Good day, and welcome to the Dollar Tree, Inc. 2Q 2022 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to hand the conference over to Randy Guiler, VP of Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to our call to discuss results for Dollar Tree's Second Fiscal Quarter 2022. With me on today's call are Executive Chairman, Rick Dreiling; President and CEO, Mike Witynski; and CFO, 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 under 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 included in these forward-looking statements. For information on the risks and uncertainties that could affect our actual results, please refer to the Risk Factors, Business, Management's Discussion and Analysis of Financial Condition and Results of Operations sections in our annual report filed March 15, 2022; our Form 10-Q for the most recently ended fiscal quarter; our most recent press release and Form 8-K; and other filings we make from time to time with the Securities and Exchange Commission. We caution against reliance on these forward-looking statements made today, and we disclaim any obligation to update or revise these statements, except as may be required by law. Following our prepared remarks, Mike and Kevin will take your questions. I will now turn the call over to Rick.

Thank you, Randy. Good morning, everyone. Mike and I and our new Board have been together for just over one quarter now. As planned and expected, change is underway, and we are moving at a fast pace. We are entirely focused on taking the right steps to transform this organization for the long term through growing and improving Family Dollar and Dollar Tree. We are 90 days further down the road from our last earnings call, and the opportunity and action steps needed continue to become more clear. Our main priorities are our associates, the distribution network and supply chain, Family Dollar's pricing and the value proposition in both segments, store standards and technology. Additionally, and Mike will go into more detail, we have a great deal of work underway to improve the company's culture, designed to build an environment of accountability, empowerment, courageous leadership, transparency and fostering two-way dialogue. And we are orchestrating these changes in one of the most unique and dynamic environments I've experienced in my retail career. Inflation is at its highest in decades as shoppers are experiencing higher costs related to food, fuel, rent and more. Supply chains have been strained and inconsistent. Inventory levels are higher across retail, and consumer shopping patterns continue to zig and zag. Let me be very clear. We are not here to take half measures or to defer high return capital and operating investments in order to manage earnings. We are honed in on taking steps necessary to seize the great opportunity for us and deliver to our shareholders, our associates, and our customers the great company they deserve. And by executing on this commitment, we'll deliver the greatest possible risk-adjusted returns to our shareholders. We'll not waver from this strategy. You will hear from Mike and Kevin later in the call about some of the actions we're taking to fix Family Dollar. As you know, our new leadership team is taking shape, and the team is moving to accelerate actions to improve the business. The most notable action is our decision to move forward with price investments that began in July and will carry into the second half intended to close our historical GAAP and pricing to key competitors. We believe this is a necessary action to provide the right value proposition and a foundational step to improve Family Dollar long term and that it will pay off handsomely. There is much more to do to enhance the results of Family Dollar, and you will hear about some positive improvements beginning to be made later in the call. That said, the refreshed team has been together for about a quarter, and we feel very confident in our ability to fix Family Dollar and materially improve its performance long term and in the process, create enormous value. We are a growth company. We are making change happen to create long-term shareholder value and enable the next waves of profitable growth for Family Dollar and Dollar Tree. On behalf of our Board, I want to thank each of our teams for their efforts on delivering very good results for the second quarter. I'll now turn the call over to Mike.

