Dollar Tree, Inc. (DLTR) Q3 2021 Earnings Call Transcript

Dollar Tree, Inc. (NASDAQ: DLTR) Q3 2021 earnings call dated Nov. 23, 2021

Corporate Participants:

Randy Guiler — Vice President, Investor Relations

Michael A. Witynski — President and Chief Executive Officer

Kevin S. Wampler — Chief Financial Officer

Analysts:

Matthew Boss — J.P. Morgan — Analyst

John Heinbockel — Guggenheim Securities — Analyst

Michael Lasser — UBS — Analyst

Edward Kelly — Wells Fargo — Analyst

Kate McShane — Goldman Sachs — Analyst

Brad Thomas — Key Banc — Analyst

Michael Kessler — Morgan Stanley — Analyst

Paul Lejuez — Citi Investment Research — Analyst

Presentation:

Operator

Good day and welcome to the Dollar Tree’s Third Quarter 2021 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the conference over to Randy Guiler. Please go ahead.

Randy Guiler — Vice President, Investor Relations

Thank you, Katie. Good morning and welcome to our call to discuss results for Dollar Tree’s third fiscal quarter 2021. With me on today’s call are Mike Witynski and Kevin Wampler.

Before we begin, I would like to remind everyone that various remarks that we will make about our 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.

These statements are subject to risk and uncertainties and our actual results may differ materially from those indicated in these forward-looking statements. For information on the risk 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 March 16, 2021, our Form 10-Q for the most recently ended fiscal quarter, our most recent press release and Form 8-K and other filings we will make from time to time with the Securities and Exchange Commission. We caution against reliance on these forward-looking statements made today and we disclaim any obligation to update or revise these statements except as required by law. Following our prepared remarks, we will open the call to your questions. Please limit your questions to one and one related follow up, if necessary.

I will now turn the call over to Mike Witynski, Dollar Tree’s President and Chief Executive Officer.

Michael A. Witynski — President and Chief Executive Officer

Thank you, Randy. Good morning. Thank you for joining us on today’s call. I would first like to take a moment to recognize our store associates, distribution center staff, our field leadership and our world-class merchants. Our teams are working around the clock to do everything they can to defend against the current inflationary environment, keep our shelves stocked and provide customers with undeniable value and great service in easy-to-shop, close-to-home store locations. Their hard work and dedication is critical to our Company’s success and I’d like to extend sincere thanks for their unwavering commitment to our customers.

We experienced a strong finish to the third quarter as shoppers are increasingly focused on value in this inflationary environment. We continue to see accelerated progress in our key strategic initiatives, including Dollar Tree Plus, Combo Stores and our H2 format.

During the past quarter freight costs were significantly higher than expected. Our fourth quarter outlook, which Kevin will provide later in the call, reflects the higher cost structure we experienced in the third quarter. However, our EPS for the third quarter was at the higher end of the range as the performance of the rest of the business offset these higher freight costs.

Freight and supply chain disruptions, of course, continue to be our biggest challenge in the near term by far and the impact will continue for a while. But this challenge is transitory. As we detailed last quarter, our team continues to take robust action to mitigate the impact of freight costs and supply chain disruptions. We believe that based on the steps that we have taken, we will benefit meaningfully as these challenges abate.

The Dollar Tree segment delivered a comp sales increase of 60 basis points against its toughest quarterly compare in nearly three years. On a two-year comp stack basis, this was a sequential improvement of 170 basis points from the prior quarter. Discretionary continues to perform well with a 3.2% comp for the quarter. Consumables were impacted by assortment constraints and past dues. Our $3 and $5 Plus assortment continues to resonate well with our shoppers as we had tremendous sell-through on our Halloween merchandise and fall decor. And for the year our multi-price point merchandise will exceed our sales plan and we will end this fiscal year with Dollar Tree Plus in nearly 600 stores, exceeding our previous target of 500 stores by the end of the year.

Family Dollar delivered a positive 2.7% comp against the 6.4% increase a year ago. This represented the third consecutive quarter that Family Dollar two-year comp stack has exceeded 9%. The consumable side of the business comped over 3% while discretionary was slightly negative as we cycled stimulus dollars from the prior year. We are extremely pleased with the Family Dollar brand as the business continues to gain share.

Comps of both banners were driven by an increase in average ticket, partially offset by a decline in transaction count. The last month of the quarter, October, represented the strongest comp for both banners.

Our digital offerings continued to evolve, while we are steadfastly focused on best meeting our customers’ changing needs. In October, we announced our expanded partnership with Instacart to now include same-day delivery from nearly 7,000 Dollar Tree stores. Nearly 100 million US households now have delivery options from 13,000 of our store locations. We are very pleased with the initial results from the latest expansion.

Turning to the $1.25 price point. Our leadership team has been planning for the expansion of this initiative since late summer. As you know, in September we announced our plans to add price points above $1 to all Dollar Tree Plus stores and on a test and learn basis to selected legacy Dollar Tree stores. As a result of the positive customer feedback and store performance during the initial phase, we have introduced the initiative to nearly 200 additional legacy Dollar Tree stores.

