Dollar Tree (DLTR) Q1 2023 Earnings Call Transcript

Dollar Tree (DLTR -1.24%)
Q1 2023 Earnings Call
May 25, 2023, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to Dollar Tree Q1 2023 earnings call. Today's call is being recorded. At this time, I'll now turn the call over to Randy Guiler. Please go ahead, sir.

Randy Guiler -- Vice President, Investor Relations

Good morning and welcome to our call to discuss results for Dollar Tree's first-quarter fiscal 2023. With me on today's call are Chairman and CEO Rick Dreiling and CFO Jeff Davis. 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. 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 refer to 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 10th, 2023, our Form 10-Q for the most recently ended fiscal quarter, our most recent press release in 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. Also, during this call, we will discuss non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financials are provided in today's earnings release and SEC filings.

These non-GAAP measures are not intended to be a substitute for GAAP results. Unless otherwise stated, we will refer to financials on a GAAP basis. Unless otherwise stated, all first-quarter comparisons for fiscal 2023 are against the same period a year ago. Please note that a supplemental slide deck that outlines a number of the company's key operating metrics is available on the IR portion of our website.

Following our prepared remarks, Rick and Jeff will take your questions. Given the large number of those that would like to participate, I ask that you please limit your questions to one. I will now turn the call over to Rick.

Rick Dreiling -- Chairman and Chief Executive Officer

Thank you, Randy. Good morning, everyone, and thank you for joining our call. As many of you are aware, Dollar Tree will be hosting its investor conference in four weeks on June 21st in Norfolk, Virginia near our corporate headquarters. The conference will be webcast, and I hope to see many of you at this important event.

Our investor conference has been overdue, and we understand the level of anticipation from many investors. I hope next month's gathering will provide each of you a better understanding of the transformation taking shape and the speed with which we are making these changes to increase both our productivity and profitability at Dollar Tree and Family Dollar. We have been hard at work building the team we need to drive the transformation of this business. The more we dig in, the more starkly clear the opportunity becomes, and we are on our way to most fully realize upon it.

Our stores are of comparable size to those of our closest peers, but they generate far less revenue per store. We understand why and we know how to close the gap. There are no structural impediments to our progressing toward this goal. As we do, we will drive growth and gain market share.

With the operating leverage embedded in the retail model, accelerating growth in revenue per store will translate into higher margins. And higher margins will increase our return on capital and fueling accelerated store growth. We've gone down this road before, and we know the way. We have a tremendous opportunity to improve both of our segments, and we are pursuing that with vigor.

While our enterprisewide transformation is still in the early stages, we are already seeing results. Our early initiatives have begun to deliver growth and market share gains. We are driving this transformation in the most dynamic retail environment I have seen in my career. While this volatility is real and will generate bumps along the way, it will not affect where this great adventure ends.

In addition to the historic levels of inflation and labor market challenges, retailers have seen in just the past quarter elevated levels of shrink and even further pressure on the consumer's willingness to spend on discretionary goods. Shrink and the mix shift from discretionary goods have pressured margins throughout retail. We are no exception. Ultimately, shrink will either be resolved through defensive merchandising, store closures, and/or through government action at the local level.

Regarding the near-term unfavorable impact of consumables mix, we believe consumer shopping behavior will normalize over time and the margin profile will rebound. We are acutely attuned to each of these bumps. In the end, none will materially affect our delivering on the promise of this transformation unless we allow them to distract us from what we know we have to do, and we will not allow that to happen. We bench our top-line sales performance primarily on three specific metrics: sales per square foot growth, growth in transaction count, and unit sales or volume growth.

Based on these three metrics, I am pleased with our Quarter 1 performance and the direction we are headed. Overall, the fundamentals of our business are strong. Most significantly, we continue to gain market share, and our traffic and unit volume growth are driving strong top-line momentum. The market share gains are a clear validation of the actions that we have taken on pricing and wages and the ongoing improvements we have made in our merchandise assortment, service level, and store standards.

Now, despite our commercial success and building momentum, we are experiencing near-term margin pressures from the macro factors impacting sales mix and elevated shrink. But the most important message that I want to convey today is that we remain completely focused on delivering on our full potential and are executing on our transformation investments at full speed. I will now review the highlights for Quarter 1. Following my remarks, Jeff will provide a detailed overview of our financial performance and our updated 2023 outlook.

For the quarter, we delivered 7.32 billion in sales, an increase of 6.1%, with enterprise comp growth of 4.8%; an operating income of $419.7 million, leading to EPS of $1.35 and adjusted EPS of $1.47 when adjusting for a $30 million accrual related to pending legal matters regarding our West Memphis distribution center. Our merchandising and execution remain strong with comp increases of 3.4% at Dollar Tree and 6.6% at Family Dollar. The underlying sales strength was concentrated in consumables and driven by meaningful transaction growth across both segments. Results were even more impressive in the context of Dollar Tree's 11.2% comp increase from a year ago.

After fully cycling the $1.25 price point in February, customer traffic remained very favorable at Dollar Tree as comparable traffic count increased by 5.5%. Notably, this was the fourth consecutive quarter of sequential improvement in comps at Family Dollar with comp traffic up 4.3%. For nearly all of 2022, comp traffic counts trends in both segments were negative, so Quarter 1 was an important inflection point for the company with traffic increasing both sequentially and year over year. The turnaround at Family Dollar is gaining meaningful traction.

