Store renovations are paying off for Dollar Tree, according to its third quarter financials. But food stands as one of the retailer's disappointments, according to its CEO.
The retailer said that the H2 renovation program at Family Dollar continues to be a key component of the momentum in the turnaround.
The H2 stores, on average, continue to comp at a 10%+ lift vs. non-renovated stores in their first year. Customers are responding favorably to the new categories and new price points, said Dollar Tree, which owns Family Dollar. Sell through on seasonal items has been exceptional, the retailer also said.
As of Oct. 31, the Company had approximately 2,240 Family Dollar stores in the H2 format. The company currently plans to renovate approximately 1,250 Family Dollar stores in 2021.
The company completed 371 renovations to the Family Dollar H2 format in Q3.
Food was not a bright spot for the company in recent months.
"Consumables were down approximately 3%. The comp sales for every line of business at Dollar Tree improved from quarter one to quarter two, with the exception of the food category," said Mike Witynski, president and CEO, during the post-earnings conference call with investors. "Factors impacting food include reduced availability of protein products from periodic plant shutdowns, slowed sales of impulse snacks as traffic has declined, and some vendors are focusing more on larger pack sizes based on demand and their production capacity."
As the pandemic surges again, pantry loading is apparently returning, and Witynski addressed that as well.
"Current environment and related in-stock levels on domestic items are improving, but the continuation of high customer demand, especially on items such as paper towels and cleaning supplies is still outpacing both vendor production capacity and the supply," he said. "In-stock levels on certain items are constrained, but we do expect to see continued improvements as we move through the quarter."
Recent civil unrest also has impacted the retailer.
"Additionally, as many of you have seen in the news reports, more than 100 of our stores were impacted in certain communities during the recent periods of civil unrest," Witynski said. "Overall, we incurred nearly $17 million in cost during the quarter related to store damages, repairs, and lost inventory. The majority of the impacted stores have been reopened."
Dollar Tree reported a 7.5% increase in consolidated net sales for the third quarter ended Oct. 31, reaching $6.18 billion. Enterprise same-store sales increased 5.1%, with a 6.4% increase for Family Dollar and 4% for Dollar Tree.
“I am incredibly proud of our team’s efforts to continue serving customers effectively, while driving operational improvements in both banners through this dynamic retail environment,” said Witynski. “Dollar Tree delivered its strongest same-store sales performance in the past ten quarters, along with a 50 basis point improvement in operating margin. At Family Dollar, the improvement continues as the team delivered a 6.4% comparable store sales increase, a 230 basis point improvement in gross profit margin and a 250 basis point improvement in operating margin.”
He also talked about the shift in consumer buying habits.
"As the quarter progressed, we saw a shift from kitchenware and table top into more home decor and soft home, as customers are investing in their homes and spending more time in their homes," he said during the post-earning conference call with investors. "Anything related to staying at home, such as lawn and garden and outdoor grilling continues to perform very well. And on the apparel side, we have had strong sell-through of our spring and summer apparel with a focus on our at-home items like loungewear, sleepwear, slippers, athleisure, children's clothing, as well as newborn and onesies."
Gross profit increased 12.9% to $1.92 billion in the quarter compared to the prior year’s third quarter. Gross margin increased 150 basis points to 31.2%, compared to 29.7% in the prior year’s quarter. The increase in gross margin was driven by improved merchandise costs including freight, leverage on occupancy costs from stronger same-store sales, improved shrink results and reduced markdowns, partially offset by higher distribution costs, which included $10.9 million in COVID-19-related payroll costs.
Selling, general and administrative expenses were 23.7% of net sales, compared to 23.5% of net sales in the prior year's third quarter. The increase was driven by COVID-19 costs of $35.3 million, or 57 basis points, related to frontline associate wage premiums, field management bonuses and store cleaning/PPE supplies.
Operating income for the quarter improved 29.9% to $465.5 million, compared with $358.4 million in the same period last year and operating income margin was 7.5% in the current quarter, compared to 6.2% in last year’s quarter.
Net income was $330 million in the third quarter and diluted earnings per share for the quarter increased 28.7% to $1.39, compared to $1.08 per share in the prior year’s quarter.
The retailer opened 143 new stores, expanded or relocated 34 stores, and closed 16 stores. Retail selling square footage at quarter end was approximately 124.3 million square feet.
For the first nine months of the year, consolidated net sales increased 8.4% to $18.74 billion from $17.30 billion in the same period last year. Enterprise same-store sales increased 6.5% on a constant currency basis, when compared to the prior year period. Same-store sales for Family Dollar increased 11.2%. Dollar Tree same-store sales increased 2.1%.
Gross profit for the first nine months increased 10.9% to $5.64 billion.
Additionally, for more than a year, Dollar Tree has tested a multi-price initiative referred to as Dollar Tree Plus! In mid-2019, the company began testing multi-price assortments in more than 100 stores in southwestern markets. Major modifications, based on learnings, have included: transitioning the offering from consumable products to primarily discretionary items; reengineering the display elements and signage to drive awareness and excitement in stores; focusing on the $1, $3 and $5 price points; and increasing the offerings above the $1 price point. The retailer will be expanding this initiative into a total of approximately 500 stores beginning in the spring of 2021.
Chesapeake, Virginia-based Dollar Tree is No. 30 on The PG 2020, Progressive Grocer’s 2020 list of the top food and consumables retailers in North America.