Dollar Tree, inc (DLTR) Q2 2021 Earnings Call Transcript

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Dollar Tree, inc (DLTR -0.28%)
Q2 2021 Earnings Call
Aug 26, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Dollar Tree Inc. 2Q 2021 Earnings Conference Call. [Operator Instructions]. After today's prepared remarks, we will have a question-and-answer session. [Operator Instructions].

At this time, I would like to turn the conference over to Randy Guiler, Vice President of Investor Relations. Please go ahead.

Randy Guiler -- Vice President, Investor Relations

Thank you, Madison. Good morning and welcome to our call to discuss the results for Dollar Tree's second 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 risks and uncertainties and our actual results may differ materially from those indicated in these forward-looking statements.

For information on the risks and uncertainties that could affect our actual results, please see the Risk Factors, Business and Management's Discussion and Analysis of Financial Condition and Results of Operations sections in our annual report on Form 10-K filed 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 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 may be 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'll 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, and good morning everyone. On this morning's call, we're going to discuss our strong operating performance, talk through some of the headwinds facing our industry, and share details on the robust and accelerated strategic initiatives we have underway to drive short and long-term value creation.

I am proud of our team's continuing efforts, especially in our stores and distribution centers to adapt and react in this dynamic environment, to serve customers and deliver improvements in both operating margin and earnings. Our second quarter earnings per share of $1.23 represented a year-over-year quarterly increase of 12% and 62% when compared to Q2 of 2019.

We continue to see strong performance in discretionary side of the business, and our key initiatives including H2, Dollar Tree Plus and the new Combo Stores are delivering compelling results. All three concepts have performed very well, and we are significantly accelerating these initiatives in 2022 and beyond.

Regarding the continuing and well publicized challenges in the global supply chain, as well as higher freight costs and other inflationary pressures, our teams are working hard to navigate these issues while staying focused, as always on delivering the value and convenience our shoppers expect. I want to share more details on these challenges, how they affect our business and the actions we are taking to best manage and mitigate the impacts.

In recent quarters, we have spoken about the freight cost environment, both international and domestic. As you have certainly seen in the media and elsewhere, freight costs have reached unprecedented levels as a result of increased demand, limited capacity and shipping delays. For context, three months ago, the Shanghai Containerized Freight Index, which reflect spot rates on ocean freight from China was already at an all-time high, up more than 280% year-over-year and more than 400% since 2019.

Now, these rates have continued to rise, and have increased more than 20% since we last reported on May 27th. According to the recent Journal of Commerce, annual ranking of the top 100 importers, Dollar Tree ranked as the fifth largest among retailers. Dollar Tree brings in nearly 90,000, 40-foot containers per year, predominantly for the Dollar Tree banner. As you can see in the slide deck on the Investor Relations portion of our website, at dollartreeinfo.com, we believe the Dollar Tree banner imports more containers per $100 million in sales, than other large retailers. And combined with our low $1 price point, we have an outsized impact from freight cost.

After the first quarter of 2021, our updated freight outlook assumed that our regular ocean carriers would fulfill only 85% of their contractual commitments and assumed -- we also assume the higher spot -- the spot market rates. However, we are now -- project that our regular carriers will fulfill only 60% to 65% of their commitments, and the spot market rates will be much higher than previously estimated.

This shortfall is caused by a variety of factors such as equipment shortages, equipment situated in wrong location, significant backlogs and delays in both China and US ports, outbreaks of COVID causing labor shortages or closure of entire terminals, and the lingering effects of the Suez Canal blockage. To give you a real life example of the kinds of challenges we're seeing, one of our dedicated charters was recently denied entry into China because a crew member tested positive for COVID, forcing the vessel to return to Indonesia to change the entire crew before continuing. Overall, the voyage was delayed by two months. With the current pressure on carriers, once disruptions in the supply chain occur, there is not enough capacity to make it up.

During a recent transportation webinar, a San Francisco-based freight forwarder stated the transit times from Shanghai to Chicago have more than doubled to 73 days from 35 days. Another transportation executive from a carrier recently estimated that voyages are now taking 30 days longer than in previous years due to port congestion, container handling delays and other factors.

The Dollar Tree banner is more sensitive to freight costs than others in the industry. Our products have lower price points than other retail importers. And, as a result, our freight costs are a higher percentage of our gross merchandise margin. The good news is, our initial product margin, which exclude freight have been improving as evidenced by our most recent overseas product purchases, included for manufacturers in more than two dozen countries.

Even in this inflationary environment, we continue to meet or exceed our desired initial product margins at values attractive to our customers. As freight cost moderate in the future, we are confident when paired with our team's significant efforts to enhance our supply chain, this will become a material tailwind contributing to a better product margins.

Industry experts expect the ocean shipping capacity will normalize no later than 2023 when many new ships come online. We are not counting on material improvements in 2022, especially in the first portion of the year.

As a result, we are working proactively to reduce the freight cost impact and otherwise improve gross margin merchandise. Examples of steps we are taking include, using dedicated space on chartered vessels for the first time, including one large vessel contracted for three-year term, which is scheduled to make its first voyage within weeks.