In addition to the improving traffic, Family Dollar's comp was driven by a 2.2% increase in average ticket. At Family Dollar, we increased our private brand penetration by approximately 80 basis points. Moving forward, we expect to continue growing private brands' penetration as we further improve merchandise, presentation, packaging, and quality control standards. For example, we recently opened a new test kitchen here in Chesapeake and are excited about our growing pipeline of private brand products across consumables, health and beauty, and other high-growth categories.

We are also encouraged by the margin opportunities associated with expanding our private brands business. Last year, we took pricing actions at Family Dollar to bring us more in line with our most direct competition. These price investments strengthen our value offering at Family Dollar and followed our transition to the $1.25 price point at Dollar Tree. Along with investments in wages and store standards, the steps we have taken on pricing across both segments are critical to improving our long-term financial and operating performance.

As I mentioned earlier, the consumer continues to be under pressure. There are simply fewer dollars available to them, and those dollars are not going as far as they did a year or two ago. We are past the multiple rounds of government stimulus. SNAP dollars have been reduced, and tax refunds are running lower.

These impacts, combined with persistent inflation, have more families prioritizing needs over wants. Both Dollar Tree and Family Dollar are part of the solution for shoppers buying for need and close to need as they look to stretch their paychecks. Our stores are nearby, easy to shop, and provide tremendous value. While these factors are contributing to the mix shift and pressuring our gross margins, they are also driving more shoppers into our stores with increased frequency.

We will continue to respond to the needs of the consumer across both consumables and discretionary categories by offering tremendous value and a great selection. While this mix shift toward consumables is clearly a margin headwind, it is worth noting that the promotional environment remains rational and is not driving any additional margin pressure. At Dollar Tree, we made great strides with our multi-price strategy, and we remain on track to add $3 and $5-plus items to another 1,800 stores this year. In Quarter 1, we added Dollar Tree Plus assortments to more than 400 stores and anticipate accelerating the pace of this rollout over the balance of the year.

Additionally, we have aggressively expanded our product assortment at Dollar Tree stores with $3, $4, and $5 frozen and refrigerated products, adding 3,500 stores last year alone on this initiative. During the first quarter, we added multipriced frozen and refrigerated doors at more than 400 Dollar Tree stores. Both our Dollar Tree Plus and our multipriced frozen assortments drive incremental sales with average ticket more than doubling its stores that we have added this expanded offering. Consumers are clearly responding, and the sales-driving initiatives are already having a measurable impact on our results.

All right, Family Dollar we are on track to add 16,000 new cooler doors in 2023. This is helping drive Family Dollar to its highest market share in close to four years as measured by Quarter 1 dollar volume. On a unit volume basis, Family Dollar's Quarter 1 share of industry growth was the highest in more than three years. We continue to improve the in-store experience at Family Dollar and completed more than 250 store renovations in the quarter.

On last quarter's call, I shared the strategic rationale for increased SG&A spending in 2023. These investments should be pursued as rapidly as our management bandwidth will allow. The sooner each is implemented, the sooner we will enjoy the benefits and the greater impact of our other investments. All of this is ultimately connected and interdependent.

Many of our investments will be ongoing, including those on our associates and store conditions. And again, the results are starting to come in. We have already seen meaningful improvements in sales momentum and reduced associate turnover. In closing, we have a plan.

I'm confident this plan will drive meaningful top-line growth, increase productivity, and improve profitability. We are vigorously executing on it. We will not allow bumps in the road to distract us or slow us down, and it's clear it's starting to work. Our investments in price, our stores, our merchandise, and our associates have already begun delivering results.

We will get to where we're going, but how we get there matters as well. I firmly believe that investments in our people, in the communities we serve are the cornerstones of a successful retailer. We've taken a comprehensive approach to improve wages and benefits for our people and to increase associate engagement to make Dollar Tree and Family Dollar great places to work and grow. It is vital for the continued success of our organization to have a strong culture.

While there is work to be done, we are pleased that our culture efforts are taking root and building the foundation for a thriving future. Finally, I am so very proud of the tremendous efforts of our 200,000-plus associates, each of whom has contributed to the great progress we are making and each of whom deserves our collective thanks. While Jeff will cover our outlook in more detail, I want to emphasize that we remain confident in the outlook for our business and our continued sales momentum. Our go-to-market strategies at Dollar Tree and Family Dollar are working and clearly resonating with consumers.

I look forward to sharing more detail on our long-term vision and our multiyear outlook next month at our investor conference. I will now turn the call over to Jeff.

Jeff Davis -- Chief Financial Officer

Thank you, Rick, and good morning, everyone. As Rick mentioned, our top-line performance was strong in both the Dollar Tree and Family Dollar segments. It was driven by meaningful growth and customer traffic, continued market share gains, and an increase in underlying unit growth. Total sales increased 6.1% to $7.3 billion based on comp store sales growth of 4.8%.

Traffic increased 5% on a consolidated basis and average ticket was down slightly. Across the enterprise, our sales mix of consumables increased approximately 200 basis points as customer purchase behavior responded to deteriorating macro conditions. Our service levels were particularly strong in Q1. In-stock positions improved by 400 basis points in the Dollar Tree segment and by 200 basis points at Family Dollar.

Our DC service levels also improved for both segments by nearly 1,600 basis points at Dollar Tree and approximately 500 basis points at Family Dollar. Operating income decreased by 43% to $419.1 million. Adjusted operating income decreased by 39% to $449.7 million. Recall that in Q1, we cycled the first full quarter of the $1.25 price point transition at Dollar Tree, which resulted in unfavorable margin comparisons given the outsized benefit we saw in Q1 last year.

