Dollar Tree Inc

NASDAQ:DLTR

Earnings Call Analysis

Dollar Tree Continues Growth Amid Challenges

Dollar Tree reported progress in its transformation, growing sales per square foot, transactions, and units. In a bold move, around 600 underperforming Family Dollar stores are set to close, with an expected annual sales loss of $730 million but reaffirming commitment to streamlining operations for sustainable growth. Consolidated net sales increased by 12% to $8.6 billion, with higher traffic offsetting a lower ticket, resulting in a 3% enterprise comp growth. Adjusted operating income rose by 21% to $749 million, and adjusted EPS increased by 25% to $2.55, slightly below expectations due to unforeseen costs. Plans include expanding the multi-price assortment strategy across Dollar Tree stores and addressing challenges at Family Dollar due to inflation and reduced government benefits.

Advances Amid Adversity: Dollar Tree's Q4 Demonstration of Resilience

Dollar Tree had an eventful fourth quarter, managing to navigate through various risks and uncertainties while striving for operational excellence and financial vigor. The company has been busy opening 641 new stores, even surpassing their high-end target. With an impressive 3.6% increase in selling square footage, Dollar Tree leans into Dollar Tree openings due to their promising returns, eyeing the vast majority of new openings in fiscal 2024 to fall under this banner.

Braving the Operational Challenges

Despite facing transient factors affecting comparable sales, such as a softer macro environment and weaker discretionary demand, Dollar Tree's underlying operations have shown robustness. The strategic implementation of improved distribution, conferred by roto cart deliveries and an expanded modern trailer fleet, has enhanced in-store efficiency. The bolstering of their distribution centers – now totaling nine with temperature control and an aim for complete temperature control across all centers by year-end – is a testament to their commitment to operational betterment. Streamlined IT systems are reinforcing their supply chain capabilities, bundling warehouse, transportation, labor management systems, and much more.

Focusing on Store Optimization and Customer Experience

Dollar Tree's advancements in its private brand expansion have been fruitful, leading to a 15% penetration and setting sail towards a 20% target by 2026. Reshaping their merchandise assortment has gained them 130 basis points to their Q4 comp—the impact of broader and deeper product ranges being felt. Addressing the retail fundamentals and relentlessly taking market share indicates a comprehensive focus on enhancing the customer experience while aiming for a granular conversion of operational changes into tangible store and chain performance.

Financial Performance: Balancing Growth and Challenges

Financially, the fourth quarter was a balance of growth and some setbacks. Net sales witnessed a 12% surge, hitting $8.6 billion, with adjusted operating income growing by 21% to $749 million. Adjusted gross profit rose by 20% to $2.9 billion. Although there were headwinds from increased SG&A, lower freight costs, higher vendor allowances, and favorable occupancy cost leverage helped drive gross margin improvement. The effective tax rate remained fairly stable, treading near the 23% mark. However, impacts from increased general liability insurance claims and impairments in the portfolio resulted in $0.17 per share negative effect on profits.

Net Gains and the Road Ahead

Despite the complexities inherent in insurance accruals and claim volatility, Dollar Tree is proactively enhancing its risk management capabilities. With a stronger grip on operating results excluding transient or extraordinary factors, the company predicts a more stable future environment. While net sales in segments like Family Dollar did increase, constraints from factors like SNAP benefits dampened their potential. Overall, the company keeps its gaze firmly on the future, projecting a range of $31 billion to $32 billion for the fiscal 2024 consolidated net sales. The full-year forecast includes a low to mid-single-digit growth, differentiating between a tougher outlook for Family Dollar and a more robust trajectory for the Dollar Tree segment with mid single-digit growth. Earnings per share (EPS) are expected to dance in the range of $6.70 to $7.30, carrying the optimism of the company's growth initiatives despite the underlying challenges.

Allocating Capital with Precision

Capital allocation remains a strategic linchpin for Dollar Tree, allocating a range of $2.1 billion to $2.3 billion towards capital expenditures to back their growth plans decisively. This investment encapsulates not just the opening of new stores and renovations, but also the fleshing out of their supply chain and IT investments. The balance sheet reflects a disciplined approach to cash management and leverage, with a leverage ratio of 2.4x under the revolving credit agreement, painting a picture of prudent financial stewardship.

Earnings Call Transcript 2024-Q4

[Operator]

Hello, and welcome to the Dollar Tree Q4 2023 Earnings Call. [Operator Instructions]

At this time, I'd like to turn the call over to Bob LaFleur, Senior Vice President, Investor Relations. Please go ahead, sir.

[Robert LaFleur, executive]

Good morning, and thank you for joining us today to discuss Dollar Tree's fourth quarter results. With me today are Dollar Tree's Chairman and CEO, Rick Dreiling; and CFO, Jeff Davis.

Before we begin, I would like to remind everyone that some of the remarks that we will make today about the company's expectations, plans and future prospects are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward-looking statements.

For information on the risks and uncertainties that could affect our actual results, please see the risk factors, business and management discussion and analysis of financial condition and results of operations section in our annual report on Form 10-K filed on March 10, 2023, our most recent press release, and Form 8-K, and other filings with the SEC. We caution against reliance on any forward-looking statements made today, and we disclaim any obligation to update any forward-looking statements, except as required by law.

Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations of those non-GAAP items to the most directly comparable GAAP financial measures are provided in today's earnings release available on the IR section of our website. These non-GAAP measures are not intended to be a substitute for GAAP results. Unless otherwise stated, we will refer to our financial results on a GAAP basis.

Additionally, unless otherwise stated, all comparisons discussed today are for the fourth quarter of fiscal 2023 or against the same period a year ago. Please note that a supplemental slide deck outlining selected operating metrics is available on the IR section of our website.

Following our prepared remarks, Rick and Jeff will take your questions. [Operator Instructions] I'd now like to turn the call over to Rick.