In today’s press release, we announced for the first time in Dollar Tree’s 35-year history we are lifting the $1 price point cap at all Dollar Tree stores on the majority of our assortment. The $1.25 price point enhances our ability to materially expand assortments, introduce new products and sizes and provide families with more of their daily essentials. We will have greater flexibility to continue providing incredible value and help customers get the everyday items they need and celebratory and seasonal products that Dollar Tree is best known for.

Additionally, we are now reintroducing many customer favorites and key traffic driving domestic and consumable products that Dollar Tree had previously discontinued due to the constraints of the $1 price point. The new price point will also enable us to mitigate the historically high merchandising cost increases, including freight and distribution costs as well as higher operating costs such as wage increases. Our teams are focused on speed, execution and customer research and our shoppers are responding favorably. When surveyed the majority of our customers indicated they were already aware of the previously-announced new price point and not surprisingly, many have also indicated they are seeing price increases across the market and that Dollar Tree is still providing the products they need at undeniable value.

We are extremely focused on flawless execution and are providing our leadership team out in the field with tools to support a seamless transition. Actions include providing teams with a conversion checklist to ensure consistently achieve [Phonetic] across markets and stores, dedicate adequate store hours to complete the preparation tasks, including removing the signage and display elements referring to the EveryThing’s At Dollar, implementing the new signage regarding the $1.25 price point on displays, end caps and shelf strips throughout the store, hosting clear communications to customers in entry ways and at the checkout and we are equipping our store teams with messaging for responding to customer inquiries.

We have closely monitored the performance of the test stores and sharper reaction through extensive customer intercepts and third-party surveys since our initial test began. We will continue to gather feedback throughout the process to ensure we remain fiercely committed to our brand promise of providing customers with extreme value every day along with more thrills, more fun and more new items every week.

For 35 years, we’ve been able to manage through inflationary periods to maintain the Everything for $1 philosophy that distinguished Dollar Tree and made it one of the most successful retail concepts for three decades. However, we strongly believe this is the appropriate time to shift away from the constraints of the $1 price point in order to continue offering extreme value to our customers.

The independent surveys of shoppers across US have indicated that 77% of the shoppers were almost immediately aware of the price point change. And of those 77%, 31% already knew before they visited the store and 17% became immediately aware upon entering store, while 29% were aware within minutes of entering the store. Critically, 91% of those surveyed indicated they would shop with the same or increased frequency. We will continue to monitor the success of these initiatives and we believe we will see improvement in the survey results since now we have the ability to further expand the product offering and reintroduce key traffic-driving items.

Upon validating the store execution, customer reception and the performance results were as anticipated, we expanded the program to nearly 200 additional stores across three major markets and we are pleased to say the results have been relatively consistent. As expected, we are seeing lifts in comp sales, partially offset by smaller decline in unit sales. We are seeing an initial lift to product margins that will normalize over time as our merchant teams evolve our assortments. Importantly, we expect this initiative will enable us to mitigate the higher freight other inflationary costs in order to return to our historical gross margin of 35% to 36% in fiscal 2022 while improving the merchandising we are providing for our customers.

All the steps I mentioned have set a solid foundation to streamline the execution of this important milestone in our Company’s history. We have been working hard to prepare this for — this key strategic initiative to ensure that we are providing customers with great products while unlocking long-term shareholder value. We are focused on aggressively executing our plan to roll out the new price point across the entire footprint of legacy Dollar Tree stores. Our teams will be introducing the new price point in more than 2,000 additional legacy Dollar Tree stores in December and complete the rollout to all stores by the end of the first quarter in fiscal 2022.

Concurrently our company’s merchants are working to continually enhance the offerings to drive traffic, capture market share and further grow customer loyalty. We are working with our suppliers and we have already begun introducing new items every week, including seasonal crafts, party supplies, food essentials and more. Beyond the changes at our legacy Dollar Tree stores, we are also continuing to expand the availability of $3 and $5 Plus assortment.

As I noted a few moments ago, we will exceed our previous goal of now adding the Plus concept to nearly 600 stores by the end of the year. We plan to add the Plus assortment to another 1,500 stores in fiscal 2022 and complete at least 5,000 stores in total by the end of fiscal 2024.

We are enthusiastic about the opportunity and improved performance of Dollar Tree by continuing to deliver extreme value to our customers at the new 1.25 price point, driving comp sales and improving store productivity, enhancing flexibility to better manage the overall business in an inflationary environment. And as previously mentioned, we are turning Dollar Tree gross margins back to the chain’s historical 35% to 36% annual range in fiscal 2022.

I will now hand the call over to Kevin to provide details on Q3 performance and our outlook.

Kevin S. Wampler — Chief Financial Officer

Thanks, Mike, and good morning. Our third quarter EPS of $0.96 per share was near the high end of our $0.88 to $0.98 guidance range. Consolidated net sales increased 3.9% to $6.42 billion, comprised of $3.42 billion at Dollar Tree and $3 billion at Family Dollar. Enterprise same-store sales increased 1.6% as we cycled a 5.1% increase from a year ago, representing a 6.7% increase on a two-year stacked basis.

Comps for the Dollar Tree segment increased 0.6%. Family Dollar same store sales increased 2.7% cycling a strong 6.4% increase from last year. On a two-year stacked basis, Dollar Tree comps increased 4.6%, which was 170 basis point improvement from Q2 and Family Dollar increased 9.1%.

