Dollar Tree Inc (NASDAQ: DLTR) Q4 2020 earnings call dated Mar. 03, 2021.
Corporate Participants:
Randy Guiler — Vice President, Investor Relations
Michael A. Witynski — President and Chief Executive Officer
Kevin S. Wampler — Chief Financial Officer
Analysts:
Kelly Bania — BMO Capital — Analyst
Joe Feldman — Telsey Advisory Group — Analyst
Paul Trussell — Deutsche Bank — Analyst
John Heinbockel — Guggenheim — Analyst
Matthew Boss — JPMorgan — Analyst
Michael Lasser — UBS — Analyst
Presentation:
Operator
Good day, and welcome to the Dollar Tree Incorporated Fourth Quarter Earnings Conference Call. Today’s conference is being recorded.
At this time, I’d like to turn the conference over to Randy Guiler, VP of Investor Relations. Please go ahead.
Randy Guiler — Vice President, Investor Relations
Thank you, Jordan.
Good morning and welcome to our call to discuss Dollar Tree’s fourth fiscal quarter and fiscal year 2020. With me on today’s call will be our President and CEO, Mike Witynski; and our CFO, Kevin Wampler.
Before we begin, I would like to remind everyone that various remarks that we will make about 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. Results might differ materially from those indicated by these forward-looking statements as a result of various factors included in our most recent press release, most recent 8-K, 10-Q and Annual Reports which are on file with the SEC. We have no obligation to update forward-looking statements, and you should not expect us to do so.
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, everyone. Thank you for joining me today. What a year. I believe that from now, that years from now, many of us will reflect upon 2020 as being one of the most unique, unpredictable and challenging business environments of our career. My sincerest gratitude goes out to our one 195,000 plus associates working in more than 15,600 Dollar Tree and Family Dollar stores and in 26 distribution centers, and to our field leadership teams as well as our store support team here in Chesapeake, Virginia. Your commitment and dedication to protect and serve our customers is critical to our Company’s success. As an essential retailer in the value segment, we will continue to be part of the solution for millions of households across North America. Additionally, I would like to recognize our business partners, both supply chain and suppliers, for their efforts to support our business throughout the year.
In 2020, we exceeded $25 billion in annual sales for the first time, and we have a long runway of growth ahead of us. As our business grows, so does the need and support from each of our business partners. We appreciate your continued support.
The recent trends have been encouraging. COVID cases are on the decline and vaccinations are on the rise. However, we will continue to be relentless in our efforts to protect each other until this pandemic is behind us. I am very pleased with the team’s operating performance for the fourth quarter, highlighted by solid same-store sales increase, improved gross margin and expense leverage. The team delivered EPS increase of 310% compared to the prior year’s quarter or 19% when adjusted for discrete charges in the prior year. Our results included a 4.9% enterprise comp increase, an 80 basis point improvement in gross profit margin and a 90 basis point increase in operating profit margin when compared to prior year’s adjusted numbers.
Our Dollar Tree segment delivered another quarter of positive same-store sales, with a 2.4% increase. January was the strongest month of the quarter, followed by November. In fact, January was our strongest month in comps since April of 2019. December was slightly negative as store traffic was impacted by an escalation in COVID cases, resulting in expanded lockdowns and significantly fewer holiday social gathering among families, companies, churches and schools. As we have seen in the onset of the pandemic, sales were again driven by average ticket, which increased 17.9% as shoppers continued to consolidate trips. Comp transaction count declined 13.1%.
We delivered a 36.1% gross margin — and Dollar Tree’s operating margin, which included $13.8 million in COVID-related costs came in at 16% operating income. Categories performing well included crafts, seasonal, household products, floral, kitchenware and beauty and eyewear. Building on the continued success of crafts department, we completed the rollout of Crafter’s Square to all US Dollar Tree stores in January.
Inspiring the creativity of our customers is at the core of Dollar Tree, and we are thrilled to provide an even broader assortment of art and craft supplies at tremendous values. With our $1 fixed price point and more than 7,500 US store locations, Crafter’s Square presents customers with an unlimited solutions for current learn-from-home and work-from-home environment. Additionally, terrific opportunities exist for DIY home projects in decor, crafts for the entire family, seasonal decorations and handmade gifts. Our shoppers love the expanded assortment, which is validated by the excitement Crafter’s Square is generating across social media platforms, including YouTube and Instagram.
Regarding our Dollar Tree Plus!, our shoppers love the values, and we exceeded our initial sales plan for the fourth quarter. We had great sell-through on our seasonal products, on our tools and household consumables. We are on schedule to kick off the previously announced expansion of Dollar Tree Plus! this month. We are expanding multi-price assortment from the current base of 120 stores to a total of 500 stores and will be completed by August. Additionally, we are capturing great buying synergies as the majority of the $3 and $5 merchandise for the DT Plus! will be offered in both banners.
Family Dollar sales highlights for the quarter included an 8.1% comp increase, comprised of a 21.9% expansion in average ticket, partially offset by 11.3% decline in transaction count. This is similar to the ticket traffic trip consolidation dynamic we have seen since Q1 of 2020. Regarding the cadence of comps, all three months were positive, with January being the strongest month. As a reminder, all Family Dollar stores were closed on Christmas Day in 2020 which has impacted December comp results as approximately 5,600 stores were open for business the previous year.
January was Family Dollar’s strongest monthly comp since May of last year. We saw solid sales across many of the discretionary categories that we’ve been focused on improving, including home decor, apparel, household cleaning, lawn and garden, party, beauty care and seasonal. The consumable side of the business delivered another positive quarterly comp at 6.2%, and the discretionary comp was a strong 13.5% comp. In Q4, discretionary as a percent of net sales at Family Dollar increased 120 basis points to 26.2% of sales. Similar to recent quarters, based on third-party data, our market share in discretionary grew 2 times faster than the remaining market in Q4. Late in 2020, we launched our initial test for produce and frozen needs at select Family Dollar stores, targeting markets where shoppers have fewer local grocery options. We want to provide shoppers with convenient access to basic produce items as well as beef, poultry and pork. We plan to expand our test in 2021.