[Richard Dreiling, executive]

Thanks, Bob. Good morning, everyone. This past year, our organization made meaningful progress in the ongoing transformation of our core business, which includes building a foundation for sustainable growth. While I have been Chairman and CEO for a year now, we are still in the early stages of this transformation journey. We're off to a good start and we remain focused, and we are excited about the remaining transformation work that lies ahead of us.

You've heard me say that sales per square foot, transactions and units are among the most important benchmarks in retail. I am pleased to report that we are seeing growth across all three, and momentum is building across the business. We are making progress on the operational objectives of our transformation. And in some areas, we are seeing positive results earlier than we expected. While the transformation process is dynamic, we remain focused on delivering against our core growth objectives and as always, navigating through the challenges we encounter along the way.

As I previewed on our last call, we are also taking decisive steps to strengthen the Family Dollar brand and better position it to achieve its full potential. We took a thoughtful and deliberate approach to address underperforming stores by considering each individual store's performance, local operating environment, and our broader need for scale and operating efficiencies across the portfolio. As part of the portfolio review process, we have identified approximately 600 Family Dollar stores that we will close in the first half of fiscal 2024. Additionally, approximately 370 more Family Dollar, and 30 Dollar Tree stores will close at the end of each store's current lease term.

We believe rationalizing these unprofitable locations will help to unlock meaningful value at the enterprise level. Collectively, we estimate that net sales loss from the stores we intend to close this year is approximately $730 million on an annual run rate basis. On the other hand, given their historical underperformance, we would get back approximately $0.30 of annual run rate EPS net of any stranded costs.

Now, let me shift gears and discuss our fourth quarter results. On a consolidated basis, net sales increased 12% to $8.6 billion, including a $560 million benefit from this year's 53rd week. Enterprise comp grew by 3% with 4.6% higher traffic, offsetting a 1.5% lower ticket. Adjusted operating income increased by 21% to $749 million. Adjusted EPS grew 25% to $2.55.

While our quarter 4 reported EPS on an adjusted basis was below our quarter 4 outlook, these results include $0.17 of net costs, primarily related to actuarial insurance adjustments that were not contemplated in our outlook. Jeff will provide more detail on this in his remarks, but without these unanticipated costs, quarter 4 operating results exceeded our expectations.

Looking at performance by banner. Dollar Tree segment comps were up 6.3% on 7.1% more traffic, and a 0.7% decrease in ticket. Traffic and ticket both improved sequentially. This strong quarter 4 comp came on top of an 8.7% comp last year. Dollar Tree's consumable comp was up 10.8%, and its discretionary comp was up 3.1%, a 200 basis point sequential increase from quarter 3 and an impressive accomplishment given the general weakness in discretionary demand across retail. The quarter's consumable comp came on top of a 9% comp last year. As pleased as we are with Dollar Tree's quarter 4 performance, it's worth noting that we believe January's winter storms negatively impacted comp by about 70 basis points.

In quarter 4, Dollar Tree continued to take unit market share in consumables. According to Nielsen, our unit volume grew 8%, while the market declined 1.5%. These strong gains in traffic and market share are supported by Dollar Tree's ability to attract new and higher income customers.

Continuing recent trends, Dollar Tree added 3.4 million new customers in 2023, mostly from households earning over $125,000 a year. We attribute Dollar Tree's exceptional performance to the range of initiatives we have been implementing.

One of the most important initiatives at Dollar Tree is our multi-price point strategy, which we're calling More Choices. The underlying premise here is that we can present a more relevant assortment to our customers if we are free to offer items at a variety of price points. Here, we are making tremendous progress. We have substantially completed the rollout of $3, $4, and $5 frozen and refrigerated items, which are now available in more than 6,500 stores. Today, we typically offer multi-price frozen product in 3 coolers within our usual 10-cooler bank. Over time, that will evolve to 8 out of 10 as we expand the assortment.

By the end of 2023, we introduced $3 and $5 center store merchandise to approximately 5,000 Dollar Tree stores, and expect to add another 2,000 stores this year. We are especially excited about the next phase of our multi-price expansion strategy. Dollar Tree's Chief Merchandising Officer, Rick McNeely and his team, are continuously working on new ways to deliver value while expanding our assortment across a wider range of price points. This expanded assortment will offer Dollar Tree shoppers a wider range of choices across a variety of categories, including food and snacks, beverages, pet care, personal care and more.

This year, across 3,000 stores, we expect to expand our multi-price assortment by over 300 items at price points ranging from $1.50 to $7. But even as our multi-price assortment expands over time, the vast majority of the items sold in Dollar Tree stores will remain at our entry-level fixed price point. Over time, you will also see us fully integrate multi-price merchandise more into our stores so our shoppers will find $5 bags of dog food next to our traditional $1.25 pet treats and toys, and our $3 bags of candy will be found in the candy aisle. This is the next exciting chapter of the Dollar Tree value story, new items, more choices and more savings.

Now let's turn to Family Dollar. Here, persistent inflation and reduced government benefits continue to pressure the lower income consumers that comprise a sizable portion of Family Dollar's customer base. Accordingly, Family Dollar's quarter 4 comp declined 1.2% as a 0.7% traffic increase was more than offset by 2% ticket decline. Family Dollar's consumables comp decelerated sequentially to 2.2% in quarter 4 from 6.2% in quarter 3. Discretionary comp was down a full 12%. As challenging as this was, it was a slight sequential improvement over quarter 3. Categories like apparel, home decor, electronics and general merchandise remain weak as lower income consumers continue to be very deliberate about their spending.

Family Dollar continued to take unit and dollar market share in consumables even as lower income consumers struggle with reduced SNAP benefits and other macro pressures. In fact, we estimate the reduced SNAP payments for total quarter 4 comps by about 5 points, and when coupled with the weak discretionary demand, the comp impact was closer to 7 points. Looking forward, we expect reduced SNAP benefits will be a headwind through at least the first half of FY '24 before comparisons ease.

While the operating environment remains difficult, I don't believe the challenges we face are structural, and I continue to believe that a well-run and well-located Family Dollar store is a powerful retail force. As I mentioned earlier, we are taking aggressive actions to address underperforming stores.

