence between traffic and units, so sort of as the idea traffic will be strong, units maybe to a lesser degree because you're basically trading people into higher price point items. Talk about that divergence in your mind. And then secondly, if the units are going to grow at a slower pace, how do you think about space allocation and replanogramming the stores over maybe the intermediate to longer term? First of all, thanks, Jeff. We'll always follow our customer on that. We believe that the customer is resonating incredibly well with multi-price. We're hearing that in the surveys we're doing. We're seeing it in how our customers are performing in the store and that real strength in the comp of that core customer.

So yes, when we look at the store, when we take multiprice, we'll take away sections of $1.25. And so your units will naturally decline there as you take that space and make that space more productive. So we do see some of that. But we believe the proof point we have from Break the Dollar was that you took up the price of the whole store. There were elements of the store that just didn't work, and our merchant team took the next buying cycles to really recover that.

What we've seen here in this multiprice evolution and some of the restickering we did based on the inflationary cost environment is that the units have performed better, the traffic has performed better, and we're confident that we can continue to drive that value in our product across these price points and continue to give the customer exactly what they need. So we see that coming together very well for us, and we'll respond to the customer and their trends with how we set up the store. Thank you. Our next question comes from the line of Edward Kelly with Wells Fargo. Please proceed with your question. Yeah, hi. Good morning. Thank you for taking my question. I wanted to ask you about the mix of multiprice as you think about next year. Just looking out, it does seem like you'll have more conversions.

I would imagine you're still doing more merchandising around improving the multiprice mix. So how do you think the stores look from the standpoint of the multiprice offering as we think about next year? And then how does that play into the way that you are thinking about driving comp next year in terms of traffic versus ticket? Thank you. Yeah, thanks. And I mean, I really want to start with saying 85% of the store is still $2 or less. So we're still early in this multiprice game. And when you look at what the seasons have done, we're going to continue to benefit in those seasons from the multiprice assortment. And we're really looking at everyday essentials and where we can benefit in the assortment there and the shift towards multiprice.

Where it ultimately goes, our customers will respond to us, and we'll respond to them in terms of building it out. But I know it's higher than where we are today, and it's something that we believe sets up a multi-year run where we're able to respond to our customers, wow them with new discovery, and not just at the seasons, but new discovery every day because multiprice contains something on a wow table for us or on an end cap that shows them something they couldn't believe they could get at that price, even though it's a price higher than $2. So we're delivering the everyday value with the majority of the store still at that 2 bucks or less, and we're wowing the customer in what we bring into the multiprice assortment. Thank you. Our next question comes from the line of Paul Lejuez with Citi.

Please proceed with your question. Hey, thanks, guys. Curious if you could talk about Thanksgiving weekend and what you saw from a traffic versus ticket perspective. It sounded like you saw a pickup in traffic around the Halloween period. Curious what you saw Thanksgiving week and weekend. And then that 85% number, I think you're talking in terms of units, in terms of the % of the store that's still $2 and below. What % of sales should we think about being above that $2 level? And how does it split between discretionary and consumables? Thanks. Yeah, Paul, let me clear up the first one. So first of all, it's sales dollars that are at the 85% of the store is $2 and less. That is on sales dollars. As we look at how the quarter has started, I said in my prepared remarks, we're really pleased.

We look at the strength of the seasonals, the Thanksgiving, the setup for Christmas, what we've seen so far in Christmas, so we feel really good about the guide for the fourth quarter. We've got one period in, and we're feeling really good about where we sit. Thank you. Our next question comes from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question. Good morning, and thanks for taking a question. I also have a two-part one, so just on the last issue front, just curious on the categories you took pricing related to tariff risk and price increases. Just curious how that played out. And then if we do get a tariff relief, how do you guys approach that, whether passing on those savings or letting it flow to the bottom line? Thank you. Yeah, thanks, Rupesh.