We are expecting to add more charters this year. We're adding alternative sources of supply, both domestic and international that do not rely on Transpacific shipping. We expect some of this shift could become permanent. As an example, Dollar Tree and Family Dollar were well prepared for back-to-school season which alternatively sourced domestic product. We're taking a fresh look at which SKU should be prioritized for import and which should be alternatively sourced; prioritizing containers based on seasonality, the margin impact and our overall inventory needs.

We'll be continuing to pull forward seasonal purchases by 30 days. We're optimizing which China and US ports we use to take advantage of the shipping availability, and our operations team is delivering shrink improvements through technology, enhanced processes and disciplined execution. We are confident that our teams will allow us to navigate through this period of global supply chain challenges.

In addition to the supply chain channel news, we are also being impacted by labor shortages in our distribution centers and stores. Steps we are taking to combat these trends include: Hosting national hiring events; Paying sign on bonuses; Offering enhanced wages in select markets; Paying tuition reimbursement and, more. All designed to be more competitive and a tight market for talent.

We're continuing to optimize our DC network by reducing stem miles, partnering with suppliers to optimize and minimize the length of haul for inbound freight, testing, validating and expanding self checkout in our stores, and developing and utilizing more efficient processes, both in our stores and DCs.

Despite these challenges affecting our industry, I'm very pleased with the team's performance to deliver a 62% improvement in EPS in Q2 when compared to 2019. Now, let's talk about the exciting path forward. I'd like to highlight some of the key initiatives we have in place, especially Dollar Tree Plus in our combo stores, which are helping to position our Company for the future.

We are incredibly excited about the results we are seeing. As we have discussed in the past, we are well positioned to serve customers across all types of markets, urban, suburban and rural. The Family Dollar H2 continues to perform very well. In Q2, we renovated 435 stores into the H2 format, and now have a total of approximately 3,300 H2 stores.

Importantly, we are accelerating the expansion of Dollar Tree Plus initiative and the rollout of Combo Stores to better serve customer's needs and drive sustainable long-term value. We have been carefully improving and calibrating our Dollar Tree Plus initiative with a better understanding of the multi-priced offerings and greater values. Customers are increasingly embracing the Dollar Tree Plus concept, which provides extraordinary value in the discretionary categories they most desire while enhancing store productivity.

As we have refined the Dollar Tree Plus concept, the operating metrics have achieved strong results and have provided us valuable insights that are enabling accelerated expansion. On average, stores with Dollar Tree Plus are experiencing an overall sales lift of approximately 6% with a similar lift in gross profit, improved contribution of approximately 13%, and a payback on investment of less than a year. For obvious reasons, we are focused first on large stores, and we are already seeing similar positive results as we are now implementing into smaller stores. We currently have the multi price assortment in about 340 stores, and we expect to be at 500 stores by year-end.

Building on this continued success, we are planning to add Dollar Tree Plus to an additional 1,500 stores in fiscal 2022. And, we aim to have at least 5,000 Dollar Tree Plus stores by the end of fiscal 2024. Many of our new stores will also be opening up as Dollar Tree Plus stores. This past March, we announced that our newest store format, the Combo Store, leveraging the strengths of both banners under one roof, to provide shoppers with extreme value and merchandise excitement. These stores represent another way to introduce the multi price assortment to Dollar Tree shoppers, and the $1 assortment to Family Dollar shoppers, a major benefit from the Dollar Tree and Family Dollar combination.

We currently have 105 Combo Stores, and I believe we can reach 3,000 of these stores in rural markets alone. Demonstrating our great confidence in Combo Stores as a strategic format, more than 85% of our new Family Dollar stores will be Combo Stores in fiscal 2022. We anticipate 400 new, renovated or relocated Combo Stores next year. We are also in the process of validating the combo store concept and other demographic markets and are excited about the possibilities.

Our larger Combo Stores on average are delivering 23% more sales, 31% more gross margin dollars, approximately 120% more cash contribution dollars, and are reducing payback time by approximately 30%. New Combo Stores compared to similar size stores are showing sales increases of 17%, and even more encouraging, our renovated or relocated Combo Stores are delivering greater than 40% more sales when compared to Family Dollar stores that have not been renovated or relocated. Details about our Combo Stores are available at www.familydollar.com/combostores.

I will now hand the call over to Kevin to provide details on Q2 performance and our outlook.

Kevin S. Wampler -- Chief Financial Officer

Thanks Mike, and good morning. Our second quarter EPS of $1.23 per share is an increase of 12% from the prior year's quarter and 62% compared to the second quarter of 2019. Consolidated net sales increased 1% to $6.34 billion, comprised of $3.26 billion at Dollar Tree and $3.08 billion at Family Dollar.

Enterprise same-store sales decreased 1.2% as we cycled a strong 7.2% from a year ago, representing a 6% increase on a two-year stacked basis. Comps for the Dollar Tree segment decreased 0.2%. Family Dollar same store sales decreased 2.1% cycling a very strong 11.6% increase from last year. On a two-year stacked basis, Dollar Tree comps increased 2.9% and Family Dollar increased 9.5%.

Dollar Tree's comps was comprised of a 1.1% increase in traffic, offset by a decline in average ticket. Family Dollar experienced a 3.5% decline in traffic, partially offset by an increase in average ticket. We do believe that Dollar Tree's traffic has continued to be hindered by a lack of shopper mobility, as more than half of the workforce continues to work remote. Gross profit was $1.86 billion for the quarter. Gross margin was 29.4% compared to 30.5% in the prior year's quarter. Gross profit margin for the Dollar Tree segment declined 130 basis points to 32.4% when compared to the prior year's quarter.