Thank you, Rick, and good morning, everyone. Thank you for joining us today. We are dialed in today from our Annual Field Leadership Summit. More than 1,000 leaders, including every district manager in the company, have gathered for several days to learn, collaborate and focus on all things Family Dollar and Dollar Tree. This is our first large in-person meeting since 2019. The energy and excitement here makes me and each of us more inspired than ever. We will transform our culture and company, and we will do this together. Rick just mentioned that we are moving at a fast pace. The theme of our leadership summit is, in fact, Lead with Speed. I want to publicly thank all of our participants for their commitment, dedication and focus while attending this great event. I'm proud to be part of your team. At these meetings, we typically talk about our company's strategy and share proof points of our collective successes. But this year is different. This year, I'm speaking to our leaders about something no less important than strategy. It's our company's culture. Every retailer has a playbook when it comes to strategy. But what sets the winning companies apart is their culture. Just as Rick mentioned, we are committed to developing a culture of accountability, empowerment, courageous leadership, transparency, and fostering two-way dialogue. We have recognized and acknowledged to ourselves that we have substantial opportunity for improvement in this respect. We have the courage to address this head-on, and we will deliver the culture necessary to provide our associates, the customers, and the shareholders the greatness they deserve. Also at this summit, our field leaders got their first look at the initial holiday buys purchase for the new $1.25 price point. We are all excited by the compelling and relevant assortment sourced by Rick McNeely's Dollar Tree merchant team and are very confident our shoppers will be wowed by these new items and the great values over the upcoming holiday season. We are undergoing a period of change, exciting change, and we have accomplished a great deal in what I'd call the first 100-plus days since our Board was reconstituted. A few months ago, we announced a number of leadership changes. We are actively engaged in recruiting leaders to the organization with the right perspectives, experiences, and skill sets to help transform our company. The great opportunity before us has attracted the attention and interest of the strongest leaders in retail. In just a few months, we have already filled several key roles with exceptional talent, including Larry Gatta as Family Dollar's Chief Merchant, John Flanigan as our Head of Enterprise Supply Chain; and Bobby Aflatooni now leads our Enterprise IT department. This morning, we announced that Jeff Davis will be joining Dollar Tree as our new CFO. Jeff has many years of experience as a retail CFO and spent nearly a decade in executive leadership roles with one of the largest retailers. And we have carefully reviewed a field of exceptional candidates for our COO and General Counsel executive roles. The teams are gelling, and the new leaders are hitting the ground running. I look forward to sharing upcoming announcements as we round out the executive team for the next waves of growth and transformation for Dollar Tree and the Family Dollar business. In light of the substantial leadership changes, I felt that we could deliver a more useful and productive event if we defer our Investor Day from October until the spring of 2023. We will share more details on the event as it takes shape in the months ahead. Our second quarter performance reinforces the relevance of our brands for millions of households as they continue to face cost pressures across the board. The team delivered increases of 6.7% in sales, 14.2% in gross profit, 25.7% in operating profit, and 30.1% in EPS while successfully navigating through another quarter of macro uncertainty. Now to Q2 performance by banner. I am pleased with the quarter delivered by the Family Dollar team. The positive 2% comp represented an acceleration from Q1 on a 1-, 2-, and 3-year stack basis. A 3.3% increase in average ticket more than offset a 1.2% decline in transaction count. Same-store sales were relatively balanced throughout the quarter as monthly comps ranged from a positive 1.5 to a positive 2.5. Despite supply chain challenges and over-the-counter related categories, the consumables comp increased 4% for the quarter. Discretionary comps declined 4.1% as shoppers continued to manage through this inflationary environment. Compared to the prior year's quarter, we saw a 150 basis point swing in product mix from discretionary to consumables. In Q2, consumables represented 77.3% of Family Dollar sales compared to 75.8% in Q2 of 2021. The turnaround of Family Dollar is an enormous value creation lever, and it is getting a great deal of focus and attention. Components of the transformation include, as Rick mentioned, a focus on our people, the DC network and supply chain, pricing and the value proposition as well as our technology. Additional factors include enhancing our culture, elevating store standards, developing our private brands, improving category adjacencies, enhancing the product mix, optimizing vendor partnerships and much more. We are pushing forward on each one of these fronts. We are still early in this journey, but I am enthusiastic about the progress we have made just in the last few months. I want to call out, in particular, the important initiative we have taken on our pricing at Family Dollar. With the recent price investments, we believe Family Dollar is now in a better competitive position on price than it has been for over a decade. We will continue to refine the Family Dollar value proposition to drive store traffic and productivity, and we fully expect to see great benefits from these and other actions over time. During the quarter for Family Dollar, we opened 95 new stores, renovated 257 stores, and relocated 24 stores. We ended the quarter with more than 540 Combo Stores, which continue to resonate with the shoppers while driving more productivity and more profitability. Moving now to the Dollar Tree segment. The Dollar Tree banner delivered another strong quarter. Among the highlights, a 7.5% comp; a 37.4% gross margin, 500 basis points above the prior year's quarter; and a 15.4% operating margin, more than 500 basis points over Q2 of last year. The 7.5% comp sales increase was driven by a 14.2% increase in average ticket partially offset by a traffic decline of 5.8%. Importantly, the consumable business at Dollar Tree was strong. Consumables, which represented 46.8% of the mix in Q2, comped at 7.9%, while discretionary increased 6.7%. The last time the consumable comp exceeded discretionary was at the onset of the pandemic in Q1 of 2020. This demonstrates the success we are seeing in key traffic-driving categories where our merchants have been active in enhancing value, such as carbonated beverage, snacks and cookies, and food. As a reminder, our reassortment in consumables has been more immediate than the discretionary merchandise given the purchasing cycle, and our sales performance demonstrates that shoppers are reacting favorably to refine the value proposition. Renewed consumables momentum is a good indicator for our continued long-term health of the Dollar Tree banner. The discretionary side of the business was strong despite the negative impact of the limited global supply of helium, which hindered sales of balloon products and the party-related merchandise. Regarding cadence, similar to Family Dollar, comps were relatively balanced throughout the quarter with each month's comping increasing between 6.5% and 8.5%. During the quarter for Dollar Tree, we opened 32 new stores and relocated 5 stores, and we added multi-price assortment to another 697 stores, bringing the total to 2,170 stores as we head into the back half of 2022 and the important holiday season. I would like to speak to what we are seeing in the business as consumers continue to be burdened by levels of inflation not experienced in decades. Overall, sales performance remains in line with our expectations. And in fact, we have modestly increased expectations for Family Dollar for the back half. There are signs of trade down to our stores, and we are focused on the value proposition for both banners in this environment. Like many retailers, we are seeing a shift in consumable preferences as many shoppers are gravitating to needs-based consumables, which is impacting our margin through product mix. Our suppliers are being hit with inflation as well. This, along with our commitments to competitive pricing and the value proposition, is expected to negatively impact our gross margins in the near term. Over time, we believe our business should be able to protect its merchandising margin from inflation effects. And regarding supply chains, from a sourcing perspective, a year ago, we had a backlog of thousands of containers we were working to get through the transpacific shipping lanes. This year, we have a small, manageable backlog. Kevin will go into more detail regarding our updated outlook for the back half of the year. Our outlook will be reduced with most of the guidance reduction related to the Family Dollar as we take action to improve that banner. Of the total, more than half of our guidance reduction is due to pricing actions taken at Family Dollar. The remainder is due to mix shift differences and inflationary cost increases on consumables at both banners. None of this dampens my enthusiasm for our long-term prospects. I'll now hand the call over to Kevin to provide more color on Q2 and our updated outlook.

