Earnings Call
Dollar Tree, Inc. (DLTR)
Earnings Call Transcript - DLTR Q2 2025
Operator, Operator
Greetings, and welcome to the Dollar Tree Q2 2025 Earnings Call. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Bob LaFleur, Senior Vice President of Investor Relations. Bob, please proceed.
Robert LaFleur, Senior Vice President, Investor Relations
Good morning, and thank you for joining us today to discuss Dollar Tree's Second Quarter fiscal 2025 results. With me today are Dollar Tree's CEO, Mike Creedon and CFO, Stewart Glendinning. Before we begin, I would like to remind everyone that some of the remarks that we will make today about the company's expectations, plans and future prospects are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward-looking statements. For information on the risks and uncertainties that could affect our actual results, please see the risk factors, business in Management's Discussion and Analysis of Financial Condition and Results of Operations section in our annual report on Form 10-K filed on March 26, 2025, our most recent press release in Form 8-K and other filings with the SEC. We caution against reliance on any forward-looking statements made today, and we disclaim any obligation to update any forward-looking statements, except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided in today's earnings release available on the IR section of our website. These non-GAAP measures are not intended to be a substitute for GAAP results. Unless otherwise stated, we will refer to our financial results on a GAAP basis. Additionally, unless otherwise stated, all discussions today refer to our results from continuing operations and all comparisons discussed today for the second quarter of fiscal 2025 are against the same period a year ago. Please note that a supplemental slide deck outlining selected operating metrics is available on the IR section of our website. Following our prepared remarks, Mike and Stewart will take your questions. Given the number of callers who would like to participate in today's session, we ask that you limit yourself to one question. I'd now like to turn the call over to Mike.
Michael Creedon, CEO
Thanks, Bob. Good morning, everyone, and thank you for joining us today. With the closing of the Family Dollar sale, the second quarter represents an important milestone in the evolution of the Dollar Tree story. In addition to closing the sale, I'm proud to say we delivered another strong quarter with results exceeding the high end of our expectations and reflecting a high level of execution across the board. The timing of the impacts of tariffs and our mitigation activities played out differently than we originally anticipated, with some of the net positive benefits of our mitigation initiatives coming earlier in Q2 and the tariff impact shifting to later in the year. Having said that, we are pleased with our momentum and our team's ability to adapt to a rapidly changing landscape. The second quarter unfolded against a volatile backdrop for both the consumer and retail industry, as the economy continued to adjust to elevated tariffs, persistent cost pressures and a static labor market. In today's environment, customers are seeking value and convenience more than ever, and Dollar Tree is uniquely positioned to deliver both. Whether it's a mom stretching her grocery budget, a college student outfitting a dorm room or a higher income shopper attracted to an expanded assortment of everyday essentials. Our stores are increasingly the destination of choice. This context is important because our Q2 performance was not just about exceeding a set of earnings expectations. It was about gaining share, expanding our relevance to a broader base of customers and proving once again that Dollar Tree thrives when customers focus on value. So let's walk through the Q2 highlights. Net sales increased 12.3% to $4.6 billion, driven by a 6.5% comp sales growth, which is a solid result in a quarter without major traffic driving events or holidays. Importantly, comp growth was nicely balanced between traffic and ticket and between consumables and discretionary. In fact, it's been two years since we've achieved a discretionary comp this high. Additionally, unit growth was positive, even with the limited pricing actions we took in the quarter. The bottom line was strong with adjusted EPS of $0.77 coming in ahead of our outlook. Stewart will walk you through the details of how Q2 benefited from some timing issues and how those should flow through the balance of the year. This positive momentum and consistency of execution demonstrates our growing appeal as a value retailer in periods of increased volatility. More importantly, we believe the customer gains we've made are sustainable, a belief underscored by our growing understanding of the dynamics driving these gains. Our dollar and unit share gains accelerated in Q2, providing additional evidence that our value proposition is resonating with customers. Our strong performance was led by seasonal items, party, balloons and personal items as customers find more items through our expanded assortment to help them live and celebrate their lives. As of the end of Q2, we have added 2.4 million new customers on a last 12 months basis, consistent with our pace in recent quarters. And nearly two-thirds of those new customers came from households earning $100,000 or more. Underscoring growing engagement, the number of shoppers visiting three or more times a month increased by 11% in Q2, a sequential improvement from the 9% growth we saw last quarter. While sales growth was strong across all income cohorts, we continue to see especially strong performance from middle and higher income customers, with households earning over $100,000 per year providing a meaningful portion of our Q2 growth. The strength of these results reflects how our value, convenience and discovery proposition is resonating with more and more customers and leading to increased trade-in activity. The increasing relevance of our expanded assortment is helping us attract and more importantly, retain a broader range of shoppers. To support the rollout of our expanded assortment, we completed 3,600 3.0 format store conversions through the end