Dollar Tree Inc
NASDAQ:DLTR
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Dollar Tree Inc
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Good day and welcome to the Dollar Tree Incorporated Second Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Mr. Randy Guiler, VP, Investor Relations. Please go ahead, sir.
Thank you, Shelby. Good morning, and welcome to our call to discuss Dollar Tree's performance for the second fiscal quarter of 2020. With me on today's call will be our President and CEO, Mike Witynski; and our CFO, Kevin Wampler. Before we begin, I would like to remind everyone that various remarks that we will make about future 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.
Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors included in our most recent press release, most recent 8-K, 10-Q and annual report, which are on file with the SEC. We have no obligation to update our forward-looking statements, and you should not expect us to do so.
At the end of our prepared remarks, we will open the call to your questions. Please limit your questions to one and one related follow-up question, if necessary.
Now I will turn the call over to Mike Witynski, Dollar Tree's President and Chief Executive Officer.
Thank you, Randy. Good morning, everyone. I am very pleased with the company's second quarter results announced this morning. Our store and distribution center teams have done a remarkable job of serving customers through an incredibly dynamic time in retail. Their continued efforts to ensure we are providing a clean, safe shopping experience, along with great value and convenience our stores offer, contributed to solid operating performance for the quarter.
Our team delivered an earnings per share increase of 44.7% compared to prior year's quarter. These results for the enterprise were comprised of a 7.2% same-store sales increase, 180 basis points improvement in gross profit margin and a 130 basis point increase in operating profit margin. Same-store sales increased 11.6% at Family Dollar and 3.1% at Dollar Tree.
It's a new day at Family Dollar. In early March, on our Q4 earnings call and following our December leadership realignment, I spoke about the challenge and opportunity to turn around discretionary side of the business at Family Dollar. Our focus is on greater values and sharper price points, with an enhanced focus on meeting the basic needs of our customers. It's all about sourcing more of the items customers want to buy.
Our team's efforts are paying off, as Family Dollar delivered a record 28.9% same-store sales increase and discretionary for the quarter. Our realigned and focused merchandising team is demonstrating how they can be nimble and opportunistic to drive sales, loyalty and repeat visits at Family Dollar. Examples of this included, following on the success we experienced at Dollar Tree, we have now completed the rollout of Hallmark-branded greening cards to all family dollar stores.
We are capitalizing on great brand name closeout opportunities, which is relatively new approach at Family Dollar. We introduced what could be the top toy of the year, Baby Yoda, and sold tens of thousands in a matter of days. As the quarter progressed, we saw a shift from kitchenware and tabletop into more home decor and soft home as customers are investing in their homes and spending more time in their homes. Anything related to staying at home, such as lawn and garden and outdoor grilling, continues to perform very well.
And on the apparel side, we have had strong sell-through of our spring and summer apparel with a focus on our at-home items like loungewear, sleepwear, slippers, athleisure, children's clothing as well as new born and onesies
Family Dollar’s 11.6% comp reflected the continuation of momentum that we saw in Q1 as customers are viewing Family Dollar as a convenient safe, local option with great values on food, essentials, household products, cleaning supplies, home decor and much, much more.
The strong performance in discretionary contributed 390 basis points improvement in gross margin. And operating income margin for Family Dollar in Q2 increased 470 basis points to 5.3%. Other Family Dollar sales highlights for the second quarter included the 11.6% same-store sales increase was on top of a 2.4% comp in Q2 a year ago. This was comprised of 25.9% increase in average ticket, which was partially offset by an 11.3% decline in transaction count as customers continue to consolidate their shopping trips.
The sales strength was broad-based geographically, with each zone delivering comp increases between 9.5% and 13.5%. Also, both rural and urban Family Dollar stores delivered double-digit comp increases, with rural slightly outpacing urban.
Regarding the cadence of comps, each month's increase was greater than 8.5%, with May, which had the greatest benefits of stimulus, being the strongest month. And June was slightly stronger than July. While it is still early in Q3, Family Dollar is delivering very solid same-store sales despite less government assistance being available than during the prior quarter.
The consumables side of the business delivered another positive quarterly comp at 6.3%. While as previously mentioned, the discretionary count was a record 28.9%. We saw more than 0.25 million new sign-ups in our smart coupon program during the quarter, bringing its total enrollment to 12.8 million customers.
Our H2 stores continue to perform very well, delivering year one cap lifts greater than 10% when compared to non-renovated stores. For fiscal 2020, as previously stated, we plan to renovate 750 Family Dollar stores, while new stores are also being open in the H2 format.
For the Dollar Tree segment, Dollar Tree bounced back with a 3.1% same-store sales increase for Q2 following a quarter where Easter seasonal performance was materially impacted by COVID-19. Gross margin, which was down 260 basis points year-over-year in Q1 was down 10 basis points for the second quarter. This sequential improvement was primarily due to the rebound on the discretionary side of the business following Easter. Geographically, comp sales were relatively balanced with increases by zone ranging from 1.2% to 4.25%.