Factors impacting the segment's gross margin performance included merchandise cost including freight, increased 175 basis points, driven by increased freight costs, which was partially offset by favorable mix net of [Phonetic] mark-on. Occupancy costs increased 10 basis points as a result of loss of leverage due to the comparable store sales decline. Shrink improved 55 basis points related to favorable inventory results and a decrease in the shrink accrual rate. And, distribution costs decreased 5 basis points cycling COVID-19 related expenses in the prior year.

Gross profit margin for the Family Dollar segment declined 110 basis points to 26.1% in the second quarter, year-over-year delta included the following. Merchandise costs including freight increased 175 basis points related to higher freight costs and increased sales of lower margin consumable merchandise. Occupancy costs increased 35 basis points as a result of the comparable store sales decrease. Shrink improved 50 basis points related to favorable inventory results and a decrease in the shrink accrual rate, distribution costs, improved 20 basis points compared to the prior year quarter due to the lower COVID-19 related costs. And, mark down costs decreased 25 basis points compared to last year based on civil unrest costs incurred a year ago.

Consolidated selling, general and administrative expenses improved 150 basis points to 23% of total revenue compared to 24.5% in Q2 last year. For the second quarter, the SG&A rate for the Dollar Tree segment as a percentage of total revenue improved 170 basis points to 22.3% when compared to the prior year's quarter.

Payroll costs improved 155 basis points, primarily due to decreased COVID-19 related store payroll costs. Other SG&A decreased by 20 basis points resulting from lower general liability insurance costs, primarily offset by increased debit and credit card fees. Store facility costs decreased 5 basis points due to lower repairs and maintenance costs. And for the Family Dollar, the second quarter SG&A rate as a percentage of total revenue was 21% compared to 21.9% in the prior year's quarter.

Payroll cost decreased 95 basis points, primarily due to decreased COVID-19 related store payroll and incentive comp costs, partially offset by deleverage related to the comp store sales decline. Store facility costs decreased 30 basis points, driven mainly by lower repairs and maintenance costs due to expense incurred from civil unrest in the prior year's quarter.

Other SG&A expense increased 35 basis points, primarily due to increased advertising and travel expense compared to the prior year and depreciation and amortization expense increased 10 basis points due to deleverage on the comp sales. Corporate and support expenses as a percent of total revenue decreased 20 basis points compared to the prior year's quarter primarily due to lower incentive and equity compensation.

Operating income increased 7.3% to $402.2 million compared with $374.9 million in the same period last year and operating income margin was 6.3% in the second quarter compared to 6% in prior year quarter. The second quarter of 2021 included total incremental operating costs of $3 million for COVID-19 related expenses compared to $134.9 million in the second quarter of 2020. Non-operating expenses totaled $33 million, comprising net interest expense and our effective tax rate was 23.5% compared to 23.1% in the prior year's second quarter.

Company had net income of $282.4 million or $1.23 per diluted share, and this compared to net earnings of $261.5 million or $1.10 per share in the prior year's quarter. Combined cash and cash equivalents at quarter end totaled $720.8 million compared to $1.42 billion at the end of fiscal 2020. Outstanding debt as of July 31st was $3.25 billion.

In Q2, we repurchased approximately 7 million shares of our common stock for $700 million. We currently have $1.45 billion remaining on our share repurchase authorization. Inventory for Dollar Tree at quarter end increased 13.1% from the same time last year while selling square footage increased 3.7%. Inventory per selling square foot increased 9%. Inventory for Family Dollar at quarter end increased 10.9% from the same period last year, while selling square footage increased 2.1%.

Inventory per selling square foot increased 8.6%. Both banners' store inventory levels are below 2019 levels at quarter-end. Capital expenditures were $229.1 million in the second quarter versus $232.5 million in Q2 last year. For fiscal 2021, we now expect that consolidated capital expenditures will be approximately $1.1 billion. Depreciation and amortization totaled $176.1 million for Q2 compared to $168.1 million in the second quarter of last year. And for fiscal 2021, we expect consolidated depreciation and amortization to be approximately $720 million.

Our outlook for the remainder of 2021 includes the following exemptions. We expect continued pressure on wages due to the current shortage of workers available for our distribution centers and stores. Spec [Phonetic] Shrink will continue to be a tailwind as we go through the back half of the year, but not at the same rate as we begin cycling improved results from the prior year.

Net interest expense is expected to be approximately $34 million in Q3 and approximately $134 million for fiscal 2021. We estimate consolidated net sales for the third quarter will range from $6.40 billion to $6.52 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 $0.88 to $0.98.

Consolidated net sales for full fiscal 2021 are expected to range from $26.19 billion to $26.44 billion, based on a low single-digit increase in same-store sales and 3.4% square footage growth. The Company now estimates diluted earnings per share will range from $5.40 to $5.60.

Freight costs for fiscal 2021 are now expected to be $1.50 per diluted share to $1.60 per diluted share higher than fiscal year 2020 expressed in terms of the impact on diluted earnings per share. The updated outlook includes $0.60 to $0.65 per diluted share, or $185 million to $200 million, of additional freight costs since our prior guidance on May 27, 2021. As Mike noted earlier, the market condition for freight have continued to deteriorate since our update in May. These changes include the significant difficulties our regular contract carriers are having in meeting their original commitments as well as continuing increases in the spot market rate. These disruptions have affected the timing of inventory receipts and have affected sales of mix.

