Dollar Tree Inc

NASDAQ:DLTR

Earnings Call Transcript 2021-Q3

[Operator]

Good day and welcome to the Dollar Tree Third Quarter 2021 Earnings Conference Call. Today's call is being recorded.

At this time, I would like to turn the conference over to Randy Guiler. Please go ahead.

[Randy Guiler, Vice President, Investor Relations]

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

Before we begin, I would like to remind everyone that various remarks that we will make about our expectations, plans and prospects for the Company constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and our actual results may differ materially from those indicated in these forward-looking statements.

For information on the risks and uncertainties that could affect our actual results, please see the Risk Factors, Business and Management's Discussion and Analysis of Financial Condition and Results of Operations sections in our annual report on Form 10-K filed March 16, 2021, our Form 10-Q for the most recently ended fiscal quarter, our most recent press release and Form 8-K and other filings we make from time to time with the Securities and Exchange Commission.

We caution against reliance on these forward-looking statements made today, and we disclaim any obligation to update or revise these statements except as required by law. Following our prepared remarks, we will open the call to your questions. Please limit your questions to one and one related follow-up, if necessary.

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

[Michael Witynski, President and Chief Executive Officer]

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

We experienced a strong finish to the third quarter as shoppers are increasingly focused on value in this inflationary environment. We continue to see accelerated progress in our key strategic initiatives, including Dollar Tree Plus, Combo Stores and our H2 format. During the past quarter, freight costs were significantly higher than expected. Our fourth quarter outlook, which Kevin will provide later in the call reflects the higher cost structure we experienced in the third quarter. However, our EPS for the third quarter was at the higher end of the range as the performance of the rest of the business offset these higher freight costs. Freight and supply chain disruptions, of course continue to be our biggest challenge in the near term by far, and the impact will continue for a while. But this challenge is transitory. As we detailed last quarter, our team continues to take robust action to mitigate the impact of freight costs and supply chain disruptions.

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

Family Dollar delivered a positive 2.7% comp against the 6.4% increase a year ago. This represented the third consecutive quarter that Family Dollar two-year comp stacked has exceeded 9%. The consumable side of the business comp over 3% while discretionary was slightly negative, as we cycled stimulus dollars from the prior year, we are extremely pleased with the Family Dollar brand as the business continues to go gain share. Comps of both banners were driven by an increase in average ticket partially offset by a decline in transaction count. The last month of the quarter October represented the strongest comp for both banners. Our digital offerings continue to evolve while we are steadfastly focused on best meeting our customers changing needs. In October, we announced our expanded partnership with Instacart to now include same day delivery from nearly $7,000 Tree stores. Nearly 100 million US households now have delivery options from 13,000 of our store locations.

We are very pleased with the initial results from the latest expansion. Turning to the $1.25 price point, our leadership team has been planning for the expansion of this initiative since late summer. As you know, in September, we announced our plans to add price points above $1.00 to all Dollar Tree Plus stores and on a test and learn basis to select legacy Dollar Tree stores. As a result of the positive customer feedback and store performance during the initial phase, we have introduced the initiative to nearly 200 additional legacy Dollar Tree stores. In today's press release, we announced for the first time in Dollar Tree's 35 year history, we are lifting the $1.00 price point cap at Dollar Tree stores on the majority of our assortment. $1.25 price point enhances our ability to materially expand assortments, introduce new products and sizes and provide families with more of their daily essentials. We will have greater flexibility to continue providing incredible value and help customers get the everyday items they need and celebratory and seasonal products that Dollar Tree is best known for.

Additionally, we are now reintroducing many customer favorites and key traffic driving domestic and consumer products that Dollar Tree had previously discontinued due to the constraints of the $1.00 price point. The new price point will also enable us to mitigate historically high merchandising costs increases, including freight and distribution costs, as well as higher operating costs such as wage increases. Our teams are focused on speed, execution and customer research. And our shoppers are responding favorably. When surveyed, the majority of our customers indicated they were already aware of the previously announced new price point. And not surprisingly, many have also indicated they're seeing price increases across the market. And that Dollar Tree is still providing the products they need at undeniable value.