We recently announced the expansion of our new partnership with Instacart platform across the US. Same-day delivery is another example of meeting the evolving needs of Family Dollar shoppers. The initial results have exceeded our expectations, and we continue to receive very positive feedback from shoppers. These transactions have materially higher average ticket, and we believe the Instacart platform is enabling us to broaden our Family Dollar customer base. Interestingly, in the first three weeks of the national rollout, more than 80% of Family Dollar stores had one or more Instacart transactions.
As always, our most important scorecards come from our shoppers. We are seeing considerable improvements in our customer satisfaction survey scores. For Q4, we saw record numbers across each of the four key categories: store cleanliness, product assortment, customer service and speed of checkout. In fact, each of these categories have shown improvement for three consecutive quarters. Contributors to this success is an enhanced Family Dollar brand strategy program that clearly conveys expectations and examples to our store teams. And the chain’s annual store manager turnover are at the best in over a decade. The improved customer satisfaction results gives us confidence that we will be able to retain shoppers that discovered or reengaged with Family Dollar during the pandemic.
Regarding Dollar Tree Canada, the team delivered another solid quarter, exceeding its plan for sales, gross margin and operating income.
From a real estate perspective, we completed more than 280 projects, including 124 new stores, 11 relocations, 106 Family Dollar renovations and 45 store closings. We ended the year with 15,685 stores.
We accomplished a great deal in 2020. Much of this was made possible by our 2019 initiatives that really set the stage to begin traction and momentum in 2020 and beyond. To quickly recap, in 2019 we consolidated our Dollar Tree and Family Dollar store support centers into one campus, greatly improving efficiencies through enhanced communication, collaboration and support. We made tremendous progress on Family Dollar’s store optimization initiatives by re-bannering 200 stores, closing more than 400 stores and doubling the pace of our renovation program to more than 1,000 per year. We also launched our initial test for Dollar Tree Plus!. And we realigned our leadership team to enhance and align the consistency of communication, strategies, processes and workflows. For example, Dollar Tree and Family Dollar merchants went through 2020 in complete unison for buying calendars, buying trips meetings, planning dates and category performance reviews. This strength in alignment was very evident in the success of our recent virtual buying trip in January, which is our biggest buying trip for the year. These initiatives helped build the foundation for 2020 performance.
The progress we have made in Family Dollar in the past, despite the pandemic has been remarkable. We are benefiting from improved store conditions and better execution on initiatives, resulting in market share gains. We have also seen improved customer satisfaction scores, store turnover and trend improvements. I am convinced that Family Dollar will exit the pandemic as a much stronger organization. This progress is why I’m more enthusiastic about the opportunities in 2021 and beyond, including the expansion of Dollar Tree Plus! and the growth of our new combination stores into small towns across America.
I will go into more detail on our plans for 2021 after Kevin speaks to the Q4 performance and our outlook. Kevin?
Kevin S. Wampler — Chief Financial Officer
Thank you, Mike, and good morning.
The fourth quarter consolidated net sales increased 7.2% to $6.77 billion, comprised of $3.71 billion of Dollar Tree and $3.06 billion at Family Dollar. Enterprise same-store sales increased 4.9% or 5% when adjusted for Canadian currency fluctuations. Comps for Family Dollar increased 8.1% and Dollar Tree segment increased 2.4%.
Overall gross profit for the enterprise increased 9.8% to $2.15 billion and gross margin improved 80 basis points to 31.8%. Gross profit margin for the Dollar Tree segment decreased 10 basis points to 36.1% when compared to the prior year’s quarter. The factors impacting the segment’s gross margin performance included distribution costs increased 40 basis points, primarily due to higher payroll costs and depreciation. This includes the continued ramp-up of the two new distribution centers as well as $4.4 million or 10 basis points of COVID-related expenses, primarily premium pay and bonuses. These higher DC costs as a percentage of net sales were partially offset by a 20 basis point improvement in markdowns and a 5 basis point improvement in shrink. Merchandise costs, including freight, also improved 5 basis points. Improvements in merchandise mix and mark-on were mostly offset by increased freight costs.
Gross profit margin for the Family Dollar segment improved 200 basis points to 26.6% in the fourth quarter. The year-over-year improvement was due to the following. Markdown expense improved 100 basis points due to lower promotional activities and improved sell-through of seasonal merchandise at apparel. Occupancy costs decreased by 50 [Phonetic] basis points from leverage on the 8.1% comp sales increase. Shrink improved 35 basis points on improved inventory results. Distribution costs improved approximately 15 basis points compared to the prior year quarter. The current year quarter included approximately $3.2 million or 10 basis points of COVID-related expenses, primarily premium pay and bonuses. And regarding merchandise costs, including freight, improvements in merchandise mix and mark-on were essentially offset by increased freight costs during the quarter.
And consolidated selling, general and administrative expenses improved 540 basis points to 21.7% of net sales compared to 27.1% in Q4 a year ago. The prior year’s quarter included a $313 million non-cash pre-tax and after-tax goodwill impairment charge, an $18 million charge to litigation reserve. Excluding these items from the prior year’s quarter, SG&A expenses improved 20 basis points from an adjusted 21.9% of net sales.
For the fourth quarter, the SG&A rate for the Dollar Tree segment as a percentage of net sales improved slightly to 20.1% of net sales when compared to the prior year’s quarter. Payroll costs increased approximately 30 basis points and was comprised of the following. Payroll expenses increased approximately $7.2 million or 20 basis points for costs associated with COVID-19-related payroll and bonuses. Additionally, increased incentive compensation was partially offset by lower health insurance benefits.
