Earnings Call
Dollar Tree, Inc. (DLTR)
Earnings Call Transcript - DLTR Q3 2021
Operator, Operator
Good day, and welcome to the Dollar Tree, Inc.'s Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Randy Guiler, VP, Investor Relations. Please go ahead, sir.
Randy Guiler, VP, Investor Relations
Thank you, Shelby. Good morning, and welcome to our call to discuss Dollar Tree's performance for the third quarter. With me on today's call will be our President and CEO, Mike Witynski; and our CFO, Kevin Wampler. Remarks that we will make today about future expectations, plans and prospects for the company represent forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Results may differ materially from those indicated by these forward-looking statements due to various factors included in our earnings release, 8-K, 10-Q and annual report, which are on file with the SEC. We have no obligation to update our forward-looking statements and you should not expect us to do so. Following our prepared remarks, we will open the call to your questions. Please limit your questions to one and one related follow-up question. Now I will turn the call over to Mike Witynski, Dollar Tree's President and Chief Executive Officer.
Michael Witynski, CEO
Thank you, Randy. Good morning, everyone. 2020 has proven to be the most unpredictable and unique year in my 40 years in retail. Nearly every business, family and person has had to adapt and react to what is currently a new normal. My heart goes out to every family that has been impacted to some degree by the coronavirus. I would also like to give a shout-out to all the medical professionals, frontline workers, and others who are working tirelessly to ensure that we stay safe and healthy. In an environment where individuals are concerned about their health and exposure, about their income and jobs, and about not knowing what is next, I firmly believe that Dollar Tree and Family Dollar are part of the solution. Our 15,000-plus stores are close to home and easy to shop, providing great convenience, and we offer a broad assortment of tremendous values to meet both needs and wants. I'm incredibly proud of our team's effort in the third quarter to continue serving customers effectively while driving operational improvements in both banners through this extremely dynamic retail environment. The team delivered an earnings per share increase of 28.7% compared to the prior year's quarter. These enterprise results were comprised of a 5.1% same-store sales increase, a 150 basis point improvement in gross profit margin, and a 130 basis point increase in operating profit margin. Our Dollar Tree segment delivered its strongest same-store sales performance in the past 10 quarters with a 4% increase. Gross profit margin improved 70 basis points to 34.9% versus Q3 a year ago, and operating margin increased 50 basis points to 12.7%, which represents a 300 basis point improvement from Q2. The quarter included $28.6 million in COVID-related costs. Geographically, comp sales were positive in all zones. For the quarter, discretionary delivered a positive 10.2% comp, and consumables were down approximately 2.6%. We did see sequential improvement in consumables throughout the quarter as inventory flow of high-demand products improved. Categories performing well included crafts, party celebrations, household products, kitchenware, and even early Christmas season. The performance of the Crafters Square offering that was rolled out into approximately 2,400 stores in Q1 of this year has been outstanding. We plan to add Crafters Square to the remainder of the Dollar Tree stores in early 2021. The Halloween seasonal sell-through was our best ever. Overall, the Fall Harvest and Halloween seasonal categories delivered a combined 9.4% comp for the quarter. Our merchants continue to hit a home run on identifying and sourcing great products that customers love at the dollar price point. Customers are continuing to shop early to celebrate events and holidays. Our sales continue to be delivered by average ticket, which increased 19% as consumers continued to consolidate trips. Our 12.6% transaction count decline was a 300 basis point plus improvement when compared to the 15.9% drop that we saw just a quarter ago. We believe this is directly related to shopper mobility. Many people are working from home, learning from home, or simply not going out as often, but when they do visit the store, they are filling their baskets. Ticket was up 19% this quarter and 22.6% last quarter. We continue to like the results we are seeing with the Dollar Tree Plus, and we are pleased to announce we are expanding the program to a total of approximately 500 stores beginning in the spring. Based on our learnings, we have continued to test, refine, and improve this initiative since the initial launch in mid-2019. The merchant and store teams have done a tremendous job. Our customers are buying these products, and sales of our multi-price items continue to grow. In fact, we are seeing that when multi-price items are included in the basket, the average transaction value is approximately twice the size. Recently, we've been seeing phenomenal sell-through of Dollar Tree Plus! items and seasonal merchandise. We are expanding our discretionary assortment to focus on sales and margin-driven categories that do not cannibalize current sales, are accretive to