of Q2 and remain on track to reach our target of approximately 5,000 stores by year-end. Recall that last quarter, we said the distinctions amongst our various multi-price and non-multi-price store formats were beginning to blur as we roll out certain aspects of the expanded assortment across all store formats. And since the flexibility of multi-price is increasingly embedded across all our stores, the relative performance among the various formats is less meaningful. As you could see from our aggregate comp this quarter, the business is doing exceptionally well, and we continue to be pleased with positive contribution from our expanded assortment. Expanding our assortment to include items at a variety of price points is fast becoming the standard Dollar Tree model. It enhances our flexibility, whether through larger pack sizes, better quality items or entirely new categories. The ability to shop for $1.25 snacks and $3 to $5 home decor items in the same trip makes Dollar Tree more compelling than ever. Our expanded assortment makes us more relevant, broadens our customer base, and increases our flexibility in responding to tariffs and other cost pressures. Tariffs remain a source of ongoing volatility and operating in an environment where rates change frequently remains one of our largest challenges. A quarter ago, we told you we were forecasting the balance of the year based on our expectation that China tariffs would be 30% and the rest of the world would be closer to 10%. Today, tariff guidelines for China have yet to be finalized and currently remain at 30%, but countries like Vietnam, India and Bangladesh are meaningfully higher than they were in June when we provided our last outlook. We are adapting to this volatility and have several strategies in place across the business to address multiple cost pressures, including tariffs. Over the past few quarters, we've detailed what we call our five levers to mitigate these cost pressures. To review, these levers include negotiating with our suppliers, respecting products, shifting country of origin, dropping non-economic SKUs and finally, as a last resort, pricing. As we demonstrated in Q2 and expect will be true over the balance of the year, these levers are effective mitigation techniques. Using all five levers helps us to achieve the lowest landed cost possible and keep delivering compelling value to our customers. As many of you saw in our stores, our price initiatives started in late Q2 and will continue rolling out across the balance of the year. Following the selective pricing actions that we've taken so far, we are pleased with the understanding and resilience of our customers and the effect on unit volume has been less than we initially expected. This again demonstrates the power of our value proposition and validates multi-price as a structural advantage as we navigate a challenging tariff landscape. In a few minutes, Stewart will share more details on our tariff mitigation efforts in Q2 and for the rest of the year. Beyond the P&L, execution was strong across the business. Our inventory levels are healthy heading into the fall and holiday seasons. Supply chain performance remains solid with strong in-stocks, favorable freight compared to last year and efficiency gains from DC realignment projects in Odessa and Ocala. In real estate, we have opened 254 new stores so far this year, including 42 former Party City locations and are on track to hit our full year target of approximately 400 stores. Additionally, we have converted 26 former Family Dollar combo stores to full Dollar Trees and expect to convert the remaining 31 stores by year-end. We remain pleased with the outperformance of our new stores, particularly the $0.99 only conversions. Elsewhere in real estate, the renovation of legacy Dollar Tree locations continues to enhance store conditions and improve the overall productivity of our fleet. Additionally, our expanded preventative maintenance program is reducing downtime and lost business, including a 15% year-over-year reduction in store closed days due to maintenance issues. That is on top of a 50% improvement last year. On August 28, we announced a new partnership with Uber Eats. I'm very excited about this partnership, as it represents the next logical step in meeting our customers where they are and helping them shop the way they want to shop. Importantly, this agreement gives us access to Uber Eats' 25 million customers, which is a newer and younger demographic that Dollar Tree has yet to fully tap into. While it's still early days, we are encouraged by the initial response to the launch. In short, we are executing on growth, productivity and cost control simultaneously. Dollar Tree has always thrived in tough times. From our founding in 1986 to today, our formula has been remarkably consistent: deliver value, convenience and discovery for our customers. With our newly expanded assortment, we can now offer more compelling products and be more agile in navigating tariffs and other cost pressures, all while offering our customers more discovery at still affordable prices. Our ability to adapt not only positions us to withstand volatility, it positions us to gain share in the face of it. Dollar Tree is built to win in these conditions, offering prices that customers value, pack sizes that help them manage tight budgets and a range of products from everyday essentials to the joy of the perfect Treasure Hunt find. Taken together, our ability to drive traffic, ticket, comp and market share in a volatile environment highlights the resilience of our model and the ever-increasing agility of our organization. Before I turn things over to Stewart for more detail on our financial results and outlook, I'd like to acknowledge the extraordinary efforts of our associates in every store, every distribution center, and every support function. Our people are the reason Dollar Tree continues to perform at such a high level in a challenging and unpredictable environment. I'd like to give a special shoutout for all the hard work that went into the Family Dollar sales process. This was a massive effort that involved nearly every aspect of the business, and I'm especially grateful for the efforts of everyone involved.