We are extremely focused on flawless execution and are providing our leadership team out in the field with tools to support a seamless transition. Actions include providing teams with a conversion checklist to ensure consistently across markets and stores. Dedicate adequate store hours to complete the preparation tasks, including removing the signage and display elements, referring to the everything's $1.00, implementing the new signage regarding that $1.25 price point on displays, and caps and shelf strips throughout the store, hosting clear communications to customers and entryways and at the checkout, and we're equipping our store teams with messaging for responding to customer inquiries.

We have closely monitored the performance of the test stores and shopper reaction through extensive customer intercepts and third party surveys since our initial test began. We will continue to gather feedback throughout the process to ensure we remain fiercely committed to our brand promise of providing customers with extreme value every day, along with more thrills, more fun and more new items every week. For 35 years, we've been able to manage through inflationary periods to maintain everything for $1.00 philosophy that distinguished Dollar Tree and made it one of the most successful retail concepts for three decades. However, we strongly believe this is the appropriate time to shift away from the constraints of the $1.00 price point in order to continue offering extreme value to our customers. The independent surveys of shoppers across the US have indicated that 77% of the shoppers were almost immediately aware of the price point change and out of those 77%, 31% already knew before they visited the store, and 17% became immediately aware upon entering the store. While 29% were all aware within minutes of entering the store.

Critically 91% of those surveyed indicated they would shop with the same or increased frequency. We will continue to monitor the success of these initiatives. And we believe we will see improvement in the serving results since now we have the ability to further expand the product offering and we introduce key traffic driving items. Upon validating a store execution, customer reception and the performance results were as anticipated, we expanded the program to nearly 200 additional stores across three major markets. And we are pleased to say the results have been relatively consistent. As expected, we are seeing lifts in comp sales, partially offset by smaller decline in unit sales. We are seeing an initial lift to product margins that will normalize over time as our merchant teams evolve our assortments.

Importantly, we expect this initiative will enable us to mitigate the higher freight other inflationary costs in order to return to our historical gross margin of 35% to 36% in fiscal 2022, while improving the merchandising we're providing for our customers. All the steps I mentioned have set a solid foundation to streamline the execution of this important milestone in our company's history. We have been working hard to prepare this key strategic initiative to ensure that we are providing customers with great products while unlocking long-term shareholder value. We are focused on aggressively executing our plan to roll out the new price point across the entire footprint of legacy Dollar Tree stores. Our teams will be introduced in the new price point in more than 2,000 additional legacy Dollar Tree stores in December and complete the rollout to all stores by the end of the first quarter and fiscal 2022.

Concurrently, our company's merchants are working to continually enhance the offerings to drive traffic, capture market share, and further grow customer loyalty. We are working with our suppliers and we have already begun introducing new items every week, including seasonal, crafts, party supplies, food essentials, and more. Beyond the changes at our legacy Dollar Tree stores, we're also continuing to expand the availability of a $3 and $5 plus assortment. As I noted a few moments ago, we will exceed our previous goal of now adding the plus concept to nearly 600 stores by the end of the year. We plan to add the plus assortment to another 1,500 stores in fiscal 2022 and complete at least 5,000 stores in total by the end of fiscal 2024. We are enthusiastic about the opportunity to improve performance of Dollar Tree by continue to deliver extreme value to our customers at the new $1.25 price point, driving comp sales and improving stored productivity enhancing flexibility to better manage the overall business in an inflationary environment.

And as previously mentioned, returning Dollar Tree gross margins back to the change historical 35% to 36% annual range in fiscal 2022. I will now hand the call over to Kevin to provide details on Q3 performance and our outlook.

[Kevin Wampler, Chief Financial Officer]

Thanks Mike and good morning. Our third quarter EPS of $0.96 per share was near the high end of our $0.88 to $0.98 guidance range. Consolidated net sales increased 3.9% to $6.42 billion comprised of $3.42 billion at Dollar Tree and $3 billion at Family Dollar. Enterprise same store sales increased 1.6% as we cycled a 5.1% increase from a year ago representing a 6.7% increase on a two year's tax basis. Cost for the Dollar Tree segment increased 0.6% and the dollar same store sales increased 2.7% cycling a strong 6.4% increase from last year.