The variance between operating income and adjusted operating income came from a $30 million accrual related to previously disclosed legal proceedings associated with our Family Dollar distribution center in West Memphis, Arkansas. Gross profit decreased by 4.7% to 2.23 billion as gross margin contracted by 340 basis points. The biggest driver of the gross margin decline was merchandise cost. In Q1 last year, we benefited from the rollout of the $1.25 price point at Dollar Tree.

In the current period, our sales mix shifted approximately 200 basis points toward lower-margin consumable merchandise. The impact of higher cost of goods and unfavorable sales mix were partially offset by lower freight costs and markdowns as we cycled the impact of our West Memphis DC closure last year. As Rick noted, elevated levels of shrink represent a persistent challenge. In Q1, shrink negatively impacted gross margin by 60 basis points and EPS by an incremental $0.14 per share compared to last year.

On a business segment basis, Dollar Tree gross margin declined by approximately 530 basis points, primarily from lower merchandise margin based on the higher consumable mix and cycling the initial transition to the $1.25 price point, elevated shrink expense, and increased distribution costs. We benefited modestly from lower spot rates for ocean freight relative to last year. But to date, this is only impacting a small portion of our shipments with a larger impact of savings from freight rate declines to come in the second half and into the years ahead. Family Dollar's gross margin decreased by approximately 100 basis points with largely the same factors contributing to the decline as Dollar Tree.

Specifically, gross margin was negatively impacted by mix, product cost increases, higher shrink, and higher distribution costs, partially offset by lower markdowns and lower freight expenses. SG&A as a percentage of revenue increased 150 basis points to 24.8%. The biggest driver was wage investments for store and distribution center associates. We also experienced higher store facility cost as we continue to focus on improving store conditions, as well as higher professional and marketing expenses.

Corporate support and other expenses were 1.7% of revenue, down approximately 10 basis points from last year. Net income was $299 million and EPS was $1.35 in comparison to $2.37 a year ago. Adjusted net income was $325.1 million, and adjusted EPS was $1.47. The $0.12 adjustment was related to the West Memphis legal accrual.

Our effective tax rate was 24.1% versus 23.1% last year, reflecting lower stock-based compensation deductions and higher nondeductible expenses, partially offset by higher work opportunity tax credits. Adjusted for the impact of the West Memphis accrual, the Q1 implied tax rate for this year was 23.3% or 20 basis points higher than Q1 last year. Moving to the balance sheet and cash flow. My comments will reflect balance sheet comparisons at the end of Q1 2023 versus Q1 2022.

Inventory increased 6.5%, primarily from an increase in merchandise costs, DC unit volume growth, the continued rollout of our Dollar Tree multipriced inventory, and new store growth. The quality of our inventory remains high and manageable. Q1 capital expenditures were $350.4 million versus $253.4 million. For fiscal 2023, we continue to expect capital expenditures to total approximately $2 billion with approximately 40% dedicated to business continuity and the balance directed toward growth, optimization, and productivity improvement.

In Q1, we repurchased approximately 1 million shares for $151.1 million, of which 7.7 million did not settle until after quarter end. Cash and cash equivalents totaled $872.8 million, compared to $1.2 billion. Our cash position increased $230 million in Q1 from the end of fiscal 2022, led by working capital improvements, partially offset by capital expenditures and share repurchases. Free cash flow improved to $402 million from $285 million last year.

Moving to our sales and EPS outlook. The company expects consolidated net sales for the second quarter will range from $7 billion to $7.2 billion based on a mid-single digit increase in comp store sales for the Enterprise and for Dollar Tree and Family Dollar segments. Diluted EPS for the second quarter is expected to be in the range of $0.79 to $0.89. As a reminder, the bulk of our ocean freight savings for the year will fall in the second half as previously mentioned.

With respect to full-year fiscal 2023 guidance, recall that fiscal 2023 has a 53rd week. Consolidated sales for the full fiscal year are now expected to range from $30 billion to $30.5 billion. The company expects to deliver a low to mid-single-digit comparable store sales increase for the year comprised of a low and a mid-single-digit increase in the Dollar Tree segment and a mid-single-digit increase in the Family Dollar segment. Selling square footage is expected to grow by 3% to 3.5% for the year, with new store growth back-end weighted.

While we modestly raise the midpoint of our top-line guidance, we are incrementally more cautious on our margin outlook given the growing industrywide challenges of accelerating shrink, the unfavorable shift in sales mix, and their impact on our near-term profitability. Since the beginning of the fiscal year, the impact of these two factors on our financial results has intensified. We expect that, over time, our mix of discretionary will normalize and that we will also improve our performance on shrink through defensive merchandising efforts, real estate optimization, and perhaps, higher prices to compensate for areas a systematically higher shrink. We expect the combined and continuing full-year earnings impact of unfavorable consumables mix and higher shrink is expected to be approximately $0.55 per share in 2023.

Our modeling considerations for our 2023 outlook include the following: We expect consolidated depreciation and amortization to range from $845 million to $850 million. Net interest expense is expected to be approximately $28 million in Q2 and $110 million for the year. Our outlook assumes a tax rate of 24.1% to 24.3% for the second quarter and 23.9% to 24.1% for fiscal 2023. While our share repurchases are not included in our outlook, we had $1.7 billion remaining under our share repurchase authorization as of April 29th.