Other selling, general and administrative expenses decreased approximately 20 basis points, primarily from reduced travel and lower legal and professional fees. Depreciation costs decreased 10 basis points. Excluding goodwill impairment and litigation reserve charges from the prior year’s quarter, the SG&A rate for the Family Dollar segment improved approximately 80 basis points to 20.6% compared to an adjusted 21.4% for the fourth quarter of 2019. Depreciation improved 30 basis points, primarily [Indecipherable] strong comp sales increase. Other selling, general and administrative expenses decreased by approximately 30 basis points primarily due to lower advertising and travel costs as a percentage of net sales. Payroll related expenses improved approximately 15 basis points, and store facility costs improved approximately 5 basis points, primarily from leverage on comp sales and lower electricity costs. Corporate and support expenses increased 20 basis points, primarily related to higher incentive comp and stock compensation expense compared to the prior year’s quarter.
Operating income improved 173% to $681.6 million compared with $249.4 million in the same period last year, and operating income margin was 10.1% in the fourth quarter compared with 3.9% in the prior year’s quarter. Excluding the $313 million goodwill impairment and $18 million litigation reserve from the prior year’s quarter, operating income margin improved 90 basis points from the adjusted 9.2%. Q4 of 2020 included total incremental operating costs of $24.8 million for COVID-19-related expenses. These incremental costs by segment were $13.8 million for Dollar Tree, $10.6 million for Family Dollar and $0.4 million for corporate support and other. Nonoperating expenses totaled $34.2 million, comprised of net interest expense.
Our effective tax rate was 22.3% compared to 41.3% in the prior year’s fourth quarter. The prior year rate was affected by the non-cash goodwill impairment charge that was not tax deductible. Without the goodwill impairment charge, the tax rate for Q4 2019 would have been 16.6%, which included a reduction in tax expense of $24.6 million for the reversal of the valuation allowance related to the Company’s foreign net operating loss carry-forwards.
Company had net income of $502.8 million or $2.13 per diluted share, which included $0.08 per diluted share for COVID-19-related expenses. This compared to a net earnings of $123 million or $0.52 per share in the prior year’s quarter and an adjusted earnings per share of $1.79.
Combined cash and cash equivalents at year-end totaled $1.42 billion compared to $539.2 million at the end of fiscal 2019. The Company paid off the $300 million legacy Family Dollar note during the quarter. Outstanding debt as of January 30, 2021, was $3.25 billion. During the quarter, we repurchased approximately 1.83 million shares for $200 million. With the Board action announced this morning, we now have $2.4 billion authorized for share repurchases. We will continue to invest in our business and will provide first quarter updates on share repurchase activity. Inventory for Dollar Tree at year-end declined 5.9% from the same time last year while selling square footage increased 3.7%. Inventory per selling square foot decreased 9.2%. Inventory for Family Dollar at year-end increased 0.5% from the same period last year, while selling square footage increased 1.8%. Inventory per selling square foot decreased 1.3%. Our inventory levels improved in Q4 and we continue to be more productive with lower inventory, significantly increasing our inventory turns.
Capital expenditures were $191.8 million in the fourth quarter versus $252.5 million in Q4 last year. For fiscal 2021, we are planning for consolidated capital expenditures to be approximately $1.2 billion. Capital expenditures will be focused on 600 new stores and 1,250 Family Dollar H2 renovations. And these stores will be 400 Dollar Tree stores and 200 Family Dollar stores, including both H2 and combo store formats based on market locations. The addition of frozen and refrigerated capabilities to Dollar Tree and Family Dollar stores, IT system enhancements and projects, development of our Chesapeake campus, installation of LED lighting and HVAC [Indecipherable] replacements in select stores and the ongoing construction for the second phase of our new distribution center in Ocala, Florida.
Depreciation and amortization totaled $182.9 million for Q4 compared to $179.1 million in the fourth quarter last year. And for the year, depreciation expense totaled $686.6 million. For fiscal 2021, we expect consolidated depreciation and amortization to range from $720 million to $730 million.
Due to a number of variables and uncertainties, we’re not providing specific sales and EPS guidance. These variables include unknowns related to the COVID pandemic and its impact to customer shopping patterns, timing and magnitude of government stimulus and potential for the planning of changes to federal minimum wage. I do want to share some points to assist your modeling for 2021. The February storms that brought snow and freezing temperatures through Texas and much of the central part of the state resulted in more than 5,500 lost store days with closures of Dollar Tree and Family Dollar stores in areas most impacted. Stores are now back open and operating but Q1 sales will be impacted from these closures. We will be cycling the 2020 onset of the COVID pandemic in Q1. Our business segments were impacted in different ways a year ago. At Dollar Tree, both sales and gross margin were negatively impacted by loss in discretionary Easter related seasonal sales. As a result, in Q1 of 2020, the Dollar Tree segment had a 0.9% comp decrease and a 31.9% gross margin. At Family Dollar, for Q1, we will be cycling a 15.5% comp increase in the prior year, which will be our toughest quarterly compare for 2021.
We face headwinds from minimum wage and freight costs in 2021. The minimum wage has increased in certain states and localities and may increase nationally depending on the outcome of future legislation. The currently scheduled minimum wage increases are estimated to increase store payroll by $45 million to $50 million in 2021. We are experiencing some delays in receiving import merchandise as a result of worldwide equipment shortages and issues with port congestion. As a result of current market conditions, we’re seeing significant increases in cost of import freight and moderate pressure on domestic freight. We currently project $80 million to $100 million of additional costs in fiscal 2021 as a result of these market conditions. These costs primarily affect the first three quarters of the year, as currently projected. We believe these headwinds will be more than offset by productivity and cost savings initiatives such as Crafter’s Square, H2 and combo stores, continued focus in shrink and reduced COVID related costs. We incurred COVID related costs of $279 million in 2020 to support our associates, stores and customers. We will continue to incur costs for COVID activities in 2021, but we believe at a materially reduced level. With expect tailwinds as well. COVID relief checks are anticipated to provide a significant lift. We also expect that as COVID abates, customer traffic could return to more normalized levels. Net interest expense is expected to be approximately $34 million in Q1 and approximately $135 million for fiscal 2021.