On a two-year stacked basis Dollar Tree comps increased 4.6% which was 170 basis point improvements from Q2 and Family Dollar increased 9.1%. Dollar Tree's comp was comprised of a 1.8% increase in average ticket partially offset by 1.1% decline in traffic. Family Dollar experienced a 5.8% increase in average ticket partially offset by a 3% decline in traffic. Gross profit was $1.76 billion for the quarter, gross margin was 27.5% compared to 31.2% in the prior year's quarter. The gross profit margin for Dollar Tree segment declined 470 basis points to 30.2% when compared to the prior year's quarter. Factors impacting the segment's gross margin performance included merchandise cost including freight increased 475 basis points driven by higher freight costs and lower initial mark-on partially offset by favorable mix from increased sales of higher margin discretionary merchandise.

Occupancy costs increased 10 basis points as a result of loss of leverage due to a lower comparable store net sales increase and higher real estate tax expense. The distribution costs increased 10 basis points from higher depreciation costs related to two new distribution centers and higher hourly wages partially offset by lower COVID-19 related expenses. And shrink improved 25 basis points related to favorable inventory results and a decrease in the shrink accrual rate. Gross profit margin for the Family Dollar segment declined 240 basis points to 24.4% in the third quarter. The year-over-year Delta included the following; merchandise costs including freight increased 220 basis points related to higher freight costs. Distribution costs increased 20 basis points compared to the prior year quarter due to higher wages, partially offset by lower COVID-19 related expenses.

Markdown costs increased to 20 basis points primarily due to higher clearance markdowns. Occupancy costs increased five basis points from early new to higher real estate taxes and shrink improve 30 basis points related to favorable inventory results and a decrease in the shrink of flooring.

Consolidated selling, general and administrative expenses improved 100 basis points to 22.7% of total revenue, compared to 23.7% in Q3 last year. We cycled $35.3 million and COVID-19 related costs were 57 basis points in the prior's quarter. For the third quarter the SG&A rate for the Dollar Tree segment as a percentage of total revenue improved 50 basis points to 21.7% when compared to the prior year's quarter. Payroll costs improved 30 basis points primarily due to lower COVID-19 related store payroll costs and lower incentive compensation expenses, partially offset by minimum wage increases and higher health insurance costs and other SG&A decreased by 25 basis points resulting from the benefit associated with the settlement of a contractual dispute and the realization of certain tax credits.

For Family Dollar, the third quarter SG&A rate as a percentage of total revenue improved 80 basis points to 21.4% compared to 22.2% in the prior year's quarter. Payroll costs decreased 65 basis points primarily due to lower COVID-19 related store payroll costs and lower incentive compensation expenses partially offset by minimum wage increases. Store facility costs decreased 30 basis points primarily due to lower repair and maintenance expenses, and lower telecommunication expenses. Depreciation and amortization expense increased five basis points due to expenditures associated with the store optimization program and other SG&A expense increased to 20 basis points primarily due to increases in advertising and travel expenses, and an increase in insurance costs related to general liability claims.

Corporate support and other expenses as a percentage of total revenue decreased approximately 30 basis points compared to the prior year's quarter, primarily due to lower incentive compensation. Operating income was $310.5 million, or 4.8% of total revenue in the third quarter. Our non operating expenses totaled $33.6 million comprised primarily of net interest expense. Our effective tax rate was 21.7% compared to 22.8% in the prior year quarter. Company had net income of $216.8 million or $0.96 per diluted share, this compared to net earnings of $330 million, or $1.39 per diluted share in the prior year's quarter. Combined cash and cash equivalents at quarter end total $701.4 million, compared to $1.42 billion at the end of fiscal 2020.

Outstanding debt as of October 30 was $3.25 billion. The company did not repurchase shares during the quarter as it was preparing for the announcement and launch of its $1.25 price point initiative across the Dollar Tree stores. We currently have $2.5 billion remaining on our share repurchase authorization. Inventory for Dollar Tree at quarter end increased 15.2% from the same time last year consisting primarily of a significant increase in goods on the water year-over-year. The comp store inventories are down 6.4% compared to a year ago when they were down 7.4%. Inventory for Family Dollar at quarter end increased 12.4% from the same period last year. Comp store inventories are up 7.2% after being down 13.2% in 2020.