I mean, the elasticity has really come in as we've modeled it. It's very manageable. It's really offset by the mix we see in the multi-price. But most importantly, the value perception is intact. Our customers responding across all income cohorts, core customers, new customers, the 60% of the new 3 million that have come in making more than $100,000. So we believe that the elasticity is very manageable. And then I do think it's important to go back to that Break the Dollar moment. What we saw there, it's a proof point. You can go back and look, see what happened with traffic. And now our performance, we believe, and what we're seeing in our numbers is better than that and gives us the confidence in the path we're on on this. As for the tariffs, I know it's been a lot in the news.

We have, I think, one of the very best global sourcing teams in the business. They are all over this. They've got great partners watching this. We'll see how it unfolds with the Supreme Court, and we'll take action from there. Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question. Hi, this is Zach on for Simeon. Thanks for taking our questions. Just a couple from our end. Back to the traffic question, is there a way you could compare your frequent and most loyal customers to those who are more episodic? And would you say there's a similar deceleration in traffic trends between both of those groups, or is there a gap in the trend? Yeah, when we break it down, we really look more at our sales across all those income cohorts.

It's really important to us to make sure that as we know multiprice skews and attracts more towards higher income, that we are committed to the base of our business, which is that core customer, that customer that makes around $60,000 a year. And we were particularly pleased with how our comps performed at that core customer. They had our highest comps in that customer. And so we think that our customer, whether you're new to Dollar Tree or you shop us several times a month, that you're finding what you need as you seek out affordability, you're finding exactly what you need at Dollar Tree. Thank you. Our next question comes from the line of Scott Ciccarelli with Truist. Please proceed with your question. Good morning, guys. Scott Ciccarelli. I think we all understand that there was some internal disruption as you restickered product.

But with the negative traffic this quarter and the expectation to keep expanding MPP, should we just expect 4Q and next year to have a similar mix of traffic and ticket that we saw in 3Q? In other words, all the comp is primarily driven by ticket. Thanks. Yeah, Scott, it's hard to say. We can go back, and we know what we saw in Break the Dollar. You saw the multiple quarters and how the traffic performed there. We believe this time around we were much more strategic. Back then, the only choice was raising everything to $1.25. And as I've mentioned, you had a healthy percentage of the store that just didn't work at that new level, and the merchant team had to go over several buying cycles and re-engineer product and renegotiate and get product that did work. And you saw what happened with traffic recovery.

This time, we were much more strategic in how we took that. We really feel that we have found the right value places to take price, and our customers responded. If you look at the value we took in Halloween or in Christmas, I mean, our customers responded incredibly well to that move. So I look at it and say, I think we were more strategic this time, or we at least had a more strategic opportunity available to us this time, and we'll see how the traffic plays out. Yeah.

Maybe one other thing, just to supplement, I think if you go back to the investment materials we laid out, I mean, that entire strategy is set up to drive higher sales in stores via productivity on the shelves, via the way we intend to market to customers, and based on the way we intend to run better stores. I think that entire setup really is organized to enhance the traffic and the ticket flow. Thank you. Our next question comes from the line of Michael Montani with Evercore. Please proceed with your question. Michael, could you please check if you're self-muted? Yes, hi. Good morning. Thanks for taking the question. I was going to ask if you could share what the average selling price was in 3Q versus this time a year ago.

And then, curious if you think that you'd be able to get that level of price increase again in 2026 to drive comp. Yeah, our AUR right now, right about $1.50. When you look at that value over time, it's pretty remarkable considering what this company's done, what other prices have done. So we look at it and say, our customer is going to tell us with their comps, with their wallets, that we're hitting the right points in terms of value, convenience, and discovery. One of the things that we really turn to is that expanded, more relevant assortment. So yes, it comes at a higher ticket, but it's still an incredible wow for the customer.