Stewart Glendinning, CFO
Thanks, Mike, and good morning, everyone. Q2 comp sales increased 6.5% and adjusted EPS was $0.77. We recognize that this was substantially better than the outlook we provided last quarter when we said we expected Q2 comp sales to be towards the higher end of our full year range of 3% to 5% and that adjusted EPS could be down by as much as half compared to the prior year. With respect to compound performance, our initial outlook took into account the relative lack of events and holidays in Q2. But as the quarter unfolded, we saw that the increasing relevance of our expanded assortment to a wider range of customers overpowered the lack of events and Q2 comps came in stronger than we expected. With respect to the EPS outperformance, our sales were higher than anticipated. Our pricing actions started earlier, the timing of how our mitigation efforts impacted COGS differed from our initial expectations, and we were able to leverage our payroll costs in SG&A. The COGS timing difference reflected tariff headwinds shifting from Q2 into Q3 and Q4 and the benefits of our mark on being higher than expected. While all of these factors will impact the cadence of our EPS in the back half of the year, on a full year basis, our outlook remains intact. With that, let's go through the details of our second quarter financial performance. For the quarter, net sales increased 12.3% to $4.6 billion. Comparable store sales increased 6.5%. Growth was balanced with increases of 3% in traffic and 3.4% in ticket. Meanwhile, the sales contribution from non-comp stores also exceeded our expectations based on strong results from new store openings and our $0.99 only conversions. Positive performance was broad-based across categories, with comp up 6.7% for consumables and 6.1% for discretionary, which is particularly impressive, given the seasonal lull we normally see in Q2. Strength in electronics, hardware and lawn and garden drove the healthy mix in the quarter. Turning to margins. Q2 gross margin increased 20 basis points to 34.4%. Several factors contributed to this, including lower merchandise costs driven by higher inventory mark-on and lower freight as well as favorable pricing that helped us offset higher tariffs. We also benefited as our mix shifted away from some lower-margin consumable categories. The strong sales comp also helped us leverage occupancy costs. These benefits were partially offset by higher markdown reserves on aged inventory, higher distribution costs and elevated shrink. While tariffs were a meaningful headwind as expected, we were able to use our five mitigation levers to counteract much of the impact. At the Dollar Tree segment level, our Q2 adjusted SG&A rate increased 50 basis points to 26.3%, driven by higher store payroll related to stickering activity, wage increases, depreciation, incentive compensation and repairs and maintenance. These were partially offset by lower general liability expenses and sales leverage. While general liability expense was lower than last year, it was higher than we contemplated in our June outlook. As many companies have noted recently, the cost of claims continues to rise across the industry. At the corporate level, adjusted SG&A expense was higher driven by incentive comp and IT project expense. On a year-over-year basis, prior to TSA income, our corporate SG&A rate held steady at 3.1%. Subsequent to the sale of Family Dollar, we received $8 million of TSA income net during the second quarter. Adjusted operating income increased 7.4% to $236 million and operating margin decreased 20 basis points to 5.2%. This was significantly better than our outlook, reflecting the sales outperformance, expense control and timing benefits. Moving on to the balance sheet and free cash flow. Total inventory increased $112 million or 4.4%, reflecting store growth, our expanded assortment and inventory mark-on related to our pricing initiatives. We ended the quarter with $666 million in cash and cash equivalents. On the Q2 cash flow statement, we generated $261 million in cash from operating activities and had capital expenditure of $245 million. This resulted in free cash flow of $16 million, which was a $131 million positive swing year-over-year. On a year-to-date basis, we have generated $145 million of free cash flow. Additionally, in Q2, we received $668 million of cash proceeds from the sale of Family Dollar. On top of that, we expect approximately $425 million of cash tax benefits from the sale and approximately $100 million of accelerated cash tax benefits as a result of the recently enacted tax