Thanks, Mike, and good morning. For the quarter, consolidated net sales increased 6.7% to $6.77 billion, comprised of $3.57 billion at Dollar Tree and $3.19 billion at Family Dollar. Enterprise same-store sales increased 4.9%. Comps for the Dollar Tree segment increased 7.5%, and Family Dollar same-store sales increased 2%. At both banners, the increase in average ticket more than offset the decline in transaction count as shoppers continue to consolidate trips as gas prices are significantly higher than a year ago. Gross profit improved 14.2% to $2.12 billion for the quarter. Gross margin was 31.4% compared to 29.4% in the prior year's quarter. Gross profit margin for the Dollar Tree segment increased 500 basis points to 37.4% compared to 32.4% for the same period last year as a result of the net of the following. Merchandise costs, including freight, decreased 455 basis points primarily due to higher initial mark-on, partially offset by higher freight costs and increased sales of lower-margin consumable merchandise. Occupancy costs decreased 50 basis points from leverage on the comp sales increase. Distribution costs decreased 20 basis points from leverage and higher capitalized amounts due to increases in inventory levels partially offset by higher hourly wages and higher DC maintenance and compliance costs. And shrink increased 20 basis points primarily from more favorable results in relation to accruals in the prior year quarter. Gross profit margin for the Family Dollar segment decreased 140 basis points to 24.7% compared to 26.1% for the same period last year. The factors include markdown costs increased 80 basis points due to higher promotional and price action markdowns. Shrink increased 45 basis points primarily from more favorable results in relation to accruals in the prior year quarter. And merchandise costs, including freight, increased 15 basis points, primarily due to higher freight costs and higher sales of lower-margin consumable merchandise, partially offset by higher initial mark-on. Similar to Q1, consolidated selling, general and administrative expenses as a percentage of total revenue increased 100 basis points. The SG&A rate for the quarter was 24% compared to 23% in Q2 last year with Dollar Tree favorable to prior year, more than offset by Family Dollar and slightly higher corporate costs. For the second quarter, the SG&A rate for the Dollar Tree segment improved 30 basis points to 22% when compared to the prior year's quarter. Payroll costs improved 90 basis points from leverage on the 7.5% comp and favorable development of workers' comp claims, partially offset by the annualization of minimum wage increases and investments in store payroll; other SG&A, which increased approximately 40 basis points, resulting from unfavorable development of general liability insurance claims; and inflationary pressure across several expense categories. Facilities costs increased 10 basis points primarily from higher utility and repairs and maintenance as we focus on improving store conditions. For the Family Dollar segment, the second quarter SG&A rate increased 200 basis points to 23% compared to 21% in the prior year's quarter. Payroll expenses increased 70 basis points, primarily due to hourly wages and investment in store payroll and an increase in workers' compensation expense due to favorable accrual adjustments in the prior year, partially offset by lower incentive compensation expenses. Store facility costs increased 50 basis points, primarily from higher utility costs and an increase in repairs and maintenance expense as we focus on improved store conditions for our customers and associates. Other SG&A expenses increased 45 basis points due to higher legal fees, debit and credit card transaction fees, store supply expense, and inflationary pressure across several expense categories. Depreciation and amortization increased 30 basis points related to elevated capital expenditures for store renovations and improvements. Corporate support and other expense as a percentage of total revenue was 1.5% compared to the prior year quarter of 1.3%. The higher costs primarily consist of increased stock compensation costs. Operating income improved 25.7% to $505.4 million or 7.5% of total revenue in the second quarter, an improvement of 120 basis points compared to a year ago. Nonoperating expenses totaled $30.7 million, comprised primarily of net interest expense. The effective tax rate was 24.2% compared to 23.5% in the prior year's quarter, resulting from higher state tax rates and lower work opportunity tax credits as a percentage of pretax income in the current year's quarter. Net income for the quarter improved 27.4% to $359.9 million or $1.60 per diluted share. This compares to net earnings of $282.4 million or $1.23 per diluted share in the prior year's quarter. Looking at the balance sheet. Combined cash and cash equivalents at quarter end totaled $689 million compared to $985 million at the end of fiscal 2021. Outstanding debt as of July 30 was $3.45 billion. The company repurchased approximately 1.66 million shares at an average price of $141.67 in Q2 or $235.8 million under the share repurchase authorization. Compared to last year, inventory levels at Dollar Tree are up 59.7% in dollars due to increased capitalized freight and distribution costs, additional multi-price Plus inventory and a significant increase in import inventory in transit compared to the prior year. Total units per store are up approximately 20% to prepandemic Q2 2019 levels but are expected to normalize as we go through the back half of the year. The inventory is fresh and basic in nature and does not represent a significant markdown risk. Inventory levels at Family Dollar increased 35.7% compared to Q2 last year due to increased capitalized freight and distribution costs and an increase in the average unit cost. Total units per store are below prepandemic Q2 2019 levels. Capital expenditures were $276.2 million in the second quarter versus $229.1 million in Q2 of last year. For fiscal 2022, we currently expect that consolidated capital expenditures will be approximately $1.4 billion. Depreciation and amortization totaled $193.5 million for Q2 compared to $176.1 million in the second quarter of last year. For fiscal 2022, we expect consolidated depreciation and amortization to be approximately $770 million. As we look to the back half of 2022, we see the following affecting our business. As Mike mentioned, we are accelerating price investments in our Family Dollar business. These investments are designed to improve the value proposition for our shoppers and to drive traffic and store productivity. This investment has a near-term impact on profit, but we expect it to accrue long-term benefit. We have seen consumer purchasing shift based on economic conditions to a more consumable-based basket at both banners, which will negatively impact our expected mix and product margin. Dollar Tree's sales continue to be negatively affected by the global helium shortage. This directly affects balloon sales but also has a halo effect on the entire party department. In general, stores with helium are comping positive in the party category, while those without helium are running negative comps. The delta is a 10%-plus comp differential in one of our largest high-margin discretionary categories. Our over-the-counter categories are being negatively affected by our supply chain challenges. This is creating a higher level of out of stocks in this category. We plan to continue to increase our investment in payroll in our stores in the back half. The labor market remains dynamic, and we are proactively addressing select markets to attract and retain associates. We are making investments in our stores and distribution centers through repairs and maintenance as well as compliance programs to ensure a great shopping and working environment. Based on these factors, diluted earnings per share for the full year is now expected to range from $7.10 to $7.40. This represents a $0.75 per share adjustment to the prior outlook based on the midpoint and is comprised of the following components. Roughly 60% of the change relates to the price investments at Family Dollar. An estimated 20% of the change relates to the margin impact of the mix shift towards needs-based consumables, projected to be a 300 basis point shift at Family Dollar and a 150 basis point shift at Dollar Tree in the back half. Again, the majority of this impact is expected to be on the Family Dollar side of the business. We are experiencing some degree of inflationary-related product cost increases, especially in lower-margin consumables, primarily at Dollar Tree, contributing to approximately 15% of the guide adjustment. As we have for decades, we have the ability to alter or reassort product based on cost changes, but this can take a few quarters, hence the near-term profit impact. And a small component of the guide adjustment relates to other items, including our commitment to improve store conditions. As a result of the aforementioned factors, most notably our accelerated price investment, we are expecting Family Dollar to be approximately breakeven from a segment operating margin perspective in the second half, down from its first half margin of approximately 2%. Consolidated net sales for the year are now expected to range from $27.85 billion to $28.10 billion with slightly higher comps offset by slightly reduced square footage growth relative to prior guidance. We expect to deliver a mid-single-digit comparable store sales increase for the year comprised of a high single-digit increase in the Dollar Tree segment and a positive increase in the Family Dollar segment. Selling square footage is expected to grow by approximately 3.5%, down slightly from prior guidance due to the supply chain delays related to procuring equipment and fixtures for store openings. For Q3, we estimate consolidated net sales will range from $6.75 billion to $6.87 billion based on a mid-single-digit increase in same-store sales for the enterprise. Diluted earnings per share for the quarter is expected to be in the range of $1.05 to $1.20 per share. Other considerations for our updated 2022 outlook include the following. Net interest expense is expected to be approximately $31 million in Q3 and $125 million for the year. Our outlook assumes a tax rate of 23.6% for the third quarter and 23.8% for fiscal 2022. Weighted average diluted share counts are assumed to be 224.8 million shares for Q3 and 225.4 million shares for the full year. Our outlook does not include any share repurchases. As of July 30, we had $2.25 billion remaining in our existing share repurchase authorization.