Our outlook assumes a tax rate of 23.5% for the third quarter and 23.2% for fiscal 2021. Weighted average diluted share counts are assumed to be 234.5 million shares for Q1 and 234.8 million shares for the full year. Our outlook does not include any share repurchases. But as noted, we increased our share repurchase authorization to $2.4 billion. Over the past several years, the Company has reduced its debt from the acquisition by over $5 billion returning to a solid investment grade rating. With our strong flexible balance sheet, we will be able to increase store growth return to share repurchases as an important part of capital allocation going forward. We expect to complete the $2.4 billion share repurchase authorization over the next two years or so.
I’ll now turn the call back over to Mike.
Michael A. Witynski — President and Chief Executive Officer
Thanks, Kevin.
Again, I’m extremely proud of the team’s efforts for fiscal 2020. For the year, our customer satisfaction scores are improving, and we are experiencing our lowest store manager turnover rates in many years. The team delivered an enterprise comp increase of 6.1%. Gross profit increased by more than $740 million, a 70 basis point improvement. We delivered our SG&A costs, which were flat year-over-year as a percent of net sales despite incurring $279 million or 110 basis points in COVID-related costs. Enterprise operating profit margin improved 70 basis points to 7.4%. The Company repurchased $400 million in shares and ended of the year with more than $1.4 billion in cash on the balance sheet. And we delivered annual diluted EPS of $5.65.
This morning, we announced our newest and tested concept that is working remarkably well in rural markets, what we refer to as our combination or combo store format. As I have said in the past, we will continue to refine strategic store formats designed to serve more customers in all types of geographic markets while improving store productivity, margins and returns. The combination store leverages both Dollar Tree and Family Dollar brands to serve small towns across the country. The store combines Family Dollar’s great value and assortment with Dollar Tree’s [Indecipherable] and $1 price point, trying a new format targeted for populations ranging from 3,000 to 4,000 people. These are markets where we traditionally do not open a Dollar Tree store alone. We opened the first test combination store in late 2019, followed by two additional test stores in early 2020. Closely analyzing the store performance and customer feedback and utilizing learnings, we refined the concept.
Between July 2020 and calendar year end, we opened or renovated 32 additional stores, and currently we have nearly 50 new stores in small towns like Wynnville, Alabama; [Indecipherable] Georgia; Ravena, New York and dozens of others. Compared to other small market Family Dollar stores, these combination stores are delivering same-store sales lift of greater than 10% on average. Combination stores are more productive, delivering higher gross margins and are better leveraging store costs. Our successful H2 stores and combination stores will both be part of the Family Dollar new store and renovation strategy moving forward. We are extremely pleased with our customers’ response to the new combination store concept. Our goal is to have formats that leverage the best of Dollar Tree and Family Dollar brands to serve customers in all types of geographic markets. We believe we can continue to change, evolve and improve. To really share why we are very excited to introduce this new format, we are providing a three-minute video, along with photos, introducing the new combination stores at familydollar.com/combostores. Please go check it out.
Our teams worked incredibly hard throughout fiscal 2020. I could not be more proud of our team’s commitment, dedication and focus. We believe our proven strategic store formats and accelerated store growth plan, 1,250 planned store renovations for the year, several key sales and traffic driven initiatives, along with our robust balance sheet will enable us to deliver long-term value for each of our stakeholders, our customers, associates, suppliers and shareholders.
Operator, we are now ready to take questions.
Questions and Answers:
Operator
[Operator Instructions] It does look like we have our first question on the line from Kelly Bania from BMO Capital. Please go ahead.
Kelly Bania — BMO Capital — Analyst
Hi. Good morning. Thanks for taking our questions. I wanted to ask just first about payroll and the freight costs that you called out. And just if you could help us understand at a greater level of detail how you’re getting to that $45 million to $50 million impact from payroll and $80 million to $100 million on freight. And I think the comment was that these pressures are expected to be more than offset by other factors. So just want to make sure I’m understanding. Are you suggesting that you are expecting EBIT growth in 2021 or maybe just elaborate on that.
Kevin S. Wampler — Chief Financial Officer
Sure, Kelly. It’s Kevin. Good morning. Yeah, so we wanted to give some color obviously as to what’s going on. Obviously, not giving specific guidance given the many variables that are out there right now. The $45 million to $50 million that we spoke to in regards to payroll is very specific — our operations. Labor Department looks at that by state. We know there’s approximately 30 states affected this year in our labor pool in those states. We know how many hourly people we have and we go through that calculation on that. Now, that’s no different than any other year. This is just really the first time we’ve given you a number as to what it relates to. We have done — we have faced these same type of increases over the last couple of years. At this time, we’re just trying to put some brackets around it to help people understand the size of that.
As it relates to the freight costs, again, our current projection is roughly $80 million to $100 million. Really fairly comparable across both banners. It is much more import related and domestic related system, probably 75-25, 80-20 as far as important related at this point in time, and that is just based upon the current market conditions that we currently face. As many of you know, we go to market with our freight contracts, our important freight contracts in the spring here. These are negotiated in March and April to go live then in May. So, really, a lot has been talked about in the marketplace in general. So I don’t think there should be a lot of surprise around that. And again, just trying to give a idea of the — of the size of that.
And then, obviously if we look at the offsets, obviously COVID costs in and of themselves last year, we talked about was $279 million. If we — even if we’ve said we spent at the same rate we did in Q4, which is roughly $25 million, we will spend obviously significantly less going into the New Year. So I’ll let you guys do the math on that at the end of the day, but those are the puts and takes. And also beyond that, obviously driving sales — I think we obviously talked this morning about how we’ll continue to drive sales. But also there’s other items. When we look at shrink as a potential good item after maybe a second year in a row after having an upswing a couple of years prior to that. So some good progress being made there. We’re still not where we think we can get to. But really proud of the team, the operations teams and the asset protection team. We’ve been working hard to mitigate the issue that we face there.