Weighted average diluted share counts are assumed to be 221.4 million shares for Q2 and 221.6 million shares for the full year. For the balance of 2023, we will work diligently to offset potential margin pressures that could come from elevated levels of discretionary inventory. We are taking actions to mitigate the potential impact of these cost pressures such as further optimizing our promotional spending and vendor allowances, identifying opportunities to further reduce inbound freight costs, and managing repairs and maintenance costs. We continue to see full-year earnings benefit of $0.01 per share from lower ocean freight costs this year, which could be significantly weighted toward the back half of the year and an additional $1 per share benefit in 2024 and beyond.

As a result of the factors I just outlined, we are revising our diluted GAAP EPS outlook for fiscal 2023 to a range of $5.73 to $6.13, which includes the expected contribution from the 53rd week and the $0.12 legal reserve taken in Q1. I will now turn the call back over to Rick for closing remarks.

Rick Dreiling -- Chairman and Chief Executive Officer

Thank you, Jeff. We are continuing to execute at a high level and acting with urgency around our business transformation, and I am pleased with our solid start to 2023. We are looking forward to our investor conference next month where we expect to provide our investors and analysts with a multiyear outlook for the business including a substantive and comprehensive overview of the key elements of our business. Our team has identified multiple levers to unlock value, and we have strong underlying business momentum that positions us favorably in the current retail and economic environment.

We see a path to greater earnings power over the next three years and look forward to sharing our plans in more detail next month. I also want to take this opportunity to welcome our new supply chain officer, Mike Kindy. I have worked with Mike in previous organizations, and he is a proven subject matter expert and thought leader in supply chain and logistics. I am very confident that Mike will demonstrate continued success at Dollar Tree based on his past record.

I also want to thank John Flanigan for his contributions which helped us get to where we are today. While John communicated to us at the outset his desire to serve only for a short period over the past year, John has led our supply chain strategy and has overseen the early stages of the process to optimize our distribution network, and he's had a tremendous impact. We are moving at a fast pace in our journey to fundamentally reposition our combined retailing operations for sustainable long-term growth. Our efforts are already paying off in the form of significant market share gains at both segments.

Both formats have a clear runway for accelerated growth in productivity and profitability. Our leaders have complete ownership over the factors that will shape our outlook for the next three to five years. We have a winning team of more than 200,000 associates who are highly motivated and eager to succeed. I look forward to sharing more next month at our conference.

And one last note before we go to Q&A, I want to share some IR news with you. Several months ago, Randy Guiler communicated with us his retirement plans. This advanced notification provided us with ample opportunity to seek Randy's replacement. I want to thank Randy for his nine years of dedicated service leading the entire function at Dollar Tree.

I am pleased to share that Bob LaFleur joined Dollar Tree on Monday of this week as our new SVP of investor relations. Randy will be with us at our upcoming investor conference and is continuing in his current role with the company through the month of June to help facilitate a smooth transition. Please join me in congratulating Randy on his impending retirement and Bob on his new role at Dollar Tree. Operator, Jeff and I are now ready to take questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] We will take our first question from John Heinbockel from Guggenheim. Your line is open. Please go ahead.

John Heinbockel -- Guggenheim Partners -- Analyst

Thanks. So, Rick, it's more of a strategic question, right? If I think about your initiatives and then the consumer, do you think that consumable penetration right, that mix, you know, not only what remains elevated, you know, maybe the consumables mix goes higher over time? What's your thought on that and then mitigating the impact of mix on margin? Private label will help, but maybe talk about where do you think that goes and the opportunity to do sort of ultimately a DG fresh-like distribution initiative to bring down COGS in that area?

Rick Dreiling -- Chairman and Chief Executive Officer

Thank you, John. Great question. There's a lot of -- a lot of meat answering that question. The first thing I'd like to say is the strength that we are experiencing in consumables has nothing to do with weakness in our discretionary.

The fact that we are responding to the needs of the consumer, which is the shift toward consumables, is a -- is a really significant step forward for us and that we're introducing consumable products, especially on the Dollar Tree side that the consumer is responding to. Now when I talk about our discretionary, I think it's also important for everyone in this call to realize that our discretionary is a little bit different than what you'd see out in the marketplace. Our discretionary tends to be high-value items that you can compare to another operator, another retailer and see a significant difference in the retail price point. So, that's part of the reason I'm still very bullish on where we are with discretionary.

Now as this shift continues, the advantage for us is twofold. Number one, private brands and the amount of work that's being done on private brands, and what I'd like to say is not just on the consumable side, our private brand effort includes HBC -- or HBC and all of the higher-margin private label products. So, that's another way for us to accelerate the margin on the -- on the consumable side. And let's not forget shrink when you think about the pressure that we're experiencing.

Shrink tends to be cyclical. And what happens with shrink is we all work to mitigate it. If you can't, all costs that can be taken out, get passed on to the consumer eventually. So, we're keeping an eye on it.

And I would say, John, again, as we talk about margin, the shrink issue, we have four classes of shrink stores with four being the highest. The shrink impact is pretty uniform through all four classes, which I've never seen that in my career, which is truly fascinating. So, in regards to the fresh concept, right no, we are committed to frozen food and refrigerated, which is one of the highest-growing categories with our particular consumer. Thank you.

John Heinbockel -- Guggenheim Partners -- Analyst

Thank you.

Randy Guiler -- Vice President, Investor Relations

Next question, please.

Operator

We will take our next question from Simeon Gutman from Morgan Stanley. Your line is open. Please go ahead.

Simeon Gutman -- Morgan Stanley -- Analyst

Good morning, Rick. Good morning, Jeff. Wanted to ask about Dollar Tree Plus, I also wanted to ask about the $1.25 price point at Dollar Tree. Can you talk about, I guess, the trade-off here of maybe accelerating a move to higher price points given some of the higher cost pressures, given some of the margin headwinds, just the trade-off given how the consumer is behaving and then maybe speeding up Dollar Tree Plus rollout to more stores? Thank you.