Thanks, Kevin. As we continue to navigate through this dynamic and somewhat uncertain environment, we are excited about the continued progress at Dollar Tree and the material positive changes beginning to be made at Family Dollar. At Dollar Tree, as it relates to our multi-price offering, the team is continuing to refine the $3 and $5 assortment and testing various concepts to enhance the program and build on the very positive long-term impact from our multi-price offering. For example, tests of multi-price frozen foods are driving exceptional sales productivity as the new offering is delivering tremendous value and meeting family portion needs such as frozen meals, pizza, and ice cream. At Family Dollar, our Combo Store initiative continues to drive improved store performance at very attractive levels, in line with previous commentary. In fact, we are now exploring various sizes and formats in other markets beyond our rural target locations, pursued in our first iteration of the concept. Some of the initiatives to improve the business will take more time to produce an impact, notably in the supply chain and technology. That said, at Family Dollar, the work being done by Larry Gatta's merchandising and marketing teams has been remarkable and is beginning to be actioned upon more urgently. In fact, we have made a number of enhancements to our H2 strategic store format. We refer to the new version as H2.5. Among the changes made to improve store productivity, customer satisfaction, and to better support our store associates through efficiencies include: adding a linear footage, developing seasonal assortments as a focal point, utilizing deeper shelving on key consumable categories to enhance store efficiencies and improve in-stocks, expanding the direct-to-store delivery offering, enhancing space dedicated to snacks, and increasing the beverage offering, and optimizing the frozen food assortments. At our Leadership Summit, the merchandising team shared with field leaders a wide array of consumables and discretionary merchandising initiatives to drive traffic and sales at Family Dollar. Our marketing teams are currently focused on four key initiatives: refreshing Family Dollar's brand positioning, evolving to a more productive ad program, relaunching our Smart Coupon program, and expanding our Boys & Girls Clubs of America partnership to be a good partner in the communities that we serve. We believe that these key initiatives are beginning to have an impact, and consumers are increasingly looking to our stores to meet their needs. We believe the time is right to accelerate actions to better serve customers by providing an exceptional value proposition. We will go into more details on these initiatives and broader plans to transform Family Dollar and continue delivering great success at Dollar Tree in the quarters ahead and at our Investor Day in the spring of 2023. And I want to briefly share a few initiatives that Bobby Aflatooni's IT team are focused on to provide better support for our stores. These include: improving DC and store in-stock service levels through refinement of our demand forecasting, allocation and replenishment systems for both banners; improving customer satisfaction and driving through enhanced ability to support more complex promotional offers, such as buy a product A and get a discount on product B; supporting field leadership and store efficiencies with improved labor systems; and enhancing our enterprise-wide data integration platforms. Before we go into Q&A, as I had previously announced, Kevin will be transitioning out of his role as Dollar Tree's CFO. Kevin has been instrumental in the company's growth and success since joining the organization in 2008. During Kevin's tenure, Dollar Tree has grown from 3,600 stores to more than 16,200 stores, from annual sales of $4.6 billion to more than $26 billion and from annual operating profits of $365 million to more than $1.8 billion. When Kevin joined Dollar Tree in December 2008, shares were trading at a split-adjusted price of just $13 or $14 per share. I would like to publicly thank Kevin for his commitment, stewardship, and significant contributions to Dollar Tree and its stakeholders over the last 14 years.