the business, and bringing great value to our customers. These $3 and $5 items will also be leveraged through our Family Dollar stores when it makes sense. This is an example of harnessing the power of two brands by bringing Dollar Tree and Family Dollar together. We now have a new merchant team dedicated to these multi-price items that will benefit both banners. Family Dollar sales highlights for the third quarter included a 6.4% same-store sales increase on top of the 2.3% comp in Q3 a year ago. This was comprised of a 21.3% increase in average ticket, partially offset by a 12.3% decline in transaction count. The ticket and traffic trends are relatively balanced throughout the quarter. The sales strength was broad-based geographically with each zone delivering positive comps ranging 4.7% or better. Categories performing well are many of the discretionary categories that we have been focused on improving, including home decor, household products, toys, electronics, and apparel. Both rural and urban Family Dollar stores delivered mid-single-digit comp increases with rural slightly outpacing urban. Regarding the cadence of comps, each month's increase was greater than 5.5%, with September being the strongest month and October slightly better than August. The consumable side of the business delivered another positive quarterly comp at 4.1%, and discretionary comp was strong at 14.6%. On our March call, I discussed the challenge and opportunity to enhance the discretionary performance at Family Dollar through improved product assortment, sharper price points, and greater values. Customers are noticing, and they are responding. In Q3, discretionary, as a percent of our net sales at Family Dollar, increased 140 basis points to 21.5% of sales. Our discretionary grew two times faster than the total market in Q3. During the quarter, we launched the ability to sell product directly on our website at familydollar.com, providing customers another way to access great values. Additionally, we are early in the test phases of the following initiatives: buy online, pick up at store; and delivery options through Instacart and Shipt. There will be more to come on future calls. As I mentioned on our call three months ago, it's a new day at Family Dollar. I continue to be very pleased with the team's overall progress. We are three quarters into 2020 with an operating margin of 5.1% compared to 2% three quarters into 2019. The key elements of our improvement plan include: improved merchandising and marketing, raising stock and raising store in-stocks, upgrading brand standards, creating a selling culture, and refining our format strategy. I would also like to recognize Dollar Tree Canada. Our Canada President and Chief Operating Officer, Neil Curran and his team are hitting on all cylinders. During Q3, Dollar Tree Canada opened two new stores, bringing the total to 230 stores north of the border. Canada exceeded its plan of sales, gross margin, and operating income, delivering low double-digit comps in both consumables and discretionary, including very strong seasonal sales on Fall Harvest and Halloween, and they have improved on store manager turnover and internal promotion as a result of their continued focus on people development. Regarding real estate, the team completed more than 550 projects in the quarter, including 143 new stores, 34 relocations, 371 Family Dollar H2 renovations, and we had 16 store closings. We ended the quarter with 15,606 stores. I'll now toss it to Kevin to provide more detail on the Q3 performance.
Kevin Wampler, CFO
Thanks, Mike, and good morning. For the third quarter, consolidated net sales increased 7.5% to $6.18 billion, comprised of $3.3 billion at Dollar Tree and $2.87 billion at Family Dollar. Enterprise same-store sales increased 5.1%. On a segment basis, comps for Family Dollar increased 6.4%, and for Dollar Tree increased 4%. Dollar Tree's comp represented its best quarterly same-store sales performance since Q1 of 2018. Overall, gross profit for the enterprise increased 12.9% to $1.92 billion. Gross margin improved 150 basis points to 31.2% compared to 29.7% in Q3 of 2019. Gross profit margin for the Dollar Tree segment increased 70 basis points to 34.9% when compared to the prior year's quarter. Factors impacting the segment's gross margin performance included merchandise costs, including freight, improved by approximately 95 basis points. Dollar Tree saw an improvement in merchandise mix and lower freight costs as a percentage of sales, partially offset by reduced markups. Occupancy costs decreased approximately 20 basis points due to leverage on the comp sales increase in the quarter. Shrink improved approximately 10 basis points. These improvements were partially offset by distribution costs that increased 50 basis points, primarily due to higher payroll costs and depreciation. This includes the continued ramp-up for the two new distribution centers as well as approximately $6.6 million or 20 basis points of COVID-related expenses, primarily premium pay and bonuses. Gross profit margin for the Family Dollar segment improved 230 basis points to 26.8% in the third quarter. The year-over-year improvement was due to the following: shrink improved to 70 basis points based on inventory results in the current year and cycling an increase in the accrual rate during the prior year. Merchandise