Looking through the transient factors that weighed on comps throughout 2023, I am encouraged by the fact that in a more normalized operating environment, our comps would have been higher. We believe our ongoing market share gains are a strong validation of the many initiatives we have underway. We are gaining traction in the vast majority of stores where they've been implemented, and I continue to believe that the Family Dollar banner is well positioned for long-term improvement as we continue to focus on operational excellence and financial performance.

Before I turn the call over to Jeff, I'd like to update you on some of the key milestones we have achieved so far in our transformation journey. In real estate, we opened 641 new stores last year, which was at the high end of our target of 600 to 650. Selling square footage increased 3.6%, which was ahead of target. We are placing a greater emphasis on Dollar Tree openings given the attractive returns and performance, and we expect the vast majority of our new store openings in fiscal 2024 will be Dollar Trees. I'm excited about the overall quality of our project pipeline for both banners.

In supply chain, our DC in Matthews, North Carolina is now providing roto cart deliveries to approximately 600 Family Dollar stores, and we are also testing roto carts deliveries to Dollar Tree stores from our DC here in Chesapeake. By the end of this year, over 3,000 stores should be receiving roto cart deliveries from a total of 6 DCs, 4 for Dollar Tree, and 2 for Family Dollar. As expected, we are already seeing a meaningful reduction in unloading times at stores using roto carts, and we expect those efficiencies will continue to build.

Expanding and modernizing our trailer fleet is an important part of the roto cart initiative. To this end, we added nearly 900 new trailers with lift gates to the fleet in 2023, and expect to add 2,000 more this coming year. By the end of 2023, 9 of our DCs were temperature controlled. By the end of this year, all 25 of our DCs should be either fully temperature-controlled or have dedicated temperature-controlled facilities on site.

Temperature-controlled DCs help reduce cross-stocking costs and allow us to carry OTC and other temperature-sensitive products throughout our distribution network. They also increase productivity by providing associates with a safer and more comfortable working environment.

And finally, we continue to make progress on our completely revamped Family Dollar DC in West Memphis, which should improve the overall efficiency of our distribution network. As you probably saw in the news last month, Family Dollar reached a resolution with the U.S. Department of Justice regarding its West Memphis DC, and we are pleased to have this situation behind us. As part of our ongoing transformation efforts, we continue to strengthen and enhance our food and product safety protocols and our compliance oversight.

In our IT modernization, our new warehouse management system is up and running at its first DC. Concurrent with this rollout, we are also deploying and integrating our new transportation management and labor management system. Over time, we expect these enterprise-wide solutions to contribute to the optimization of our distribution network and labor efficiency. We have also installed new network infrastructure in over 3,800 stores, bringing improved Internet connectivity, security and in-store WiFi access to better support store operations.

Since our last report, we have also begun implementation work on both our new enterprise-wide POS solution and our new human capital and payroll management system. We have also launched new mobile apps for both Family Dollar and Dollar Tree. The Family Dollar app allows us to offer more targeted promotions and a better customer experience. The Dollar Tree app gives shoppers the ability to see new products, view weekly ads, receive notifications about great deals and do price checks.

In private brands, we launched approximately 250 new SKUs, and converted over 300 control brands to private brands. The private brand program is one of the most significant initiatives underway at Family Dollar. And I'm excited that we now have a highly competitive offering that expands our assortment across multiple categories and offers the Family Dollar consumer national brand equivalent products at compelling values. By the end of last year, our private brand penetration reached 15%, 100 basis points ahead of our target, and a great head start towards reaching our 20% goal by 2026.

On category resets, I'd like to take this opportunity to recognize Family Dollar's Chief Merchandising Officer, Larry Gatta and his team for their efforts to expand and improve our merchandising assortment. By the end of 2023, we successfully raised the merchandise height profile to 78 inches across the banner, and optimize our assortment with the addition of approximately 900 net new SKUs.

These efforts are already having a meaningful impact on our results, adding 130 basis points to our quarter 4 comp, which helped offset at least some of the impact from the softer macro environment and comparatively weaker discretionary demand. This reset was a major undertaking for Larry's team, and our new planograms will allow us to expand and improve our product assortment and help Family Dollar gain additional market share.

We are also moving forward with our goal of increasing the number of cooler doors in Family Dollar stores. We added over 17,000 cooler doors last year, which was 1,000 doors above our target, and brought our average across the Family Dollar segment to 26 coolers per store, which is approaching our goal of 30 coolers per store.

In summary, we continue to execute well around factors that we can control. I've said before that our progress on this journey will include challenges with the belief that we will succeed more often than not in our efforts, but the direction and destination remain clear, which is the long-term health and success of our business for the benefit of our customers, associates, stakeholders and partners.

Our growth initiatives are central to this journey and we are focused on continually improving, even in the face of a rapidly evolving macro landscape. We have an outstanding team with a cultural foundation focused on service to the customer and improving our performance each and every day. We remain relentlessly focused on retail fundamentals and continue to take market share.

While challenges and macroeconomic factors will always be part of any retail journey, we continue to face them head on as they arise. We're excited about where we are and optimistic about where we are headed.

With that, I'll turn the call over to Jeff.

[Jeffrey Davis, executive]

Thank you, Rick, and good morning. I will first discuss our fourth quarter results. After which, I'll provide some details on the financial impact of the portfolio optimization, and close with our fiscal 2024 and Q1 outlook.

As I discuss our fourth quarter results, where applicable, I will focus on our non-GAAP adjusted results. A reconciliation between GAAP and non-GAAP is provided in our earnings release. Also, as a reminder, our Q4 and full year 2023 results include an extra week of operations, which gave us an incremental $560 million in revenue and $0.35 of EPS for the quarter and the year.