Rick Dreiling -- Chairman and Chief Executive Officer

Yeah, two good questions there. We are very excited with what we're seeing with Dollar Tree Plus, and our intent is to move that along as fast as we can. The same thing with the $3, $4, $5 frozen food, the change in the basket when those items goes in is significant. The price point thing, Rick McNeely, our chief merchant, is actually experimenting with a couple more price points in certain stores, and there has been no consumer resistance.

I think once we broke the dollar, I think that -- I think that any backlash on that is behind us. And what Rick is doing incrementally priced SKUs are not repetition of what we already have. So, we're creating a bigger basket and a broader shopping experience.

Jeff Davis -- Chief Financial Officer

If I could just add to that, one of the things that the merchant team is really focused on in all situations is always making sure that they're giving more value in relation to the market at every price. And while some of our prices in relation to where we were previously in breaking the dollar are at a higher price point, we continue to have that price separation and value separation against other competitors in the marketplace.

Simeon Gutman -- Morgan Stanley -- Analyst

Thank you.

Randy Guiler -- Vice President, Investor Relations

Next question.

Operator

We will take our next question from Edward Kelly from Wells Fargo. Your line is open. Please go ahead.

Rick Dreiling -- Chairman and Chief Executive Officer

Good morning, Ed.

Edward Kelly -- Wells Fargo Securities -- Analyst

Hi, guys. Good morning. So, first, on -- on shrink, just quickly, could you just walk us through the -- you know, the surprise there? I would think that shrink would be tied to, like, a year in inventory account. So, I'm just curious as to what happened there.

And then, Rick, for you, you know, big picture, we all see the potential here and we hear you that nothing changes with all this. But the base that we're looking at as a starting point has been going down. And I'm sure you joined because you saw potential for significantly higher earnings than you're going to be at six bucks this year. But I guess the question is the timing around the inflection, and you mentioned sort of three years, but like how quickly do you think we can begin to see, you know, that -- that acceleration?

Jeff Davis -- Chief Financial Officer

This is Jeff. I'll take the first part of the question regarding shrink. When we gave our guidance for the year, we had approximately less than 10% of our stores have taken their inventories for the year. And while we did see some elevation in that shrink, that was embedded in our guidance for the year.

As we move through the course of the quarter, we saw a pretty rapid increase in the level of shrink that was being experienced by the stores. And as Rick had said, we were seeing that across all shrink classes, which was really out of the normal for us. That's the reason why we needed to make the -- the adjustment. So, through this period of time, we only have a little less than 40% of our stores that have taken their inventories.

We are anticipating that what we're seeing today could accelerate even further because we still have a number of our higher-shrink class stores still left. And that's what's being reflected in the adjustment that we had for the year. But based upon what we know today, based upon some other leading indicators, we believe that the adjustment made is most appropriate. This is not unlike what you're seeing in many other retailers across the industry.

Some of this is societal, some of his economics, some of it, of course, is particular to us. And we're taking all the appropriate steps that we can to control and mitigate this where we can.

Rick Dreiling -- Chairman and Chief Executive Officer

Then, Ed, on the second part of your question, the first thing I'd like to say is we intend to highlight a lot of that question at the Investor Day, which will give you a little more clarity to how it's going to shake down and how quick it's going to come. A couple comments, though, prior to that, number one, I am very bullish on the opportunity here. And I do think if we are realistic, this consumable shift and this shrink impact are transitory. I do not believe we're going to be living with them forever, and that is all accretive to what we're doing.

Then you throw in -- and all of this, Ed, is in -- is in motion now: the move to the 70-inch profile, we're going to add almost 1,000 new SKUs, the work on Dollar Tree Plus, the expanded coolers, the expanded frozen food, the improvement in the physical store facilities. We're reducing our turnover. There's already proof of that by the wage investments we've made, which is going to help us in so many other areas. So, what I'd like to say there's a lot in motion.

I am incredibly confident and optimistic and will lay this out for you in more detail at the Investor Day.

Edward Kelly -- Wells Fargo Securities -- Analyst

Thank you.

Rick Dreiling -- Chairman and Chief Executive Officer

Thank you, Ed.

Operator

We'll take our next question from Scot Ciccarelli from Truist Securities. Your line is open. Please go ahead.

Rick Dreiling -- Chairman and Chief Executive Officer

Good morning, Scot.

Scot Ciccarelli -- Truist Securities -- Analyst

Good morning, guys. Scot Ciccarelli. Good morning.

Rick Dreiling -- Chairman and Chief Executive Officer

[Inaudible]

Scot Ciccarelli -- Truist Securities -- Analyst

So -- all good. A lot of your initiatives like expanding core doors and frozen foods have been focused on driving consumable sales, and that's obviously the driver to the transaction growth as you've highlighted. But, Rick, as the consumer behavior starts to stabilize, how do you shift consumers back to buying more discretionary goods? Because in theory, your consumable sales gains should be sustainable. And if we look at Dollar General as an example, like their consumable sales spiked during the Great Recession, but then consumables continue to become a bigger part of their sales pie every year up until the pandemic.

So, like, how do you actually change that trend once the consumer starts to normalize?

Rick Dreiling -- Chairman and Chief Executive Officer

Another great question. And I would say this, and no offense to anybody prior to me, somewhere along the line, we have confused value and cheap. Our consumer is looking for value. And value means that -- the classic story I can remember years ago, people, somebody bought a rake in one of our stores, took it home, used it one day, and it was broken.