costs, including freight, improved 60 basis points, primarily due to a balanced improvement in merchandise mix and markdown. Occupancy costs decreased approximately 60 basis points as a result of leverage from the comp sales increase, and markdown expense improved approximately 40 basis points due to lower promotional activity and improved sell-through of seasonal merchandise and apparel. As a percentage of net sales, distribution costs were flat compared to the prior year quarter. The current year quarter included approximately $4.3 million or 15 basis points of COVID-related expenses, primarily premium pay and bonuses. Consolidated selling, general and administrative expenses increased 20 basis points to 23.7% of net sales compared to 23.5% in Q3 a year ago. For the third quarter, the SG&A rate for the Dollar Tree segment as a percentage of net sales increased to 22.2% compared to 22% in Q3 of 2019. Payroll costs increased approximately 50 basis points based on payroll expenses increasing $17.3 million or 50 basis points for costs associated with COVID-19 premium paying bonuses. Store facility costs decreased 15 basis points, primarily due to leverage of the stronger same-store sales and lower electricity costs. Other selling, general and administrative expenses decreased approximately 5 basis points, primarily from lower travel and legal costs. The SG&A rate for the Family Dollar segment improved approximately 20 basis points to 22.2% compared to 22.4% for the third quarter of 2019. Other selling, general and administrative expenses decreased by approximately 20 basis points, primarily due to lower advertising and travel costs as a percentage of net sales. Store facility costs improved approximately 20 basis points, primarily from leverage on comp sales and lower electricity costs, and depreciation improved 10 basis points, primarily from leverage on comp sales increase. These benefits were partially offset by payroll expenses, which increased approximately 35 basis points driven by COVID-19 costs of $11.4 million or 40 basis points for premium paying bonuses and increased incentive compensation based on performance. Operating income increased 29.9% to $465.5 million compared with $358.4 million in the same period last year, and operating income margin improved 130 basis points to 7.5% compared to last year's third quarter. The current year quarter included $46.3 million in COVID-19-related expenses in total. Nonoperating expenses totaled $38.2 million comprised primarily of net interest expense. Our effective tax rate was 22.8% compared to 19.3% in the prior year's third quarter. Current quarter rate reflects higher state tax rate and higher income amounts taxed at the statutory rate. Prior year rate reflected a larger benefit from the reconciliation of the tax provision to the tax return. The company had net income of $330 million or $1.39 per diluted share, which included $46.3 million or $0.15 per diluted share of incremental operating costs for COVID-19-related expenses. This compares to net earnings of $255.8 million or $1.08 per share in the prior year's quarter. Combined cash and cash equivalents at quarter end totaled $1.12 billion compared to $539.2 million at the end of fiscal 2019. The company paid down the remaining $500 million on its revolving line of credit during the quarter. Outstanding debt as of October 31, 2020, was $3.55 billion. During the quarter, we purchased nearly 2.2 million shares for $200 million. At quarter end, we had $600 million remaining in our share repurchase authorization. We will continue to provide post-quarter updates on share repurchase activity. Inventory of our Dollar Tree at quarter end declined 1.8% from the same time last year, while selling square footage increased 4.2%. Inventory per selling square foot decreased 5.8% and inventory levels are well positioned for the holiday selling season. Inventory for Family Dollar at quarter end decreased 2.9% from the same period last year, while selling square footage increased 1.1%. Inventory per selling square foot decreased 4%. Our inventory levels improved in Q3, and we continue to be more productive with lower inventory, significantly increasing our inventory turns. Capital expenditures were $238.7 million in the third quarter versus $279.8 million in Q3 last year. And for fiscal 2020, we continue to expect consolidated capital expenditures to be approximately $1 billion. Depreciation and amortization totaled $170.1 million for Q3 compared to $160 million in the third quarter last year. As for fiscal 2020, we now expect consolidated depreciation and amortization to be approximately $680 million. While we are not providing sales and EPS guidance, I do want to provide a few data points for your modeling. Net interest expense is expected to be approximately $37 million in Q4 and $151 million for fiscal 2020. The tax rate is expected to be 22.3% for the fourth quarter and 22.8% for fiscal 2020. Weighted average diluted share counts are assumed to be 236.3 million shares for Q4 and 237.5 million shares for the full year. We have a strong balance sheet and continue to grow the company by investing in both new and renovated stores, our supply chain, and technology to improve the customer experience. We remain confident in our business and our ability to drive long-term shareholder value. I'll now turn the call back over to Mike.