Kelly Bania — BMO Capital — Analyst
That’s very helpful. And then just wanted to ask on the combination stores. Any color you can give us on the new store economic model? The cost of the stores, the size and sales per square foot and how the returns maybe compare to the H2s?
Michael A. Witynski — President and Chief Executive Officer
Yeah. So right now the stores are about 10,500 sq. ft. So they’re slightly bigger than what a normal Dollar Tree store would be. And we like the economics of — our sales are exceeding — the comp sales are 20% or greater on average and we’re going into a new market that they’re performing better than our expectation of when it was just a Family Dollar as a stand-alone store. And you can imagine the margins are enhanced because now you’ve got the mix of Dollar Tree product in there at the $1 price point, and in the categories that normally are higher margins. And you’re leveraging it with one store manager and one store team and delivering two brands to a customer and to a small town and we like the results.
Operator
[Operator Instructions] We’ll take our next question from Joe Feldman with Telsey Advisory Group. Please go ahead.
Joe Feldman — Telsey Advisory Group — Analyst
Great, guys. Thanks for taking the question. I wanted to ask on freight, again. Kevin, as you mentioned, you guys do renegotiate freight every spring. And I guess I’m a little confused why you’d be seeing so much pressure, at least in the fourth quarter. I guess, are they allowed to put surcharges on your negotiated rates or — I understand I guess you’re assuming it will be just higher pressure for this year, but maybe could share a little more color on that?
Kevin S. Wampler — Chief Financial Officer
Sure, Joe. As you look at it, we contract for a certain volume of containers. It’s been a big year from a import standpoint, obviously. And so at some point if you exceed your volume, we pay more potentially based upon the marketplace. The spot market — and you guys see all the things and explanation that we see, has been up significantly in general. And again, a part of the supply and demand, there is a backup in China, in Asia, and to get good move in some instances, people are paying more. And it’s not just us. You’ve heard other retailers over the last two weeks speak to it as well. So it’s not — it’s not Dollar Tree specific. It’s an industry issue. And our team is working through that and moving our goods. We’ve been able to keep our seasonal goods coming in and feel good about that. But in general, based on where the marketplace is predicted to be, that is our best projection as we sit here today.
Joe Feldman — Telsey Advisory Group — Analyst
Got it. Thanks. And then a follow-up question. As you think about ’21, and I know you’re not giving too much detail on guidance, but I guess how should we think about the profitability of the two different brands? Family Dollar has been much better. We’ve seen a lot of improvement there. Should we expect continued greater improvement within the Family Dollar profitability versus kind of stable at the Dollar Tree business?
Kevin S. Wampler — Chief Financial Officer
Well, Joe, I think as we think about it, I mean, we obviously — we think there’s opportunities in both. We’ve made a big leap this year with the Family Dollar operating income, going in the right direction. It’s still not where we want it to be ultimately. We’ve made big stride. And we do believe obviously as we began 2020 we spoke a lot about discretionary business and building that side of the house and being a more important player and building that kind of muscle. And obviously the pandemic helped with that, but we do believe that we’ve made strides. And, again, I think Mike, in his comments, talked about the fact that our — growing twice the market in that — in that piece of business. So that’s a great opportunity to continue to go. But better, there may be — we think there’s other opportunities as well. You look at the — as we talk about the combo store, we think that’s a great opportunity. We believe there’s at a minimum 3,000 locations out there where we can play an important role in our customers’ lives on a day-to-day basis and be their — and be their place to shop for many, many things. They may not live close to a very large metropolitan area, and so it’s a big opportunity as we think about it. So a lot of opportunity there.
I think on the Dollar Tree side, I think — again, there always will be opportunity. and Dollar Tree has evolved over the years, as you well know, in the sense of — we always reinvent ourselves. Most recently, we talked about snack zone, we’ve talked about our Crafter’s Square initiative and again some of these initiatives are traffic driving, some of these are really margin driving and — but it’s always relevant to the consumer. And the $1 fixed price point does not go out of style. People love the value it provides. And now we can add upon that. Obviously, taking the Dollar Tree Plus! Opportunity, expanding into 500 store, continuing to learn and build upon that, and really be able to take and benefit both banners are taking that $3 and $5 product.
Michael A. Witynski — President and Chief Executive Officer
Yeah. Joe, this is Mike. I agree with Kevin. I am so excited about 2021. And I absolutely believe there’s growth for both banners. And Kevin hit on them. I mean, I’ll start with Family Dollar. We are absolutely going to come out stronger on the backside of the pandemic than on the front side for a lot of reasons. And I think about what Kevin was speaking to on March 4 of last year. Our comp sales and consumables were strong low single digit quarter after quarter, and where we needed to focus our energy was on the discretionary side. And it was a year ago in December that Rick McNeely was assigned to be the lead merchant for both banners and really leverage synergies where possible and bring disciplines and capabilities to the Family Dollar team.
So during this pandemic, we didn’t just survive through it. We thrived through it and changed our disciplines and strategies. And when you looked at — in our merchandising, we’ve looked at our basic assortment of what we’re carrying at sharper price points. We got better values. And we’re not going to go back to the old way. We’re going to improve upon that. And the pandemic really accelerated our inventory from the past and really flushed that through last year, and then our new receipts coming in on all the disciplines that I just got done describing are really selling at a great mix, stronger sell-throughs, less markdowns and better turns.