Well, that was cheap, but that's not value. And how we are going to manage this, we're doing a better job of procuring products and bringing the right selection in. The people at Dollar Tree are making their first trip to China in over three years. And we're really excited now they'll be able to stand face to face with the manufacturer and the vendor and be able to see and hold and feel what they're going to bring into the store.

And then, the other thing, Scot, to be frank, the consumer is going to make that choice. If we have the right products, the right selection, and we promote value, the consumer is going to gravitate there anyway.

Scot Ciccarelli -- Truist Securities -- Analyst

Got it. Understood. Thank you.

Operator

We'll take our next question from Peter Keith from Piper Sandler. Your line is open. Please go ahead.

Rick Dreiling -- Chairman and Chief Executive Officer

Good morning, Peter.

Peter Keith -- Piper Sandler -- Analyst

Hey, good morning, everyone. So, the -- the transaction comps are pretty impressive and nice to see. I'm curious, with the economic backdrop, what type of trade-in, trade-down benefit you're seeing. Obviously, you're getting more customers in stores.

Is this repeat behavior? Are you starting to see new customers that you can track behavior on?

Rick Dreiling -- Chairman and Chief Executive Officer

We're actually seeing new customers. Our core customer is coming more frequently. Now when they come, they don't spend anymore, but they come more often. And now, we're seeing is the trade-down in that $80,000 income range, and we're actually beginning to target that consumer.

And that consumer is more wrapped up in the consumable business. And one of the things that Jeff highlighted, I hope that everybody caught, was the improvement in our service level to the stores, which is significant. And that service level improvement is becoming -- comes from giving the stores what they want when they order it. And they're drawing consumables at a much higher rate now.

And then, what happens when that higher-income consumer comes in, they're used to a certain in-stock level, and we're now able to do a better job of satisfying that, which is why we're seeing that -- that trade-down.

Jeff Davis -- Chief Financial Officer

And, Peter, just to give you a little more dimensionalization, across both banners, they're averaging about 3 million net new customers over a trailing 12-month period. So, you are seeing that customer -- new customer coming to us. We're seeing that customers shop across the entire store across the consumables and discretionary. And as Rick has mentioned, our ability to make sure that we have the right store environment such that they want to come back is an important element for us and is reasons why we want to continue improving our store standards and delivery and service to those stores.

Peter Keith -- Piper Sandler -- Analyst

OK, very helpful. Thank you so much.

Rick Dreiling -- Chairman and Chief Executive Officer

Thank you.

Operator

We will take our next question from Karen Short from Credit Suisse. Your line is open. Please go ahead.

Rick Dreiling -- Chairman and Chief Executive Officer

Good morning, Karen.

Karen Short -- Credit Suisse -- Analyst

Hey, morning. Thanks very much and look forward to seeing you in a few weeks. I just wanted to ask a couple things. So, on -- on overall margin structure within the Dollar Tree banner, so is it fair to say, as we get through the year, you'll have more benefit from freight? So, what we're looking at right now is not necessarily the run rate, but there is a mix shift, and then that will be offset a little more impactfully in the second half of the year on freight? But then, the second bigger thing I wanted to ask is, I know you're doing a test on consolidating a distribution center and wondering if you could give some updates on that as it relates to what that could look like as a much bigger rollout as we go forward.

Jeff Davis -- Chief Financial Officer

I'll take the second. Yes, so, on the first portion of the question with respect to margins, at Dollar Tree, we had stated earlier that our expectations that we'd be able to manage that business over the course of the year to a 36% to 37% gross margin rate. And there's a lot that goes into that, of course, not only product costs, but shrink, markdowns, and some other elements. Today, as we look in our guidance, I would say that we would be at the -- at the lower end of that range.

But we feel comfortably that we will be able to continue managing the business based upon our product offering and how the customer behaviors have been in that 36, 37 range, so at the lower end of that. There's just a number of elements that we believe that we still have to work to -- from our product offering basis, as we look at the introduction of new price points and able to capture a little more margin where previously we weren't able to do so at some of the lower price points.

Rick Dreiling -- Chairman and Chief Executive Officer

Then in regards to the question concerning combined warehouses, we're opening -- in the process of building one in Florida. We had one in Utah, and we actually converted it to Family Dollar only. It's one of those propositions that sounds easy, makes sense, but it tends to be a little more difficult to execute. And what John and Mike have done for us is they've done -- and which we'll share at the Investor Day -- we've done a total analysis of the system.

And at the end of the day, this really boils down to stem miles and how far away the distribution center is from the stores. And I am -- I am -- I have no opinion. I'm not sold that we need to do it, but I'm not sold that we don't need to do it, but we need to spend a little more time with it. And we're going to give you our thoughts on a more broader base at the investor conference, and then, we'll probably have an answer in the next six or seven months about where we want to go, ultimately, a combined warehouse.

Karen Short -- Credit Suisse -- Analyst

OK, great. Thank you very much.

Operator

We will take our next question from Matthew Boss. Your line is open. Please go ahead.

Matt Boss -- JPMorgan Chase and Company -- Analyst

Great, thanks.

Rick Dreiling -- Chairman and Chief Executive Officer

There you are, Matt. Good morning.

Matt Boss -- JPMorgan Chase and Company -- Analyst

Good morning, Rick. So, Rick, at the Dollar Tree banner, could you speak to the -- to the dichotomy that you're seeing between the traffic improvement, which obviously is a nice positive, relative to the average ticket decline that you're experiencing? And then, just what are you seeing with recent trends to support the sequential comp acceleration that you embedded in your second-quarter guidance at the Dollar Tree banner?