It fits their occasion, the purpose for their trip, and whether it's a great pack size for them that helps them or just an item that helps them celebrate and they love it. So we feel that while the AUR moves up, it does so locked squarely into that value play for the customer. Keep in mind one other item is that obviously, as our multiprice penetration increases, so that will also move AUR that is not price dependent. And I think if you looked at the supplementary materials and you look at how well the multiprice worked in Halloween this year, it'll give you a sense for the kind of benefit we might see going forward as we drive that multiprice harder. Thank you. Our next question comes from the line of Tian Ma with Bernstein. Please proceed with your question. Great. Thank you.

Just one quick clarification on corporate expenses. Did it come in a bit better than your prior expectations? If you can provide a bit more color there, that'll be really helpful. And then a quick one on next year. Given the trade down you have seen from middle to higher-income consumers, what does the tax refund, the incremental tax refund next year do to middle to high-income consumers' shopping behaviors in your mind? Thank you. Yeah, I'll pick up on the first part, Stewart. The SG&A did come in better than we expected. As we get ready to set ourselves up for next year and achieve some of the aggressive savings targets we've set up, we've been squeezing down on SG&A. Some of those savings came in a little bit faster than we had expected. Yeah. And then I'll take the second one.

I look at the tax refunds of the OB3, Big Beautiful Bill. When you offer the best value in retail, you benefit when people have more money in their wallet. Dollar Tree has the best value retail has, and we think we'll benefit as they get more money in their pocket. Thank you. Our next question comes from the line of Kelly Bania with BMO Capital Markets. Please proceed with your question. Good morning. Thanks for taking our questions. Wanted to ask about the consumables, the market share trends there from a unit perspective. They seemed quite strong in the first half, but really shifted in the third quarter here. I was just curious if you had any explanation of what you think is happening there. Is that attributable to the restickering impact or any other color on the market share trends there?

Yeah, Kelly, the red dots is kind of how I'll answer that. It really peaked for us in this Q3. It was the mass distraction. I will tell you, though, as we've seen trends from our customer post that, we track via customer surveys, via scrapes of website and star ratings and all that. The sentiment of our customer that really peaked negative in that August, September has improved every week. So the fewer mentions of pricing, more positivity, less negativity. We've been watching that, and every week that's gotten better. So we don't love that we had to create that environment for our customer. It was a necessary evil to continue to deliver for them and give them product at a value. But it is what it is, and it's behind us now. The restickering is basically done.

You get a little bit as you take some pack away, but it's basically done. The distraction's behind us, and our stores and customers are responding very favorably. Thank you. Our next question comes from the line of Joe Feldman with Telsey Advisory Group. Please proceed with your question. Yeah, thanks for taking the question, guys. When you talked about that higher-income consumer trying to get them to visit more often with more frequency, I'm just wondering how you guys plan to go about that. Maybe is it more stimulus from a marketing standpoint, or I don't know what other methods that you might be thinking of, but how do you get them to come more frequently? Thanks. Yeah, we love that this customer's finding us. We want to create a very sticky relationship with them, and we believe it is the more relevant assortment.

So continuing to wow them each season that they come up and for their everyday essentials with items they just can't believe they found. Remember, you don't come into Dollar Tree with a list and your head down, and I have to get this. You come in with your head moving around, looking at all the things that are wowing you. So that relevant assortment creates a sticky relationship, and then there is nothing more important than running better stores. Our store standards are on the move up, and we believe that as we continue to improve the in-store experience, those customers are going to want to come more and more often. Thank you. Our next question comes from the line of Robbie Ohmes with Bank of America. Please proceed with your question. Oh, hey, thanks for taking my question. I wanted to follow up on the last question.

Just, it's impressive how you guys are gaining all the new customers and the info you gave us on that. Just help me understand gaining all these new customers at all these income cohorts versus negative traffic. How does that happen? Are there cohorts dropping out or coming a lot less frequently? And that's offsetting all these new customers that you guys have gotten to come to the stores? Maybe a little more color on what's happening there. Yeah, Robbie, it's really a question of frequency. So you're driving new customers to the store, which is fantastic. I mean, three million new households. Yes, they're skewing a bit higher income, but the strength of our business is still in that core customer, their purchase frequency, their comp dollars.