Capital expenditures were $295.6 million in the third quarter versus $238.7 million in Q3 last year. For fiscal 2021, we expect the consolidated CapEx will be approximately $1.1 billion. Depreciation and amortization total $178.5 million for Q3 compared to $170.1 million in the third quarter last year. For fiscal 2021, we now expect consolidated depreciation and amortization to be approximately $715 million. Our outlook for the remainder of 2021 includes the following assumptions. We have forecasted continued pressure on wages due to the current shortage of workers available for our stores and distribution centers. We expect shrink will continue to be a tailwind but not at the same rate as we are cycling improved results from the prior year. Higher sales, lower store inventory levels, technology and better processes continue to drive better results.

Net interest expense is expected to be approximately $33.6 million in Q4 and approximately $133 million for fiscal 2021. We estimate consolidated net sales for the fourth quarter will range from $7.02 billion to $7.18 billion based on a low single digit increase in same store sales for the combined enterprise. Diluted earnings per share are estimated to be in the range of $1.69 to $1.79. As Mike mentioned earlier, rate costs were significantly higher than expected in the third quarter. Our fourth quarter outlook reflects the expectation of higher transportation costs. These costs will be offset by the benefit of the Dollar Tree stores that are transitioned to the $1.25 price point net of one time costs to implement that change.

Consolidated net sale for full fiscal year 2021 are expected to range from $26.25 billion to $26.41 billion based on a low single digit increase in same store sales and 3.3% square footage growth. The company now estimates diluted earnings per share will range from $5.48 to $5.58. The freight costs for fiscal 2021 are now expected to be approximately $2 higher than fiscal 2020 expressed in terms of the impact on diluted earnings per share. While much of the focus has been on Trans Pacific Ocean container rates, we are being impacted by all aspects of freight including higher costs for inland transportation by truck and rail and higher diesel costs. Additionally, in the third quarter, we moved more containers than originally planned which required to utilizing the spot market at rates higher than forecasted. To echo Mike's comments, freight continues to be our biggest challenge in the near term. We believe that majority of the freight challenges are transitory, the rest of the business performing much better in the near term.

Our outlook assumes a tax rate of 22.1% for the fourth quarter and 22.7% for fiscal 2021. Weighted average diluted share counts are assumed to be 225.9 million shares for Q4 and 228.9 million shares for the full year. Our outlook does not include any share repurchases; we have $2.5 billion remaining on our existing share repurchase authorization.

And I'll now the call back over to Mike.

[Michael Witynski, President and Chief Executive Officer]

Thanks, Kevin. As I mentioned earlier on the call we ended the third quarter with momentum in the business. And that has certainly continued in both segments. Through the end of last week quarter-to-date our comps are running at a 4.9% increase at Family Dollar and a 3% increase at Dollar Tree and we are seeing positive trends as customers are planning to gather in person with family and friends to celebrate the holidays this year. The combination of shopper seeking value in the inflationary environment along with the acceleration of a company's initiatives, including Combo Stores and Dollar Tree plus bodes well for the continued traction in store productivity. In 2022, we plan implementing the $3 and $5 plus assortment and to 1,500 more Dollar Tree stores, we will also be adding 400 Combo Stores through new or renovated stores. And we plan to renovate 800 legacy Family Dollar Stores into the H2 format.

Additionally, lifting the $1.00 constraint represents a monumental step for our organization and we are enthusiastic about the opportunity to meaningfully improve our shoppers experience and unlock value for our stakeholders. We will be relentless in our commitment to offer our customers the best value possible albeit at a different price point while guided by Dollar Tree's same founding principles. We are extremely excited and confident about the opportunities in 2022 and beyond. We are very focused on the acceleration of the initiatives that are working for us and are operating with clarity, focus and speed. As I previously mentioned, we do expect Dollar Tree banner to return to its historical annual range of 35% to 36% gross margin in fiscal 2022.