But the second thing is our stores. You heard us talk about our customer satisfaction scores across the board for three quarters are improving. We’ve invested a lot in getting better initiatives and execution in our stores and our customers are responding. And we’ll have that carrying forward compared to going into the pandemic. The fourth thing, as Kevin said, is we’ve got clear direction now on a format strategy. We’ve got H2 format that is continuing to produce 10% comp, so when we go in and renovate them — and we’re going to renovate another 1,250 of them this year. And then this wonderful new store of a combo store in small towns that is producing a 20% comp, it’s another thing that we didn’t have prior to the last year going into the pandemic. And then our balance sheet, as Kevin spoke about. We generate a lot of cash flow and we’ve got $1.4 billion on our balance sheet, and that enables us to be very flexible and grow this Company like we haven’t grown before because we don’t have to pay $1 billion to $1.2 billion every year to pay down the debt. We can use it flexible to grow this Company and grow shareholder value.
And then the last thing I would say on Family Dollar side is — and we haven’t abandoned [Phonetic] the digital and omnichannel business. And you heard us just now tipping our toes into Instagram — or Instacart. And the Instacart has just given a huge response for our customers and it give us a broader — able to serve a broader segment of this customer with Instacart. So there’s another upside with our digital and omnichannel. And then you’ve heard us about Dollar Tree Plus!. We will always grow that business and refine those categories. And now we have our Crafter’s Square in all of Dollar Tree. Just got it done in January. We’re going to go this entire year with Crafter’s Square. And you’ve heard us talk about Dollar Tree Plus! So we’re going to drive that Dollar Tree Plus!.
And then, Dollar Tree Inc. didn’t perform that well because of those COVID-related. If you look at our fourth quarter, our November comps in Dollar Tree were spectacular and our January the best in three years. What happened was, December lockdown because of the COVID cases increased and spiked at highest levels across the country, and you all saw that. And the states because of that increased the lockdowns, people did not move around. And what happens is there wasn’t any celebrations. The Dollar Tree feeds those celebrations in the schools, in the churches, at home, at work parties. And all of our party categories that flourish during the — the first 10 days before Christmas. And it just didn’t happen because of COVID. Outside of that, we had a great quarter with 2.4% comp, which was better than the fourth quarter in 2019, and we had a COVID problem. So we deliver a 36 plus margin and a 16% [Phonetic] comp income at Family Dollar, and I believe we can beat that next year. So, yeah, to answer your question, I believe we’re going to have a successful year at both banners for those reasons.
Joe Feldman — Telsey Advisory Group — Analyst
That’s really helpful, and I hope that proves true. Thank you so much, guys. I appreciate it.
Operator
Okay. And we’ll take our next question from Paul Trussell with Deutsche Bank. Please go ahead.
Paul Trussell — Deutsche Bank — Analyst
Good morning. And thank you for all the color. I guess I wanted to maybe just follow up the comments with maybe some bigger picture questions then looking beyond 2021. Just curious on — obviously 2020 was a pretty unique year to say the least. So just curious as you kind of move and turn the corner here, if you can give some comments on long-term margin potential as we think about the Dollar Tree and Family Dollar banner, given what’s transpiring on the merchandise front and with all the new formats, what would be the timetable do you think to be able to navigate all the headwinds and perhaps return to some of the levels we’ve seen in prior years?
Kevin S. Wampler — Chief Financial Officer
Paul, it’s Kevin. I’ll start and I’ll let Mike chime in if he has anything. I guess I think about it in a couple of ways. One, one of the words you guys have all heard me use before and I think it’s very true within our Company is continuous improvement. We go into every year expecting to improve in all aspects of our business. And whether that’s driving sales, reducing costs, being a more efficient company. And so that’s just the way our mindset is. And so, while I don’t — I don’t have a timetable to give you in the sense of certain milestones as I sit here today, again, part of that is obviously the uncertainty of what’s going on out there in the world with the pandemic and — but we would expect continuous improvement. And I think Mike has shared a lot of that with all of you this morning and the idea. So we entered the year. The expectation is we’re going to improve our operating income for both banners when we think about it. Whether we can do it with some of the things going on in the world, that’s yet to be seen. But it’s a great opportunity, and I think that’s the most important thing is the way we always want to improve.
Michael A. Witynski — President and Chief Executive Officer
Yeah. Paul, I agree with Kevin that we will continuously improve and drive our pass on Family Dollar side. As you’ve heard me, we have not arrived yet. And there is upside because we just cycled through our first year, and we are going to continue to look at our assortment, our locations and improve upon the products that we have and price points. And I think on the Dollar Tree side, we have things ahead of us, just like the tariffs. Once we got it in front of us, we know how to manage around and it. And I would say that short-term, the freight thing, once we’re aware of it, we’re going to figure out how to mitigate it and grow the margin and grow Dollar Tree. Dollar Tree, for 14 years has had a quarter after quarter of positive comp store sales growth except for first quarter last year, and here we are cycling that right now this year. So yeah, I feel very strong that we continue to grow both sides.
Paul Trussell — Deutsche Bank — Analyst
Thank you. And this year, you’re opening up I believe it’s 600 stores and remodeling like 1,250 Family Dollars or so. Is that in your mind kind of a good go-forward run rate or do you see a scenario where you guys may actually want to accelerate in the future given the different formats and opportunities that you have? And just any updates on long-term store count potential?
Michael A. Witynski — President and Chief Executive Officer
Yeah, I’ll comment and then you could go to Kevin there. But from my perspective, we will absolutely — we’re going to continue. We have 1,250 renovations this year. Next year, we believe there going to be another 1,250. But then the great thing about our balance sheet and our capital structure, it enables us to feed the growth and accelerate the growth. So, as we wind down the renovations after — we’ll add about — this year and next year, then we can shift to total store growth. And then we’ve got these formats ahead of us that we feel very confident in growing. So yeah, I would see the — an acceleration in new store growth as we round up or ramp up our 1,250 renovations for the next two years. Then we’ll shift to new store growth.