We believe that these new customers come in, we can increase their trip frequency too when they find better-run stores and they find an assortment that keeps them coming back. So right now, they're coming in because of a Halloween or they're coming in for a great season, and then what they find in the store when they're there in health and beauty and in everyday essentials, that's what keeps them coming back. If you look at Dollar Tree compared to some of the folks we aspire to be, the difference is not in our ticket. The difference is in trip frequency. We believe we've got an opportunity to unlock increased trip frequency with these great newer trade-up customers. Thank you. Our next question comes from the line of Bobby Griffin with Raymond James. Please proceed with your question. Hey, good morning, guys. Thanks for taking the question.

Just curious if you can expand a little bit more on Shrink and where you are in that journey of bending that line item. And then I don't think it was discussed at the investor day, but what is embedded in the multi-year outlook for Shrink? Is that elevated rate versus pre-COVID, or is it a return to 2019 rates? Yeah, I'll start with that, with the focus we have. We learned a lot about Shrink from Family Dollar. Family Dollar has a higher Shrink threshold, if you will, and we were able to bend the curve over there. And so we've really reorganized how we're addressing Shrink at Dollar Tree. It's not as simple for us as it is other people. We can't just go rip out a bunch of self-checkouts and improve our Shrink. We don't have self-checkout in any large capacity.

So for us, it has to be leveraging training of our people, leveraging technology to address Shrink over time. And then in terms of how it builds, Stuart. So Bobby, Stuart, we have built in some improvement in Shrink as we move forward. I mean, we've made these changes to people and process. We're investing money in our asset protection, and we expect that to bend the trend. So that is built into the forward expectations. Thank you. Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question. Hey, thanks a lot. I have just a question on the SG&A line. In slide 9, you talk about the unit trend going from 100 to 89. So there's a clear benefit from running less units through the store on freight and handling expenses.

When we look at the core SG&A line, can we unpack the 160 basis points increase in SG&A? And then also looking ahead to the fourth quarter, how are you thinking about the complexion of both gross margins and SG&A in the last quarter of the year? Yeah, so Chuck, Stewart, when you really look at SG&A in total, the big driver for SG&A increases is really in store payroll in that whole space. We do have some increases, as we said before, both in DNA based on store investments and also in general liability claims. Those are probably the big areas to think about. If I unpack the store payroll for you a little bit, earlier in the year, we commented on the fact that first, we were faced with some rate increases. A number of those were driven by state minimum wage increases.

Second, we had decided at the beginning of this year that we would put some more hours back into the stores because we felt that if we invested some hours in stores, we could drive a better comp. Certainly, we set that out as an aggressive goal for the year, 3%-5% comp, and we're obviously at the top end of that. The last piece, of course, is the tariff-related stickering activities, which is a pretty substantial add. If you think about the increase in payroll, which again, the biggest driver of the SG&A, it was about a third, a third, a third. A third was the rate, a third was the increased investment in hours, and a third was stickering. Let me come back now to your unit point because I want to look forward to next year.

If you're thinking about next year, the stickering is sort of largely gone. So that piece is not going to be pushing on our P&L. In fact, that's a benefit. The rate increases, we believe that that rate's going to start to moderate, and that's going to help us next year. And then the last piece on the hour side, actually on the hour side, is exactly the point you've just made. The success of multi-price, in fact, allows us to move fewer units through the store, and that'll give us the flexibility to decide, do we take the units, do we take the hours down, do we invest some hours in running stores better? But I think it puts us in a better position overall. Hopefully, that gives you a good flavor for your question. Thank you. We have reached the end of our question and answer session.

I would now like to turn the floor back over to Mike Creedon for any closing comments. Hey, thanks for joining us today, and we wish everyone a safe and healthy holiday season. Thanks so much. Ladies and gentlemen, thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.