bill. Also, during the quarter, we paid off our $1 billion May 2025, 4% senior notes using a combination of commercial paper and available cash on hand. In the near term, we will continue to leverage commercial paper and available cash. In Q2, we repurchased 5 million shares for $501 million, including excise tax. Subsequent to quarter end, we repurchased an additional 0.6 million shares for $71 million. Year-to-date, we've completed $1 billion in share purchases or approximately 11.6 million shares at an average price of $86 per share. We ended the quarter with healthy liquidity, a more flexible balance sheet and ample capacity to fund growth while returning capital to shareholders. Our capital allocation priorities have remained consistent and include investing growth for new stores, multi-price conversions and supply chain efficiency, maintain balance sheet strength and flexibility, return capital to shareholders through ongoing share repurchases. Now let me provide an update on our full year 2025 outlook. We now expect comparable sales growth of 4% to 6% and adjusted EPS of $5.32 to $5.72, assuming current tariff rates. Gross margin improvement of approximately 50 basis points driven by pricing, freight and partially offset by higher tariffs. For Dollar Tree segment adjusted SG&A, we anticipate approximately 120 basis points of year-over-year deleveraging driven by a modestly higher outlook for labor and general liability costs. For corporate SG&A, prior to any TSA reimbursement, we expect costs to increase approximately 11% to 12% on a year-over-year basis. TSA proceeds of approximately $55 million to $60 million, subject to final adjustments. On a net basis, our outlook for adjusted corporate SG&A net of TSA proceeds remains essentially unchanged. Finishing the P&L, we expect net interest expense of approximately $100 million and an effective tax rate of approximately 25%. We still expect capital expenditures to be in the range of $1.2 billion to $1.3 billion, including approximately 400 new Dollar Tree store openings. We remain committed to offsetting cost pressures, including tariffs through our five levers while sustaining investment in growth initiatives and store expansion. Throughout the balance of 2025, we will be focused on consistent execution, disciplined cost control and delivering value to customers in what remains a challenging macro environment. And with that, I'll turn the call back to Mike.
Michael Creedon, CEO
Thanks, Stewart. Our second quarter results reinforce the unique position Dollar Tree holds in today's retail landscape. We delivered strong sales growth, margin outperformance and market share gains, all while navigating cost pressures in a dynamic consumer environment. With the Family Dollar divestiture complete, Dollar Tree is now a fully focused business. Every ounce of our leadership attention, capital investment and operating resources is now directed towards strengthening the core Dollar Tree brand. This sharper focus is already showing up in the pace of conversions, new openings, and faster decision-making on pricing, assortment and sourcing. Looking ahead, our strategic priorities remain clear: one, continue the rollout of our expanded assortment, which is driving higher traffic, ticket and discretionary penetration; two, manage costs with agility, use our five mitigation levers to protect margins while maintaining customer value; three, invest in the customer experience with compelling assortments, clean stores and well-stocked shelves; and four, drive disciplined growth and returns, supported by a strong balance sheet, free cash flow and the proceeds from Family Dollar. We entered the back half of the year with strong momentum, healthy inventory, a clear strategy and the resources to execute. That gives me tremendous confidence in our ability to deliver for our customers, associates and shareholders, not just in the near term, but for the long run. Finally, as we mentioned last quarter, we'll be hosting an Investor Day in New York on October 15 to share a refreshed long-term strategy and financial outlook for the stand-alone Dollar Tree business. This will be an important opportunity to show you how we intend to build on the momentum we've established and how we see the company evolving over time. Importantly, we will share more details about our updated strategic roadmap and financial framework. We look forward to showcasing the growth runway ahead, the earnings power of our expanded assortment and the operational improvements we are embedding across the business. And with that, we're ready to take your questions.