Dollar Tree’s comp was comprised of a 1.8% increase in average ticket, partially offset by 1.1% decline in traffic. Family Dollar experienced a 5.8% increase in average ticket, partially offset by a 3% decline in traffic.

Gross profit was $1.76 billion for the quarter. Gross margin was 27.5% compared to 31.2% in the prior year’s quarter. Gross profit margin for Dollar Tree segment declined 470 basis points to 30.2% when compared to the prior year’s quarter. Factors impacting the segment’s gross margin performance included merchandise cost, including freight, increased 475 basis points driven by higher freight costs and lower initial markdown, partially offset by favorable mix from increased sales of higher-margin discretionary merchandise.

Occupancy costs increased 10 basis points as a result of loss of leverage due to a lower comparable store net sales increase and higher real estate tax expense. Distribution costs increased 10 basis points from higher depreciation costs related to two new distribution centers and higher hourly wages, partially offset by lower COVID-19 related expenses. Shrink improved 25 basis points related to favorable inventory results and a decrease in the shrink accrual rate.

Gross profit margin for the Family Dollar segment declined 240 basis points to 24.4% in the third quarter. The year-over-year delta included the following. Merchandise costs including freight increased 220 basis points related to higher freight costs. Distribution costs increased 20 basis points compared to the prior-year quarter due to higher wages partially offset by lower COVID-19 related expenses. Markdown costs increased 20 basis points, primarily due to higher clearance markdowns. Occupancy costs increased 5 basis points, primarily due to higher real estate taxes and shrink improved 30 basis points related to favorable inventory results and a decrease in the shrink accrual rate.

Consolidated selling, general and administrative expenses improved 100 basis points to 22.7% of total revenue compared to 23.7% in Q3 last year. We cycled $35.3 million in COVID-19 related costs of 57 basis points in the prior-year’s quarter. For the third quarter, the SG&A rate for the Dollar Tree segment as a percentage of total revenue improved 50 basis points to 21.7% when compared to the prior year’s quarter.

Payroll cost improved 30 basis points, primarily due to lower COVID-19 related store payroll costs and lower incentive compensation expenses, partially offset by minimum wage increases and higher health insurance costs. And other SG&A decreased by 25 basis points resulting from the benefit associated with the settlement of a contractual dispute and the realization of certain tax credits.

For Family Dollar the third quarter SG&A rate, as a percentage of total revenue, improved 80 basis points to 21.4% compared to 22.2% in the prior year’s quarter. Payroll costs decreased 65 basis points, primarily due to lower COVID-19 related store payroll costs and lower incentive compensation expenses, partially offset by minimum wage increases. Store facility costs decreased 30 basis points, primarily due to lower repair and maintenance expenses and lower telecommunication expenses.

Depreciation and amortization expense increased 5 basis points due to expenditures associated with the store optimization program and other SG&A expense increased 20 basis points, primarily due to increases in advertising and travel expenses and an increase in insurance costs related to general liability claims. Corporate support and other expenses as a percentage of total revenue decreased approximately 30 basis points compared to the prior year’s quarter, primarily due to lower incentive compensation.

Operating income was $310.5 million or 4.8% of total revenue in the third quarter. Our non-operating expenses totaled $33.6 million comprised primarily of net interest expense. Our effective tax rate was 21.7% compared to 22.8% in the prior-year quarter.

Company had net income of $216.8 million or $0.96 per diluted share as compared to net earnings of $330 million or $1.39 per diluted share in the prior-year’s quarter. Both cash and cash equivalents at quarter-end totaled $701.4 million compared to $1.42 billion at the end of fiscal 2020. Outstanding debt as of October 30 was $3.25 billion. The Company did not repurchase shares during the quarter as it was preparing for the announcement and launch of its $1.25 price point initiative across the Dollar Tree stores. We currently have $2.5 billion remaining on our share repurchase authorization.

Inventory for Dollar Tree at quarter-end increased 15.2% from the same time last year, consisting primarily of a significant increase in goods on the water year-over-year. Comp store inventories are down 6.4% compared to a year ago when they were down 7.4%. Inventory for Family Dollar at quarter-end increased 12.4% from the same period last year. Comp store inventories are up 7.2% after being down 13.2% in 2020.

Capital expenditures were $295.6 million in the third quarter versus $238.7 million in Q3 last year. For fiscal 2021, we expect the consolidated capex will be approximately $1.1 billion.

Depreciation and amortization totaled $178.5 million for Q3 compared to $170.1 million in the third quarter last year. For fiscal 2021 we now expect consolidated depreciation and amortization to be approximately $715 million.

Our outlook for the remainder of 2021 includes the following assumptions. We have forecasted continued pressure on wages due to the current shortage of workers available for our stores and distribution centers. We expect shrink will continue to be a tailwind but not at the same rate as we are cycling improved results from the prior year. Higher sales, lower store inventory levels, technology, and better processes continue to drive better results.

Net interest expense is expected to be approximately $33.6 million in Q4 and approximately $133 million for fiscal 2021. We estimate consolidated net sales for the fourth quarter will range from $7.02 billion to $7.18 billion based on a low single-digit increase in same-store sales for the combined enterprise. Diluted earnings per share are estimated to be in the range of $1.69 to $1.79.