In the fourth quarter, the Dollar Tree and Family Dollar segments increased traffic, unit volume and market share despite persistent headwinds from an unfavorable sales mix and reduced SNAP benefits. Looking at the business on a consolidated basis, net sales increased 12% to $8.6 billion. Adjusted operating income was $749 million, a 21% increase from last year. Adjusted operating margin increased by 70 basis points, driven by a 220 basis point increase in adjusted gross margin, and offset by a 150 basis point increase in adjusted SG&A rate.

Adjusted gross profit increased 20% to $2.9 billion. Adjusted gross margin improvement was driven primarily by lower freight costs, occupancy cost leverage from the extra week, and higher vendor allowances, partially offset by product cost inflation, unfavorable sales mix and elevated shrink.

Adjusted SG&A expenses increased primarily from ongoing labor investments, higher incentive compensation, unfavorable general liability claim development and depreciation, partially offset by leverage from additional sales from the extra week. Our adjusted effective tax rate was 23.1% compared to 23.4%. Adjusted net income was $556 million, and adjusted EPS was $2.55, which includes the $0.17 per share negative impact, primarily from unfavorable general liability insurance claims.

Before I move on to segment level results, let me spend a moment to walk you through the non-GAAP adjustments in our Q4 results and shed some additional light on the $0.17 per share negative impact, primarily from unfavorable general liability insurance claims.

The first non-GAAP adjustment was related to the portfolio review process. Here, we incurred total noncash charges of $594 million, including $86 million for inventory markdowns and $504 million for store asset impairments. We also incurred an additional $4 million of related fees. The second non-GAAP adjustment was a noncash impairment charge of $2 billion for Family Dollar, including $1.1 billion related to goodwill, and $950 million related to the trade name. The third non-GAAP adjustment was a $27 million charge within SG&A related to the resolution we reached with the Department of Justice regarding our West Memphis distribution center. This was in addition to the $30 million West Memphis reserve we recorded in Q1.

Outside of the non-GAAP adjustments, Q4 results included $0.17 of net EPS headwinds related to items that weren't contemplated in our Q4 outlook. These items include negative adjustments to our general liability accruals, which were partially offset by favorable adjustments to workers' compensation liabilities and the elimination of certain rent and depreciation expenses as part of our Family Dollar impairment process. Adjustments to general liability accruals may sound familiar to many of you as we absorbed $0.07 of EPS impact from this issue in the second quarter of 2023. So let me explain why we are revisiting this in Q4.

In the process of accruing for potential general liability exposure, predicting the outcome of both existing and unreported claims is inherently complex. We rely on third-party actuarial analysis to estimate insurance reserves on an ongoing basis. As we discussed in our second quarter call, general liability claims have been more volatile in recent years. Since the pandemic, the development of claims has worsened. The charge taken this quarter intends to capture this new environment.

To address this over the long term, we have upgraded our risk management capabilities and revised our processes to focus on claim closures, among other areas. As we continue to address all open claims with our new processes, our actuarial studies should reflect more normalized risk exposure over time.

Now back to our business segment results. Dollar Tree's net sales increased by 16% to $5 billion. Adjusted operating income increased 21% to $873 million. Adjusted operating margin increased 80 basis points, driven by a 230 basis point increase in gross margin, partially offset by a 150 basis point increase in adjusted SG&A rate.

Gross margin improved primarily from lower domestic and import freight costs and favorable occupancy cost leverage due to the 53rd week. These were partially offset by mix pressures from lower-margin consumables, cost inflation, higher distribution and merchandise costs, and elevated shrink. Adjusted SG&A expenses expanded principally from the unfavorable general liability insurance claims and higher payroll expenses, depreciation, amortization, and repairs and maintenance.

Family Dollar's net sales increased by 7% to $3.7 billion. Adjusted operating income was $7.2 million compared to $1.4 million, and adjusted operating margin increased 20 basis points on a 160 basis point increase in adjusted gross margin, offset by a 140 basis point increase in adjusted SG&A rate. Adjusted gross margin increased primarily from lower freight, mark-on increases resulting from vendor allowances, lower occupancy and distribution costs, partially offset by higher shrink and sales mix. Adjusted SG&A expenses increased primarily from unfavorable general liability claims, store labor investments, repairs and maintenance, and depreciation.

Moving on to the balance sheet and free cash flow. Inventory decreased by 6.2%, reflecting a decrease of $337 million. Relative to last year, our sell-through of seasonal merchandise was strong. In addition, we had more capitalized freight costs and inventory last year. Fourth quarter capital expenditures were $784 million versus $328 million, reflecting the record 219 new stores we opened in the quarter, and elevated investments in other renovations, supply chain and IT to support our growth initiatives.

Free cash flow declined by $82 million versus the fourth quarter last year, reflecting higher levels of capital expenditures at year-end. For fiscal 2023, free cash flow improved by $217 million versus the same period last year led largely by lower merchandise inventories and the timing of accounts payable with a partial offset from lower net income adjusted for noncash items and increased CapEx. This improvement for the full year comes despite a challenging macro environment and significantly higher levels of investments to support our multiyear growth strategy.

Given the portfolio review process, we did not repurchase any shares in the open market during Q4. For the year, we repurchased 3.9 million shares for $504 million, including applicable excise tax. At the end of fiscal 2023, we had $1.35 billion remaining under our share repurchase authorization. Cash and cash equivalents totaled $685 million compared to $643 million. At year-end, our leverage as defined under our revolving credit agreement, stood at approximately 2.4x.

Before I move on to our fiscal '24 and Q1 outlook, I'd like to take a moment to level set our 2023 performance to give you some deeper perspective on the foundation upon which our 2024 outlook is built. We think the best way to look at fiscal '23 is to start with our non-GAAP adjusted full year EPS of $5.89. As I mentioned earlier, this adds back all the costs associated with the portfolio review, the goodwill and trade name impairments, and the West Memphis resolution.

On top of that, we got about $0.29 related to costs we called out in quarters 2, 3 and 4, including the insurance true ups, the OTC recall and other discrete items. Finally, the 53rd week this year added an extra $0.35 of EPS. Taking all that into consideration gets you to approximately $5.83 of EPS coming from the underlying operating performance of the business in 2023 on a 52-week basis.