Michael Witynski, CEO
Thanks, Kevin. We certainly have momentum in our business. For Q3, in a challenging retail environment with government stimulus mostly behind us, we delivered very solid enterprise results, including a positive 5.1% comp, 150 basis points of gross margin improvement, and 130 basis points of operating margin improvement despite incurring more than $46 million in COVID-related costs. Additionally, we completed more than 550 real estate projects, paid down the $500 million drawn on our revolving line of credit, and repurchased $200 million in stock. Our strong balance sheet provides us the flexibility to grow the business and create shareholder value. It is still very early, but I am encouraged by our start to the current quarter. We are just over 3 weeks into our important fourth quarter, and we are off to a very good start with same-store sales at both banners currently tracking above reported third quarter levels. We are truly leveraging the power of both brands. Actions taken in 2019, including the consolidation of store support centers and the alignment of organizational leadership under one team are paying off. Examples include: we are experiencing improved accessibility to a broader base of manufacturers and vendors by going to market as a 15,000-plus store chain. Many vendors are willing to work with us to support both the dollar price points as well as price points above the dollar. Our merchant teams are harmonized to act with clarity, focus, and speed. When the first COVID wave hit in March, we took action to derisk the Halloween season and actually saw the best sell-through in company history. This fall, we modified our assortments away from traditional cold and allergy and to more focus on health products, vitamins, and face coverings. We also made strategic buys on paper, soaps, and sanitizers to get ahead of the curve as COVID cases were expected to pick up in the second wave. Our seasonal businesses, both at Dollar Tree and Family Dollar are doing very well. We are able to be a convenient shopping trip to meet the needs of those staying at home, eating at home, working at home, and/or learning at home. We are seeing greater sales of seasonal product as it hits our stores. Customers are buying ahead and not waiting until the last minute. This is resulting in better sell-through and reduced markdown exposure. We will continue to develop new strategic store formats so we are able to better serve our customers while improving store productivity, margins, and returns. We want formats that utilize the best of both brands to serve customers in all types of geographic markets. This will be a story of evolution, change, and improvement. Our gross margin return on investment or GMROI at Family Dollar is the highest it has been since we have owned the business. This is a combination of improved sales, gross margin, and inventory returns. An example is our apparel category where we delivered a significant improvement in sales and margin with materially less inventory. This is while the overall market has been down for apparel. We are focused on delivering the basics at greater values, sharper price points. The team has undergone a significant amount of work to get us to this stage with one consolidated store support center, a strong balance sheet, and an aligned, energized, and focused leadership team, and a full staff of talented retailers. We believe we have the ability to better serve customers across North America. Our actions represent a transformational opportunity to leverage the power of both of our brands through flexible store formats designed to drive operational results and enhance shareholder value. Before we go to your questions, I'd like to wish all of our stakeholders a safe and happy holiday season. I believe we are all looking forward to the arrival of 2021. It's almost here. Operator, we are now ready to take questions.
Operator, Operator
We'll take our first question from Simeon Gutman with Morgan Stanley.
Simeon Gutman, Analyst
Nice quarter. I'll ask one and a follow-up as one full question. First, the quarter-to-date acceleration at both banners, what do you attribute it to? Is there any stocking up going on at the Family Dollar banner? And you mentioned maybe some... like shopping earlier. Is there any signs of pull-forward of holiday spending? And then I just want to go back to the Dollar Tree Plus! for a second. It sounds like you are excited. The initial results are good. I guess my question, a little tongue-in-cheek, is, why did it take so long if it sounds like it's so successful? Why didn't it come sooner? And anything about the current backdrop that could be unreliable as a test?
Michael Witynski, CEO
Thank you for the question. Currently, we are observing some stocking up, although it's not at the levels we saw in March and April. We estimate it to be around 30% of the earlier rate this year, but we can see that stocking is indeed happening. The seasonal pull-through includes some early sales, and customers are purchasing and decorating their homes sooner, which has positively impacted our sell-through. We are experiencing fewer markdowns, leading to less exposure, and this allows us to have more product available on the sales floor. Regarding Dollar Tree Plus!, I understand it seems to be taking a while, but this process is similar to our other tests. For instance, with Crafters Square, we initially tested it in a few stores before expanding to 800 locations and eventually rolling it out across the chain, which took about 18 months to two years. We didn't share every detail of the initial testing phase. We followed a similar approach with our snack zones; we spent a year testing and refining that before expanding to a select number of stores. This is the same methodology we are applying now. We want to ensure that everything is aligned and correct, and we've gained valuable insights from the process. We've shifted focus from consumables to discretionary items that genuinely appeal to customers, allowing us to deliver great value. Additionally, our buyers dedicate time to sourcing these imports, as we manufacture and design these products to provide excellent value and excitement at the $3 and $5 price points. We want to make sure we are offering the right products that add value for both our customers and our company.