Rick Dreiling -- Chairman and Chief Executive Officer

Yeah, I don't want to give a mid-quarter guidance here. It's -- we're only three weeks -- three and a half weeks into the quarter. But I will tell you, I am very pleased with the trends, and the transaction counts have not changed. I -- Matt, when I look at this, you know, we always want to look at the basket, and I've always believed that footsteps ultimately drive the basket.

And I am very pleased with what we're seeing with transactions. And I think the transaction growth we have is leading to the comp sales that we're driving at Dollar Tree. So, I remain very very bullish on both banners at this stage of the game.

Randy Guiler -- Vice President, Investor Relations

Next question, please.

Operator

We will take our next question from Joe Feldman. Your line is open. Please go ahead.

Rick Dreiling -- Chairman and Chief Executive Officer

Good morning, Joe.

Joe Feldman -- Telsey Advisory Group -- Analyst

Hi. Good morning, guys. Thanks for taking the question. Really appreciate that.

I guess I wanted to go back on the -- the consumables mix. I guess, you know, we all kind of understand the environment we're in. And I guess I'm a little curious as to what is -- what's different in the quarter than you expected. It seems like it did accelerate the mix pressure.

And you also made reference to an earlier question that you were still -- the discretionary business sounded like it wasn't that bad from your perspective, and I wanted a little more color on performance of discretionary, I guess, if you could share it.

Rick Dreiling -- Chairman and Chief Executive Officer

Yeah, maybe we'll tag team that if that's OK. And I'll start. If you go back to the last earnings call, we did call out that we were starting to see a shift in shrink and -- and the drive toward consumables. Now there's absolutely no doubt over the last 12, 15 weeks that that call-out has accelerated.

And I think the consumer is feeling the real pressure now of a lot of things that have taken place. We've had a change in SNAP benefits. Tax returns are smaller than this time last year. All the stimulus is out of the system.

And all of that is taking root, and the consumer now is more focused on needs, and buying to those needs as close as they can versus wants. And that's the shift we've seen. Now we think that shift is going to continue for a while. We don't particularly believe it's going to get any worse.

I can't remember the second part of the question.

Joe Feldman -- Telsey Advisory Group -- Analyst

Well, I was just asking discretionary, yeah.

Rick Dreiling -- Chairman and Chief Executive Officer

Yeah, the reason I bring up discretionary, I think it's really important, really important. Our discretionary business is still good, and the fact is we've strengthened the consumable side. So, we shouldn't be making the assumption that our low-cost, pertinent discretionary items are no longer wanted or needed by the customer. It's that they're buying more consumables.

Jeff, I don't know if you have anything to add.

Jeff Davis -- Chief Financial Officer

Yeah, I'm just going to add a little -- provide a little dimension on the acceleration of consumables. So, in the fourth quarter, you may recall that for Dollar Tree, on a year-over-year basis, they were flat in their mix, and Family Dollar was about 120 basis points shift into consumables. You fast forward to the first quarter of this year, Dollar Tree is now 180 basis points shift into consumables, and Family Dollar was -- was 200 basis points. So, you saw a pretty significant, on a year-over-year basis, shift to -- more into the consumables, and that's what, you know, our financials have reflected.

But that should hopefully give you an indication of just the quantum of what that shift is. And if you think on a margin basis, what that does for you is that there's about a full 20-point differential in your gross -- in your initial margins between discretionary and consumables. So, when that dollar shifts from discretionary and to consumables, on average, you're losing 20 points of initial margin.

Joe Feldman -- Telsey Advisory Group -- Analyst

Got it. That's really helpful. Thanks for clarifying that. Appreciate it.

Good luck this quarter, guys.

Rick Dreiling -- Chairman and Chief Executive Officer

Thank you.

Operator

We'll take our next question from Michael Lasser from UBS. Your line is open. Please go ahead.

Rick Dreiling -- Chairman and Chief Executive Officer

Good morning, Michael.

Michael Lasser -- UBS -- Analyst

Morning, Rick. One of the hallmarks of your and your team's tenure in the previous retail situations is that you would consistently under-promise and overdeliver and generate consistent and reliable performance. This experience has been colored by surprises due to factors like reinvestment and unanticipated costs such as shrink and mix. At what point do you think Dollar Tree is going to get into the cycle of greater consistency? Is it realistic that that could happen in the second half of this year? Also, it's part of this question, I'm going to put in a second one, the market was focused on Dollar Tree's ability to earn $8 in '24 and potentially $10 in '25.

Given these factors that you've outlined today, is it realistic that the market should push off those expectations in light of everything you know? And then, lastly, you've alluded to this -- this incremental price points above 1.25, presumably that's above 1.25 but below $3. Can you give us more detail on that? It's sparked a lot of interest so far this morning. Thank you so much.

Rick Dreiling -- Chairman and Chief Executive Officer

So, I'll take the first part, let Jeff handle the second. Under-promise, overdeliver, I think has been the mantra of my career, and I cannot deny that, but I will make a couple of comments. Number one, when we started the journey at my previous employer, we were private. We did not do it in the public arena.

And what you're seeing is a lot of the maturations we went through a long, long time ago. I do believe we are on the right path. I do believe all of the things we are doing are right. And I do believe there's a payoff coming.