As Mike mentioned earlier, freight costs were significantly higher than expected in the third quarter. Our fourth quarter outlook reflects the expectation of higher transportation costs. These costs will be offset by the benefit of the Dollar Tree stores that are transitioned to the $1.25 price point, net of one-time costs to implement that change. Consolidated net sales for full fiscal year 2021 are expected to range from $26.25 billion to $26.41 billion based on a low single-digit increase in same-store sales and 3.3% square footage growth. The Company now estimates diluted earnings per share will range from $5.48 to $5.58.

The freight costs for fiscal 2021 are now expected to be approximately $2 higher than fiscal 2020 expressed in terms of the impact on diluted earnings per share. While much of the focus has been on transpacific ocean container rates, we are being impacted by all aspects of freight, including higher costs for inland transportation by truck and rail and higher diesel costs. Additionally, in the third quarter we moved more containers than originally planned, which required utilizing the spot market rates higher than forecasted.

To echo Mike’s comments, freight continues to be our biggest challenge in the near term. We believe the majority of the freight challenges are transitory. The rest of the business is performing much better in the near term. Our outlook assumes a tax rate of 22.1% for the fourth quarter and 22.7% for fiscal 2021. Weighted average diluted share counts are assumed to be 225.9 million shares for Q4 and 228.9 million shares for the full year. Our outlook does not include any share repurchases. We have $2.5 billion remaining on our existing share repurchase authorization.

And I’ll now turn the call back over to Mike.

Michael A. Witynski — President and Chief Executive Officer

Thanks, Kevin. As I mentioned earlier on the call, we ended the third quarter with momentum in the business and that has certainly continued in both segments. Through the end of last week quarter-to-date, our comps were running at a 4.9% increase at Family Dollar and a 3% increase at Dollar Tree and we are seeing positive trends as customers are planning to gather in person with family and friends to celebrate the holidays this year.

The combination of shoppers seeking value in the inflationary environment along with the acceleration of the Company’s initiatives, including Combo Stores and Dollar Tree Plus bode well for the continued traction and store productivity. In 2022 we plan implementing the $3 and $5 Plus assortment into 1,500 more Dollar Tree stores. We will also be adding 400 Combo Stores through new or renovated stores and we plan to renovate 800 legacy Family Dollar stores into the H2 format.

Additionally, lifting the $1 constraint represents a monumental step for our organization and we are enthusiastic about the opportunity to meaningfully improve our shoppers’ experience and unlock value for our stakeholders. We will be relentless in our commitment to offer our customers the best value possible, albeit at a different price point while guided by Dollar Tree’s same founding principles. We are extremely excited and confident about the opportunities in 2022 and beyond. We are very focused on the acceleration of the initiatives that are working for us and are operating with clarity, focus and speed. As I previously mentioned, we do expect Dollar Tree banner to return to its historical annual range of 35% to 36% gross margin in fiscal 2022.

Before we go into Q&A, I would like to make a brief statement. We appreciate that many of you are focused on the Form 13D filed by Mantle Ridge two Fridays ago. So we will make a short statement about that but will not entertain any questions on the topic.

We believe Mantle Ridge has made a very smart investment. As we said, Dollar Tree’s Board of Directors and management team are always open to listen to input and engaging with our shareholders and we evaluate any ideas for constructive value creation with the best interest of all shareholders and stakeholders in mind. In keeping with our practice not to comment publicly on our private discussions with individual investors, we will not take any questions regarding Mantle Ridge. We appreciate your understanding and cooperation.

Operator, we are now ready to take questions.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] Your first question will come from Matthew Boss with J.P. Morgan.

Matthew Boss — J.P. Morgan — Analyst

Thanks. So maybe first the Dollar Tree banner, two-year stacked comps back to mid-single digits in the third quarter November holding the momentum despite supply side constraints still remaining. I guess, could you just help speak to drivers of the stabilization, what’s your confidence also in that 35% to 36% gross margin for next year, meaning do we need a material reset in freight or is the driver of this the pricing change across the fleet that you outlined today?

Michael A. Witynski — President and Chief Executive Officer

Yeah. Good morning, Matt. Thanks for the question. I would say the main driver of that is, as Kevin said, inside that forecast for next year we are anticipating freight to pretty much look like it did this year. So the major change would be the $1.25 price point as the key enabler to mitigate that. And it’s also going to give us the opportunity to bring in new items and a new assortment that will drive traffic in Dollar Tree and that will help offset where we’ve lost traffic this year historically.

Matthew Boss — J.P. Morgan — Analyst

And then, Mike, as a follow-up on Family Dollar, what do you believe the concept takes from this pandemic, meaning, are you seeing new customers, what initiatives do you have to retain some of the new footsteps that you’re seeing? And on the — as we think about kind of where we go from here, what do you think the sustainable comp for the Family Dollar concept multi-year is from here as we exit the pandemic?

Michael A. Witynski — President and Chief Executive Officer

Yeah. Thanks, Matt. So on the Family Dollar side, we believe that based on the fundamental changes our merchants have made in our price points and in our assortment on the discretionary side, along with the continued growth we see on the consumable side, we believe that we will sustain our growth beyond the pandemic as we exit it and it’s evident in our three quarters in a row of over 9% two-year stack of comp sales.