Operator, Operator
We'll take our next question from Edward Kelly with Wells Fargo.
Edward Kelly, Analyst
So Mike, just a follow-up on Dollar Tree Plus!. I was hoping that you could provide a bit more color on the actual decision to expand the test. Any more detail in terms of what you've seen from a sales lift or a margin impact in the stores where the product is currently? Why is 500 stores the right number? And then it's notable that you have a team that's now focused on this product internally. So what does that say about where we go from here?
Michael Witynski, CEO
We are organizing our strategy, which shows our commitment to finding great products at the $3 and $5 price points. This approach allows us to leverage these products across both of our banners where it makes sense. We estimate rolling this out to 500 stores that are appropriately sized to carry these products. This gives us a sufficient number of locations to monitor growth, improvement, and customer reactions. We are seeing positive results, with sales increasing compared to consumable items, and customer engagement is strong. The challenges we face stem from the changes in sales patterns due to COVID, making it difficult to isolate specific categories in stores. However, we have enough evidence that these categories are performing well, and customer feedback has prompted us to continue expanding and testing further. Additionally, we've noticed that even seasonal items priced at $3 and $5 are responding positively.
Edward Kelly, Analyst
And just a quick follow-up related to that. So I think it was about a year ago that when asked about this initiative, you guys had talked about how customer response that may be like one-third of customers has liked it, one-third were indifferent, one-third didn't like it. And I think it had people sort of thinking like maybe this is not something that would make sense. How has that customer response changed?
Michael Witynski, CEO
Well, I think the number one thing that we could see is the sales are up over the program when it was consumables. So we think that they're responding favorably because the products that we are buying are selling through at the rate we expect and it's continuing to grow.
Operator, Operator
We'll take our next question from Matthew Boss with JPMorgan.
Matthew Boss, Analyst
Congrats on the performance, guys. Maybe first on Dollar Tree banner gross margins. What drove the 95 basis points of merchandise margin expansion this quarter? How best to think about puts and takes in modeling fourth quarter gross margin at Dollar Tree? And I know we've talked in the past about the return to 35% to 36% gross margin. Is there any impediment to getting there potentially next year at the Dollar Tree banner?
Kevin Wampler, CFO
Matt, this is Kevin. As we went through the quarter, it was clear that the mix was a significant factor in enhancing the merchandise margin, along with freight. The mix shifted about 300 basis points year-over-year towards discretionary items, which relates to successful sales events like Halloween that Mike mentioned. Crafters Square has also been a vibrant draw in our stores. This mix shift is noteworthy, especially considering the improvement we observed in freight. It's important to note that a year ago we faced considerable increases due to a surge, which makes our comparisons somewhat unique. Additionally, we saw some leverage with occupancy costs, as expected since this was based on prior performance. The gross profit for this quarter was the best we've seen since 2017, and if the current trend continues, we aim to stay within the 35% to 36% range. There are no barriers preventing us from achieving this; we simply need to continue growing the business, and right now the discretionary side is performing strongly, which is a significant advantage.
Matthew Boss, Analyst
That's great. And then as a follow-up on the Family Dollar side, what have you seen from new customers relative to spending from existing customers more recently and the improved performance? How to think about retaining some of these new customers? And maybe larger picture, how do you envision, Mike, the Family Dollar comp story as we think about relative to the low single-digit historical comp profile at Dollar Tree? Do you see it similar? Do you see it lagging? What's the best way to think about Family Dollar multi-year relative to comps at Dollar Tree in your opinion?
Michael Witynski, CEO
Yes. In my opinion, I see it similar to the Dollar Tree, low single-digit, continued growth year after year in comp store sales growth. I think both banners should be able to settle into that with no problem. Regarding the new customers, what we're seeing is just overall, it's very similar to new and old. As I shared in the prepared remarks, when the customers are coming into the store, they are shopping with intent. And what we do like to see is they're shopping the entire store in the discretionary side that we are working so hard on to fill that basket, and we're seeing our discretionary side grow with both new and old customers.
Operator, Operator
We'll take our next question from Brad Thomas with KeyBanc Capital Markets.
Bradley Thomas, Analyst
Nice quarter here. I was hoping you could give a little color on how you all are starting to think about 2021 at this point. Clearly, 2020 is shaping up to be a good year for you all, but there are also some dynamics like traffic that have been challenges for you. I guess how are you thinking about some of the puts and takes at a high level at this point for next year?