We'll take our first question from Chuck Grom with Gordon Haskett.

Rick, I'm curious, since you joined the company 90 days ago, what have been the biggest surprises for you, both positive and negative? And when you talk about steps to improve the store standards at Family Dollar and the DC network across both banners, can you elaborate a little bit more for us? And do you see any offsets in the P&L to help fund those actions?

Yes, I'll start here and then turn it over to Michael. The positive, I have to tell you, the enthusiasm within the organization and its willingness to embrace change. The interesting thing has been, there's not a lot of things we're talking about that people, Chuck, aren't shaking their head, yes, let's go get it done. So that, to me, is the foundation of this. And the company has made a major commitment to culture enhancement. In fact, we spent our near whole day just talking about how to manage people and how people need to be managed. And we spent a whole day just listening to people to hear what they're dealing with. Probably on the negative side, the pricing gap was a little bit larger than we thought. And we also believe this is a great time for customer trial, and we want to be right on our pricing. In terms of the supply chain side, we're looking at everything in the supply chain. We are assembling, I think Mike would agree, probably one of the best supply chain teams in the country. We have a lot of distribution centers that need to be updated and modernized. So we're feeling really good on how we're approaching that. The IT side, information technology, I might classify as a little bit bigger surprise in that there's a lot of basic things that the operators and the merchants need and the supply chain needs. So with that, Mike, I don't know if you want to add anything?

