Earnings Call
Dollar Tree, Inc. (DLTR)
Earnings Call Transcript - DLTR Q4 2021
Operator, Operator
Good day and welcome to the Dollar Tree, Inc. fourth quarter earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Randy Guiler, VP of Investor Relations. Please go ahead.
Randy Guiler, VP of Investor Relations
Thank you, Jordan. Good morning and welcome to our call to discuss Dollar Tree's fourth fiscal quarter and fiscal year 2020. With me on today's call are our President and CEO, Mike Witynski, and our CFO, Kevin Wampler. Before we begin, I would like to remind everyone that various remarks we will make about expectations, plans, and prospects for the company are forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Results may differ significantly from those indicated by these forward-looking statements due to various factors mentioned in our most recent press release, 8-K, 10-Q, and annual report, which are filed with the SEC. We have no obligation to update these forward-looking statements, and you should not expect us to do so. After our prepared remarks, we will open the call to your questions. I will now turn the call over to Mike Witynski, Dollar Tree's President and Chief Executive Officer.
Michael Witynski, CEO
Thank you, Randy. Good morning, everyone. Thank you for joining me today. What a year. I believe that years from now, many of us will reflect upon 2020 as being one of the most unique, unpredictable, and challenging business environments of our career. My sincerest gratitude goes out to our more than 195,000 associates working in more than 15,600 Dollar Tree and Family Dollar stores and in 26 distribution centers, as well as our field leadership teams and our store support team here in Chesapeake, Virginia. Your commitment and dedication to protect and serve our customers is critical to our company's success. As an essential retailer in the value segment, we will continue to be part of the solution for millions of households across North America. Additionally, I would like to recognize our business partners, both in the supply chain and suppliers, for their efforts to support our business throughout the year. In 2020, we exceeded $25 billion in annual sales for the first time, and we have a long runway of growth ahead of us. As our business grows, so does the need and support from each of our business partners. We appreciate your continued support. The recent trends have been encouraging. COVID cases are on the decline, and vaccinations are on the rise. However, we will continue to be relentless in our efforts to protect each other until this pandemic is behind us. I am very pleased with the team's operating performance for the fourth quarter, highlighted by solid same-store sales increase, improved gross margin, and expense leverage. The team delivered an EPS increase of 310% compared to the prior year's quarters or 19% when adjusted for discrete charges in the prior year. Our results included a 4.9% enterprise comp increase, an 80 basis point improvement in gross profit margin, and a 90 basis increase in operating profit margin when compared to the prior year's adjusted numbers. Our Dollar Tree segment delivered another quarter of positive same-store sales with a 2.4% increase. January was the strongest month of the quarter, followed by November. In fact, January was our strongest monthly comp since April of 2019. December was slightly negative as store traffic was impacted by an escalation in COVID cases, resulting in expanded lockdowns and significantly fewer holiday social gatherings among families, companies, churches, and schools. As we have seen in the onset of the pandemic, sales were again driven by average ticket, which increased 17.9% as shoppers continued to consolidate trips. Comp transaction count declined 13.1%. We delivered a 36.1% gross margin, and Dollar Tree's operating margin, which included $13.8 million in COVID-related costs, came in at 16% operating income. Categories performing well included crafts, seasonal, household products, floral, kitchenware, and beauty and eyewear. Building on the continued success of our craft assortment, we completed the rollout of Crafter's Square to all U.S. Dollar Tree stores in January. Inspiring the creativity of our customers is at the core of Dollar Tree, and we are thrilled to provide an even broader assortment of art and crafts supplies at tremendous values. With our $1 fixed price point and more than 7,500 U.S. store locations, Crafter's Square presents customers with unlimited solutions for the current learn-from-home and work-from-home environment. Additionally, terrific opportunities exist for DIY home projects and decor, crafts for the entire family, seasonal decorations, and handmade gifts. Our shoppers love the expanded assortment, which is validated by the excitement Crafter's Square is generating across social media platforms, including YouTube and Instagram. Regarding our Dollar Tree Plus!, our shoppers love the values, and we exceeded our initial sales plan for the fourth quarter. We had great sell-through on our seasonal products, on our toys and household consumables. We are on schedule to kick off the previously announced expansion of Dollar Tree Plus! this month. We are expanding the multi-price assortment from the current base of 120 stores to a total of 500 stores and will be completed