Michael Witynski, CEO
Matt, we're all looking forward to 2021. I believe that customers' shopping patterns have changed, and this shift will take time to adjust. I don't anticipate a sudden return to their previous habits. We will continue to focus on increasing basket size and driving intentional purchases when they are in our stores.
Kevin Wampler, CFO
I think the other thing, Brad, is, obviously, as Mike laid out early this year, focus on discretionary business in the Family Dollar store. And obviously, we've had the pandemic this year, which is obviously muddies the water a little bit, but it's obviously an area that we feel where we can drive new business and convert more customers at the end of the day. The team continues to work cross-functionally to build out those assortments, and we saw our best Halloween sell-through in the time we've owned Family Dollar this year. So that tells us that we can sell seasonal. It can be a bigger part of the overall business, and it needs to be part of our overall business a bigger part as we go forward. So it's going to be a continued focus, just like we talked about early this year.
Bradley Thomas, Analyst
Great. And if I could ask a follow-up on the H2 stores. You talked about your plans for the multi-price expansion on the Dollar Tree side. Do you have a target at this point for how many H2 renovations you'll do next year? I know you pared back a little bit this year in the COVID backdrop? How are you thinking about those models next year?
Kevin Wampler, CFO
Yes, Brad, you're right. This year, about 750, H2. We ended the year expecting to about 1,250, but obviously, COVID kind of got in the way of that. We do expect 1,250 additional H2s in 2021 to continue that process forward. It continues to be something that we can build upon. Our customers really like the layout and the offering and the assortment, and it's an important part of the growth as we go forward.
Operator, Operator
We'll take our next question from Peter Keith with Piper Sandler.
Peter Keith, Analyst
Maybe just to touch base quickly on some of the gross margin trends. This looks like the first time in a while where shrink is now a tailwind. So have you gotten over the hump where you think you've controlled shrink? And can you continue to see some benefit there? And similarly, on gross margin, freight has a nice tailwind for Q3, but we have seen freight rates jump rather dramatically. How should we think about that impact in the fourth quarter?
Kevin Wampler, CFO
Thank you for the questions, Peter. Regarding shrink, we've observed noticeable improvement, which has been a challenge for longer than it should have been. It's been a focus for many of us. I commend our operators and asset protection team for the progress we’ve made, and we are starting to gain momentum. However, we still have work to do to reach our goals of being class-leading in this area. The positive news is that we are making progress. Looking ahead to Q4, I believe there is potential for improvement, although it may not match the rate seen in Family Dollar during Q3 last year due to a significant increase in accrual rates. On the freight side, although we had a solid performance in Q3, I expect some moderation in Q4. As mentioned earlier, last year’s freight costs were unusually high due to surges and transportation logistics. We've noticed some of the rate increases you've mentioned. Our transportation team is diligently working to minimize expenses, but I do not anticipate the same level of benefit in Q4 as we experienced in Q3. We also observed more of these freight challenges on the Dollar Tree side than the Family Dollar side. This sums up how we foresee both areas developing as we move forward.
Peter Keith, Analyst
Okay. Maybe a separate question for Mike. Mike, you pushed out some omnichannel initiatives, it looks like you're looking at BOPIS for Family Dollar. Maybe give us a little bit of sense on what you guys are playing out with there? And is it only on the Family Dollar business where you're looking at that? Or would you think about more omnichannel investment needed for Dollar Tree as well?
Michael Witynski, CEO
Yes, thanks for the question. It's a great question. We think it's critical. And especially after this year, as you've seen by others and how the customer is really moving into the omnichannel and using that. So we definitely are going to build that capability at both Family Dollar and Dollar Tree. And like we have organized around our Dollar Tree Plus!, we are organizing around our omnichannel business as well. We've got a new leader there, who's got great experience, and we will accelerate our capabilities.
Operator, Operator
We'll take our next question from Chandni Luthra with Goldman Sachs.
Chandni Luthra, Analyst
This is Chandni Luthra at Goldman. Just building up on that last question on omnichannel. You've also talked about introducing delivery at Family Dollar. If you could provide any color on what early reads are? What sort of customer is buying back? What the delivery basket is looking like? And finally, how do you think about economics with Family Dollar, economics to ship-to-home with Family Dollar?
Michael Witynski, CEO
Yes, it's really early. We launched it in the middle to late part of the quarter. I would say we are really pleased with the basket size and the products being purchased. We are excited to provide this opportunity to our customers as their shopping behaviors change. The great thing is that we have a large network of 15,000 stores conveniently located in their neighborhoods. Additionally, we will offer options for customers who want to buy online, pick up in store, or have items delivered to their homes. It's still early for us, but we are happy with the basket and the variety of products we're seeing.