And what we will do at the Investor Day is we're going to show you that path. And what I'd like you to do is hold on to that time, Michael. So, Mike -- and so, we can stand up there with charts and graphs and show you the journey. But I think we are -- we are getting this level set now.

Every day, we find something new we didn't know about, and we have to go out and get it fixed. And this is -- this is a journey and I've got the right people around me. I've got 200,000 people that are excited, that are dying to be led, and we just need a little bit of time, and we're going to lay it all out for you in about four weeks. Jeffrey, why don't you handle the --

Jeff Davis -- Chief Financial Officer

The only thing I would add to that is that we are very confident that we will be able to deliver double-digit EPS. And the actions to get there, we are embarked upon currently. As Rick has said, we are confident in what we're doing and you're starting to see some of the results from a top-line perspective. The components of how we get there in a time frame that we get there would be best illustrated when we get to the Investor Day, and we don't want to take anything away from that -- that period of time.

But we are confident that double-digit EPS is in our near-term horizon.

Michael Lasser -- UBS -- Analyst

I think on the price point, Jeff?

Rick Dreiling -- Chairman and Chief Executive Officer

On the price.

Jeff Davis -- Chief Financial Officer

I'm sorry --

Rick Dreiling -- Chairman and Chief Executive Officer

The specific question on multi-price, yeah, could you say it again, sir?

Michael Lasser -- UBS -- Analyst

Yeah, so you have alluded to testing, several times on this call, incremental price point. The interpretation is that those are above 1.25 but below the Dollar Tee Plus price points of $3 and $5 items. So, if you could elaborate on that test, it would be super helpful.

Rick Dreiling -- Chairman and Chief Executive Officer

Yeah, to answer your question, at this stage of the game, north of $1.25 and less than $5, that is a correct assumption. That doesn't mean that's where we're going to land when this is all said and done. But, yes, we are -- that was a -- that's very fair between a buck and a quarter and five bucks is where we're at right now, with no duplication of the SKU.

Michael Lasser -- UBS -- Analyst

Understood. Thank you very much.

Operator

We will take our next question from Krisztina Katai from Deutsche Bank. Your line is open. Please go ahead.

Rick Dreiling -- Chairman and Chief Executive Officer

Good morning, Krisztina.

Krisztina Katai -- Deutsche Bank -- Analyst

Good morning, Jeff and Rick. Thank you for taking my question. Just wanted to quickly follow up on some of the increased pressure points on margins. Could you just talk about how you see the promotional environment evolve from here? I know you said that, currently, it's still very rational.

But in case some of the larger players do pick up price investments, can you just talk about how much you can potentially lean on your vendors, better source? And I think, Rick, you said that you view shrink as something that is cyclical, but can you just talk about some of the steps that you can take right now to mitigate it? Thank you.

Rick Dreiling -- Chairman and Chief Executive Officer

Yeah, I'll talk about the promotional environment. I'll reinforce that it's very stable right now. And I will also tell you this, we are generating on the Family Dollar side vendor relationships we have not had in a very, very long time in this banner. And those vendor relationships are driven by our ability to execute on the commitments we make to the vendor and the manufacturer.

And it is -- and that's how you get the incremental support for incremental markdowns in case you have to go to battle in print; however, I do not see that. I think the market is as rational -- as rational as I have ever seen it. And then, you want to take the --

Jeff Davis -- Chief Financial Officer

Yeah, on shrink, it's a -- it's a multifaceted sort of approach. You definitely start off with defensive merchandising where there's opportunities for us in some situations to how you display items, what restrictions you have, and how that is displayed. And those are the types of things that we -- we don't particularly care for because we know that that that impacts sales, but it's an inevitable portion. We introduced new technologies within the store in how we monitor and alert.

We -- we take such steps quite honestly and working more closely with local law enforcement to the extent that there is, you know, elevated levels within the communities. But also, as we have been really focused on our turnover and getting certain key positions filled and continue to be in position, that also helps us from a turnover perspective, which also helps to thwart some of the internal elements of our shrink. So, we're, once again, very multifaceted, and we will work across that. In the eventuality that this is something that we -- is elevated levels and we're going to have to pass some element of this on to our consumer, we'll ultimately have to think about how we will price this into some of our merchandise.

Rick Dreiling -- Chairman and Chief Executive Officer

Krisztina, I had -- one last thing. The shrink tends to fall into certain categories. And in our higher-shrink stores, we're actually exploring do we need the same assortment as a low-shrink category store. So, those are the kinds of things we're looking toward.

To just point, we're looking at everything right now to mitigate the problem.

Krisztina Katai -- Deutsche Bank -- Analyst

All right. Thank you so much.

Operator

Now I will hand over back to Randy Guiler. Please go ahead, sir.

Randy Guiler -- Vice President, Investor Relations

Thank you. Thank you for joining us today. And we hope to see you at our investor conference on June 21st. Have a good day.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Randy Guiler -- Vice President, Investor Relations

Rick Dreiling -- Chairman and Chief Executive Officer

Jeff Davis -- Chief Financial Officer

John Heinbockel -- Guggenheim Partners -- Analyst

Simeon Gutman -- Morgan Stanley -- Analyst

Edward Kelly -- Wells Fargo Securities -- Analyst

Scot Ciccarelli -- Truist Securities -- Analyst

Peter Keith -- Piper Sandler -- Analyst

Karen Short -- Credit Suisse -- Analyst

Matt Boss -- JPMorgan Chase and Company -- Analyst

Joe Feldman -- Telsey Advisory Group -- Analyst

Michael Lasser -- UBS -- Analyst

Krisztina Katai -- Deutsche Bank -- Analyst

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