by August. Additionally, we are capturing great buying synergies as the majority of the $3 and $5 merchandise for the Dollar Tree Plus! will be offered in both banners. Family Dollar sales highlights for the quarter included an 8.1% comp increase, comprised of a 21.9% expansion in average ticket, partially offset by an 11.3% decline in transaction count. This is similar to the ticket traffic trip consolidation dynamic we have seen since Q1 of 2020. Regarding the cadence of comps, all three months were positive, with January being the strongest month. As a reminder, all Family Dollar stores were closed on Christmas Day in 2020, which has impacted December comp results as approximately 5,600 stores were open for business the previous year. January was Family Dollar's strongest monthly comp since May of last year. We saw solid sales across many of the discretionary categories that we have been focused on improving, including home decor, apparel, household cleaning, lawn and garden, party, beauty care, and seasonal. The consumables side of the business delivered another positive quarterly comp at 6.2%, and the discretionary comp was a strong 13.5%. In Q4, discretionary as a percent of net sales at Family Dollar increased 120 basis points to 26.2% of sales. Similar to recent quarters, based on third-party data, our market share in discretionary grew two times faster than the remaining market in Q4. Late in 2020, we launched our initial test for produce and frozen needs at select Family Dollar stores, targeting markets where shoppers have fewer local grocery options. We want to provide shoppers with convenient access to basic produce items as well as beef, poultry, and pork. We plan to expand our test in 2021. We recently announced the expansion of our new partnership with the Instacart platform across the U.S. Same-day delivery is another example of meeting the evolving needs of Family Dollar shoppers. The initial results have exceeded our expectations, and we continue to receive very positive feedback from shoppers. These transactions have materially higher average ticket, and we believe the Instacart platform is enabling us to broaden our Family Dollar customer base. Interestingly, in the first three weeks of the national rollout, more than 80% of Family Dollar stores had one or more Instacart transactions. As always, our most important scorecards come from our shoppers. We are seeing considerable improvements in our customer satisfaction survey scores. For Q4, we saw record numbers across each of the four key categories: store cleanliness, product assortment, customer service, and speed of checkout. In fact, each of these categories has shown improvement for three consecutive quarters. Contributors to this success include an enhanced Family Dollar brand strategy program that clearly conveys expectations and examples to our store teams. The chains' annual store manager turnover is at the best in over a decade. The improved customer satisfaction results give us confidence that we will be able to retain shoppers that discovered or reengaged with Family Dollar during the pandemic. Regarding Dollar Tree Canada, the team delivered another solid quarter, exceeding its plan for sales, gross margin, and operating income. From a real estate perspective, we completed more than 280 projects, including 124 new stores, 11 relocations, 106 Family Dollar renovations, and 45 store closings. We ended the year with 15,685 stores. We accomplished a great deal in 2020. Much of this was made possible by our 2019 initiatives that really set the stage to gain traction and momentum in 2020 and beyond. To quickly recap, in 2019, we consolidated our Dollar Tree and Family Dollar store support centers into one campus, greatly improving efficiencies through enhanced communication, collaboration, and support. We made tremendous progress on Family Dollar store optimization initiatives by rebannering 200 stores, closing more than 400 stores, and doubling the pace of our renovation program to more than 1,000 per year. We also launched our initial test for Dollar Tree Plus!, and we realigned our leadership team to enhance and align the consistency of communication, strategies, processes, and workflows. For example, Dollar Tree and Family Dollar merchants went through 2020 in complete unison for buying calendars, buying trip meetings, planning dates, and category performance reviews. This strength in alignment was very evident in the success of our recent virtual buying trip in January, which is our biggest buying trip of the year. These initiatives help build the foundation for 2020 performance. The progress we have made at Family Dollar in the past despite the pandemic has been remarkable. We are benefiting from improved store conditions and better execution on initiatives, resulting in market share gains. We have also seen improved customer satisfaction scores, store turnover, and shrink improvements. I am convinced that Family Dollar will exit the pandemic as a much stronger organization. This progress is why I'm more enthusiastic about the opportunities in 2021 and beyond, including the expansion of Dollar Tree Plus! and the growth of our new Combination Stores into small towns across America. I will go into more detail on our plans for 2021 after Kevin speaks to the Q4 performance and our outlook. Kevin?