Before we go into Q&A, I would like to make a brief statement. We appreciate that many of you are focused on the Form 13-D filed by Mantle Ridge two Fridays ago So we will make a short statement about that but will not entertain any questions on the topic. We believe Mantle Ridge has made a very smart investment. As we said Dollar Tree's Board of Directors and management team are always open to listen to input and engaging with our shareholders. And we evaluate any ideas for constructive value creation with the best interest of all shareholders and stakeholders in mind. And keeping with our practice not to comment publicly on our private discussions with individual investors, we will not take any questions regarding Mental Rich, we appreciate your understanding and cooperation. Operator, we're now ready to take questions.

[Operator]

[Operator Instructions]

Our first question will come from Matthew Boss with J.P. Morgan.

[Matthew Boss, J.P. Morgan]

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

[Michael Witynski, President and Chief Executive Officer]

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

[Matthew Boss, J.P. Morgan]

And then, Mike, as a follow up on Family Dollar. What do you believe the concept takes from this pandemic? Meaning is you seeing new customers? What initiative do you have to retain some of the new footsteps that you're seeing? And on the -- as we think about kind of where we go from here what do you think the sustainable comps for the Family Dollar concept multi year is from here as we exit the pandemic?

[Michael Witynski, President and Chief Executive Officer]

Yes, thanks Matt. So on the Family Dollar side, we believe that based on the fundamental changes our merchants have made in our price points and in our assortment on discretionary side, along with the continued growth we see on the consumable side, we believe that we will sustain our growth beyond the pandemic as we exited. And it's evident in our three quarters in a row of over a 9% two-year stacked of comp sales. And we're seeing our customers really gravitate to our assortment. You heard us say our consumable side is comping well, and they're buying more than discretionary side as we get it in our stores. And we believe that long term, we can sustain that low single digit growth. And it's really evident in our Combo Stores and our H2 formats. So we're going to exceed our 1,250 H2 renovations, and we continue to see a 10% increase when we renovate those stores. But more importantly, it's that Combo Store that bringing these two great companies together allows us to drive a great format in rural America. And there are 3,000 towns we've identified. And we're going to grow that store count by more than 400. And as we shared on the last quarter, and I think we have a posted on our website, our Combo Stores deliver 17% more than our pro forma than our new store expected. They grow 23% more when we renovate and when we relocate them, it's a 40% increase. So those things are really driving not only top line but our margin is stronger, and it's translating into a more productive store. So I think our initiatives, I think the foundational things that we've fixed at Family Dollar, and then what are key initiatives going forward will enable us to continue to grow single store comp.

[Operator]

Our next question comes from John Heinbockel from Guggenheim.

[John Heinbockel, Guggenheim Partners]

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

[Michael Witynski, President and Chief Executive Officer]

Yes, thanks. So the majority of the stores will be at the $1.25 price point. Just like as today where Dollar Tree has everything's for $1.00 but there are categories in food in candy bars up at the front register, in our greeting cards, and in some poster board, where they're lower than $1.00. So if you can imagine, everything is just bringing in reset in that same footprint at the $1.25. And then those categories and items will be at the -- remain at the $1.00 price point. So it's the majority of the footprint inside of our store. And we will share as we continue to roll this out, we will share more details about the comp lift and the margin, but we see enough evidence that the comp between the comp lift and the margin expansion will help mitigate this burden of freight that we're experiencing this year. And get us back to that historic 35% to 36% gross profit range.

[John Heinbockel, Guggenheim Partners]

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

[Michael Witynski, President and Chief Executive Officer]

Yes, historically, Dollar Tree did not lot of external marketing. Everything was in the store and the excitement and the value of the product. And it's really driven because our assortment is always moving and never flowing. So we want to talk more about the great value that we can bring at that $1.25 price point. And they'll see that assortment that they see when they're in our store. And our customers gave us -- they gave us credit for that when we did our customer research and customer intercepts. They were telling us that even at the $1.25 they're still great value and they're going to continue shopping here. And then we could tell and some of the unit declines in some of the categories were our intuition. We knew that we needed to improve some of our assortment and value in certain categories. So our merchants are working extremely hard at identifying those and getting those products flowing. And I would say new products and new product mix will be flowing through certainly the first half of the year as they change their mix and everything -- get everything aligned to the new $1.25 price point.