So with this $5.83 as a 2023 starting point, I'd like to discuss a few items that we expect to affect the actual operating performance of the business in 2024. First, lower ground and ocean freight costs benefited our full year 2023 EPS by approximately $1.50, which was nicely ahead of our original expectations. On the other side of the ledger, shrink and mix hurt EPS by approximately $1.15 on a full year basis, which is also more than we originally expected. Said another way, the 2023 shrink and mix headwinds offset about 3/4 of the benefit we received from lower freight costs last year.

The good news is that, based on current rates, we expect to realize additional freight savings in FY '24. The bad news is that the base level of shrink and mix headwinds is meaningfully worse than we had previously expected. We anticipate these headwinds to be concentrated in the first half of 2024 and then moderate longer term as the macro environment normalizes and our self-help initiatives start to yield results. In light of these factors and to address the immediate macroeconomic environment, in 2024, we will be optimizing our SG&A and capital expenditure investments to support our growth initiatives.

So with that, let's move on to our full year and Q1 outlook. Consolidated net sales for fiscal 2024 are expected to be in the range of $31 billion to $32 billion. For the full year, we expect low to mid-single-digit comparable net sales growth for the enterprise, low single-digit growth for the Family Dollar segment, and mid-single-digit growth for the Dollar Tree segment. Adjusting for the stores that are closing as part of the portfolio optimization, we expect fiscal year '24 net sales for the Family Dollar segment to decline by 1% to 3% on a year-over-year basis. Diluted EPS for the full year is expected to be in the range of $6.70 to $7.30.

For Q1, we expect net sales to be in the range of $7.6 billion to $7.9 billion based on comparable net sales growth in the low to mid-single digits for both the enterprise and Dollar Tree segment, and approximately flat for the Family Dollar segment. Diluted EPS for the first quarter is expected to be in the range of $1.33 to $1.48. Our outlook for Q1 and fiscal '24 does not include any severance or other incremental costs related to the portfolio review process.

Having given you our high-level expectations, let me share some of the key factors and assumptions that are incorporated in our fiscal '24 outlook. We expect full year gross margin in the Dollar Tree segment will be in the range of 36% to 36.5%, reflecting our strong comp outlook for the year and reduced freight expenses. In the Family Dollar segment, we expect full year gross margin will be in the range of 24.5% to 25% as elevated shrink, unfavorable mix and reduced SNAP benefits remain headwinds through at least the first half of the year.

We expect lower freight costs to provide approximately $0.80 to $0.90 of full year EPS benefit in fiscal '24. This is a bit below the $1 benefit we've discussed previously and reflects the current conditions in the global shipping market, including lower water levels in the Panama Canal and the Red Sea situation. We expect approximately 60% of the freight savings to come in the first half of the year, with Q1 seeing the greatest benefit before it moderates in each subsequent quarter.

Our fiscal '24 outlook also assumes approximately $0.30 to $0.35 of EPS headwinds from unfavorable mix and elevated shrink. Nearly all of these headwinds will be absorbed in the first half of the year as we annualize our 2023 exit rate on these items, with approximately 2/3 of the impact coming in Q1 and the balance in Q2. While we don't expect to get meaningful relief from shrink and mix pressures in the back half of the year, we expect the year-over-year impact to be more or less neutral in the back half.

We expect full year SG&A expenses as a percent of total revenue will be approximately 25%. Our fiscal '24 SG&A outlook for the Dollar Tree segment reflects the incremental onetime reconfiguration costs that we expect to absorb at each of the 3,000 stores we are scheduled for conversion into our expanded and fully integrated multi-price format this year. Within our overall SG&A expenses, we expect full year corporate, support and other expenses will be in the range of 1.8% to 1.9% of total revenue.

The Family Dollar store closures are expected to be approximately $0.15 accretive to EPS, mostly in the second half of the year as we close these stores throughout the first half. Adjusting for the timing impacts of all of these items, we believe approximately 38% of our full year EPS will be achieved in the first half of the year, with the remaining 62% coming in the back half. From a seasonality perspective, fourth quarter is historically our strongest earnings quarter.

And finally, here are a few other modeling items to consider. Full year depreciation should be approximately $1 billion, which is approximately $0.55 higher year-over-year on an EPS basis, reflecting the additional depreciation and amortization associated with the $2.1 billion of CapEx spent in fiscal '23.

We expect net interest expense of approximately $95 million for the year and $26 million for Q1. Our effective tax rate should be approximately 24% for both Q1 and the year. We expect capital expenditures for the year to be in the range of $2.1 billion to $2.3 billion. Finally, our outlook assumes no share repurchases, but we do have $1.35 billion of capacity under our remaining authorization.

And with that, I'll turn the call back over to Rick.

[Richard Dreiling, executive]

There was certainly a number of moving parts last quarter. As a result, our reported earnings included a few unexpected items. That said, if you peel away the layers, we produced some very good operating results in a very challenging macro environment.

Considering what we accomplished, while continuing to execute upon multiple strategic initiatives, we have much to be proud of. And as I discussed earlier, we are continuing to invest in our risk mitigation, food and product safety and compliance programs in order to keep building on the foundation of service that defines this company.

Looking forward, the Dollar Tree segment led by multi-price is exceeding expectations and gaining momentum. In the Family Dollar segment, we are taking the steps, as I outlined earlier, to fortify our base, strengthen our brand and position Family Dollar to achieve its full potential. I couldn't be prouder of our organization and our 200,000 associates across Dollar Tree and Family Dollar for their continued contribution to our success. I am truly honored to lead and to be part of the best team in retail.

Operator, with that, Jeff and I are ready to take questions.

[Operator]

[Operator Instructions] Our first question today is coming from Edward Kelly from Wells Fargo.