For the quarter, discretionary delivered a positive 9% comp and consumables were down approximately 3%. The comp sales for every line of business at Dollar Tree improved from quarter one to quarter two, with the exception of the food category. Factors impacting food include reduced availability of protein products from periodic plant shutdowns, slowed sales of impulse snacks as traffic has declined, and some vendors are focusing more on larger pack sizes based on demand and their production capacity.
Categories performed well in the quarter include crafts, kitchenware, housework products, party celebrations, and beauty and eyewear. The Crafter’s Square program is a tremendous hit with our customers and is driving repeat visits to our stores. Our timing with the rollout of more than 2,400 stores in Q1 could not have been better.
The improved performance in the basic craft assortment is also contributing to a lift in our seasonal craft business as well. For the quarter, Dollar Tree's transaction count was down 15.9%, while average ticket increased 22.6% as consumers, in general, have been shopping less but buying more.
Q3 has gotten off to a good start at Dollar Tree as well. Regarding upcoming seasons like back-to-school, fall harvest, and Halloween, we are seeing more volatility than usual on the timing of back-to-school sales. But the good news is these are in line categories, and there is minimal markdown risk associated with these items. I view this as similar as the graduation category. The timing of the sales were disrupted, but overall, the category performed very well for us.
Consumers are adapting to their current environment and are still celebrating, albeit in smaller groups or celebrating in different ways. In March, the merchant team took action to make adjustments in Halloween buys and de-risk the category. Much less focus on traditional trick or treating and large gatherings and more focus on decorations and costumes. We are seeing very nice trends regarding the early sales related to Fall Harvest and Halloween.
Now regarding Dollar Tree Plus, our focus on selling great value merchandise at price points of $5 and below, we are continuing to analyze, learn, and make adjustments to the program.
Earlier this year, we transitioned from the initial consumable-dominated assortment to more of a wild-type discretionary products that Dollar Tree is known for. We recently added bins to our larger test stores to promote some hot one-time item sales. Sales of these discretionary products remained strong with good sell-through as customers are responding favorably.
We are excited about the many new multi-price discretionary products that we already have on the store shelves for this fall selling season. We remain encouraged about the potential for Dollar Tree Plus.
Inventory levels in both our segments were impacted during the quarter as it relates to higher turned consumable categories. Current environment and related in-stock levels on domestic items are improving, but the continuation of high customer demand, especially on items such as paper towels and cleaning supplies, is still outpacing both vendor production, capacity, and improving. In-stock levels on certain items are constrained, but we do expect to see continued improvement as we move through the quarter.
Throughout the quarter, we rewarded our dedicated hourly store and distribution center associates with premium pay. This was in recognition for their extraordinary efforts to protect and serve our customers effectively with enhanced cleaning protocols and other safety measures.
We believe these efforts contributed to our solid top line sales performance during the quarter. The value and convenience of our stores offer is desired in the current environment by customers who are looking to save money while shopping close to home.
The COVID-19-related costs incurred for wage premiums for the frontline associates, our guaranteed sales bonuses for field management and the supplies needed for keeping our customers, associates and facilities safe, totaled nearly $135 million for the quarter.
Surveys indicate that customers want to shop where they feel comfortable and safe. We have invested in our associates and believe this is contributing to enhance loyalty, attendance while we're reducing turnover in our stores.
Over time, lower turnover can lead to improved shopper experience, more efficient store operations and reduced shrink. During the quarter, 123 [ph] ranked Dollar Tree and Family Dollar, first, an aggregate of strongly trusted or somewhat trusted ratings of all retailers enforcing safety measures for shoppers.
Additionally, as many of you have seen in the news reports, more than 100 of our stores were impacted in certain communities during the recent periods of civil unrest. Overall, we incurred nearly $17 million in costs during the quarter related to store damages, repairs and lost inventory. The majority of the impacted stores have been reopened.
Regarding our supply chain, we continue to support planned growth and infrastructure and distribution capacity ahead of the need. We recently began shipping from our newest distribution centers in Rosenberg, Texas and Ocala, Florida. These facilities will provide increased capacity and improved efficiencies to support continued profitable store growth in both Southeastern and Southwestern states.
We completed more than 250 real estate projects in the quarter, including 131 new stores, 22 relocations, 76 Family Dollar H2 renovations and 26 store closings. We ended the quarter with 15,479 stores. I am very proud of the work our leaders throughout the organization, including our store operations and field leadership teams, our merchandising group, our DC and supply chain teams and our store support center team.
I'll toss it over to Kevin now to provide more detail for the Q2 performance.
Thanks, Mike, and good morning. For the second quarter, consolidated net sales increased 9.4% to $6.28 billion, comprised of $3.18 billion at Dollar Tree and $3.1 billion at Family Dollar. Enterprise same-store sales increased 7.2%. And on a segment basis, comps for Family Dollar increased 11.6% and for Dollar Tree, increased 3.1%.