Our outlook assumes a tax rate of 22.7% for the third quarter and 23% for fiscal 2021. Weighted average diluted share counts are assumed to be 225.9 million shares for Q3 and 228.9 million shares for the full year. Our outlook does not include any additional share repurchases, although, as I said before, we still have $1.45 billion remaining on our existing share repurchase authorization.

I'll now turn the call back to Mike.

Michael A. Witynski -- President and Chief Executive Officer

Thank you, Kevin. Our core business is strong. As Kevin stated, our updated outlook for fiscal 2021 is $5.40 per share to $5.60 per share. It's unfortunate that the global supply chain is in the condition it is, which is expected to result in a year-over-year drag to our business of $1.50 per share to $1.60 per share. If freight costs this year were similar to what we were just a year ago, we estimate that our earnings per share would be in the range of $6.90 to $7.20 for this fiscal 2021.

The work of our teams has been remarkable. Our store and distribution center teams continue to demonstrate their commitment to serving our shoppers each and every day. Our customer satisfaction survey scores have never been higher. We have been -- we have seen improvements across the board for store cleanliness, assortment, service and speed of checkout.

The merchants are delivering greater values to our customers that are meeting or exceeding our initial merchandise margin targets. Our buyers are disciplined, nimble and committed. While it represents a smaller part of our overall business, our digital team saw a 70% increase in sales versus the first half of 2021. We're also pleased with the solid performance of our local delivery program through Instacart. Our initiatives are driving improved results. Customers are responding to Dollar Tree Plus, the H2 format and our new Combo Stores.

We are pleased to accelerate both these initiatives in fiscal 2022. The supply chain issues, which we are confident are transitory in nature will take some time until the global demand and supply for equipment is rebalanced. Importantly, we believe the foundation of our business is stronger than ever. We believe we are in the process of materially improving the long-term earnings power of our business for years to come.

Before we get into questions, there's another topic I want to quickly touch on because it's important to all of us here at Dollar Tree. Recently, Morning Consult reported that the public views Dollar Tree as one of the ten most trusted retail brands in America. We see this as a validation of our core mission of delivering value and convenience to our customers, but it also reflects our commitment to the broader communities we serve.

As I wrote in our 2021 corporate sustainability report, Dollar Tree strives to be the best corporate citizen for all stakeholders and the thousands of neighborhoods, towns and rural markets where our stores are located. And that means taking concrete actions to implement our sustainable vision. One recent step I can share, we are executing on our climate goals by pursuing two new solar projects for our stores and distribution centers. These will provide up to 6 megawatts of renewable power, taking that usage off the carbon grid for years to come.

These, and other efficiency projects show that our efforts to build out the infrastructure for sustainable growth are now taking root. Additionally, our executive leadership team has leaned in on commitment to fostering an inclusive work environment, where the individual differences are understood, respected and appreciated as a valuable source [Phonetic] to strengthen our Company.

This strategy is designed to evolve our culture and sustained momentum through the guidance of our executive council that ensures leadership accountability to our very important DEI objectives. We constantly seek to improve all aspects of our business and that includes areas like store safety, healthier product offerings and many other that are so important to our associates, our customers, our neighbors and our shareholders.

You should know that we always strive to be transparent on these topics. I look forward to providing future updates on the strides we are making. In summary, there is a lot of inspiring news at Dollar Tree. We are excited that our strategic store formats, our accelerated growth plans, and many key sales and traffic driving initiatives, along with our robust balance sheet and commitment to sustainable growth will enable us to deliver long-term value for our stakeholders.

Operator, we are now ready to take questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. We'll go ahead and take our first question from Matthew Boss with J.P. Morgan. Please go ahead.

Matthew Boss -- J.P. Morgan -- Analyst

Great, thanks.

Great, thanks. So Mike maybe overall, how do you feel about the health of the Dollar Tree banner today? Any factors to consider that impacted the second quarter? Should we expect similar comp performance in 3Q? And just overall, how do you see Dollar Tree concept relative to 2% to 3% sustainable comps looking back as we look forward?

Michael A. Witynski -- President and Chief Executive Officer

Yeah. Thanks, Matt. Yeah, we feel very good about Dollar Tree looking forward, especially in the inflationary times where the $1 price point will mean more to customers than ever, and our ability to continue to procure the product at the margins that we expect. The second quarter, there was still some trip consolidation going on due to the COVID implications out there.

And we saw that in the summer, of course, everybody in the country went on vacation twice to make up for last year. And there is the -- between that and there is not really any huge holidays during the summer that Dollar Tree does so well on. What I do like, and what I'm really encouraged about is, our average ticket is continuing on a two-year stack to be at 21% to 22%. That's amazing growth over 2019. And if we can get that Dollar Tree traffic going along with that basket size, I really believe we're going to like the results. And especially as we look ahead of us, we've got back-to-school, fall, Halloween, Thanksgiving and Christmas. And with schools opening back up and offices hopefully opening back up and traffic moving around, and the trips aren't so consolidated, I believe there is upside for us.