Operator, Operator
Our first question is coming from Michael Lasser from UBS.
Michael Lasser, Analyst
Guys, there's a perception out there that as you have more fully rolled out some of your tariff mitigation strategies, including raising price points across your assortment that the consumer has pushed back, your comps have slowed and the perception of relative value has decreased. And if this is the case, Dollar Tree's margins are going to be at risk over the long term as it will not have the levers to navigate through a higher cost environment. So why are those points wrong, especially in light of what there's been a lot of moving pieces within your full year guidance suggesting that business does remain somewhat volatile?
Michael Creedon, CEO
Yes. Thanks, Michael. Michael, we're pleased with our customer response. If you look at mix on all levels of our customer, the traffic and ticket are balanced, our consumables and discretionary are balanced and across all income levels, Dollar Tree is resonating with our customer. You look at what we're adding last quarter. In Q1, 50% of the customers we added came from the higher $100,000 salary point. If you look this quarter, that was two-thirds of our customers. So we think we're resonating very well with the customer. And when you look at these comps, both one-year and on a two-year basis, these are incredibly strong comps that demonstrate the relevance that Dollar Tree holds. Our customers are walking in. And one of the things I love about small box is you get a feel for the whole store as soon as you walk in the door. They're walking in and they're seeing value. We still have 85% of our stores at $2 or less. Think about that. You walk in and you're finding value around every corner. We think our customer is really pleased with that.
Operator, Operator
Our next question is coming from Paul Lejuez from Citi.
Paul Lejuez, Analyst
Can you talk about the drivers of the higher ticket between AUR and UPT, maybe any more detail you gave about AUR and discretionary versus consumables? And just at a high level, just trying to understand what pricing actions were already taken in the second quarter versus what is still planned in the second half?
Michael Creedon, CEO
Yes, Paul. When we look at the drivers of it, first of all, that balance that I talked about between discretionary and consumables was really strong and then, of course, the balance in traffic and ticket. And even though we did take some price in Q2, units were still up. So that tells us that our customer is accepting, they're still finding value in our stores. And we look at their reaction and they'll continue to guide us. But as I mentioned in my prepared remarks, the unit performance was actually better than we expected. So those are the major drivers there in terms of the mix and what we've seen on units.
Operator, Operator
Next question is coming from Edward Kelly from Wells Fargo.
Edward Kelly, Analyst
I wanted to follow up on guidance. Looking at your guidance for the back half of the year, it implies a fairly wide comp range of about 2% to 6%. And I was curious if you could, maybe talk a bit about why that range would be wide, given you have accelerating price you've mentioned lower-than-expected elasticity, which is obviously positive. I mean wouldn't a comp slowdown be a surprise given that? And then the second part of this is related to bottom line. And I was just curious if you could maybe quantify some of the new headwinds that sort of work their way in, whether it's incremental tariffs, liability claims or anything else?
Stewart Glendinning, CFO
Looking at the second half of the year, there is a lot of volatility in the market. We cannot predict how consumers will respond to the price increases happening overall. In the first half of the year, we performed very well and we anticipate a strong performance in the latter part of the year. However, we want to be aware of the volatility that consumers are experiencing. That captures our expectations. Regarding the variability in the comp range, the increased costs we are encountering related to general liability are not due to more claims, but are a reflection of a trend in the industry where the cost of settling claims is rising. Consequently, while the rate of claims has not increased, the costs associated with those claims are becoming higher.
Operator, Operator
Your next question is coming from Simeon Gutman from Morgan Stanley.
Uriel Zachary Abraham, Analyst
This is Zach on for Simeon. I was wondering if you could speak to perhaps what a normalized EPS for the full year '25 would be in the way you see it? Because it does seem like there's some one-time items. There's some noise with corporate and TSA as well as some of the general liability and other tariff impact. So in any way you can to kind of address that and the way you see it, what a normalized level of EPS could be in for the year?