Kevin Wampler, CFO
Thank you, Mike, and good morning. For the fourth quarter, consolidated net sales increased 7.2% to $6.77 billion, comprised of $3.71 billion of Dollar Tree and $3.06 billion of Family Dollar. Enterprise same-store sales increased 4.9% or 5% when adjusted for Canadian currency fluctuations. Comps for Family Dollar increased 8.1% and Dollar Tree segment increased 2.4%. Overall, gross profit for the enterprise increased 9.8% to $2.15 billion, and gross margin improved 80 basis points to 31.8%. The gross profit margin for the Dollar Tree segment decreased 10 basis points to 36.1% when compared to the prior year's quarter. The factors impacting the segment's gross margin performance include distribution costs increased 40 basis points primarily due to higher payroll costs and depreciation. This includes the continued ramp-up of the two new distribution centers as well as $4.4 million or 10 basis points of COVID-related expenses, primarily premium pay and bonuses. These higher distribution costs as a percentage of net sales were partially offset by a 20 basis point improvement in markdowns and a 5 basis point improvement in shrink. Merchandise costs, including freight, also improved 5 basis points. Improvements in merchandise mix and markdown were mostly offset by increased freight costs. Gross profit margin for the Family Dollar segment improved 200 basis points to 26.6% in the fourth quarter. The year-over-year improvement was due to the following: markdown expense improved 100 basis points due to lower promotional activity and improved sell-through of seasonal merchandise and apparel; occupancy costs decreased approximately 50 basis points from leverage on the 8.1% comp sales increase; shrink improved 35 basis points on improved inventory results; distribution costs improved approximately 15 basis points compared to the prior year quarter; the current year quarter included approximately $3.2 million or 10 basis points of COVID-related expenses, primarily premium pay and bonuses; and regarding merchandise costs, including freight, improvements in merchandise mix and markdown were essentially offset by increased freight costs during the quarter. Consolidated selling, general and administrative expenses improved 540 basis points to 21.7% of net sales compared to 27.1% in Q4 a year ago. The prior year's quarter included a $313 million non-cash pretax and after-tax goodwill impairment charge, and an $18 million charge to the litigation reserve. Excluding these items from the prior year's quarter, SG&A expenses improved 20 basis points from an adjusted 21.9% of net sales. For the fourth quarter, the SG&A rate for the Dollar Tree segment as a percentage of net sales improved slightly to 20.1% of net sales when compared to the prior year's quarter. Payroll costs improved approximately 30 basis points and comprise the following: payroll expenses increased approximately $7.2 million or 20 basis points for costs associated with COVID-19-related payroll and bonuses. Additionally, increased incentive compensation was partially offset by lower health insurance benefits. Other selling, general and administrative expenses decreased approximately 20 basis points primarily from reduced travel and lower legal and professional fees. The depreciation cost decreased by 10 basis points. Excluding goodwill impairment and litigation reserve charges from the prior year's quarter, the SG&A rate for the Family Dollar segment improved approximately 80 basis points to 20.6% compared to an adjusted 21.4% for the fourth quarter of 2019. Depreciation improved 30 basis points, primarily from leverage on strong comp sales increases. Other selling, general and administrative expenses decreased by approximately 30 basis points primarily due to lower advertising and travel costs as a percentage of net sales. Payroll-related expenses improved approximately 15 basis points, and store facility costs improved approximately 5 basis points, primarily from leverage on comp sales and lower electricity costs. Corporate and support expenses increased 20 basis points primarily related to higher incentive compensation and stock compensation expense compared to the prior year's quarter. Operating income improved 173% to $681.6 million compared with $249.4 million in the same period last year, and operating income margin was 10.1% in the fourth quarter compared to 3.9% in the prior year's quarter. Excluding the $313 million goodwill impairment and $18 million litigation reserve from the prior year's quarter, operating income margin improved 90 basis points from the adjusted 9.2%. Q4 of 2020 included total incremental operating costs of $24.8 million for COVID-19-related expenses. These incremental costs by segment were $13.8 million for Dollar Tree, $10.6 million for Family Dollar, and $0.4 million for Corporate, Support, and Other. Non-operating expenses totaled $34.2 million, comprised of net interest expense. Our effective tax rate was 22.3% compared to 41.3% in the prior year's fourth quarter. The prior year rate was affected by the noncash goodwill impairment charge that was not tax-deductible. Without the goodwill impairment charge, the tax rate for Q4 2019 would have been 16.6%, which included a reduction in tax expense of $24.6 million for the reversal of our valuation allowance related to the company's foreign net operating loss carryforwards. Company net income of $502.8 million or $2.13 per diluted share, which included $0.08 per diluted share for COVID-19-related expenses. This compares to net earnings of $123 million or $0.52 per share in the prior year's quarter and an adjusted earnings per share of $1.79. Combined