[Edward Kelly, analyst]

So I wanted to start -- maybe, Rick, just take a step back and talk about how the company or how you are thinking about the company's outlook and the confidence in the strategy around the individual businesses are evolving. So you take your core Dollar Tree segment, the rollout of multi-price point seems to be going very well. How is your view on the opportunity there changing?

And then Family Dollar, obviously, not where it needs to be. What does that say? I'm sure you're not going to throw good money at the bad here. And then as part of all of that, is $10 still in play, maybe you just get there differently? Just thoughts on how things are evolving for you would be, I think, helpful.

[Richard Dreiling, executive]

Yes. Great question. And hey, I'd like to throw on the table, Jeff and I talked a little longer than normal. And for those of you that are interested, we'll go past the 9:00 straight up, and give you a little more time for questions.

As I think about, Ed, there is a -- this is a sum-of-the-parts story at the end of the day. And what's important here is we're very intently focused on creating shareholder value. The Dollar Tree multi-price point strategy is doing significantly better than we thought it would do. The customer acceptance has been off the charts to be frank. Our biggest problem right now is getting enough merchandise into the stores fast enough so the consumer can respond.

Family Dollar is a victim of the macro environment out there. If you think about the increase in shrink, which I thought would have moderated, if anything, by now, but it's continuing to accelerate. And then the pressure on the mix. But again, I come back to a well-run Family Dollar is a very, very powerful retail format. And I think what we're doing is making the right decisions to fortify the base in Family Dollar and position it so we can go forward in a more stronger position.

Now, in regards to the $10, we continue to believe in the $10 target that we announced, well, I guess, about a year ago, and we're continuing to march toward that goal. However, the macro environment has gotten in our way and we are dealing with high, high shrink numbers. We're dealing with big mix shifts. So it's a little difficult for us to pinpoint that $10 target going forward. We still believe in the target, but we believe the path is to get to $7 in 2024, and we're intently focused on that. But again, we want a positive 2024. And then as we move through '24 and '25, we'll give you more of a handle on the $10.

[Operator]

Our next question is coming from Simeon Gutman from Morgan Stanley.

[Uriel Zachary Abraham, analyst]

This is Zach on for Simeon Gutman. Can you provide any additional color on how you're thinking about the comp outlook in '24? Specifically, what are your assumptions for the progression of ticket and traffic throughout the year?

[Richard Dreiling, executive]

Yes. I mean obviously, our guidance -- we're looking for a strong year, particularly on the Dollar Tree side. And I think as we get into quarter 4, that is our big time of the year in terms of discretionary in Dollar Tree. We believe the initiatives that we're putting in place in Dollar Tree are definitely delivering very positive comp.

Family Dollar, as Jeff called out, is going to be a little tougher. And it's driven by the mix shift and it's also driven by, quite honestly, the pressure on the low-end consumer in terms of income and the SNAP benefits. We will cycle through the SNAP benefits as we move towards the end of the year, but we feel very comfortable with our comp outlook.

[Operator]

Your next question is coming from Matthew Boss from JPMorgan.

[Matthew Boss, analyst]

So two questions. Maybe, could you elaborate on the traffic trends and market share by demographic that you're seeing at the Dollar Tree banner? And just any change in underlying momentum at Dollar Tree quarter to date?

And then in light of the portfolio optimization, just your confidence in the go-forward Family Dollar fleet or maybe if you could share some performance across the curve in terms of the store base. And just lastly, potential opportunity to accelerate unit growth at Dollar Tree as you see it, just given the performance.

[Richard Dreiling, executive]

Yes. Dollar Tree, the fastest-growing demographic is north of $125,000 a year in income, which brings a lot more firepower to the store, to be honest with you. And I think, quite honestly, I think that attraction is the multi-price point, and the fact that we've been able to increase the variety of product in the store. And I think the interesting thing about Dollar Tree, the lift is pretty universal across all the operating markets. It's not like the Northeast is strong and the West is weak, it's where -- that boat is lifting pretty even all the way up.

When I look at the potential for Family Dollar and the optimization, again, it's a sum-of-the-parts story. And there are many opportunities in Family Dollar to maximize shareholder value. And what we intend to do, we know how well Dollar Tree is performing. As we said on our call, we're going to shift our focus to opening more Dollar Trees than we historically have done in the past. And quite frankly, it's been driven by the work on the coolers, and it's being driven by the multi-price point, that's made the box more viable.

But I think the rationalization of the portfolio was a natural step. And now what we could do by eliminating a bunch of underperforming stores, which take the bulk of the district managers' time, we can now focus them on the stores that are doing better.

[Jeffrey Davis, executive]

If I may add just one additional point. If you think about the Family Dollar segment, one of the things that we're really proud of is that we continue to take market share across units, dollars, traffic. So what we're doing there within this banner is working for us. We have found that we are under a little more pressure with our particular higher penetration in lower income customer segment. But we believe the other merchandising and operating actions that we're taking will allow us to further unlock the value of this remaining portfolio of stores that we have within the Family Dollar brand.

[Operator]

Your next question is coming from Chuck Grom from Gordon Haskett.

[Charles Grom, analyst]

Just a couple for me. Jeff, can you unpack the margin guide by banner? I'm just trying to isolate if you're still anticipating another year of a loss at Family Dollar.

And then Rick, just bigger picture, when you look -- with input prices dropping, can you talk about how your merchants are adding more value, particularly at the Dollar Tree and particularly at that $1.25 price point?

[Richard Dreiling, executive]

Can you take the first one?

[Jeffrey Davis, executive]

Yes. So on Dollar Tree, for example, on the margin, we're guiding to 36% to 36.5%. That's a combination of a couple of things. One, as we continue to roll out the multi-price offering, that is going to place a little bit of pressure on us from a margin rate perspective, but you're really going to like the dollars that's going to be driving with units.

We do anticipate -- we had mentioned that we're anticipating about another $0.80 to $0.90 of freight that's going to be more heavily realized on the Dollar Tree side. And as I've mentioned, we'll expect to see about 60% of that in the first half of the year. So the margin on the Dollar Tree side is going to be sort of led by additional freight and then offset partially as a result of the roll out of the 3,000 stores and multi-price and further penetration in some of the other stores. But all in all, a very healthy 36% to 36.5% gross margin.