And we’re seeing our customers really gravitate to our assortment. You heard us say our consumable side is comping well and they’re buying more of the discretionary side as we get it in our stores. And we believe that long term we can sustain that low single-digit growth and it’s really evident in our Combo Stores and our H2 formats. So we’re going to exceed our 1,250 H2 renovations and we continue to see a 10% increase when we renovate those stores.

But more importantly is that Combo Stores that bringing these two great companies together allow us to drive a great format in rural America and there’s 3,000 towns that we’ve identified. And we’re going to grow that store count by more than 400. And as we shared on the last quarter and I think we have it posted on our website, our Combo Stores deliver 17% more than our pro forma, than our new store expected, they grow 23% more when we renovate them and when we relocate them, it’s a 40% increase. So those things are really driving not only the top line, but our margin is stronger and is translating into a more productive store. So I think our initiatives, I think the foundational things that we’ve fixed at Family Dollar and then with our key initiatives going forward will enable us to continue to grow single store comp.

Matthew Boss — J.P. Morgan — Analyst

That’s great color. Best of luck.

Operator

Thank you. Our next question comes from John Heinbockel with Guggenheim.

John Heinbockel — Guggenheim Securities — Analyst

So, Mike, let me start with you think the $1.25 price point will — you said majority, but what do you think that will apply to in terms of the assortment, number one? And then number two, tied to that, I know you’re getting a lift on price. Is there any way to what you’ve seen on impact to volume on those items specifically and then also the store as a whole, other than they’re down you must have a sense of how much they’re down?

Michael A. Witynski — President and Chief Executive Officer

Yeah. Thanks. So on the — the majority of the stores will be at the $1.25 price point. Just like us today where Dollar Tree has Every Things for $1, but there are categories in food, in candy bars up at the front register, in our greeting cards, and in some poster board where they are lower than $1.

So if you can imagine everything is just bringing in reset in that same footprint at the $1.25 and then those categories and items will remain at the — remain at the $1 price point. So it’s the majority of the footprint inside of our store.

And we will share — as we continue to roll this out, we will share more details about the comp lift in the margin. But we see enough evidence that the comp between the comp lift and the margin expansion will help mitigate this burden of freight that we’re experiencing this year and get us back to their historic 35% to 36% gross profit range.

John Heinbockel — Guggenheim Securities — Analyst

And then maybe just as a follow-up to that. How do you guys think about marketing the $1.25, right, you want people to experience it naturally, right, rather than you want to call attention to it unduly. So it that — it’s basically just I’ll see it when I come into the store. Otherwise, you’re not going to really do a lot of TV, radio, print around the strategy or how do you attack that?

Michael A. Witynski — President and Chief Executive Officer

Yeah. Historically Dollar Tree did not do a lot of external marketing. Everything was in the store, in the excitement, in the value of the product and it’s really driven because our assortment is always moving and ever-flowing. So we want to talk more about the great value that we can bring at that $1.25 price point and they’ll see that assortment that they see when they are in our store. And our customers gave us — they gave us credit for that.

When we did our customer research and customer intercepts, they were telling us that even at the $1.25 there is still great value and they’re going to continue shopping here. And then we can tell in some of the unit decline in some of the categories where our intuition we knew that we needed to improve some of our assortment and value in certain categories. So our merchants are working extremely hard at identifying those and getting those products flowing. And I would say, new products and new product mix will be flowing through certainly in the first half of the year as they change their mix and get everything aligned to the new $1.25 price point.

John Heinbockel — Guggenheim Securities — Analyst

Thank you.

Operator

Thank you. Our next question comes from Michael Lasser with UBS.

Michael Lasser — UBS — Analyst

Good morning. Thanks a lot for taking my question. So you tested Dollar Tree Plus for a couple of years. You did a planning process for the move to $1.25 price point, I think at the end of the summer. The move to the full rollout is faster than the move to Dollar Tree Plus. Obviously, you’re seeing a lot of inflation.

So this is probably pushing the issue. How do you manage the risk that consumers are going to push back? They’ve become accustomed to expected $1 price point. And so you’re going to have to manage around the cannibalization. At the same time you do have a lot of going on into next year. How do you ensure that you’re going to get consistency in your execution as you’re implementing more initiatives than you have had in quite some time?

Michael A. Witynski — President and Chief Executive Officer

Yeah. Well, the $1.25 is — our team has been very focused to bring clarity to it. We’ve got a very detailed plan for our operation teams. And the key to it is going in and cleansing the store. So we’ve got a team that is doing that. Then we come in and we clearly sign — and we’re putting signage throughout the entire store so that customer understands the $1.25. And then at the same time, our merchants are working hard today and they have been working actually. On their last buy trip it was with the intent of the $1.25 price point. So our assortment is better than ever and we’re so excited on the hard work that our merchant team is doing. In fact, they’ve already looked at and reviewed over 7,000 of our core items. It’s almost 7,500 of our core items. They’ve put them on a table. They’ve done a comp shops. So they bring in product from other competitors to make sure that at $1.25 this product still has an unbelievable value for our customers and it resonates well with them. And then the ones that don’t, we’re working hard on and we’re attacking and we’re bringing in those new items.