Chandni Luthra, Analyst
Got it. And I guess my follow-up is a little bit long-term as we sort of think about 2021 and beyond. There is a lot of talk about raising the federal minimum wage threshold. Could you perhaps give us color in terms of what percentage of your employees are in minimum wage? How do you think about if that headwind were to come about? How should we think about that?
Michael Witynski, CEO
Yes, that's a relevant question because we consider it frequently. Minimum wage regulations vary significantly by state, making it difficult to provide a specific figure as it will differ based on geography. However, there are currently six to seven states moving towards a $15 an hour minimum wage that they announced several years ago. Our operational teams are focused on enhancing in-store efficiencies. For instance, implementing technology and self-scanning can help optimize our resources. Additionally, our merchants are continuously exploring merchandising strategies with shelf-ready products and improving distribution methods. We have three primary areas to focus on: our store operators, technology, and the products our merchants are purchasing, all of which we will be actively working to improve.
Operator, Operator
We'll take our next question from Michael Montani with Evercore.
Michael Montani, Analyst
Just wanted to ask, first off, on flow-through rates, if I could, for the fourth quarter. Third quarter was quite healthy in the mid-20% range. So I just wanted to see if there's any puts and takes that you would call out to think about at the enterprise level, if that is sustainable? And then I just had a follow-up on Dollar Tree Plus!.
Kevin Wampler, CFO
Yes. Regarding flow-through, this past quarter was very strong. We experienced significant leverage across both of our businesses, and we benefited from a favorable mix contributing to gross profit. Heading into Q4, I do expect year-over-year improvement in gross profit, but not at the same rate as we saw in Q3 due to certain factors that may not be repeated. For instance, shrink and freight might not contribute as much this time. Therefore, the flow-through on total gross profit may differ. Generally, Q4 tends to be a more discretionary period for Dollar Tree, and it typically showcases some of our highest margins across the year. While we anticipate improvement, it likely won't match the substantial gains we observed in Q3.
Michael Montani, Analyst
Okay. That's helpful. And then if I could, just around Dollar Tree Plus!, I want to see if there's any incremental color that you could share in terms of how the stores were performing relative to the overall chain from a comp perspective when you roll out Dollar Tree Plus!? And if there's any incremental color perhaps related to that on incrementality, either in terms of shoppers or kind of basket size. Just any incremental color there?
Michael Witynski, CEO
Yes, Mike, thanks for your question on the DT Plus!. As I shared earlier, right now, when you look at relative performance to other stores or prior, the challenge we have is when we changed to our 2.0 and brought in all our discretionary, it landed right in March. So there was so much noise around other stores and/or themselves that is really hard for us to determine the lift that was associated specifically to these products. And remember, the linear footage, it's still 10% to 11% of the total store. So it's hard to see what this is doing. But the two things we do see, we like the sales that the products that we're putting in there at the $3 and $5 price point are selling. It's also selling at a much higher margin because it's discretionary product, and we're able to manufacture these products and bring value to the customer. And then the third thing we can see is the basket size. When one of these items is in the basket, it is twice the basket size when they're not in there. Those are the things that we can see, and it gives us courage to keep moving forward, and we're going to keep on fueling it.
Operator, Operator
We'll take our next question from Scot Ciccarelli with RBC Capital.
Scot Ciccarelli, Analyst
Scot Ciccarelli asked if the company has been surprised by the extent of change in the mix of discretionary versus consumable items, given their efforts to improve the discretionary mix. He also inquired if there are any supply issues with consumables, or if that is simply not what customers are currently interested in.
Michael Witynski, CEO
Thank you for the questions, Scot. I'll address the first one regarding consumables. We are actively pursuing both the product and the national brand, particularly those related to COVID, as manufacturers work to increase their capacity. This includes items like paper products, hand sanitizers, wipes, and other consumable products. Inventory levels have improved since April, but they still lag behind demand. We are still working to close that gap, and there is potential for increased capacity.
Kevin Wampler, CFO
Scot, your question about discretionary spending and its strength highlights the consumer's pattern. Consumers are purchasing more locally, which is definitely a factor. However, it's primarily about the categories they are buying. As we've noted, seasonal items in particular have performed well as people seek to maintain a sense of normalcy during an unusual time by decorating their homes or enhancing their soft goods. Our Family Dollar stores have been successful in this regard, as customers look to replenish their homes and décor. Many such products are thriving, and we believe we can consistently offer these items. This allows us the chance to showcase our offerings in this area and hopefully encourage customers to continue shopping with us in the future. It presents a great opportunity as we expand that product range.