Michael Creedon, CEO
Yes. As you consider the year, there are many factors at play. The current tariffs raise questions about their normalcy. The core issue is how we normalize these tariffs to assess their impact on 2026. To answer your inquiry, it's helpful to look through that lens. This year has seen various influences, including much higher tariffs initially, followed by a slight easing, and then a rise in sourcing countries like India and Vietnam, creating an atypical tariff shift. Our pricing strategies adapted to these newer tariffs, and while we experienced an increase this year, we chose not to make further changes because we had already implemented sufficient measures to absorb these impacts. We also saw other cost advantages reflected in our financials that helped us maintain stability throughout the year, which was crucial for us. Looking ahead to next year, we're managing our finances to preserve our gross margin. We may need to make minor adjustments in response to any further tariff changes or cost management efforts, supported by our five operational levers. Furthermore, there are several significant one-time costs to consider. For instance, the cost associated with stickering and re-signage in stores amounts to approximately $115 million for the year. However, this year, we also benefitted from inventory that did not carry the high tariff costs, which is now contributing positively to our revenues at higher prices—this is a temporary advantage. Additionally, there are costs tied to the revaluation and mark-ons of our on-hand inventory, providing another one-time benefit that we saw primarily in the second quarter. This will continue to materialize in the following quarters but will gradually ease as the year progresses, extending slightly into next year. Overall, I've provided a lot of detail because this is a complex situation. By the end of the year, we aim to balance everything. While it's challenging to define an exact normalized figure, our goal for next year remains to sustain our gross margin.
Operator, Operator
Your next question is coming from Matthew Boss from JPMorgan.
Matthew Boss, Analyst
So I have a couple. Mike, maybe first on the sequential acceleration in same-store sales. Where are you seeing the largest gains by income demographic, if you broke it down? Second, on the initial pricing actions. Are there any categories where you've seen material pushback? And then last, any change in comps so far in the third quarter relative to the second quarter performance? Or just how best to think about third quarter versus fourth quarter comps?
Michael Creedon, CEO
Yes. In terms of the sequential acceleration, when we started and we had our call and we were one period in, you were kind of done with the holidays and the events. And so we looked out, and Q2, I always say periods 5, 6 and 7. So Q2 and the start of Q3 are the toughest times for Dollar Tree because you don't have those big drivers, the real reasons people go to Dollar Tree. And yet in Q2, we saw very strong performance, balanced ticket and traffic in those comps. And in terms of the drivers, where they come from income cohorts, yes, we saw the strongest performance from the higher income. But what was interesting was we still saw very strong performance from our lower income customer. So really, the pack sizes that we have, the ability to help them kind of stretch their budget and make it to that next paycheck, we saw that all strong. In terms, Matt, of how the Q3 started, I mean, we raised our guidance for the full year to 4% to 6%. P7, again, doesn't have those big holidays. You start to get the back-to-school in it towards the end of it. We're within that range, albeit we are at the lower end of that range, but we're within that range and feel confident about looking out in the year and raising guidance for the full year on the top line.
Operator, Operator
Next question is coming from Chuck Grom from Gordon Haskett.
Charles Grom, Analyst
As you guys gain more experience with multi-price, how is the buying team evolve in its purchasing decisions? How are you handling incremental markdowns with multi-price as we move forward? And then can you help us frame out where you are on the journey of moving higher on the $1.25 price point to $1.50, $1.75, $2 across the fleet?
Michael Creedon, CEO
Our merchant team is doing an outstanding job despite the complexities of a highly volatile environment. When we evaluate our five levers, we can see how our negotiations with suppliers are influenced by factors such as 30% of our focus on China and 10% on the rest of the world. The origin of products is also being reassessed, and some SKUs are being dropped. We're determining what can be added to our assortment at higher prices, all while dealing with sudden changes like a 50% increase in costs from areas such as India or Vietnam. I commend our merchants for their exceptional efforts, as well as our global sourcing team’s ability to manage these challenges. In stores, our teams are also adjusting to these rapid shifts. Overall, they've navigated these difficulties impressively. While we wouldn't wish for such chaos, it has led to increased agility throughout the company. Our teams are now more responsive than they ever were, striving for the lowest landed costs to provide great value for our customers. Looking ahead, our price point of $1.25 remains unchanged, with 85% of our store offerings still at $2 or less. That's our identity. However, we see opportunities to broaden our assortment and enhance the convenient shopping experience. With this expansion, we're emphasizing the excitement of discovery at Dollar Tree, where shoppers often leave with more than they intended to buy. This essence of Dollar Tree hasn’t changed and will remain at the core of who we are as we move forward.
Operator, Operator
Your next question today is coming from Rupesh Parikh from Oppenheimer.