Overall, gross profit increased 16.2% to $1.92 billion. Gross margin improved 180 basis points to 30.5% compared to 28.7% in Q2 of 2019.
Gross profit margin for the Dollar Tree segment decreased approximately 10 basis points to 33.7% when compared to the prior year's quarter. Factors impacting the segment's gross margin performance included distribution costs increased 70 basis points, primarily due to higher payroll costs and depreciation. This includes the start-up expenses of the two new distribution centers that Mike mentioned, as well as approximately $6.7 million or 20 basis points of COVID-related expenses, primarily premium pay bonuses and health screening costs.
Shrink increased approximately 15 basis points based on inventory results and an increase in the accrual rate. These cost increases were partially offset by improved merchandise costs, including freight, which improved by approximately 65 basis points. Dollar Tree saw an improvement in merchandise mix, lower freight costs as a percentage of sales and improved markdown, partially offset by an incremental $8.2 million of tariff costs.
Occupancy cost decreased 15 basis points, due to leverage on the comp sales increase in the quarter. Gross profit margin for the Family Dollar segment improved 390 basis points to 27.2% in the second quarter. The year-over-year improvement was due to the following: merchandise costs, including freight, improved 190 basis points primarily due to improved merchandise mix. Discretionary sales driven by government systems and improved assortment comped up 28.9% for the quarter, increasing total discretionary sales to 26.2% of the business from 22.9% last year.
Traditionally, the Family Dollar segment had improved mark on and lower freight cost as a percentage of net sales, partially offset by $2.6 million of incremental tariffs.
Occupancy costs decreased approximately 95 basis points as a result of leverage from the comp sales increase. Markdown expense improved approximately 85 basis points as we cycled the store optimization markdowns and higher clearance sales from the prior year's quarter and lower promotional activity in the current year, partially offset by $7 million of markdown costs for stores affected by civil unrest.
Shrink decreased approximately 40 basis points based on improved inventory results in the current year, and an increase in the accrual rate during the prior year. These benefits were partially offset by distribution costs, which increased approximately 25 basis points due to increased payroll costs at the DCs. These costs included approximately $4.7 million or 15 basis points of COVID-related expenses, primarily premium pay bonuses and health screening costs.
The consolidated selling, general and administrative expenses increased 50 basis points to 24.5% of net sales compared to 24% in Q2 a year ago. For the second quarter, the SG&A rate for the Dollar Tree segment as a percentage of net sales increased to 24% compared to 22.4% in Q2 of 2019.
Payroll costs increased approximately 175 basis points, comprised of the following. Payroll expenses increased approximately $66 million, or approximately 210 basis points for costs associated with COVID-19 premium pay and bonuses. This increase was partially offset by decreases in workers compensation and benefit costs as well as leverage from the comp sales increase.
Other selling, general and administrative expenses increased approximately 5 basis points. The company incurred COVID costs of $3.5 million, or approximately 10 basis points for PPE and cleaning supply. Additionally, general liability claim expense increased based on development, partially offset by lower legal and travel costs. So our facility costs decreased approximately 10 basis points, primarily due to leverage of the stronger same-store sales and a lower electric costs. The SG&A rate for the Family Dollar segment improved approximately 85 basis points to 21.9% compared to 22.7% for the second quarter of 2019.
Operating expenses decreased by approximately 90 basis points, primarily due to higher costs in the prior year related to the disposal of fixed assets in connection with the store optimization plan and reduced advertising and travel as a percentage of net sales in the current year, as well as leverage from the comparable store sales increase.
Store facility costs have improved approximately 25 basis points, primarily from leverage on comp sales and lower electric costs. And depreciation improved 5 basis points, primarily from leverage on the comp sales increase. These benefits were partially offset by payroll expenses, which increased approximately 40 basis points, driven by COVID-19 cost of $48.2 million or 155 basis points for premium payment bonuses, an increased incentive compensation based on performance. These increases were partially offset by decreases in workers' compensation, benefit costs and temporary health and leverage from comp sales.
Operating income increased 39.4% to $374.9 million compared with $268.9 million in the same period last year. And operating income margin improved 130 basis points to 6% compared to last year's second quarter. The current year quarter included $134.9 million in COVID-19-related expenses and $16.8 million in civil unrest cost. Non-operating expenses totaled $35 million, comprised primarily of net interest expense. Our effective tax rate was 23.1% compared to 21.1% in the prior year second quarter.
The company had net income of $261.5 million or $1.10 per diluted share, which included $134.9 million or $0.44 per diluted share of incremental operating costs for COVID-19-related expenses and $16.8 million or $0.05 per diluted share for civil unrest costs. This compared to a net earnings of $180.3 million or $0.76 per share in the prior year's quarter.