And we saw a little bit of -- while we weren't happy with the traffic in Q2, it was positive for the first time in four quarters. So we're very confident that Dollar Tree is going to have sustainable growth in that low single digit comps.

Matthew Boss -- J.P. Morgan -- Analyst

Great. And then maybe just a follow-up, maybe for Kevin, and maybe also Mike at the end, just outside of freight, your underlying core business guidance this year, and you kind of walked through this in your opening remarks, actually increased by $0.20, I think at the midpoint. So maybe just anyway to speak to the factors that drove the increased outlook outside of freight this year.

And I guess my second part of that question is, as we look forward, are there any impediments preventing the acceleration of the Dollar Tree Plus concept that you announced today from being accretive to the bottom line profile as we think multi-year?

Kevin S. Wampler -- Chief Financial Officer

Sure, Matt. I'll start. So obviously the outlook we gave today, really the message there is that the freight is the change in the guidance for the most part, basically. I think the other thing you got there is a little bit of benefit in the back half from the shares we repurchased in Q2.

So I think otherwise, we look at the business as much like we did in Q2, all pieces outside of -- outside of freight. So, very stable and feel good about where we're at from that perspective, we've done a good job controlling our SG&A costs and everybody is very on top of those, and doing a good job. So we feel good about that. And so now it's about driving that topline and working through the supply chain issues that we documented in for everybody today. So I think a lot of good opportunity.

Your question as it relates to Dollar Tree Plus of being additive, yes, I mean that is the whole reason to do that. It was -- if it's not additive to the bottom line, we don't want to spend our resources necessarily doing that. So that is the expectation. And with the mix change from the initial version that was very consumable driven to the one that is now very discretionary driven, that obviously plays well, it's part of what we are known for, our customers embracing it, and it allows us to drive that bottom line.

And then obviously the topline does help us leverage some of the fixed costs.

Michael A. Witynski -- President and Chief Executive Officer

Yeah. And just to add or finalize that, we've seen nothing that's going to be a barrier against us to continue to drive the things that you said, top line growth and margin dollars in our stores.

Matthew Boss -- J.P. Morgan -- Analyst

Great. Best of luck.

Operator

[Operator Instructions]. We can go ahead and take our next question from Kate McShane with Goldman Sachs. Please go ahead.

Kate McShane -- Goldman Sachs -- Analyst

Hi, good morning. Thanks for taking my question. I wondered with regards to the issues with freight and thank you for all the detail -- how are you balancing the prioritization of the cost of freight versus getting the inventory on the shelf? Is airfreight ever an option or something that you're using increasingly more? And how much were you able to make up by shifting to some of the domestic solutions you highlighted in your prepared comments?

Michael A. Witynski -- President and Chief Executive Officer

Yeah. Kate, thanks for your question. It's a dollar price point, unfortunately air freight just is cost prohibitive, and there really isn't that much of it available out there. So our teams, our global supply team, we've got a sourcing team that's over there working with our merchants and working with the logistics team. Those three are working hard to pick the right source and prioritize the right product based on inventory needs, margin and seasonality.

And just as an example on the switching to different sources domestically, our teams solved this problem and we wanted to be right before back to school. So we very quickly shifted both the Family Dollar and Dollar Tree to procure products for the back-to-school season here domestically so that we could have it on the shelves and drive that important season for us.

Kate McShane -- Goldman Sachs -- Analyst

Thank you.

Operator

Alright. [Technical Issues]. We can go ahead and take our next question from John Heinbockel with Guggenheim Partners. Please go ahead.

John Heinbockel -- Guggenheim Partners -- Analyst

Hey, Mike, just wanted to start. Do you have any comment on -- by brand, right, you had [Phonetic] some color on cadence and consumable versus discretionary other than discretionary were strong. Do you have some color on that to see how the quarter unfolded?

Michael A. Witynski -- President and Chief Executive Officer

Yeah. So, geographically, we pretty much saw consistent across geographies other than weather events or, but normally it's -- they're both behaving similarly across the geography. What -- on the Family Dollar side, what we like -- what we're seeing is we are seeing consumable sale, our consumable market share continues to gain market share and it's -- the addressable market opportunity is so large. So we really focus on continuing to drive that market share and Family Dollar has been doing a great job continually quarter after quarter to have a year-over-year look and enhancing our market share on the consumable side. And then on the discretionary side, as you call out, remember, the team did such a great job with apparel and toys and home, seasonal and we are maintaining that two-year stack of high double-digit market share in the teens that is really helping our business.

John Heinbockel -- Guggenheim Partners -- Analyst

Okay. And then maybe just as a follow-up, when you think about Dollar Tree Plus, two issues there. So it sounds like it's probably is a penetration right, mid single-digit penetration of the baskets, right. So I think the basket rate is 2x with the Dollar Tree Plus item. Where do you see that going, right, when you think about adding more items to the mix or more SKU intensity? And then what's the bottleneck on -- I know you're going to do 1,500 next year. Can you do more and what's the bottleneck to doing more next year and '23?

Michael A. Witynski -- President and Chief Executive Officer

Yeah. Well, we're really excited about doing the 1,500 because of the impact it has on a 6% sales lift. And I would say, as we -- the beautiful thing about this is, it gives us the flexibility to do what we need to grow our overall productivity of the store, and I'm referring to your do you grow the categories and/or assortment inside the multi price.