And listen, Dollar Tree also is not immune to some of the issues we're having with shrink as well as the overall mix impact across the business. A little more profound when you get to the Family Dollar side of the business, while they will have a modest impact on the freight because we do import there also, but the impact there is really on the shrink and mix, offset by or actually lifted by further penetration of our private label product as well as our opportunity within OTC and HBA, which are normally higher margin opportunities for us.

[Richard Dreiling, executive]

And the only thing I'd add to that, Chuck, especially on the Dollar Tree side. When input cost goes down, the fact that we have fixed price points allows the Dollar Tree team to reengineer the product and bring a greater value to the table. And that's how that franchise has been built over the years. And so it's $1.25, it might stay $1.25, but it brings more value to the table, to the consumer.

[Operator]

Our next question today is coming from John Heinbockel from Guggenheim Partners.

[John Heinbockel, analyst]

I wanted to focus on the multi-price point journey, right? So going from 3 doors to 8, how do you think you'll attack that, right, 3 to 8 all at once in certain stores or staggered? How long do you think it will take to kind of replanogram Plus, the old Plus, right, into the categories? And then do you have a view -- like multi-price point penetration, when do we get to 10%? That seems like a fair mile marker.

[Richard Dreiling, executive]

Yes. Great questions. First thing I'll say to you, John, is we will stagger the rollout. I like to spread an initiative over time. That way, it turns into a gift that keeps on giving. So that's kind of our first plan on that.

The penetration, I would say right now, if Rick McNeely was in the room, the demand is insatiable from the customer. I like the 10% number that you threw out. We're going to be -- we were 8.8% in quarter 4. So yes. I think it is -- right now of all of the things we're doing, and I got Jeff shaking his head, I would call it the gift that keeps on giving right now. And we're just really pleased with it.

[Jeffrey Davis, executive]

And then I believe that the last part of the question, if I'm hearing it correctly, is about the timing of doing the replanograming, if you will, of the Plus section. First of all, we don't planogram. So that's an easier part to look at this. But as we think about doing some reconfiguration of the store to bring in the multi-price in line with other products, we're starting to do that this year, and that's the 3,000 stores that we expect to deliver this year.

[Richard Dreiling, executive]

And our goal, John, is get the multi-price point in the aisle where it belongs rather than being in the center of the store. We think it's more shoppable and the consumer will trade up.

[Operator]

Our next question today is coming from Michael Montani from Evercore ISI.

[Michael Montani, analyst]

Just wanted to ask, first off, two questions related to the store closures. I guess, number one, is there additional opportunity that we should be thinking about here in terms of rebannering in addition to the closures? And then number two, I wanted to see your thoughts around the potential to recapture some of that $700 million of revenue, given the proximity to the other stores.

[Richard Dreiling, executive]

Two great questions. As far as rebannering, we've already looked at a modest number of stores that we intend to do that in. And as we move through the portfolio, we will continue to research that.

The one thing we want to be very careful of is, number one, the proximity to another Dollar Tree. And number two, we want to be careful that we don't distort the Dollar Tree brand. So it's a little more complicated than just standing up saying, change them all to Dollar Trees and move forward. But it's a very good question that we're actually looking at as we speak.

And what was the second part of the question?

[Michael Montani, analyst]

Recapturing sales.

[Richard Dreiling, executive]

Yes, recapturing the sales. I think we feel pretty bullish about that. A lot of these stores that were rationalizing out of the system were built on top of another store. And there is the opportunity for us to take back some cannibalization. And I think it's a matter of time. And of course, we're going to continue to build new stores next year.

[Operator]

Our next question is coming from Kate McShane from Goldman Sachs.

[Katharine McShane, analyst]

I wondered if we could ask about the supply chain, the changes that you've been making, and how it's impacted inventory levels and turns.

[Richard Dreiling, executive]

I mean, I'll speak to half that question, and let Jeff do the hard part.

The fascinating thing -- depends on how many cases a store gets in an order to determine how many hours of savings there are. But I can tell you this, we've reduced our unload time to approximately 1 hour, which will benefit us long-term majorly, especially in terms of store standards, in stocks, which should lead to higher transactions, and the rest will be history having been through it. And in regards to inventory?

[Jeffrey Davis, executive]

Yes. So from a supply chain basis, one of the things we've been very focused on this past year is, not only in stock in the stores, but how we get in stock in the DCs. So working with our supplier partners to make sure that we're getting the merchandise at a timely basis according to the POs that we've placed. We've actually seen some good improvement in that area, which has benefited us ultimately in having our inventories in store at the time that we need to.

The fourth quarter is just an example of that, where last year, we had a little bit more supply chain disruption. The year before this year, we were able to have the merchandise in-country, in DC, in our stores, and that helped us with our overall sell-through, which ultimately helped us on our inventory levels at year-end because we were able to flow that through versus not having any inventory at the right time for the customer.

But I believe, overall, the other actions that we're taking with respect to some of our systems to give us better visibility into where our inventories lie and where our needs are across the network will allow us to further improve on our in-stock positions.

[Richard Dreiling, executive]

And Kate, if I -- I'd like to call out, Mike Kindy, who's been with me for years, he's driving the supply chain now. And again, you raised a very good question.

Mike is working on 2 things: the inbound service rate, which is getting the right inventory here at the right time; and then the outbound service rate, which is shipping what the stores are drawing. And we've had trouble with that, to be frank, over the years. But again, it's another example of improvements we're making.

[Operator]

Our next question today is coming from Paul Lejuez from Citigroup.

[Paul Lejuez, analyst]

Two questions. Just curious what's driving the average ticket lower at Dollar Tree, even as you add the higher price points? And how do you think about enrolling in those high-priced items, the eventual impact on the average ticket at Dollar Tree?