Combined cash and cash equivalents at quarter end totaled $1.75 billion compared to $539.2 million at the end of fiscal 2019. The company paid down $250 million on its revolver during the quarter. Outstanding debt as of August 1, 2020, was approximately $4.1 billion, which includes $500 million drawn on our revolving line of credit.
Inventory for Dollar Tree at quarter end declined 4.2% from the same time last year, while selling square footage increased 4.9%. Inventory per selling square foot decreased 8.7%. The team is actively managing the mix of inventory to build food and essential goods categories. Inventory for Family dollar at quarter end decreased 7% for the same period last year, while selling square footage increased 0.6%. The inventory per selling square foot decreased 7.6%. Our Family Dollar inventory reflects higher-than-normal out-of-stocks in certain categories. Our merchants, supply chain and vendors continue to work to improve our position to meet increased product demands.
Capital expenditures were $232.5 million in the second quarter versus $293.3 million in Q2 of last year. And for fiscal 2020, we continue to expect consolidated capital expenditures to be approximately $1 billion. Depreciation and amortization totaled $168.1 million for Q2 compared to $155.1 million in the second quarter last year. And for fiscal 2020, we expect consolidated depreciation and amortization to range from $675 million to $680 million.
While we are not providing sales and EPS guidance, I do want to provide a few data points for your modeling. Net interest expense is expected to be approximately $38 million in Q3 and $152 million for fiscal 2020. The tax rate is expected to be 22.4% for the third quarter and 22.6% for fiscal 2020. And weighted average diluted share counts are soon to be 238.3 million shares for Q3 and 238.1 million shares for the full year.
As demonstrated by the significant business trend changes between Q1 and Q2, the environment remains volatile. We have always valued the flexibility of our business model, and we continue to adapt as necessary during these uncertain period.
We have a strong balance sheet and continue to grow the company by investing in new and renovated stores, our supply chain and technology to improve the customer experience. We remain confident in our business and our ability to provide long-term shareholder value.
I'll now turn the call back over to Mike.
Thanks, Kevin. I could not be more proud of the overall team's performance for the second quarter. As I stated earlier, it is a new day at Family Dollar. Family Dollar delivered a 13.6% comp for the first half of the year, and operating margin has improved 350 basis points from the first half a year ago. We have seen nice momentum thus far in Q3.
Dollar Tree had a good quarter with sequential improvement in both sales and margin, following a very challenging Q1. Aside from the food category, we saw comp improvement in every line of the business in the second quarter.
I believe we are at the right spot at the right time. We have a business teams consolidated into one store support center. Our leadership teams are aligned, focused and energized. Our support teams are receiving consistent direction and are acting with enhanced clarity, focus and speed. Our merchant teams are doing a tremendous job of adapting and reacting to evolving customer trends. And our store operators are focused on running great, clean, safe stores.
At Dollar Tree and Family Dollar, we have a tremendous opportunity to drive sales, enhance gross margins and leverage our cost structure, each contributing to operating margin improvements over time. We are a growth company and the most attractive sector in retail, opening more stores, renovating stores, improving our efficiencies, generating significant free cash flow, focusing on our customers and running great businesses. I truly believe the best is still ahead of us.
Before we go into Q&A, I would like to just share that our thoughts are with all of our families and communities and our associates that have been with and are being impacted by Hurricane Laura that is passing through the Louisiana and Texas area right now.
Operator, we are now ready to take questions.
Thank you. [Operator Instructions] We'll take our first question from Matthew Boss with JPMorgan.
Great. Thanks. Mike, congrats on the new role. Maybe while early, any change in the key areas of focus as we think about Dollar Tree and the Family Dollar banners? And maybe specifically, how are you thinking about multi-price points at Dollar Tree? Where do we stand about today and what key metrics are you looking forward to potentially scale this initiative?
Hey Matt, thanks for your interest. Regarding the multi-price point at Dollar Tree, we are very interested and excited about the opportunity. We're going to -- especially as we moved into the more discretionary and wow factor that Dollar Tree is known for, we're seeing good response from our customers as we provide exciting products for them. And we're going to continue to watch it. Not the key metrics that we're watching, we're going to continue to watch our -- are our customers responding to a favorably? Are we getting more productivity out of that four-wall box, so we want sales per square foot to go up? And we want to enhance our margins. I mean, those are the three things that we'll be looking at to determine if it's successful as we continue to enhance it.
On the Family Dollar side, we will continue. We think that that 11.7% comp is -- just confirms that our customers are appreciating the investment we're making in our H2, they're responding favorably. And Rick and the merchant teams too, that 18 months ago, we focused a lot on rolling out the H2.
In the last six months, with Rick in charge, he's really working on refining that the H2 assortment. As you always have continuous improvement, we're looking at adjacencies, SKU count, how do you expand in discretionary side. So, while we're rolling out that H2, the merchants are working on that continuous improvement that will get us more sales per square foot and more margin by getting our discretionary mix stronger.