No, I think Rick said it right. On the store side, the biggest thing is that we're focusing the entire organization on doing everything we can to make our store associates successful and enable them to run better, cleaner, fuller stores. I mentioned in my opening that we're currently gathered from our summit with every district manager in the country, and we are all aligned behind improving store conditions. In response to your question, yes, we will continue to invest, as Kevin mentioned, in our property management and everything necessary to ensure that our store conditions meet our standards for our customers, and we are committed to that. More importantly, our associates are enthusiastic about the culture of support and being at the center of everything we do. They also see the proof points of our investments in pricing, improvements in logistics, and enhancements in merchandising, resulting in better assortments and more space for customers to shop. I believe Rick addressed the supply chain well. We are doing everything possible to drive efficiencies and improvements to supply our stores more effectively with the products they need, when they need them.

And we'll go ahead and move on to our next question from John Heinbockel with Guggenheim Securities.

I want to focus on pricing and investments at FD. How do you think the maturity of the price investments will develop? Initially, it seems deflationary as we compare until people see the benefits and then traffic increases. How will that unfold? Is it more difficult to shift your price perception in an inflationary environment? Do you believe that most of the investments at FDO will be confined to 2022, or will there be additional investments in 2023 as well?

Thank you for the question. As I mentioned earlier, the timing is ideal right now. We noticed a shift with new customers coming our way, and in this inflationary environment, it's the perfect moment to adjust how customers perceive us and what they experience in our stores. We're attracting new customers while our existing ones are feeling more pressure than ever. With their budgets stretched, shoppers are relying on us to help meet their financial goals, and we're observing strong demand trends. This situation creates a great opportunity for us to act more swiftly than we initially planned to better align with customer expectations for value, close any pricing gaps, and secure long-term loyalty in this inflationary climate. We believe that now is the right time to win over these customers. At first, we discussed a gradual approach, starting with our key value items. However, as we recognized the changing environment and customer pressures due to inflation, we decided to accelerate our efforts to earn these customers' loyalty for the long term. To answer your question, the moment to act is now. We are currently in the most competitive pricing position we've seen in over a decade. Now, it's about managing this situation and fine-tuning our promotions. Larry will continue to excel with the H2.5 in our product lineup, so we find ourselves in a fantastic position at this time.

And we'll go ahead and move on to our next question with Matt Boss from JPMorgan.

So at the Dollar Tree banner, what was the cadence of top line trends during the second quarter? Any color on August, or just drivers of confidence in holding high single-digit performance in the back half? And then on Dollar Tree banner gross margin, could you just touch on any puts and takes in the back half of the year to consider and how you're thinking about multiyear gross margin at the Dollar Tree banner?

Thank you for the question. As I mentioned, our performance was quite stable over the summer at Dollar Tree, with comparable sales ranging from 6.5% to 8.5%. Dollar Tree tends to perform well during seasonal periods, with graduation being the biggest season in the second quarter. As Kevin noted, our helium supply issues affected one of our largest categories, which has a significant impact on our party supplies. However, lawn and garden season also emerged as one of our top five categories, and when we had the products available, customers responded positively. Additionally, as both Kevin and I mentioned, we experienced a shift towards consumables, with our team reinvesting in these items to drive customer traffic. Other strong categories included beverages, candy, snacks, and cookies. Our customers are really engaging with these products. Although it's early in the third quarter, we're already seeing better trends this month compared to the second quarter at both Dollar Tree and Family Dollar. Regarding margins, as Kevin mentioned, our inventory is up. Last year, we faced delays with containers that hadn't even reached our system yet. Now, everything is in our system, and we are on track with our seasonal products. Our merchants have also prepared for the latter half of the year with items priced at $1.25, and we're excited about the quality. All our district managers, regional directors, and field associates are here and they are enthusiastic about the exciting products we have. We're confident that we've secured the products we need, and the newly assorted $1.25 items will impress the market and resonate with our customers. We're looking forward to this. Kevin can provide further insights on margins for the second half of the year.

Yes, as you consider this, Matt, freight has been a significant challenge over the past year and into the first half of this year. We anticipated it continuing to be a challenge as we compared to last year’s rates, but we expect it to stabilize in the latter half of the year. If diesel prices keep decreasing, that will also be beneficial. Looking at the Dollar Tree gross margin rate, we expect Q3 to be slightly lower than Q2, but it should improve a bit in Q4, which is a crucial quarter for us. Regarding the multiyear gross margin, we are focusing on increasing traffic and enhancing our stores. We currently have 2,000 Dollar Tree Plus stores and are continuing to improve our assortment at the $1.25 price point. We also look forward to seeing the freight rates decline and positively impacting next year. There are several factors at play, but it’s a bit early to discuss specifics. Those are the key elements we’re considering.