And then beside that we’re bringing in additional items that we had to discontinue in the past. So now those items would be coming in that customers responded to very favorably in the past and we believe that will drive traffic. And most of those items are in your consumables side of the business where we’ve seen softness over this year, where we’ve been limited to the $1 price point. We’ve lost some items. And we’ll be able to bring meaningful value at the $1.25 in our frozen section and in our food section. So we’re really excited about our plan.

And then in our Dollar Tree Plus, the way we think about it, that’s sitting at about over 600 of our stores and it’s about 10% to 12% of the space in our stores, 200 linear feet and the team is very good. They’ve been delivering that all year. So next year we are just going to deliver an expansion of that. So just grow same exact product assortment, different seasonal items, of course, but the same categories, the same square footage that we’ve done to 600 stores this year. So it’s something we’ve already done. We already know what it takes to get it done and our stores are executing it very well and our customers understand it in a store. It will be $1.25 now, of $3 and $5 that’s clearly marked and they’re responding very, very well to the $3 and $5 items.

And then if you think about — that’s in 2022 and then in 2023 for our Dollar Tree Plus, the growth will be twofold. We will grow more store count, but then also our merchants next year while we’re rolling out the same footprint to 1,500 stores next year, behind the scenes at the same time, the merchants are going to be working really hard at more categories, more assortment, can you go from a 10% of your store to 20% of your store, what kind of items can we really bring in at that $3 and $5 that will really drive more business to the stores.

So our lift to 6% as we’ve — and it’s still hovering around that 6%, we think it can be more as we grow this going forward. So the $1.25 we’ve got a great answer on, we’re going to go with clarity and focus and speed from a marketing and in-store execution and then our merchants are working hard at analyzing every item to make sure it has got that great value. And then we’re going to grow the Dollar Tree Plus as we did the 600 stores with focus.

Michael Lasser — UBS — Analyst

Understood. My follow-up question is on your expectation to get to 35% to 36% gross margin in your Dollar Tree business — banner next year. It seems like that will drive a mid-teen increase at least in your gross profit dollars. So based on that, what type of EBIT improvement would you be looking for because you are probably going to see significant fixed cost leverage? And if you’re going to roll out $1.25 price point and the freight pressure potentially rolls over, would you actually let your gross profit margin for the Dollar Tree banner rise above 36% if all of this comes together at the same time or would you look to reinvest the upside back into the business? Thanks.

Kevin S. Wampler — Chief Financial Officer

Yeah, Michael. I think the way we think about it, obviously, is we are investing back into that product. We’re always going to live by the rule that was the mainstay of Dollar Tree which is the product has to be an unbelievable value in the marketplace and that’s what the Company was built upon and that’s what it will continue to be built upon. It’s just that price point has changed.

So to your question about the margin, obviously, it’s a little early at this point to talk about next year and, obviously, we’ll have a lot more information to share when we talk again on March 3 for end of the year and we’ll be able to give a better direction. A lot of moving pieces right now. We want to make sure we capture them all and give everybody the true picture of all those moving pieces. But we do obviously see a clear path to the 35% to 36% gross margin for Dollar Tree next year. So I think that’s the most important thing that we can give you today, obviously with more details to come as to all those moving pieces.

Michael A. Witynski — President and Chief Executive Officer

Yeah. I’d just reiterate, unlocking and moving to the $1.25 gives us the flexibility that we need to be able to manage and mitigate the high cost of, as you saw 400 basis points in margin at Dollar Tree, and at the same time really bring more value, greater items, and a better assortment that will drive traffic and top line sales for our customers that they’re so used to at Dollar Tree. So as Kevin stated, we’re going to be more focused on getting the assortment, right and driving traffic and long-term growth and we can do that and confidently think we can get to the 35% to 36% range.

Michael Lasser — UBS — Analyst

Thank you very much.

Operator

Thank you. [Operator Instructions] Our next question comes from Edward Kelly with Wells Fargo.

Edward Kelly — Wells Fargo — Analyst

Hi. Good morning, guys. I was hoping you could talk a little bit more about the testing process on the $1.25 price point so far. The initial release that you put out had $1.25 and $1.50 in the release. I was curious as to what that was about. When you did the test, were all of the test just taking most of the assortment to $1.25 or there is some variation there? And then could you help us understand what the impact of elasticity is on the volumes are looking like?

Michael A. Witynski — President and Chief Executive Officer

Yeah. Thanks. So we closely monitored it. The majority of the stores were at the $1.25 and that’s what our focus is because that’s really the price that we need to really bring great value and a meaningful differentiation in our assortment in the consumables side of the business that will drive traffic. So we were very focused on that. And we’ve been watching the sensitivity and the sales and the units and the response from the customer every week at every store and every market. And as we shared that’s been consistent across stores and markets. And where we see the unit decline, it’s where we expected it to be and that’s where the merchants are working really, really hard on bringing in that new assortment and that new assortment will be layering in, as I said, over time. So it’s going to be over the next six months to bring in the assortment on those side to drive the traffic.

And then while we are working the results of the stores and monitoring units and margin and comp at the same time, we were doing in-depth consumer research and listening to our customers and doing customer intercepts and one-on-one surveys with the customers and hearing their response. And they have a lot of trust in Dollar Tree and they believe that as $1.25 it’s still going to be an undeniable value because of what they’re seeing out in the marketplace and they know the Dollar Tree hasn’t raised its price in 35 years. So they have given us credit and now that our buyers are going to take that trust and make sure they deliver undeniable and a great assortment at that new price point. And we’ll monitor that as we do our — as we did at $1 and help drive the business, bring new items in, discontinue items and manage the business accordingly.