cash and cash equivalents at year-end totaled $1.42 billion compared to $539.2 million at the end of fiscal 2019. The company paid off the $300 million legacy Family Dollar note during the quarter. Outstanding debt as of January 30, 2021, was $3.25 billion. During the quarter, we repurchased approximately 1.83 million shares for $200 million. With the Board action announced this morning, we now have $2.4 billion authorized for share repurchases. We will continue to invest in our business and will provide post-quarter updates on share repurchase activity. Inventory for Dollar Tree at year-end declined 5.9% from the same time last year, while selling square footage increased 3.7%. Inventory per selling square foot decreased 9.2%. Inventory for Family Dollar at year-end increased 0.5% from the same period last year, while selling square footage increased 1.8%. Inventory per selling square foot decreased 11.3%. Our inventory levels improved in Q4 and will continue to be more productive with lower inventory, significantly increasing our inventory turns. Capital expenditures were $191.8 million in the fourth quarter versus $252.5 million in Q4 last year. For fiscal 2021, we are planning for consolidated capital expenditures to be approximately $1.2 billion. Capital expenditures will be focused on 600 new stores and 1,250 Family Dollar H2 renovations. The new stores will be 400 Dollar Tree stores and 200 Family Dollar stores, including both H2 and combo store formats based on market locations. The addition of frozen and refrigerated capability to select Dollar Tree and Family Dollar stores, IT system enhancements and projects, development of our Chesapeake campus, installation of LED lighting, and HVAC and flooring replacements in select stores, and the ongoing construction for the second phase of our new distribution center in Ocala, Florida. Depreciation and amortization totaled $182.9 million for Q4 compared to $179.1 million in the fourth quarter last year. And for the year, depreciation expense totaled $686.6 million. For fiscal 2021, we expect consolidated depreciation and amortization to range from $720 million to $730 million. Due to a number of variables and uncertainties, we're not providing specific sales and EPS guidance. These variables include unknowns related to the COVID pandemic and its impact on customer shopping patterns, timing and magnitude of government stimulus, and potential for the timing of changes with federal minimum wage. I do want to share some points to assist your modeling for 2021. The February storms have brought snow and freezing temperatures through Texas and much of the central part of the states, resulting in more than 5,500 lost store days for closures of Dollar Tree and Family Dollar stores in the areas most impacted. Stores are now back open and operating, but Q1 sales will be impacted from these closures. We will be cycling the 2020 onset of the COVID pandemic in Q1. Our business segments were impacted in different ways a year ago. At Dollar Tree, both sales and gross margin were negatively impacted by losing discretionary Easter-related seasonal sales. As a result, in Q1 of 2020, the Dollar Tree segment had a 0.9% comp decrease and a 31.9% gross margin. At Family Dollar, for Q1, we'll be cycling a 15.5% comp increase in the prior year, which will be our toughest quarterly compare for 2021. We face headwinds for minimum wage and freight costs in 2021. The minimum wage has increased in certain states and localities and may increase nationally depending on the outcome of future legislation. The currently scheduled minimum wage increases are estimated to increase store payroll by $45 million to $50 million in 2021. We're experiencing some delays in receiving import merchandise as a result of worldwide equipment shortages and issues with port congestion. As a result of current market conditions, we're seeing significant increases in the cost of import freight and moderate pressure on domestic freight. We currently project $80 million to $100 million of additional costs in fiscal 2021 as a result of these market conditions. These costs primarily affect the first three quarters of the year as currently projected. We believe these headwinds will be more than offset by productivity and cost savings initiatives, such as Crafter's Square, H2 and combo stores, continued focus on shrink, and reduced COVID-related costs. We incurred COVID-related costs of $279 million in 2020 to support our associates, stores, and customers. We will continue to incur costs for COVID activities in 2021, but we believe, at a materially reduced level. We've got tailwinds as well. COVID relief checks are anticipated to provide a significant lift. We also expect that the base customer traffic could return to more normalized levels. Net interest expense is expected to be approximately $34 million in Q1, approximately $135 million for fiscal 2021. Our outlook assumes a tax rate of 23.5% for the first quarter and 23.2% for fiscal 2021. Weighted average diluted share counts are assumed to be 234.5 million shares for Q1 and 234.8 million shares for the full year. Our outlook does not include any share repurchases. But as noted, we increased our share repurchase authorization to $2.4 billion. Over the past several years, the company has reduced its debt from the acquisition by over $5 billion, returning to a solid investment-grade rating. With our strong flexible balance sheet, we'll be able to increase store growth and return to share repurchases as an important part of capital allocation going forward. We'd expect to complete the $2.4 billion share repurchase authorization over the next two years or so.