Rupesh Parikh, Analyst
So two on just on pricing. Just given the current tariff backdrop, what inning do you think we are in terms of enacted pricing increases? And then if you look at the increase that you've already taken and plan on taking, just how do you feel about your price gaps?
Michael Creedon, CEO
In terms of our current position, it's a bit unique due to the holiday timing. We've established the price we're going to use. While we haven't finalized everything yet, preparations are underway. Looking ahead to the third and fourth quarters, with the arrival of a new holiday and inventory restocking, there are opportunities for updating labels and signage. Our team is experienced and aware of the necessary adjustments, and while we're making progress, every new stock from the distribution center or removal from storage involves updating labels and signs. Overall, customer feedback has been positive. We closely monitor customer behavior and their spending patterns, and we are pleased with what we're observing.
Operator, Operator
Next question today is coming from John Heinbockel from Guggenheim Partners.
John Heinbockel, Analyst
Mike, I have two related questions. How significant is the percentage of baskets that contain both consumable and discretionary items? Also, do you think that treasure hunt promotions help drive traffic for consumables, and does repeat purchasing of consumables boost traffic for discretionary items? Lastly, we have previously discussed zone pricing, and it seems like you might be less focused on it now than before. Is that due to the current macroeconomic conditions and timing?
Michael Creedon, CEO
Great questions, John. The first, the basket, it really is both in terms of the traffic drivers, consumables, and maybe there's a bit nuance by income cohort. So if I look at our traditional lower-income customer, they're driven by kind of everyday essentials. They're driven by pack sizes. They're trying to stretch a budget between paychecks. So they're coming in for that purpose and finding the back-to-school find that just wows them. That $5 backpack that saves them a trip to a large mass merchant at a better price. And then you have that thrill of the hunt discovery customer that tends to skew more higher income. They're coming into our stores, they're targeting the seasons, the holiday, the back-to-school, all that. And they're saying, wow, I can't get over that I can get Dixie plates for $3. I mean, it's just incredible. They didn't know they could find that. And so really, it's a very complementary ticket and traffic across all income cohorts. And then zone pricing. It is not that we've lost our interest in this. Think of it as priorities. If it was something we really wanted to test at the beginning of the year, when we were faced with the inflationary cost environment, the tariffs, et cetera, we really had to pivot to our tariff mitigation strategy. And that has put zone pricing a little bit down the priority, but it's still something we want to look at. We're all about delivering an incredible relative value. And as you can imagine, that relative value in California or New York may be different than that relative value in other parts of the country. So maybe a little down the priority, but still something that we will lean into at some point.
Operator, Operator
Your next question is coming from Seth Sigman from Barclays.
Seth Sigman, Analyst
I wanted to follow up on the performance across price points. Is there any way to quantify the overall lift to comps from that new multi-price point product? And then specifically on the $1.25, Mike, to your point, obviously, that's still a bulk of the product, but with more variations on that now. I'm just curious, like how is the consumer responding to that? How is that part of the assortment performing?
Michael Creedon, CEO
Thanks, Seth. We are seeing strong performance across our entire range of offerings. The balance in customers' baskets is noteworthy, considering both discretionary and consumable items at various price points. Our customers continue to find value, resulting in fairly balanced baskets. While we observe a higher basket volume in our multi-price category, which does trend higher, it has a solid flow of items. However, we haven't pinpointed how the different components affecting price points are performing individually; overall, the entire basket demonstrates strong performance.
Stewart Glendinning, CFO
Yes. Maybe one other thing just to add, Mike. And that is to say that actually, if you look at the departments where we have had a change in merchandising strategy, i.e., the assortment has gotten broader, we have increased price points. There's very clear data to show that those departments are performing well and use hardware as an example of that. We had $1.25 hammers before, we couldn't sell them. We've got $5 hammers now, we can't keep those in stock. And so, think about those kinds of items as just creating more interest for consumers in a way that is very positive to the shopping experience and also to our revenue line.
Operator, Operator
Your next question today is coming from Scot Ciccarelli from Truist.
Scot Ciccarelli, Analyst
You seem to be making increasingly cautious comments on the consumer. Can you provide more color or maybe some examples of what you're seeing at the consumer level that's making it more challenging and volatile than before? And then just a housekeeping item, hopefully, what's driving the change to your TSA outlook?