And then second, and sorry if I missed this, but what's the cash cost of closing the 600 stores of Family Dollar? And maybe if you can talk about the locations of those stores. Are they concentrated in certain geographies? Any common threads other than just not earning their cost of capital?

[Richard Dreiling, executive]

I'll let you manage the second part, which is the hard part. The -- what we're seeing is the reason our average ticket is down, I think it's because we're seeing more trips. People are coming more often. I think eventually, that will probably shake itself out, but it's all driven by the frequency of which the customer is coming in.

[Jeffrey Davis, executive]

Just to top that off also, what we've seen is that when a customer has a multi-price item in their basket, their basket many times is as much as 2x the average basket. So as it relates to the variety that we're asked that we're providing, it's definitely giving us a larger basket. But as Rick has said, the additional traffic, people are coming more often and their basket is just on average, lower.

As it relates to the stores that we're taking action on, from a geography standpoint, there's really no real concentration across the country. It's pretty much reflective of our overall fleet demographics, if you will, across the country.

As it relates to the cash cost of closing these stores, on a cash basis, we'll actually be neutral to actually accretive in closing these stores. And it really comes from the fact that from a P&L perspective, you pick up the idea that you no longer have to carry the rents, but the stranded costs associated with the ongoing cost of running the dark store is going to be less than if you were operating the store. And net-net, you would actually pick up just a little bit of cash versus if we were running these stores and operating them under a loss position.

Over time, that actually gets better as these stores start to run off whatever remaining portion of their lease. So the cash requirement is reduced pretty substantially over the next 3 years.

[Operator]

Our next question today is coming from Peter Keith from Piper Sandler.

[Peter Keith, analyst]

I wanted to dig into the SNAP headwind of negative 5% on Family Dollar. Could you quantify how you got to that math? Because if I'm doing the math myself, I look at about a 35% decline in SNAP for the quarter on about 7% to 8% of sales is about a 2.5% headwind overall.

[Jeffrey Davis, executive]

Yes. The way we're looking at this, once again, it depends on the -- your assumption on the penetration of our customer. But as we take a look at what that SNAP customer means for us and how we've been looking at the sort of contribution on a year-over-year basis, that's how we derive the 5%.

[Operator]

Our next question is coming from Joe Feldman from Telsey Advisory Group.

[Joseph Feldman, analyst]

I wanted to ask, what -- as you guys are looking at the Family Dollar stores that you're closing, I was just kind of curious, like what part of the transformation strategy work that you guys have done in the past year or so, I guess, do you feel won't work in those stores? Like, was there something that you just felt like -- I guess it's a lost cause, for lack of a better term? But maybe you could just share some thoughts around that where maybe like help the other stores that do continue to run and what works there that didn't work in these stores.

[Richard Dreiling, executive]

Yes. Another really good question. I would look at you and say the initiatives have worked in every store. The problem is the magnitude of the lift. And I think also as we looked at these stores, it was their location, the competitive environment, the quality of the facility, the proximity to the competition. There was many, many, many factors.

And we have had in the past a real estate strategy that wasn't really, really focused on maximizing value. And what we've done now is pick stores that we don't think have a long-term future, and more importantly, hopefully, we'll be able to transfer some sales from this closed store into one of our operating stores.

So I mean, it's a pretty thorough process. And the important question is, why didn't they get the lift from the initiatives of the other stores that we're keeping, obviously, which is the bulk of the portfolio. It has to do merely with a lot of other extraneous factors.

[Jeffrey Davis, executive]

Yes. And just to add back, I think actually, Paul had a portion of his question I didn't answer that was on this very topic. Many of these stores were operating unfortunately at a level that the operating loss of these stores was pretty substantial. And even with the lift of some of the initiatives, while we're starting to mute the level of loss, we were still significantly below what we consider to have a reasonable return. Especially when we think about the additional investments that we would want to make in these stores as it relates to store standards, as it relates to just a number of other things, that it just wouldn't be able to carry a return on the additional investment for these stores.

A lot of this is driven by the fact that over time, rents shrink and a number of other exogenous sort of factors has driven the store to a point where, unfortunately, they're just operating at a very significant loss.

[Operator]

Our next question is coming from Brad Thomas from KeyBanc Capital Markets.

[Bradley Thomas, analyst]

Rick, I was hoping you could talk a little bit on the Family Dollar side about the consumables category. And I was hoping, you could talk a little bit about the competitive landscape, how you're feeling about pricing and some of the opportunities to drive share going forward?

[Richard Dreiling, executive]

Yes. On the consumables side and Family Dollar, as we have gotten our mix right inside the store in terms of the SKU count, remember, we discontinued 1,000 and added 2,000 for a net of 1,900 and change. We're very pleased with what we're seeing in terms of movement. We've made the consumable mix more relevant. And add to that, the emphasis that we have placed on private brands. And now you have a national brand equivalent item that the consumer can purchase. And I think our consumable mix, to be honest, is the best it's been in Family Dollar, hearkens back to my old days as a grocer.

In regards to pricing activity out there, the market continues to be relatively stable. I would even say, the promotional activity on the weekly flyers is relatively stable. It's not like we're seeing anything that's really wild. And I think our pricing position for Family Dollars is as good as it's ever been.

[Operator]

Our next question is coming from Scot Ciccarelli from Truist Securities.

[Joshua Young, analyst]

This is Josh Young on for Scott. Could you guys just clarify what are you going to do with the inventory at the stores slated for closure? So in other words, are there discounts which may boost sales and hurt margins? Or will inventory just be shifted to other stores? And is that all captured in your guidance?

[Jeffrey Davis, executive]

Yes. So first of all, it is captured in our guidance. And the way that we'll do this is, given the announcement of the timing of the store closure, we'll run a series of different discounts to help move through the inventory. Also, as part of the impairment that we've taken, we've also already accounted for an impairment of that value of inventory at some level in order to ultimately realize the sale.

[Operator]

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

[Richard Dreiling, executive]

Thank you all very much for your time today, and looking forward to talking to you again in the near future.

[Operator]

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.