Great. And then, Kevin, at the Dollar Tree banner, what's the best way to think about the gross margin headwinds versus tailwinds in the back half of the year, maybe relative to the second quarter?
And then as we think about the 35% to 36% banner gross margin long-term, that I think you are still very confident with, any constraints to getting to that level next year think that we should think about?
Thanks for the question, Matt. I think as we think about it, obviously, we saw things balance out in Q2 a little bit. And again, we saw some nice improvement in our overall margin. Again, discretionary mix grew in Q2 and balanced things back out from where we were in Q1.
As we look to the back half of the year, I believe we're set up for a strong discretionary run. I think as Mike mentioned early on, we're seeing good sales in Fall Harvest and Halloween, which bodes well. And we'll continue to build the categories back up on the food and essential side.
But as I look at it in general, I think as we talked about, maybe our biggest headwind as we go to the back half is our distribution costs. We talked about it being up 70 basis points in Q2. And again, what we did have in there is start-up costs for two new buildings, which is the first time in a long, long time, many, many years, we've had two buildings opening up at the same time. So there are a lot of start-up costs that go into that and add to that.
But again, I think that's where the pressure is. Shrink is continue to be a little bit stubborn, but I do believe we can get our arms around that. And – but – so I think really, as I look at it, if we can drive some additional sales, create some more leverage, we feel pretty good about the natural product margin side, the commodity side of the business, still feel like it's in a pretty good place.
Our buyers completed their July trip in a sense from here in the states, but feel good about the way that trip went and how that will affect us as we continue to go forward. So I think that's kind of how I'm thinking about the second half in the Dollar Tree segment.
Matt, just to give a little color too on your question, getting to the 35% to 36%. We absolutely believe we can get to that range that we historically have. As Kevin said, we like the mix that can drive us there. And if you really look at our initial markdown from a product and mix perspective, we're in great shape. Our pressure is from the shrink and the DC costs. We know where it is, and we're going to get after those areas.
Great. Best of luck.
And we'll take our next question from Michael Lasser with UBS.
Good morning. Thanks a lot for taking my question. On the Family Dollar side, first, why do you think the spread between Family Dollar and its largest competitor in terms of comps expanded this quarter versus where it had been in the last several quarters? And as part of that, your consumable business was very good that drove gross margin expansion. Are you going to give some of that back? And this is not a realistic gross margin to expect that we should be modeling moving forward?
Hey, Michael, thanks for the question. We're very proud of and like our 11.7% comp growth and especially a record 28.9% growth on the discretionary side. We're seeing that on the Family Dollar side, based on the information that we're getting from third parties and internal, that we captured 15% new customers during the quarter.
Our discretionary market share gains were three times what the market was on the discretionary side of the business. And with our 250,000 new sign-ups on our smart coupons, we are getting new customers engaged. So we like our comp sales growth. And all the things that our merchants and the Rick McNeely and the team are focused on are the right things, they're responding. And that focus to sharper price points, basic items and having what customers need when they're in our store we think is working.
Okay. And my follow-up is, you provided some comments around what you've been seeing early into the third quarter, which is important because there's still a lot of folks who are out of work and you guys provide great value to them, but yet their unemployed insurance has – or their enhanced benefits have worn out. So you mentioned that Dollar Tree is off to a good start. Is it cool if we assume that, that business has accelerated from where it was last quarter? Just given that you've addressed some of the out of stocks and other issues in that – in the consumable categories? And should we also assume that Family Dollar is seeing similar trends to what you reported in July? Thank you.
Yeah. We believe – we like the third quarter, and we think the third quarter is starting just like we ended the second quarter. We've got strong comp store sales. We like the mix on both sides of the business. And as Kevin said, early indicators on fall and Halloween are strong, and we think we're well positioned for that. We think based on what we're seeing from the customer, since they're spending more time at home, they want to decorate their homes and invest in their homes more. So we're seeing those categories. So how we may be different with them spending more time at home, they are going to decorate that home since they're there. And we're seeing that in our sales.
Okay. Thank you very much and good luck.
Thank you.
We'll take our next question from John Heinbockel with Guggenheim.
Hey, Mike. Let me start with your thoughts on Dollar Tree, right, and the discretionary business over the next, I don't know, six to nine months. Right, because in 2008, 2009, you did see an acceleration on trading down as the recession took effect. What's your outlook when you think about Dollar Tree in the next couple of quarters? And are the merchants doing anything differently in anticipation of some trading down benefits?
Yeah. Thanks, John, for the question. And I think we're well positioned on – with our – everybody is staying at home right now. Our Crafters Square that are – that we rolled out the first quarter, the 2,400 stores now and more than 3,000 stores. Our customers are responding very, very well. So our merchants are continuing to re-buy that and fulfill the drive and the demand in that category.