[Operator]

Our next question comes from Michael Lasser with UBS.

[Michael Lasser, UBS]

Good morning. Thanks a lot for taking my question. So you had tested Dollar Tree Plus for a couple of years, you've been planning process for the move to $1.25 price points since the end of the summer, the move to the full rollout is faster than the move to Dollar Tree Plus, obviously, you're seeing a lot of inflation. So this is probably pushing the issue. How do you manage the risk that consumers are going to push back, they've become accustomed to expected dollar for $1.00 price points and so you're going to have to manage around the cannibalization? At the same time, you do have a lot of going on into next year. How do you ensure that you're going to get consistency in your execution? And you're implementing more initiatives than you have had in quite some time?

[Michael Witynski, President and Chief Executive Officer]

Yes, well, the $1.25 is -- our team has been very focused to bring clarity to it; we've got a very detailed plan for our operation teams. And the key to it is going in and cleansing the store. So we've got a team that is our -- we're doing that, then we come in, and we clearly sign and we're putting signage throughout the entire store, so that the customer understands the $1.25. And then at the same time, our merchants are working hard today, and they have been working actually, on their last buy trip it was with the intent of the $1.25 price point. So our assortment is better than ever. And we're so excited on the hard work that our merchant team is doing. In fact, they've already looked at and reviewed over 7,000 of our core items, so it's almost 7,500 of our core items. They've put them on a table, they've done a comp shop, so they bring in product from other competitors to make sure that at $1.25, this product still has unbelievable value for our customers, and it resonates well with them.

And then the ones that don't, we're working hard on and we're attacking, and we're bringing in those new items. And then beside that we're bringing in additional items that we had to discontinue in the past. So now those items will be coming in. The customers responded to very favorably in the past. And we believe that will drive traffic. And most of those items are in your consumable side of the business where we've seen softness over this year, where we've been limited to the $1.00 price point, we've lost some items. And we'll be able to bring meaningful value at the $1.25 in our frozen section and in our food section.

So we're really excited about our plan. And then but in our Dollar Tree Plus, the way we think about it, we've that sitting in about over 600 of our stores. And it's about 10% to 12% of the space in our stores 200 linear feet. And the team is very good at they've been delivering that all year. So next year, we are just going to deliver an expansion of that. So just grow, same exact product assortment, different seasonal items, of course, but the same categories, the same square footage that we've done to 600 stores this year. So it's something we've already done, we already know what it takes to get it done. And our stores are executing it very well. And our customers understand it in a store, it will be a $1.25 now, a $ and $5 that's clearly marked, and they're responding very, very well to the $3 and $5 items. And then if you think about that's in 2022, and then at 2023 for our Dollar Tree Plus, the growth will be twofold.

We will grow more store account, but then also our merchants next year while we're rolling out the same footprint to 1,500 stores next year, behind the scenes at the same time the merchants are going to be working really hard at more categories, more assortment, can you go from a 10% of your store to 20% of your store? What kind of items can we really bring in at that $3 and $5 that will really drive more business to the stores? So our lift is 6% as we've -- it's still hovering around that 6% we think it can be more as we grow this going forward. So the $1.25 we got a great answer on where we're going to go with clarity and focus and speed from marketing and in store execution. And then our merchants are working hard at analyzing every item to make sure it's got that great value. And then we're going to grow the Dollar Tree Plus as we did the 600 stores with focus.

[Michael Lasser, UBS]

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

[Kevin Wampler, Chief Financial Officer]

Yes, Michael, I think the way we think about it obviously, is we are investing back into that product, we've always been to live by the rule that we've -- was the mainstay of Dollar Tree, which is the product has to be an unbelievable value in the marketplace. And that's what the company was built upon. And that's what it will continue to be built upon. Just the price point is changed. So to your question about the margin, obviously, it's a little early at this point to talk about next year. And obviously, we'll have a lot more information to share when we talk again, on March 3, for end of the year, we'll be able to give a better direction. A lot of moving pieces right now we want to make sure we capture them all. And give everybody the true picture of all those moving pieces. But we do obviously see a clear path to the 35% to 36% margin, gross margin for Dollar Tree next year. So I think that's the most important thing that we can give you today, obviously with more details to come as to all those moving pieces.