Kevin S. Wampler — Chief Financial Officer
Yeah, Paul. I think, to your point, total number of stores — I think the most recent numbers we’ve given is Dollar Tree, about 10,000 stores and Family Dollar, roughly 15,000 stores. And again, I think we haven’t updated those recently to the Street. It’s something we’re looking at. I think part of what plays into that and will be something we can maybe update in the future, the idea of stores continue to evolve and changes the way we think about what’s, what that potential is, right? So as we — as we talk today about the new combo store, we have to really look at the marketplace, and as we’ve said, I think that’s 3,000 stores at a minimum at this point in time. So at some point in the future, we’ll be able to achieve outtake that. But it’s a great opportunity. To Mike’s point, the balance sheet help support us in all things growth, and we’re in a great place where obviously there are some retail space being vacated. The second-hand space has always been a big opportunity for us. And so that’s another opportunity that allows us to grow at a good clip going forward.
Paul Trussell — Deutsche Bank — Analyst
Thank you. Best of luck.
Operator
Okay. And it looks like we have time for about one more question. Looks like we have a question on the line from John Heinbockel with Guggenheim Securities. Please go ahead.
John Heinbockel — Guggenheim — Analyst
Hey, Mike. I wanted to start with strategic impact about the combo, right? So one, do you think it allows you get in the margin mix — you get sharper — if you need to on Family Dollar pricing, number one. And then secondly, can you take learnings from — from new combo and put them into non-rural stores that may not overlap with Dollar Tree or are you pretty sensitive to that?
Michael A. Witynski — President and Chief Executive Officer
Like I said, we’re going to continue to learn and refine on all our formats and do whatever it makes sense to get the most productive and improve our margins and profitability of the banners that we have. What I’m really excited about is on the — on this format as it — these are small towns that we would not go into — into the town with a Dollar Tree because the economics just don’t support that. And we would go in with a Family Dollar. And what we — what we said is, well, let’s go in with the great part of Dollar Tree and bring in the seasonal and the party and the stationery and the Crafter’s Square and all the things that small town America needs to celebrate their lines. And then on the Family Dollar side, it helps them live their lives and feed their families. So this combination store is really hitting on all cylinders from us because of the great mix and the great margin that provides and the overall productivity per store.
And to your further comment, we will continue to look at the categories that do well. And don’t remember — don’t forget that in our H2s, we already have about 20 categories that have the Dollar items that we’ve brought into those categories from the Dollar Tree banner that really help bring that value program into those stores and are helping drive the H2 format as well. So we will continue to look at that, John.
John Heinbockel — Guggenheim — Analyst
And then maybe one follow-up to that, right, on how you source that product. What’s the thought now right on the supply chain? And is this — this push, the idea of hybrid DCs versus the one you have, does that accelerate that process?
Michael A. Witynski — President and Chief Executive Officer
Well, we will always — we are absolutely in a parallel path. To your point, we’ve got a great DC network and we are evolving that with trying to decide which — what kind of format in our DC or — we have a lot of trucks going by all these towns. So we’re going to leverage 10 miles and leverage our distribution network to make sure we’re driving the most efficiencies as we see these formats across the country. But you’re right, that would lend well to Dollar Tree and Family Dollar product riding on the same truck to drive those efficiencies.
John Heinbockel — Guggenheim — Analyst
Thank you.
Operator
Okay. And we’ll take another question from Matthew Boss with JPMorgan. Please go ahead.
Matthew Boss — JPMorgan — Analyst
Great. Thanks. So Mike, at the Dollar Tree banner, fourth quarter low-single digit comps overall basically match the concept historical run rate despite I know there was some volatility in there with December and January. So, as we think about the first quarter relative to the 2% to 3% comps in the fourth quarter, I guess overall any puts and to consider? And similarly for the full year, is any impediments to driving low single-digit comps in your view for the year at Dollar Tree?
Michael A. Witynski — President and Chief Executive Officer
Yeah. Overall, we don’t see any structural or calendar impediment side. Last year with Dollar Tree, Easter, as you know, did not happen just because it was at the peak of the beginning of COVID. And it did two things that really impacted our first quarter sales at Dollar Tree and our margin at Dollar Tree because we didn’t sell the high margin Easter goods. And then as you look throughout the year, I believe that as the country opens up and people get back to their routines and occasions start to begin to the increase inside the churches and schools and families and weddings and all those things that are great for Family Dollar business, I see some upside throughout the year.
And then, as you just heard, at Christmas, the 10 days or two weeks to Christmas because the COVID completely shut down and traffic. So yeah, I believe there is upside this year for Dollar Tree.
Matthew Boss — JPMorgan — Analyst
That’s great. And then just a follow-up on gross margin at the Dollar Tree banner. I guess when we put together the anniversary of the first quarter headwind, I think you were down 250 basis points plus. And then we considered the freight headwind that you walked through. How should we think about Dollar Tree banner gross margin this year versus that 35% to 36% target range?
Kevin S. Wampler — Chief Financial Officer
Yeah, I think a lot of puts and takes, as always, Matt, and I think, absolutely, as we’ve stated, the last — last couple of quarters, we believe we can return to that 35 to 36 point range. I think the one development that probably hinders that a little bit here as we go into 2021 is the change in freight that is really a pretty new item to the first — for the size of that I guess is where we speak to it. So again, I think, overall, I think there are things that I think — our mix continues to be good. I think mark-on will continue to be good. I think obviously freight will be the big bad guy there. I think shrink would be helpful. And I think after a couple of years of distribution costs rising, I think maybe that could flatten out just a little bit. So there’s many, many puts and takes, but I don’t necessarily see it getting back to that above 35% in 2021. Right now with the freight headwind. It doesn’t mean we can’t get there, but it’s a little bit of an uphill climb.