And on the consumable side, we see every week and each period, we see the replenishment side getting better as vendors start to drive capacity. So we're – we like the mix of sales going forward, and I think we're going to be in a good position in the back half of the year, and going into next year, especially when the customers are going to need us most, with the unemployment, the extra benefits going away and the unemployment rate where it is, we believe we're in a great position as we were in 2008, 2009, 2010.
All right. And then maybe secondly, you talked about the two DCs at Dollar Tree. So, maybe a thought on where we are in co-mingling distribution, right, between the two banners and I assume those two are going to be Dollar Tree-centric only. But where do we – are we moving closer to more co-mingling to try to get the distribution cost down, or is that a ways away?
Yeah, that's a great question. As you've seen, our DC costs are outpacing where we want them to be. So part of that is, we do have a longer-term strategy to leverage our network. Currently, we are -- we have one co-banner DC in our St. George, Utah. But keep in mind, in the last two, two-and-a-half years, every DC that we've opened or opening it with systems and the capability of co-bannering, just as we have these two.
So we are starting out these two because that's where the growth historically has been on the Dollar Tree side, so we've been feeding that growth. But down in the Ocala business and the Texas, they are going to be capable of co-bannering. And in that long-term plan, we will be moving to that.
Thank you.
We'll take our next question from Scot Ciccarelli with RBC Capital Markets.
Good morning, guys. Scot Ciccarelli. Can you provide some more color, just regarding some of the supply shortages you highlighted, especially on the Dollar Tree side and how you think that inventory flow will change as we get kind of further through the back half?
Yes, Scot. Thanks. And I would say on both sides, on the consumables side, it's really anything to do with paper and cleaning. So specifically, paper towels as people continue to enhance their protocols at home or wherever they're at with cleaning, any chemical with a kill claim, any hand sanitizer, there is still a lot of pressure on meeting the needs of the customer.
But we do see, the bath tissue, for instance, that is starting to improve. And actually we can have that tissue on the shelf for more than just a couple of days. So I would say throughout the back half of the year, we will see improvement in our in-stocks and those highly consumable items. But we have been communicated from vendors that this is a longer term -- there will be pressure on the back half of the year from our manufacturers.
And Mike, do you guys have a -- I'm sorry.
No, go ahead.
I was going to say, do you guys have an estimate for what the potential sales impact was or headwind that you faced during the quarter from these supply shortages?
Yes. No, not at the top of my head, we do not.
Okay, great. Thanks a lot guys.
We'll take our next question from Robbie Ohmes with Bank of America.
Hey. Thanks for taking my question. Mike, I was hoping you could give a little more color on Dollar Tree and kind of what's going -- what you're seeing there. So the one question would be, just the stimulus impact with some things rolling off at the end of the quarter and into this quarter. I know Dollar Tree is a much broader income demographic than Family Dollar. Anything you're seeing in the type of customer and how they're responding is, are you seeing some impacts on the stimulus side with the lower income customers buying less?
And then, the other question is just, can you help us, for yourselves and for the industry, think about this big decline. I think you guys said 16% decline in transactions at Dollar Tree. Like how are you guys thinking about the transaction comp playing out in the back half and how should we think about that? Thanks.
Yes. Thanks for your question, Robbie. So in Dollar Tree, we believe that the first half of the quarter in May, as we stated, was supported by the stimulus and the extra benefit dollars out there. But the great news is as those went away and as customers needed value and convenience and safety, they continue to shop at Dollar Tree and at Family Dollar. So we feel good about our comps towards the end of the quarter and going into the third quarter.
And from the basket and transaction size, we are still seeing -- they are shopping with a purpose. When they come in, they are shopping and getting -- definitely driven a higher basket. So we think that will continue as we go into the fall as people continue to practice social distancing in the safety protocols as they should.
And Mike, as other stores came back online, because you guys obviously were a necessity retailer that's been open, but any changes you've had to make from a marketing standpoint or any pressures you've seen on either Family Dollar or Dollar Tree related to some of these other stores coming back online?
Yeah. We have not seen any noticeable difference. As I stated, at Family Dollar, our discretionary business as customers came over other competitors opened up, we -- the market grew on the discretionary side, but Family Dollar grew three times back. So we're seeing that as competitors are opening up and more stores are opening, we did not see a noticeable difference in our traffic and/or basket.
That’s great. Thanks so much for that color.
We'll take our next question from Chuck Grom with Gordon Haskett.
Hey, thanks. So, my congrats on the new position. My question is on Family Dollar. You talked about 15% new customer acquisition, I believe, in the quarter. Just wondering if you could just give us that metric for the first quarter? And then looking ahead, I'm curious what steps you're taking to retain those shoppers and cultivate those relationships over the next few quarters and even into next year?
Yeah. Thanks, Chuck. I do not have that number for the first quarter. I think we can grab that and Randy can get back to you.