We will watch this, and over time, we will make great decisions to keep an eye on our overall margin dollars and topline sales and ebb and flow as we did with Dollar Tree product and categories. Just like we did with our Snack Zone, we use that to drive, so we've increased our assortment in there and space allocated to it. And then on our Crafter's Square, we did the same thing there. So I see this as the -- we keep doing the same ability to ebb and flow based on whatever our customers are responding to, and whatever is driving our topline and improving our margin dollars.

John Heinbockel -- Guggenheim Partners -- Analyst

Okay. Thank you.

Operator

Okay. We'll go ahead and take our next question from Joe Feldman with Telsey Advisory Group. Please go ahead.

Joe Feldman -- Telsey Advisory Group -- Analyst

Yeah. Hi guys. Thanks for taking the question. I guess on the freight side of things. I guess a big question is, what gives you confidence at this point that you've properly forecasted the impact of these increases? I guess, were we conservative or were you conservative with the forecast for the second half? You know, was it based just on what's happened to date? I guess, I'm trying to understand why we're not going to have another quarter like this where we hear another, well, we had to take numbers down again because freight was more expensive.

Kevin S. Wampler -- Chief Financial Officer

Yeah. Joe, this is Kevin. So obviously, as always, when we give a forecast, we use the best information we have, and what we know about our business, in this case what we know about the external factors, and the changes. And again it's very dynamic as anybody would tell you. And again, but I don't know that we can with 100% certainty say that it won't change. There could be another COVID outbreak, there could be a lot of different things it could affect it.

I just think you have to think about the fact that it is probably the most dynamic thing we may have ever seen as it relates to the marketplace. And -- but again, we always put it together with the idea of what do we know, how we're thinking about it, and do we -- and this is our best estimate at this point in time. And I'm hoping the sense that we have it tight this time, but there are never any guarantees in this type of thing.

Joe Feldman -- Telsey Advisory Group -- Analyst

Got it. And I guess a follow-up kind of related to it is, if you guys are assuming now, you know that your receipts will be more like 60% to 65% of what you had previously thought, I guess, how -- what gives you confidence that you'll get to the low-single digit comp guidance that you've given, because if you don't have the inventory, will you be able to -- how do you sell it?

Michael A. Witynski -- President and Chief Executive Officer

Yeah, let me -- let me -- that's a great question because I do want to bring clarity to that. The 60% to 65% is the contractual agreement that we have at the lower freight rate. We have a contract that's a 100%. We forecasted it first as well, they're going to at least meet 85% of that, and where I said they are not even meeting that, we think it's going to be 60% to 65%.

What that means is, the other 30% to 35% then will be at the market rate, at the higher rate, and all those rates are calculated into our freight that Kevin described going forward.

Joe Feldman -- Telsey Advisory Group -- Analyst

Got it. Thanks for clarifying that. Appreciate it, and best of luck with this quarter guys. Thank you.

Operator

And we'll go ahead and take our next question from Paul Lejuez with Citi. Please go ahead.

Paul Lejuez -- Citi Investment Research -- Analyst

Thanks guys. You made a comment about favorable product, merch margin and pricing that you're seeing, just curious what's driving that. Are you adjusting pack sizes, are you actually seeing declines in like product? And then on the Dollar Tree Plus store roll-out next year, how are you thinking about that geographically? Are you taking a regional approach, or are you going to look, will you open a bunch of Dollar Tree Plus stores in one region at a time, or are you looking to have a Dollar Tree Plus presence across a broad range of your markets? Thanks.

Michael A. Witynski -- President and Chief Executive Officer

Yeah. And your first question is, it was the question about our initial markup, the margin that we're able to get with all the inflationary pressures going on. Was that your question?

Paul Lejuez -- Citi Investment Research -- Analyst

Yeah, correct. And what's driving that?

Michael A. Witynski -- President and Chief Executive Officer

Yeah. Yeah, thanks for the question because I want to brag about our merchants and the great job that they do. When you sell everything for $1, there are -- as you've read about, there is inflationary pressures, all over the board, and we've got a very experienced and knowledgeable team of merchants. And then, they're supported by a best-in-class global sourcing team that work really hard. And they're not just negotiating the end product you see on the shelf. Our merchants absolutely understand all the components that drive the cost of the product as well as the value that they need out in the marketplace to sell it.

So they know, the main commodity of the product, whether it's resin or cotton or paper or copper. So they go in very knowledgeable [Phonetic] on the cost and the components. They know the cost of a handle, or a lid, or a stitching or the weight of the paper. And as they build their product and understand that, that's how they come up where they know the margin they need, they know what the retail is at $1, and they know the sales that they have to obtain to drive the mix.

So on this most recent trip, in our July trip, they were just wrapping up a couple of weeks ago, we bought $1.8 billion in receipts, and they were able to obtain the margin, the initial markup and actually beat it by a little bit and it's higher than 2019. So that's why, with all the pressures they have, and with that dollar price point, our merchants are able to navigate and manage that, and look at all the components. So it's not only what's making that product, but it's the packaging, it's the plastic, it's how do we pack it in a case. They were very knowledgeable and negotiable, because pennies matter when you're selling things for $1, and I couldn't be more proud of the work that they do.

And when they read out and shared the products, and they -- you know, it gets down to the detail of how many petals around that rose, what's size of the petal, what size does the market have, does that value look great, and then they produce us great product at the cost that they need to hit the margins we want at the dollar price point.