Michael A. Witynski — President and Chief Executive Officer
Yeah, Matt, this is Mike. What Kevin said is — what I am encouraged about is we just finished our January trip, which is our largest trip and we buy for the back half of the year. And our buyers did it remotely. But the value of the product, the excitement of the new product coming in for the back half of the year and the initial markup we’re seeing on that product is exactly at our expectation. And then, as Kevin said, there is going to be some headwinds, but we’ll figure out how to manage that, just like we did the tariffs. As long as they are ahead of us and we know what it is, we will manage around that. And then that — and our mix is going to be favorable too at Dollar Tree as we — the Crafter’s Square. And as we grow the discretionary side of the business this year as the country begins to open up, that’s the size that will benefit the most from this. And that’s why I’m really excited about it.
As with shrink, as you know, for the last three years, shrink has been a headwind at Dollar Tree and Family Dollar. And last year, we improved it but we see some continued improvement in that area as well to help offset some other pressures.
Matthew Boss — JPMorgan — Analyst
That’s great color. So interpretation is, just under 35% this year but you have visibility given the sourcing trips and the IMU that you’re seeing to be back in that 35% to 36% just given [Indecipherable] is that kind of the best way to think about it?
Michael A. Witynski — President and Chief Executive Officer
I guess the way to think about it, Matt, I think we’ve tried to describe the puts and takes the best we can. At this point in time, it’s obviously very fluid, and we’ll continue to update you on — going to be very transparent this morning on all these items affecting us and we’ll update you as we go forward.
Matthew Boss — JPMorgan — Analyst
Okay. Best of luck.
Operator
Okay. And it looks like we have time for one more question from Michael Lasser with UBS. Please go ahead.
Michael Lasser — UBS — Analyst
Good morning. Thanks a lot for taking my question. So can you frame out the math a little bit that you provided? That was very helpful. So $279 million of COVID costs are going to roll off. You’ll have $100 million [Indecipherable] that are going to be ongoing from the $25 million run rate that you provided for the fourth quarter. So that’s a net $179 million benefit. At the midpoint of the incremental pressure you’re feeling from wages and shrink, that’s $137.5 million. So all else equal, nothing else happens, your sales are flat, you should have $41 million of additional operating income simply from the mix of those two factors. And as pointed out, can we — can we then just kind of model out how we think sales are going to be and operating income would grow with sales putting aside that other math?
Kevin S. Wampler — Chief Financial Officer
Well, I mean, obviously, the puts and takes that you talked to there, Michael, those are the numbers. And again, those are the big ones. There is obviously many things that happen in a given year. We’re not giving specific guidance. I think [Indecipherable] this morning in every way possible. But again, I think you’re right, the big items, I think — we think we can offset and then there is plenty of other puts and takes at the end of the day. But we feel relatively — we feel good about our business, we feel good about where we’re going to be in 2021 and the opportunities ahead of us. And I don’t know that I can give you a whole lot more guidance beyond that.
Michael Lasser — UBS — Analyst
Okay. I really just got several messages to make a counter argument to that math, which is although that’s true except for Family Dollar is going to be down, potentially in the year ahead and we’ll have to lap some unique benefits, so can we put in frame of reference around how we should think about what was unique to Family Dollar in 2019 that’s really just not going to repeat? I know that’s a big point of certainty, but I think [Indecipherable] and then I have one last follow-up on Dollar Tree Plus!.
Kevin S. Wampler — Chief Financial Officer
I mean, Family Dollar — I mean, you’ve heard us talk this morning about our initiatives, heard us talk about the opportunities that we have with the H2 and the combo stores. You’ve heard us talk about how we believe we are truly making a difference and building out our discretionary business. And that’s a big — it’s not just big for sale, it’s big for margin, it’s big for customer satisfaction, return trips and all the things we do with that. So I think those are — those are the things that we’re working on hard day in and day out. I don’t think anybody can truly project stimulus, how fast the economy will bounce back and all those things [Indecipherable] at the end of the day. So we feel good about where we’re at. That’s where we — that’s where we stand today.
Michael A. Witynski — President and Chief Executive Officer
Yeah, Michael, I just want to reiterate the enthusiasm I have for both banners and where we’re at with our formats, with the strategy that our merchants are working on, recycling last year’s pandemic and again our capital structure. We are in the best position we’ve been in five years, and we’ve got a bright future. And our merchants are going to continue to do the things they do every day and get better, and we’re going to keep growing the Company.
Michael Lasser — UBS — Analyst
Yeah. And this is very clear from the messaging you’re providing today. That’s helpful. And then my last follow-up is on the Dollar Tree Plus! Concept. You’ve stated that it’s exceeding year plans. What’s holding you back from rolling this out back to the 500 locations that you’re currently in the process deploying to. And how does the overall financial performance of the Dollar Tree stores look in terms of sales, operating income dollars and margin? Thank you.
Michael A. Witynski — President and Chief Executive Officer
Yeah. And again, we’re going to — that’s why we’re rolling it out to another 500 is continue this test. We had 120 stores and we bought seasonal items and items for the back half of the year and we exceeded the sales that we expected. So our customers are responding favorably. And what I’ve shared in the past is, we will continue to look at the overall store sales, the overall margin and the profitability of those stores, and those we want to see improve. And the top thing is with everything going on last year, everything I just described of COVID, it was really hard to lift our head up and say that the 10% of the store and the DT Plus really drive those things that I just described.
So we’re going to keep testing and refining and rolling this out. But we like the results we’re seeing so far.
Michael Lasser — UBS — Analyst
It’s great to hear. Thank you so much and good luck.
Operator
All right. And that concludes today’s question-and-answer session. Mr. Randy Guiler, I’d like to turn the conference back to you for any additional or closing remarks.
Randy Guiler — Vice President, Investor Relations
Okay. Thank you, Jordan. And thank you for joining us for today’s call and for your continued interest in Dollar Tree and Family Dollar. Our next earnings conference call to discuss Q1 results is tentatively scheduled for Thursday, May 27, 2021. Thank you and have a good day.
Operator
[Operator Closing Remarks]