[Michael Witynski, President and Chief Executive Officer]

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

[Operator]

Our next question comes from Edward Kelly with Wells Fargo.

[Edward Kelly, Wells Fargo]

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

[Michael Witynski, President and Chief Executive Officer]

Yes, thanks. So we, yes, we're closely monitored it, the majority of the stores are at the $1.25. And that's what our focus is. Because that's really the price that we need to really bring great value and a meaningful differentiation in our assortment in the consumable side of the business that will drive traffic. So we were very focused on that. And we've been watching the sensitivity and the sales and the units and the response from the customer every week at every store in every market. And as we shared that's been consistent across stores end markets. And where we see the unit decline, it's where we expected it to be and that's where the merchants are working really, really hard bringing in that new assortment. And that new assortment will be layering in as I said overtime. So it's going to be over the next six months to bring in the assortment on those sides to drive the traffic. And then while we're working the results of the stores and monitoring units and margin and comp, at the same time we were doing in-depth consumer research and listening to our customers and doing customer intercepts and one on one surveys with the customers and hearing their response and they have all a lot of trust in Dollar Tree. And they believe that at $1.25, it's still going to be an undeniable value because of what they're seeing out in the marketplace. And they know that Dollar Tree hasn't raised its price in 35 years. So they've given us credit. And now that we are buyers are going to take that trust, and make sure they deliver undeniable, and a great assortment at that new price point. And we'll monitor that as we do our -- as we did at $1.00 and help drive the business, bring new items in, discontinue items, and manage the business accordingly.

[Edward Kelly, Wells Fargo]

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

[Michael Witynski, President and Chief Executive Officer]

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

[Operator]

Our next question comes from Kate McShane with Goldman Sachs.

[Kate McShane, Goldman Sachs]

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

[Michael Witynski, President and Chief Executive Officer]

Yes, well, definitely the customers are feeling the inflation. It's twofold right now. I mean, our customers are benefiting from Child Tax Credit stimulus. In October, they had a huge increase of SNAP benefits. And they're experiencing increase in hourly wages that you're seeing across the industry. So I think our customers are at a pretty good position, but they are also feeling a lot of pressure on other costs, gas and fuel prices and energy for their homes. So I think right now more than ever, they're going to be relying on great value. And that's why I think Dollar Tree and Family Dollar in a great position to be able to offer that to them. And 15,000 locations that are conveniently located. As far as trading down, we're still not seeing a lot of trade down. There's not a lot of promotion out there in national brands, private brands are about as steady as they were throughout the first half of the year. So it's -- we haven't seen a big shift right now from the customer.

[Operator]

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

[Brad Thomas, KeyBanc Capital Markets]

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

[Michael Witynski, President and Chief Executive Officer]

Thanks Brad. So yes, there are still pressures and it's market driven, both in our distribution centers, we've had to increase our hourly wages in our DCs and have done so and that's embedded in our fourth quarter outlook and we've made movements there and I say we're seeing the same thing in our stores. In markets we've followed where we had to increase our labor rates to attract associates in our stores. And as you've seen across retail, people are still sitting on the sidelines and not working so we are working hard driving benefits and raising our hourly wage where we need to, and be in a convenient place to work through other things of having their schedule on their phones, having a program called daily pay where they can get their pay, they don't have to wait for their paycheck and our associates are liking that a lot and there's a high use of that. So we're doing a lot of things to attract the hourly worker out there in our stores to operate our stores effectively. But yes, it still is a tough environment out there. And we have seen a little bit of a slip in our store manager turnover, where last year during the pandemic, we hit our lowest turnover ever in store manager. And now there's -- I think there's a little bit of fatigue and it's creeped up a little bit on us. Our teams are working hard at filling those roles and attracting the talent we need.