Edward Kelly — Wells Fargo — Analyst

And just a quick follow-up on that. How powerful is it to be able to bring items back you’ve discontinued over time or to be able to introduce new items? And then just getting back to the $1.50 because it was in your prior release, is that a price point that might make sense as you start introducing new items next year?

Michael A. Witynski — President and Chief Executive Officer

Well, right now we can bring in very meaningful items that we discontinued at $1.25 and they are on the food and consumable side where you get a repeat customer and more frequency. So it’s important to us. And when we announced we just wanted to have — we had flexibility out there that we gave examples of $1.25 and $1.50 and our $3 and $5, we didn’t say specifically that we would use those. So right now we feel confident in $1.25, the $3 and $5 and as we’ve said that on our Dollar Tree Plus we’re accelerating to 1,500. But by 2024 we will have 5,000 stores that will be at $1.25, $3 and $5 that we will be able to deliver a meaningful assortment and it gives us the flexibility that we need to manage and mitigate these costs and deliver great products and drive our business.

Edward Kelly — Wells Fargo — Analyst

Great. Thank you for taking my question.

Operator

Thank you. Our next question comes from Kate McShane with Goldman Sachs.

Kate McShane — Goldman Sachs — Analyst

Hi. Good morning. Thanks for taking our question. Just a question with regards to any kind of activity you saw from more inflationary headwinds and customers trading down and how you anticipate that to look in the fourth quarter relative to what you saw in the third quarter?

Michael A. Witynski — President and Chief Executive Officer

Yeah. Well, definitely the customers are feeling the inflation. It’s twofold right now. I mean, our customers are benefiting from child tax credit stimulus. In October they had a huge increase of SNAP benefits and they’re experiencing increase in hourly wages that you’re seeing across the industry. So I think our customers are in a pretty good position, but they are also feeling a lot of pressure on other costs of gas and fuel prices and energy for their homes. So I think right now more than ever, they are going to be relying on great value and that’s why I think Dollar Tree and Family Dollar are in a great position to be able to offer that to them in 15,000 locations that are conveniently located.

As far as trading down, we’re still not seeing a lot of trade down. There is not a lot of promotion out there in national brands. Private brands are as not as steady as they were throughout the first half of the year. So we haven’t seen a big shift right now from the customer.

Kate McShane — Goldman Sachs — Analyst

Thank you.

Operator

Thank you. Our next question comes from Brad Thomas with KeyBanc Capital Markets.

Brad Thomas — Key Banc — Analyst

Hi. Good morning. Thanks for taking my question. I was hoping to ask about labor a little bit more and hoping, Mike, you could talk a little bit about how you’re dealing with getting good people now and any seasonal staff you’ve brought on board. And then just to continue to talk about the Dollar Tree side of the business, how you all are planning for some of that incremental complexity as you roll out the $1.25 price point from a labor perspective? Thanks.

Michael A. Witynski — President and Chief Executive Officer

Thanks, Brad. So yeah, there are still pressures and it’s market-driven both in our distribution centers. We’ve had to increase our hourly wages in our DCs and have done so and that’s embedded in our fourth-quarter outlook and we’ve made movements there. And I say we’re seeing the same thing in our stores, in markets we followed where we had to, to increase our labor rates to attract associates in our stores. And as you’ve seen across retail, people are still sitting on the sidelines and not working.

So we are working hard at driving benefits and we’re raising our hourly wage where we need to and being a convenient place to work through other things of having their schedule on their phones, having a program called daily pay where they can get their pay. They don’t have to wait for their paycheck and our associates are liking that a lot and there is a high use of that. So we’re doing a lot of things to attract the hourly worker out there in our stores to operate our stores effectively.

But yet, it still is a tough environment out there. And we have seen a little bit of a slip in our store manager turnover where last year during the pandemic, we hit our lowest turnover ever in store manager and now there’s — I think there is a little bit of fatigue and it’s creeped up a little bit on us. But our teams are working hard at filling those roles and attracting the talent we need.

Regarding managing the $1.25, there is — as Kevin said in our fourth quarter, there will be one-time costs of cleansing the store and then re-marketing and re-signing the store. But once that is set aside, it’s really running the same play. They unload the truck, they put it on the shelf. It’s clearly marked already, so there really isn’t any additional labor hours needed.

And then on our Dollar Tree Plus as we’ve rolled that out to 600 stores, we have not had to add any additional labor in those stores because the majority of those products are coming in pre-priced. The sections in the store are clearly marked $3 and $5 items and now there’ll be a $1.25, $3 and $5. So there really isn’t any additional labor needed in those stores, either.

Brad Thomas — Key Banc — Analyst

Great. Thanks so much, Mike.

Operator

Thank you. Our next question comes from Simeon Gutman with Morgan Stanley.

Michael Kessler — Morgan Stanley — Analyst

Hey, guys. This is Michael Kessler on for Simeon. Thanks for taking our questions.