Michael Witynski, CEO
Thanks, Kevin. Again, I'm extremely proud of the team's efforts for fiscal 2020. For the year, our customer satisfaction scores are improving, and we are experiencing our lowest store manager turnover rates in many years. The team delivered an enterprise comp increase of 6.1%. Gross profit increased by more than $740 million, a 70 basis point improvement. We delivered our SG&A costs, which were flat year-over-year, as a percent of net sales despite incurring $279 million or 110 basis points in COVID-related costs. Enterprise operating profit margin improved 70 basis points to 7.4%. The company repurchased 400 million shares and ended the year with more than $1.4 billion in cash on the balance sheet. And we delivered annual diluted EPS of $5.65. This morning, we announced our newest and tested concept that is working remarkably well in rural markets. What we refer to as our combination or combo store format. As I have said in the past, we will continue to refine strategic store formats designed to serve more customers in all types of geographic markets while improving store productivity, margins, and returns. The Combination Store leverages both Dollar Tree and Family Dollar brands to serve small towns across the country. The store combines Family Dollar's great value and assortment with Dollar Tree's thrill of the hunt and $1 price point, creating a new format targeted for populations ranging from 3,000 to 4,000 people. These are markets where we traditionally do not open a Dollar Tree store alone. We opened the first test Combination Store in late 2019, followed by two additional test stores in early 2020. Closely analyzing the store performance and customer feedback and utilizing learnings, we refined the concept. Between July 2020 and calendar year-end, we opened or renovated 32 additional stores. Currently, we have nearly 50 new stores in small towns like Linden, Alabama, Hogansville, Georgia, Bovina, New York, and dozens of others. Compared to other small market Family Dollar stores, these Combination Stores are delivering same-store sales lift of greater than 20% on average. Combination Stores are more productive, delivering higher gross margins and are better leveraging store costs. Our successful H2 stores and Combination Stores will both be part of the Family Dollar and new store and renovation strategy moving forward. We are extremely pleased with our customers' response to the new Combination Store concept. Our goal is to have formats that leverage the best of Dollar Tree and Family Dollar brands to serve customers in all types of geographic markets. We believe we can continue to change, evolve, and improve. To really share why we are very excited to introduce this new format, we are providing a 3-minute video, along with photos, introducing the new Combination Stores at FamilyDollar.com/ComboStores. Please go check it out. Our teams worked incredibly hard throughout fiscal 2020. I could not be more proud of our team's commitment, dedication, and focus. We believe our proven strategic store formats and accelerated store growth plan, 1,250 planned store renovations for the year, several key sales and traffic-driven initiatives, along with a robust balance sheet, will enable us to deliver long-term value for each of our stakeholders: our customers, associates, suppliers, and shareholders. Operator, we are now ready to take questions.
Operator, Operator
It looks like we have our first question on the line from Kelly Bania from BMO Capital.
Kelly Bania, Analyst
I wanted to ask about the payroll and freight costs that you mentioned. Could you provide more detailed information on how you're estimating the $45 million to $50 million impact from payroll and the $80 million to $100 million on freight? You mentioned that these pressures are expected to be offset by other factors. Are you suggesting that you expect EBIT growth in 2021? Please elaborate on that.