We'll go ahead and move on to the next question from Robby Ohmes with Bank of America.

I was hoping we could get a little more color. I think you mentioned trade down. And maybe some more discussion about the environment. The transactions were up at Walmart, Target and warehouse clubs. And I was just curious why the transactions are so much stronger versus being down at Family Dollar and Dollar Tree and if we should expect some improvement in the transactions.

We anticipate an improvement in our transactions, particularly due to the pricing adjustments we've implemented, the assortment changes that Larry Gatta and the team are making, and the introduction of new product categories along with our seasonal offerings. However, as you mentioned, our customers are indeed facing significant financial pressure. The positive aspect is that we are witnessing third-party data indicating a substantial influx of new customers at both of our banners compared to last year, most of whom have a household income of $80,000 or more, which gives us confidence. Additionally, there is a noticeable transition from cash to credit, further indicating that customers are feeling the strain. Inside our stores, we've observed that private brands have outperformed national brands for 24 consecutive weeks, a trend not seen in the past five years, reflecting customers' efforts to manage their budgets. Larry and the team are diligently enhancing our private brands, and we are noticing similar shifts within our stores. Customers are making specific choices regarding product forms, such as shifting from liquid to powder detergent and opting out of fabric softener altogether. These are the decisions our customers are making, and with the investments in pricing and the new assortment at Dollar Tree, we believe we are well-positioned to address their needs across our 16,000 conveniently located stores, which will reduce their travel distance. We are optimistic about the future.

We'll take our next question from Scot Ciccarelli with Truist.

Scot Ciccarelli. So I wanted to revisit the question that I actually asked last quarter. So we know that, in general, retail turnarounds take longer, costs more than what people generally expect. And last quarter, when I asked about that, your comment was that for the investments for '22, it was all embedded in your outlook. So given the change this morning and the fact that you've now had more time to evaluate the improvements that need to be made, do you have a better view of how much more investment may be needed to get Dollar Tree and Family Dollar where you want them from an operational and technological standpoint?

Yes, that's a great question. Our team is currently forming, and from an operating expense perspective, we will continue to invest in labor as necessary, with payroll investments planned for the future. This year, given the dynamic market conditions, those investments are incorporated into our forecast. The main areas we're focusing on are IT and supply chain. Bobby is well aware of our systems and knows precisely what needs to be done, having experience with other retailers, and has worked closely with our supply chain and merchandising executives. Bobby is diligently working on this, and I'll provide more clarity on the numbers during our Investor Day in the spring, as it will offer a long-term outlook, primarily focused on capital expenditures. We're also evaluating the most efficient ways to deliver to our stores, including our Combo Stores, Dollar Tree Plus stores, and traditional Dollar Tree and Family Dollar locations. John is modeling this out now, and we expect to have more information in the spring as we gather insights from our two leaders. Our recently announced CFO will also contribute to this discussion. While those are the main investments, we have included necessary repair and maintenance in our operating expenses and forecast, and we will follow up if there are any long-term initiatives that could affect those areas.

We'll move on to our next question from Simeon Gutman with Morgan Stanley.

It's Simeon Gutman. For Mike and Rick, I have a question regarding timing and sequencing. It seems that 2023 might be more of a transitional year. Is that correct? Some of the price investments will persist, and we'll also be moving past some previous thresholds. If that's a reasonable assumption, how do you view the possibility of accelerating investments in 2023 to pave the way for 2024?

Yes, I agree with your perspective. Our pricing investments are already in place, and we will manage them moving forward. We plan to focus our efforts on enhancing our supply chain and IT, although these improvements will take time due to the number of systems involved. As Rick mentioned, this includes our store and retail systems, supply chain systems, and merchandising systems. The implementation will be gradual and based on our capabilities. As we launch new distribution centers, we will also make adjustments to our network and continue making strategic decisions. Our aim is to act swiftly to achieve the best possible returns in a timely manner.

We'll take our last question from Kate McShane with Goldman Sachs.

It looks like the elasticity response improved again sequentially with the $1.25 change. Just wondered what your expectation for the response is for the second half and if that's changed meaningfully from what you were thinking when we last spoke to last quarter.