Michael Witynski, CEO
Our merchants have worked hard to provide better value at sharper price points, which has met customer needs for the past several months. Moving forward, they will continue to focus on buying better, buying basics, and offering great value to customers.
Operator, Operator
We'll take our next question from Paul Lejuez with Citi.
Paul Lejuez, Analyst
In response to an earlier question, I think it was Ed's on Dollar Tree Plus!. You mentioned something about doing it in stores that are close to the DC, I think. Just want to make sure I understood that and whether the Dollar Tree Plus! rollout would be in certain geographies. Also, if you're happy with the test, are there any limits to how many stores could get this assortment, either because of store size or proximity to DC? And then just a follow-up, maybe a silly question, but why don't you like the even numbers $2 and $4 when you think about that Dollar Tree product?
Michael Witynski, CEO
Yes. The reason for our rollout is not restricted by proximity to the distribution centers. It's mainly about integrating these products into a distribution center and setting up space for various items. We will carefully evaluate this rollout and conduct tests. The store size consideration is primarily to ensure that we do not disrupt the single price point selection that customers have come to expect in our stores. We are currently seeking store sizes during the test that won't negatively affect that selection, which is the main reason for our approach. Regarding your question about the $2 and $4 price points, we aim to provide great value with excellent products. The $3 and $5 price points resonate better with our customers and help differentiate us from the Dollar price point. We want to avoid confusion with in-between products and focus on offering significant items priced at $3 and $5 that would typically be $7 and $10 in other retail settings. We're working to create clarity for ourselves, our merchants, and our customers regarding the value we offer.
Paul Lejuez, Analyst
Got it. And just a follow-up on the store side. What percent of the fleet are large enough to handle that Dollar Tree Plus! assortment at this point?
Michael Witynski, CEO
I don't have that information available at the moment, but Randy can provide that for you.
Operator, Operator
We'll take our last question from Michael Lasser with UBS.
Michael Lasser, Analyst
You outlined the diligent and disciplined process that you typically go through when you're rolling out initiatives from pilot to test to full rollout. Could you see any conditions under which you would roll back this test or this expansion of the test of 500 Dollar Tree Plus! locations, particularly given some of the opacity that you spoke about in determining the results of the initial 100 in the last 6 months. Then I have a follow-up.
Michael Witynski, CEO
Yes. The key concern is if there are negative effects on comparable store sales or profit margins, which would not benefit the business. Our goal is to ensure that this program positively contributes to sales, margin, and operating income, and that is our expectation.
Michael Lasser, Analyst
Have you gotten to a point like this where you expanded the test and then subsequently had to roll back the test?
Michael Witynski, CEO
I can't remember one to this level, no. We've got certainly a lot of tests out there that we never went forward with, but no, not to this level.
Michael Lasser, Analyst
And my follow-up question, Mike, is on framing the Family Dollar consumable business, which increased in the 4% range in the most recent quarter. If we compare that to a lot of the results from the other consumable retailers, it was a bit slower and perhaps suggests that the Family Dollar's market share in those categories was lagging behind others. How do you think about that and how do you see the ability to improve share from this point for Family Dollar?
Michael Witynski, CEO
Yes, that's a great question. But first and foremost, it was a positive low single digits. So we continue to grow our consumable sales. And nine months ago in March, we were talking about how consumable has always been healthy for the Family Dollar business, and I foresee that continuing to grow. And we're going to keep doing the same thing as we are on the discretionary side. We're bringing great values. We're going to have the right assortment. We're going to sharpen our price points to be competitive in the marketplace. And we are chasing the inventory. I would say on the consumable side, we are not happy with our everyday in-store stocks on consumables. So we believe that we can build that business going forward.
Operator, Operator
That concludes today's question-and-answer session. At this time, I will turn the conference back over to Randy Guiler for closing remarks.
Randy Guiler, VP, Investor Relations
Thank you, Shelby, and thank you for joining us for today's call and for your interest in Dollar Tree. We would like to wish our best wishes to all of you for a happy and safe holiday season. Our next earnings conference call to discuss Q4 and full year results is tentatively scheduled for Wednesday, March 3, 2021. Have a good day.
Operator, Operator
This concludes today's call. Thank you for your participation. You may now disconnect.