And they did it over and over again. Because on this last trip, I think it was 70% to 73% of the items on that $1.8 billion buy had problems with inflation that things that we had to solve for, and they did it. They worked at it, they did it and the presentations were spectacular, and I'm so excited about the value and product we're having at $1. And I know it's hard to understand. That's why a lot of retailers can't do, but we do it. We've been doing it for 30 years and they just did it in July and that's why I said, if you think about the components of our margin, we have the initial markup that we're very excited about that I just described how we got to it.

You heard it from Kevin that our shrink is very favorable, our markdowns are in line and then you have freight. So if you take the freight and set it to a more normalized. We feel really good about the future of Dollar Tree.

And then to answer the second part of your -- the Dollar Tree Plus rollout, we're doing it probably regionally, and by distribution center. So as we put the product in the DC, then we're going to look at the available stores around that DC network, and then we'll grow it that way. So it's going to be probably a distribution center geographically driven. The good news is... [Speech Overlap].

Paul Lejuez -- Citi Investment Research -- Analyst

Which regions would be first stop [Phonetic] on that?

Michael A. Witynski -- President and Chief Executive Officer

Well, right now, we're in the -- we started out in the Southeast, and then -- or the Southwest, I'm sorry, and then I shared that we are moving into the mid-Atlantic and we're going to -- we'll be rolling out from there.

Paul Lejuez -- Citi Investment Research -- Analyst

Got it. Thank you. Good luck.

Operator

And we'll take our next question from Brad Thomas with KeyBanc Capital Markets. Please go ahead.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Hi. Thanks, good morning. Wanted to ask a question about the third quarter, first of all, your guidance implies total sales and comps to accelerate for 3Q, and we're just curious if that's something that you're seeing so far to date. What gives you confidence in that, and if you're seeing that in both banners.

Michael A. Witynski -- President and Chief Executive Officer

Yeah, you're right. We gave -- we're back to giving guidance for the first time in well over a year, and we guided low single digits at the $6.40 billion to $6.52 billion. And I can share that both banners are positive comps now, and they're aligned with the guidance that we've given.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Really helpful. And then a quick follow-up on the Dollar Tree Plus financial commentary that you shared today, very encouraging. As we think about that flow through, should we think about the 6% sales lift and the 6% gross profit lift as adding close to that to total operating margin for the Dollar Tree banner? How should we think about the flow-through of those gross profit dollars?

Michael A. Witynski -- President and Chief Executive Officer

Yeah. And I think that's exactly, it's pretty in line with the other data point we gave, which was basically a 13% lift in the -- increase in contribution. So yes, it's somewhat additive there, 6% and the 6% kind of gets you to that same point.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Very helpful. Thank you so much.

Operator

All right. We'll go ahead and take our next question from Chuck Grom with Gordon Haskett. Please go ahead, Chuck.

Chuck Grom -- Gordon Haskett Research -- Analyst

Hey, thanks a lot. You know, guys, when you look at the Tree business, and I know you just said that August was a little bit better, but when you think about the backdrop and all the money that's flowing out there, and only delivering a flat comp, I guess I'm curious when you dissect why that is, I guess how would you unpack it for us?

Michael A. Witynski -- President and Chief Executive Officer

So in this, are you referring to look forward or the.. [Speech Overlap]

Chuck Grom -- Gordon Haskett Research -- Analyst

Well, just for the second quarter [Speech Overlap] -- just the second quarter and the flat comp given on stimulus and child tax credit money that's out there.

Michael A. Witynski -- President and Chief Executive Officer

Yeah. Well, Family Dollar response to stimulus dollar is a lot better than the Dollar Tree comp. And I've already shared the comments on the -- we think that there is still some trip consolidation, there wasn't any -- there is no big holidays. You saw and read about everybody went on vacation, and then the Delta variant kind of hit toward the end of the quarter and kind of slowed things down a little bit.

So I think it's more of that. I'm really excited about looking forward with what we have ahead of us. But I think you bring up a great point on the opportunity ahead with the SNAP benefits out there. Our enterprise has increased the SNAP benefits in our -- as a retailer, by almost double since 2019. And why that's important is, right now as an enterprise, we are the sixth largest SNAP retailer. And that's really important to us and we're just behind Walmart, Kroger, Ahold and Albertsons. So we are the number one largest retailer of SNAP benefits in the Dollar channel.

And think about the benefits, as you know, they announced that they're going to increase them in October significantly. And in Family Dollar what we really like about that is, we've doubled it in since 2019 inside Family Dollar. But then inside that basket of SNAP, 42% of that customer buys a discretionary item.

So if you think about all the work we've done on the discretionary side, in that mix, and looking forward and the basket, we think there is a big upside for us when the SNAP benefits continue to increase in October, and then our capabilities that the merchants have been on the discretionary side and our customer willing to add that to the basket, when they're in their store.

Chuck Grom -- Gordon Haskett Research -- Analyst

That's great. And my second question is on the Combo stores, they look great. And, you know, the movement [Phonetic] to 85% of the new Family Dollars in that format is pretty exciting. I'm curious what you do with the existing Family Dollar stores. Is there an opportunity to remodel some of them to convert in certain markets, I guess, how does that -- how does that play out?