Regarding what we're doing to retain them is, A, provide a great shopping experience. Now more than ever, all the surveys and what we hear from our own customers is safety, cleanliness and convenience of getting in and out is very important to them. And then providing them what our strategy is on that, on the consumables side, we want to have the products that are looking for on the shelf. And on the discretionary side, our teams are continuing to work on those sharper price points with great value on basic needs. And we think doing those things and providing that when they're in our store, we'll keep retaining them.
And then along with, we like the increase of 0.25 million people signing up for our smart coupons, we think that we're going to be able to enable us to speak to those customers and watch what they're buying and keep driving basket size with them.
That's helpful. And then just bigger picture, like the Dollar Tree guys purchased Family Dollar four years ago. It's been a little bit of a struggle over the past few years. Just curious what you think needs to get done, not near-term, but just bigger picture to fix the Family Dollar business to narrow the gap with Dollar General to improve margins, just what do you think needs to get done? Thanks.
I think it's a new day at Family Dollar. And I think the direction that this team is focused on right now, under Rick Mcneely and the merchants, they are bringing clarity, focus on the right things, getting the right products. And I think it's evident by retaining more customers and driving an 11.7% comp and a 28.9% comp in our discretionary business. So, I think those are the right things. And I think structurally, in our organization, we are all in one building now under one leader. And I think we've got the right leaders in place that can drive this strategy.
So, it's not only what is your focus on your strategy, but having the right people in place that can drive and execute that and I'm more confident than ever that we've got the right team on the merchandising and the operations side to execute what we need.
And I also -- I think as we -- with the two companies coming together, the discipline that Dollar Tree has and buying that wow and driving that cost and bringing that value into products, so embedded in our culture. We've also moved some people. So, as we look at our structure, we have cross pollinated some leaders. So, we've got a great leader driving our discretionary side of the business that had many, many years of experience in Dollar Tree. So, it's a combination of all being in one building, having a great strategy that our customers are responding to, and then getting the right people in the chairs to execute the work.
Thanks. Best of luck.
And we'll take our next question from Paul Trussell with Deutsche Bank.
Good morning. Thank you for taking our question. I wanted to go back to the discussion around EBIT margins. This quarter has -- came with some elevated expenses, right, particularly on the Dollar Tree side related to labor and other issues with the stores.
If you are comping in the 3%-plus range going forward, Kevin, how should we think about the ability to leverage overall expenses in the third quarter and second half? And just thinking about how to think about that go-forward algorithm of the business and ability to really flow down to really flow down to the bottom-line?
Okay. Thanks, Paul. Yes, I think, obviously, to your point, if you -- obviously, we have invested in our associates around safety and premium pay. And obviously, from the standpoint, we do believe it's made a difference between, as Mike mentioned in his comments, attendance, turnover, various things that we think help us run a better store and hopefully keep people coming back, even though traffic doesn't really show -- it was really pretty was really pretty stubborn in that 15% negative on the Dollar Tree side.
Sans the COVID costs, obviously, operating income would have been up, EBIT would have been up. As we go into Q3, we put an 8-K out a few weeks ago that premium pay would continue for the first four weeks of August at a cost of about $18 million. And basically, that's less than it was, so we have lowered what the premium amount is.
In our 10-Q that was filed this morning, we noted that, that premium pay will continue additional four weeks. And I think realistically, for any modeling, you should assume that it will be in place for the 13 weeks of the quarter of Q3.
Again, we're going to also continue to obviously have expenses like anybody else for PPE and cleaning and sanitizing supplies. So that being said, it will be a headwind. It will be hard for – I don't necessarily expect that Dollar Tree will show a improvement year-over-year in operating income or EBIT in Q3 because of that. So we've made that decision as a company that it makes all the sense in the world to reward these frontline workers and go through that.
Now it will not last forever. And so these costs at some time – at some point in time, will fall away as we get into next year, you can expect these costs, I would think, to fall away to a certain degree, maybe not 100% because I'm sure we're going to still have cleaning protocols and various things.
But because of that, that will be the headwind. I think if you look at the other operating lines, I mean, I think SG&A has been well controlled, otherwise. I think we're on the right track with getting our gross profit back to levels that we believe are where we should be and driving that back to that 35% to 36% range.
So I think long-term, the prognosis is very, very good but obviously, we have these one-time costs currently. And realistically, what we don't know, another thing that's going to happen in Q3, I would expect there's going to be costs related to the hurricane at the end of the day that we can't put our arms around today. But obviously, we have many stores in the path of that storm. And I would expect that there'll be some damage and some dollars that will affect Q3 as well that we can't speak to beyond the fact that there'll be some when we report in November.
Thank you. And just wanted to also ask about your cash priorities and thought process. You do have an elevated amount of cash on the balance sheet today versus usual levels this time of the year, although some of that is related to what's drawn on the revolver. Just help us think about how are you thinking about leverage, store openings and remodels and share repurchases, which I think has been about been about a year since you've been engaged in that.