Regarding managing the $1.25 there is, as Kevin said, in our fourth quarter, there will be one time costs of cleansing the store, and then remarketing and resigning the store. But once that is set aside, it's really running the same play, they unload the truck, they put it up on the shelf, and it's clearly marked already. So there really isn't any additional labor hours needed. And then on our Dollar Tree Plus, as we've rolled that out to 600 stores, we have not had to add any additional labor in those stores because the majority of those products are coming in pre priced. The sections in the store are clearly marked $3 and $5 items and now they'll be $1.25, $3 and $5. So there really isn't any additional labor needed in those stores either.

[Operator]

Our next question comes from Simeon Gutman with Morgan Stanley.

[Michael Kessler, Morgan Stanley]

Hey, guys, this is Michael Kessler on for Simeon. Thanks for taking our questions. I wanted to ask, not to be the broken drum here with the price point, if I could squeeze in one more curious, why not be more diverse with the price point, it sounds like you're really sticking to the $1.25, you could perhaps be even more precise with price points and manage the different skews and categories. So I'm curious kind of what went into that decision process and am I interpreting I guess the strategy with the price point correctly in that regard. And then bigger picture on that is very even longer term vision of perhaps, price points going up across the store. And then you have a separate initiative with plus even higher price points. And perhaps even melding these initiatives together expanding plus to even more of the store, Just I guess the longer term vision would be interesting to hear about as well.

[Michael Witynski, President and Chief Executive Officer]

Yes, thanks for the question. So first of all, moving off the $1.00 price point gives us the flexibility to manage our business, and really drive the assortment that our customers are used to and bring value and simplicity to them. So the reason we move to the $1.25 is allows us to do all three of those things. Our merchants are I believe the best in the industry. And they've been able to defend and get great product at $1.00 and we know the type of product, we can get it that $1.25. And we'll be able to bring in exciting, great product that will drive the business and drive traffic into our stores. And enable us to get back to that 35% to 36% margin. And it gives us the flexibility to manage our business going forward. And it really brings simplicity, simplicity still very important to us as it's a single price point, our customers understand it and are our shoppers, our customers and our associates understand it. So we'll manage this going forward, I think at first we're going to go to $1.25 and then we'll be carrying that $1.25 into our Combo Stores as well. So our Combo Stores baseline will be at $1.25 going forward and will be wrapped around that Dollar Tree brand and then have the great products at the Family Dollar on that side of the business as well. So moving off the $1.00 gives us the flexibility to make changes we need to go into the future.

[Michael Kessler, Morgan Stanley]

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

[Michael Witynski, President and Chief Executive Officer]

We think traffic is going to come back at Dollar Tree. Keep in mind, as Kevin said, with our, we still have past dues that are 4.5x greater than what we normally have at Dollar Tree. So there's inventory that we wish we had, that would drive that excitement and sales and traffic inside our Dollar Tree. And then we have had some items we've had to discontinue, that would be traffic driving, where we were limited at the $1.00 price point. So we think looking forward, going to the $1.25 bringing in new assortment. And then once we move beyond this transitory freight logistics issues that we have, getting that assortment that we want inside our store, the combination of those two things will get back to driving traffic at our Dollar Tree format.

[Operator]

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

[Paul Lejuez, Citi Investment Research]

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

[Michael Witynski, President and Chief Executive Officer]

Yes, on the assortment, that's the beautiful thing about Dollar Tree, we do not have planograms, our merchants go out and get the very best product at the $1.25 price point, we surprise and delight our customers, we bring different products in depending on the seasons and the front end of our store changes like the leaves on the tree. So we will continue to use that flexibility and drive the assortment we need that will be meaningful to our customers and in the key categories that drive traffic. And then where they can celebrate their lives and live their lives and decorate their homes. So those are the -- that's how we manage the business before and that's how we'll manage it going forward. And I'll let Kevin talk about the average ticket, but since the pandemic, our average ticket at Dollar Tree has been elevated, and it's been consistently elevated throughout we think that this $1.25 will help with that.

[Kevin Wampler, Chief Financial Officer]

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

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

[Randy Guiler, Vice President, Investor Relations]

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

[Operator]

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.