Michael A. Witynski -- President and Chief Executive Officer

Well, absolutely. So there's two things. I mean, we also -- we're not slowing down. We've got 800 H2 renovations that we're going to continue to do, and we like the results and the lift we're getting on those. And then to your point in those 3,000 towns that we've identified, we're attacking the new ones, but we're also in a 1,000 of them already.

So our team -- our real estate team is diligently going through there, how long is that lease, can we expand it where we're at, can we relocate it, or is it big enough already. So those are the things that we're going through on that 1,000 existing of the 3,000 opportunity. So we're -- we've got a team effort going against both of those new, and then the relocated and then our existing will be focused on the H2 renovations.

Chuck Grom -- Gordon Haskett Research -- Analyst

Okay, great. Thanks a lot.

Operator

All right. Unfortunately, we are getting close to the end of the call, and only have time for one more question. We will take our last question from Michael Lasser with UBS. Please go ahead.

Michael Lasser -- UBS -- Analyst

Good morning. Thanks a lot -- Good morning, thanks a lot for taking my question. Dollar Tree comp negative at a time when many other retailers are really experiencing robust trends. This comes on the heels of challenges from tariffs, now transportation costs and Family Dollar issues before that.

So, is it just too difficult to manage this business in an environment where inflation is going to be structurally higher than it's been, and all of this is translating to your earnings expectation for 2021 being on par with where your earnings were in 2018. So at what point do you think you're going to be able to be in a position to start to resume growth in earnings that will be more consistent with what the market is accustomed to from Dollar Tree in the past.

Michael A. Witynski -- President and Chief Executive Officer

Yeah. I can't reiterate more about my confidence in Dollar Tree's ability to grow and our ability to manage through these inflationary times. You set this freight aside, and we would be delivering exactly what you're describing. And I'm excited about the market opportunity out there. And the beautiful thing is as we've got these strategic initiatives that will grow and well into the future. And more importantly with everything you described, we still got a strong balance sheet. We make a lot of cash flow and with our cash flow, we have the ability to keep growing this Company, growing the infrastructure of the Company and buying back shares to drive total shareholder wealth.

So I like our opportunity going forward for both Dollar Tree and Family Dollar.

Michael Lasser -- UBS -- Analyst

Okay. Mike, the biggest source of push back we've gotten from folks today is just on the core Dollar Tree comp being negative when everyone else is seeing robust trends. Putting aside Dollar Tree and putting aside some of the questions around traffic, what gives you the confidence that you can see the core of that business continue to improve, independent of what's going to happen in the external environment? And as a quick follow-up, Kevin, could you walk us through the path for how freight costs are going to unfold beyond this year? Your comments were, it's not going to see relief in fiscal '22. You're saying if you add this back, you could earn close to $7. So when is it realistic for the market to expect you to earn this $7 target?

Michael A. Witynski -- President and Chief Executive Officer

Yeah, I couldn't -- I can't reiterate enough how confident I am in the Dollar Tree format, especially with the Dollar Tree Plus initiative that we're going to be driving to 5,000 stores in just a short few years. And then what I just described on what our merchants are able to do with a great value and the dollar price point, and keep in mind, this dollar price point is going to be more important than ever as other retailers are driving their comps by raising prices. That dollar price point is going to look good and I'm confident going into the back half, with our seasons, with our product that we have and what our merchants are delivering, we're going to continue to be able to drive this organization forward.

Kevin S. Wampler -- Chief Financial Officer

And Michael, as to your second part of your question as it relates to the freight. So obviously, the marketplace in general, there is an expectation that it does not get better necessarily in the first half. And the other piece of what you have to remember is costs -- some of the costs that we'll incur this year in freight at the end of the year are attached to those goods that then gets sold in the next year.

So, certain amount of freight gets capitalized in the inventory as it comes in. So as your inventory turns, it's when you burn that off. So anything along the lines that we've been incurring will fall -- there is a piece of that, that falls into next year. So that's how you have to remember that. As far as $7, listen, obviously we know -- we know today, a lot of things are going to change in the next six months. And we'll know more then, and when we give guidance in March of 2022 for the year we'll again be in a point where we'll put our best foot forward on what we know at that point in time.

So beyond that, it's, there is nothing to speculate at this point.

Michael Lasser -- UBS -- Analyst

Understood. Good luck, and thank you.

Operator

All right. Mr. Guiler, I'd like to turn the conference back to you for any additional or closing remarks.

Randy Guiler -- Vice President, Investor Relations

Great, thank you. Thank you for joining us for today's call. Our next earnings conference call to discuss Q3 results is tentatively scheduled for Tuesday, November 23rd, 2021. Thank you and have a good day.

Operator

[Operator Closing Remarks].

Duration: 60 minutes

Call participants:

Randy Guiler -- Vice President, Investor Relations

Michael A. Witynski -- President and Chief Executive Officer

Kevin S. Wampler -- Chief Financial Officer

Matthew Boss -- J.P. Morgan -- Analyst

Kate McShane -- Goldman Sachs -- Analyst

John Heinbockel -- Guggenheim Partners -- Analyst

Joe Feldman -- Telsey Advisory Group -- Analyst

Paul Lejuez -- Citi Investment Research -- Analyst

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Chuck Grom -- Gordon Haskett Research -- Analyst

Michael Lasser -- UBS -- Analyst

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