Yes. So obviously, to your point, we did preemptively draw on the revolver in Q1 with the uncertainty of the pandemic. We've paid back $250 million of that $750 million draw. So at some point in time, we'll pay that $500 million back as well.
The other thing we have due February 1, 2021, the $300 million legacy Family Dollar notes come due. So the plan would be to extinguish those notes at that point in time. That being said, we'll still have a nice cash position even with that. Obviously, we always want to support growth, and we continue to grow through new stores, renovations, supply chain technologies I spoke to. So those things will continue.
We do have a share repurchase plan authorization out there. We have $800 million authorized and outstanding as we sit here. Obviously, we kind of put the brakes on that with the pandemic, but as things settle. Again, there's obviously some uncertainty as we go to the back half, will there be rebound in pandemic as we get into the fall and the flu season that comes with winter. So we'll keep our eye on those type of things and make some decisions as we enter the New Year.
Thanks. Best of luck.
We'll take our next question from Kelly Bania with BMO Capital.
Hi. Good morning. Thanks for fitting me in to the questions. I wanted to just go back a little bit to H2 remodels. It sounds like from a top line perspective, they continue to perform well. Wondering, if you can expand a little bit more on the margin performance you're seeing there relative to the other stores? And is there any opportunity to kind of reaccelerate the remodels there, or is there any logistical headwinds in accelerating that? Maybe you can just touch on that a little bit. Thank you.
Yeah. Kelly thanks. I'll throw it to Kevin for the margin. But from a perspective of accelerating, so we're trying to do as many as we can given the current environment of travel restrictions and COVID restrictions in the state. So we've – we're going to do 750. But absolutely, as soon as the states open up in the locations, and it's safe and we can get our third parties and our teams in there to do the remodels, we will absolutely open that back up and accelerate that.
Speaking to the margins, obviously, as you look at the H2 model, there's some various components, right? So you have additional freezers and coolers, which is lower margin goods. More impulse/media consumption, which is a little bit higher margin. And then, obviously, an emphasis on seasonal. One of the things Mike spoke to earlier was the fact of Rick and team really looking and continuing to improve that overall model. Looking at the space, we dedicated to discretionary, and how do we provide a probably even better discretionary assortment and relevant assortment within that box.
But we like overall. Obviously, we'll get a nice sales lift. We get a nice overall driving – driving more profit dollars at the end of the day. And then obviously, it is our intention to drive a higher overall rate of profitability out of those stores. And we obviously are seeing that, but we think there's even more we can do with it.
Next question.
We'll take our last question from Karen Short with Barclays.
Hi. Thanks very much. Just a couple of questions on COVID cost. So you did call out that $18 million that will continue – that we should assume continues for the whole quarter. Wondering, if that also applies to the $4.5 million in manager bonuses, should we assume that, that's in place for the quarter? And then wondering if you could give the split between the Dollar Tree and the Family Dollar banner on those two components? And then I had one other follow-up.
Okay. From an overall standpoint, from a banner perspective, the Dollar Tree segment incurred $76.6 million in Q2 and Family Dollar incurred $57.1 million. And again, the vast majority of that being payroll costs at the end. And between -- and mainly stores, but obviously, there's a component there of DCs, which we broke out within the detail we gave you earlier today. So you have that piece of it.
As far as the $4.5 million of manager bonuses, that does not continue necessarily directly. Those were above and beyond. And as we go forward, that does -- will probably not take place. But, again, it's a very fluid situation. And so, it's always open for change. But at this point, we do not expect that to necessarily continue.
But take the $18 million and allocate it the same way between the $76 million and the $57.1 million that we saw throughout the quarter.
Yes. I think that's reasonable, because what you have to remember is we just -- we have a larger hourly workforce population in the Dollar Tree banner than the Family Dollar banner.
Great. Okay. And then, I guess, I'm still not totally clear what the message would be on the takeaway on Family Dollar comps in the current quarter. I know you said it's still solid. So should we assume that they are continuing at the level that we saw for the entire quarter in 2Q or too soon to tell? I mean, just curious if you can be a little more clear on that.
Well, I think, Karen, as you think about it. So I think within the prepared remarks, we spoke a little bit about the cadence of comps for Family Dollar and the fact that the lowest quarter -- or excuse me, the lowest month within the quarter was roughly 8.5%. And the easiest way to think about it is, there's been little degradation from that trend coming out of July.
Okay. That’s helpful. Thank you very much.
This concludes today's question-and-answer session. I would now like to turn the call back over to Randy Guiler for closing remarks.
Thank you, and thank you for joining us on today's call and especially for your continued interest in Dollar Tree and Family Dollar. Our next quarterly earnings conference call to discuss Q3 performance is tentatively scheduled for Tuesday, November 24, 2020. Thank you, and have a good day.
This concludes today's call. Thank you for your participation. You may now disconnect.