Michael A. Witynski — President and Chief Executive Officer

Hi, Michael.

Michael Kessler — Morgan Stanley — Analyst

I wanted to ask, not — hey, guys, not to beat a broken drum here with the price point, if I could squeeze in one more, curious why not be more diverse with the price point. It sounds like you’re really sticking to the $1.25. You could perhaps be even more precise with price point and manage different SKUs in categories.

I’m curious to know what went into that decision process and am I interpreting, I guess, the strategy with the price point correctly in that regard.

And then, bigger picture on that. Is there even longer-term vision of perhaps price points going up across the store and then you had a separate initiative with Plus at even higher price points and perhaps even melding these initiatives together, expanding Plus to even more of the store [Indecipherable] longer term vision would be, interested here about as well.

Michael A. Witynski — President and Chief Executive Officer

Yeah. Thanks for the question. So first of all moving off to $1 price point gives us the flexibility to manage our business and really drive the assortment that our customers are used to and bring value and simplicity to them. So the reason we moved to the $1.25 is that it allows us to do all three of those things.

Our merchants are, I believe, the best in the industry and they’ve been able to defend and get great product at $1. And we know the type of product we can get at that $1.25 and we’ll be able to bring in exciting great product that will drive the business and drive traffic into our stores and enable us to get back to that 35% to 36% margin. And it gives us the flexibility to manage our business going forward and it really brings simplicity. Simplicity is still very important to us.

As it’s a single price point our customers understand it and our shoppers, our customers, and our associates understand it. So we’ll manage this going forward. I think at first, we’re going to go to $1.25 and then we’ll be carrying that $1.25 into our Combo Stores as well. So our Combo Stores baseline would be at $1.25 going forward. And it will be wrapped around that Dollar Tree brand and then have great products at the Family Dollar on that side of the business as well. So moving off the Dollar gives us the flexibility to make changes we need to going into the future.

Michael Kessler — Morgan Stanley — Analyst

Okay. Great. And a quick follow-up on traffic. I think you guys said it was down at both banners. I guess is that — has it surprised you at all that we haven’t seen more of a rebound in traffic relative to last year? Is it of any concern or it’s not because tripling [Phonetic] of ticket is up basically more than offsetting the traffic declines? And going forward, especially with higher price points at core Dollar Tree, would it be a fair expectation that traffic could remain down to being more than offset by ticket? How you’re thinking about that?

Michael A. Witynski — President and Chief Executive Officer

We think traffic is going to come back at Dollar Tree. Keep in mind, as Kevin said, with our — we still have past dues that are 4.5 times greater than what we normally have at Dollar Tree. So there is inventory that we wish we had that would drive that excitement in sales and traffic inside our Dollar Tree. And then we have had some items we’ve had to discontinue that would be traffic-driving where we were limited at the Dollar price points.

So we think looking forward going to the $1.25, bringing in new assortment and then once we move beyond this transitory freight logistics issues that we have, getting that assortment that we want inside our store, the combination of those two things will get back to driving traffic at our Dollar Tree format.

Michael Kessler — Morgan Stanley — Analyst

Thanks, Mike.

Operator

Thank you. We do have time for one last question. Our final question comes from Paul Lejuez with Citi.

Paul Lejuez — Citi Investment Research — Analyst

Hey, guys. Thanks. Curious if you bring back some of these discontinued items, do you expect the total SKU count to grow or will those be replacing existing SKUs? And then separately, could you just talk about your average ticket at Dollar Tree and how consistent that has been over time? As you move to this $1.25 price point, what are your expectations for that average ticket? Thanks.

Michael A. Witynski — President and Chief Executive Officer

Yeah. On the assortment, that’s the beautiful thing about Dollar Tree is we do not have planograms. Our merchants go out and get the very best product at the $1.25 price point. We surprise and delight our customers. We bring different products in depending on the seasons and the front-end of our store changes like the leaves on the trees.

So we will continue to use that flexibility and drive the assortment we need that will be meaningful to our customers and in the key categories that drive traffic and then where they can celebrate their lives and live their lives and decorate their homes. So those are the — that’s how we manage the business before and that’s how we’ll manage it going forward.

And I’ll let Kevin talk about the average ticket, but since the pandemic our average ticket at Dollar Tree has been elevated and it’s been consistently elevated throughout and we think that this $1.25 will help with that.

Kevin S. Wampler — Chief Financial Officer

Yeah. I think just as a point of reference pre-pandemic the Dollar Tree price point has hovered right around that $8.50 range and since the pandemic, it’s been closer to the $10 mark. I think as we go forward with the $1.25 price point, I think it will remain elevated. So the question has always been as traffic return, would we see the average ticket come down. And to this point, we haven’t really seen that aspect. But — so overall, I think in general that the price — the average ticket will remain elevated as we go forward.

Paul Lejuez — Citi Investment Research — Analyst

Thank you. Good luck.

Operator

Thank you. This concludes today’s Q&A. I would now like to turn the call back over to Randy Guiler for closing remarks.

Randy Guiler — Vice President, Investor Relations

Thank you, Katie and thank you for joining us on today’s call. Our next earnings conference call to discuss Q4 and year-end results is tentatively scheduled for Wednesday, March 2, 2022. Thank you and have a good day.

Operator

[Operator Closing Remarks]