Michael Creedon, CEO
The commentary around the consumer shows that there are many uncertainties currently. While the retail environment has been strong up until now, we are approaching key periods like back-to-school and the holiday season. This year started strong with the holidays, and we hope that trend will continue. However, we remain cautious because, looking back over the past four to five years, prices have risen substantially across retail, making things more expensive for families. Additionally, we are still uncertain about the full effects of tariffs, particularly regarding China, where we won't have clarity until November about potential increases. It's a time of volatility, which contributes to our caution. We appreciate the customer traffic and the success we've seen, especially in our second-quarter discretionary sales, which have been remarkable. Nonetheless, we are aware of the struggles faced by lower-income consumers, with rising costs affecting them daily, which is why we believe caution is warranted. Regardless of how this situation develops, we have confidence in the Dollar Tree model as a solution, as we appeal to lower-income shoppers, middle-income consumers, and even higher-income customers enjoy the thrill of finding good deals. However, the overall retail environment we are navigating requires us to remain cautious.
Stewart Glendinning, CFO
Yes, I believe that as we move into the next quarter, we will have a clearer understanding of some tariff issues related to consumer behavior. Overall, we've achieved impressive performance this year. Even looking at the second half of the year, regardless of where we end up, it's a very strong outcome considering the range we've provided. Regarding the TSA, you mentioned that it's expected to be slightly lower. TSA income is ultimately negotiated with the buyer, and in this case, the buyer opted for fewer services than anticipated. However, we have provided guidance based on our expectations for SG&A, and we are on track to meet that guidance for this year. Although the TSA will come in a bit under, we have implemented other cost savings for the year that will help us reach our target. Looking ahead to 2026, we do have a gap to address, but we have ample time to manage the SG&A for that year. Overall, we are pleased with how this has unfolded.
Operator, Operator
Our next question today is coming from Zhihan Ma from Bernstein.
Zhihan Ma, Analyst
So my question is on the store side of things with Q2 performance clearly coming in ahead of your expectations. How do you feel about the service level, the in-stock levels in store? Will you need additional investments to sustain the momentum into the back half of the year?
Michael Creedon, CEO
I'm very pleased with our stores. It's certainly a journey. Jocy Konrad and her team have done an excellent job on what we refer to as our road to gold, focusing on the grand opening look daily. As we evaluate our stores and their relative performance, we've seen improvements with more stores scoring higher. The customer experience when they enter the store continues to show positive progress. Jocy would say there’s still much to accomplish, and she holds the team to high standards, as do I, but we are very satisfied. Additionally, Roxanne Weng, who oversees our supply chain, has mentioned that our distribution centers are in the best position they've been in for a long time. As we prepare to deliver products to stores for the upcoming holiday season, the state of our distribution centers and the corresponding shelf availability is very strong—indeed, the best we've observed in several years. Customers will find well-stocked shelves and excellent value, and we are confident they're experiencing an improved shopping environment. We've been engaging with our customers more through insights, working with third parties, and conducting surveys based on receipts, and we appreciate the feedback we’re receiving from them.
Operator, Operator
Your next question is coming from Peter Keith from Piper Sandler.
Peter Keith, Analyst
Mike, I just want to follow up on the Uber Eats with just a couple of questions on that topic. So is that going out to all stores? And is there any maybe quantifiable lift that you've seen in early tests? And finally, are you a stand-alone offering? Or is it more part of their multi-store initiative?
Michael Creedon, CEO
I'm very excited about Uber Eats. When you consider digital commerce, Dollar Tree is still new to it and hasn't focused on these areas. One of my priorities as CEO has been to engage more with our customers and identify opportunities to meet them where they are. Uber Eats presents a fantastic opportunity for this, reaching 25 million customers who are largely new to Dollar Tree. We’re thrilled about the demographic's younger age, as many of them were previously unaware of us. Though it won't be available at all stores, it will reach 8,500 locations due to lease constraints. We've just begun marketing, and even during the soft opening, we've been amazed by the order volumes and customer engagement. They are discovering us through the app, showcasing the offering's convenience which aligns with our values of value, convenience, and discovery.
Operator, Operator
I would now like to turn the call back over for any further or closing comments.
Michael Creedon, CEO
Thanks, everybody, for the call. Have a great day.
Operator, Operator
Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.