Yes. I believe the most significant change is in the marketplace dynamics and the considerable shift from discretionary spending to consumables, rather than the $1.25 price point itself. At the start of the quarter, we conducted extensive customer research and interviews focused on Dollar Tree, aiming to understand our brand, product selection, and in-store experience. I was surprised to find that not a single customer mentioned price or the $1.25. Instead, they emphasized the importance of clean, new assortments, seasonal items, and the service they experience in stores. Customers have moved past the price concern because, based on our early testing, they recognize value more than ever. In the current market, they perceive $1.25 as an excellent value. This is why our new items and consumables are performing so well, and I'm optimistic about the second half of the year. The second quarter didn't have any major seasonal events, and Dollar Tree thrives on seasonal changes. Typically, we adjust our offerings in sync with the seasons, but during the summer, we focus on lawn and garden products and graduation items, which were affected by helium shortages. Looking ahead, Kevin mentioned we have 2,100 Dollar Tree Plus locations that we didn’t have previously, which adds to the excitement for the latter half of the year. Our seasonal inventory is fully stocked at $1.25, and customers are expected to engage with this merchandise as they did with Valentine's Day and Easter in the first quarter. We anticipate exciting developments and positive customer responses due to our favorable inventory position and outstanding value. Additionally, we have addressed the consumables that were lacking last year at this time. Overall, I am very enthusiastic about the second half of Dollar Tree.

We'll go ahead and move on to our next question from Scott Mushkin with R5 Capital.

So I just wanted to get into a little bit more about labor, some of the comments you said about labor and the labor competition and what kind of pressure that might put on you as you try to get that more where you want it to be.

Yes, Scott, and thanks. Early on, we shared that we're investing over $195 million, just under $200 million in our payroll, the majority of it in our store associates and some of it in our DCs. We feel really good where we're at in our distribution centers. We've got all of our roles filled compared to this time last year where we didn't have open positions. We are continuing to invest in markets in the stores and at retail stores, and we will continue to do that where we see the need. Looking out over the back half of the year, where we need to make adjustments is already in our forecast. So it's a dynamic environment. Now people are coming back to work a little bit just because of what's going on in the economy. So I think that's going to shift a little bit, but we will continue to invest where we need to. And so far, in the next six months, looking for the rest of the year, we have what we need to invest in the forecast.

We'll take our next question from Michael Montani with Evercore ISI.

Just wanted to dig into a little bit further, if I could, the top kind of two to three drivers of traffic for both banners moving forward and kind of what the realistic timeline to anticipate the shift. Obviously, there's pricing actions you're doing at Family Dollar, but then prices have gone up at Dollar Tree. So just kind of talk about, if you could there, Rick and Mike, what gives you the confidence and what's the timeline to get those things turned up?

I wanted to highlight the enthusiasm surrounding Dollar Tree. Our investments in the $1.25 consumable items are significantly boosting customer traffic. To give you some context, we haven't experienced this level of improvement in consumables since before the pandemic. This is a direct result of our investments, and the exciting new assortment we have planned for the upcoming seasons is set to enhance this performance. Dollar Tree offers unparalleled value at $1.25, which creates a unique excitement in the market. On the Family Dollar front, our pricing strategy positions us as the best value in the market for over a decade. This alone will attract more customers. Additionally, Larry Gatta and the merchandising team are optimizing our H2.5 with a refined assortment and more impactful pricing, enabling us to utilize shelf space more effectively by stocking products that customers really want. We are prioritizing seasonal items to capture customer attention. I'm genuinely optimistic about the strategic moves we've implemented. It’s important to recognize that it takes time for our new customers to notice these changes. But as they do, we anticipate gaining recognition for our competitive pricing, improved assortment, and stronger market position at Family Dollar. Larry is actively focusing on our marketing efforts, utilizing digital platforms and print ads to ensure we target the right messages that resonate with our customers, driving traffic effectively. All these strategies are being employed by our teams at Family Dollar, and I'm equally excited about the growth potential we have at Dollar Tree.

And our last question comes from Michael Lasser with UBS.

So Rick, you've been around the value retail space for a long time. Presumably, you came in and over the last 90 days, you said, look, we need to get Family Dollar price perception at a better spot in order to realize the full potential of this asset over the long run, and we have this opportunity because Dollar Tree gross margins are expanding, and we can use that expansion to fund investments at Family Dollar. So now the question is, with Dollar Tree exiting this year at a 37% to 38% gross margin rate and Family Dollar exiting this year with a low 20s gross margin rate, can Dollar Tree sustain the 37% to 38% gross margin rate over the long run? And can you rebuild Family Dollar's gross margin rate over the long run in order to generate a suitable return on these investments?

I think the answer to that is we're very comfortable with where we are on the gross margin in Dollar Tree for the back half of the year and going forward. And I will say we are working our way with the vendor community, with vendor support, and we anticipate that the Family Dollar margin will improve over time.

And with that, that does conclude our question-and-answer session for today. I would now like to hand it back over to our presenters for any additional or closing remarks.

Great. Thank you, Ali. Thank you for joining us for today's call. Our next earnings call for Q3 is tentatively scheduled for Tuesday, November 22. Thank you, and have a good day.

With that, that does conclude today's call. Thank you for your participation, and you may now disconnect.