Kevin Wampler, CFO
Sure, Kelly. It's Kevin. We wanted to provide some insight into the current situation. We aren't offering specific guidance due to the numerous variables in play right now. The $45 million to $50 million we mentioned regarding payroll is quite precise. Our operations and labor department analyze this by state, knowing that around 30 states are impacted this year. We have a clear understanding of our labor pool in those areas and the number of hourly employees, and we perform calculations based on that. This process is consistent with prior years, but this is the first time we’ve shared a specific figure for context. We have encountered similar increases over the past couple of years, and this time, we aimed to provide some visuals to help illustrate the scale of the issue. Regarding freight costs, our current estimate is about $80 million to $100 million, which is fairly consistent across both banners. The costs are primarily import-related rather than domestic, typically around 75-25 or 80-20 in favor of imports at this point. This is influenced by the current market conditions we’re experiencing. As many of you are aware, we negotiate our freight contracts in the spring, primarily in March and April, to take effect in May. There has been substantial discussion in the market, so this shouldn't come as a surprise. Again, we’re aiming to convey the magnitude of these costs. Looking at offsets, we noted that COVID-related costs last year reached $279 million. Even if we maintain the spending rate from Q4, which is about $25 million, we expect to spend significantly less in the new year. So, I’ll let you calculate that. These are the key factors to consider. We also discussed ways to drive sales and mentioned that shrinkage has shown improvement after a two-year upswing. We still have room for growth in that area, but I’m really proud of the efforts from our operations and asset protection teams in mitigating those challenges.
Kelly Bania, Analyst
That's very helpful. And then just wanted to ask, on the Combination Stores, any color you can give us on the new store economic model, the cost of the stores, the size and sales per square foot and how the returns maybe compare to the H2s.
Kevin Wampler, CFO
Currently, the stores are about 10,500 square feet, making them slightly larger than typical Dollar Tree locations. We appreciate the economics, as our sales are surpassing expectations with comparable sales averaging 20% or more. In new markets, these stores are outperforming our initial forecasts when they were solely Family Dollar outlets. The margins have improved due to the inclusion of Dollar Tree products priced at $1 in categories that typically have higher margins. This setup allows us to operate with one store manager and one team, providing two brands to customers in smaller towns. We are pleased with the results.
Operator, Operator
We'll take our next question from Joe Feldman with Telsey Advisory Group.
Joseph Feldman, Analyst
Great. I wanted to ask about freight again. Kevin, as you mentioned, you renegotiate freight every spring. I'm a bit confused about why there seems to be so much pressure, especially in the fourth quarter. Are surcharges allowed on your negotiated rates? I understand you expect higher pressure for this year, but could you provide a bit more detail on that?
Kevin Wampler, CFO
Sure, Joe. As you look at it, we contract for a certain volume of containers. It's been a big year from an import standpoint, obviously. And so at some point, if you exceed your volume, you do pay more potentially based upon the marketplace. The spot market, and you guys see all the same information we see, has been up significantly in general. And again, then a part of it is supply and demand. There is a backup in China and Asia. And to get goods to move in some instances, people are paying more. And it's not just us. You've heard other retailers over the last two weeks speak to it as well. So it's not a Dollar Tree-specific issue. It's an industry issue. And our team is working through that and moving our goods. We've been able to keep our seasonal goods coming in, and we feel good about that. But in general, based on where the marketplace is projected to be, that is our best projection as we sit here today.
Joseph Feldman, Analyst
Got it. And then a follow-up question. As you think about '21, and I know you're not giving too much detail on guidance. But I guess, how should we think about the profitability of the two different brands? Family Dollar has been much better. We've seen a lot of improvement there. Should we expect continued greater improvement within Family Dollar profitability versus kind of stable at the Dollar Tree business?
Kevin Wampler, CFO
We see opportunities in both brands. While Family Dollar's operating income has improved significantly this year, it still has not reached our ultimate goals. We've made considerable progress and believe that as we entered 2020, our focus on discretionary business positioned us better in that area. The pandemic has contributed to that growth, and we are now growing at twice the market rate in that segment, which presents a fantastic opportunity moving forward. However, we also recognize other opportunities. For example, the combo store model is promising, with at least 3,000 potential locations where we can be an essential shopping destination for customers. Many of them aren't near large metropolitan areas, which enhances our opportunity in this space. Regarding Dollar Tree, we continuously identify opportunities for growth. The brand has evolved over the years, with new initiatives like Snack Zone and Crafter's Square that drive traffic and improve margins. These initiatives remain relevant to consumers, and the $1 fixed price point continues to be popular. We are also expanding Dollar Tree Plus! into 500 locations, which will further enhance our offerings and benefit both brands through the introduction of $3 and $5 products.
Michael Witynski, CEO
Yes. Joe, this is Mike. I agree with Kevin. I am very excited about 2021 and firmly believe there is growth potential for both banners. I'll start with Family Dollar. We are definitely going to emerge from the pandemic stronger for many reasons. Reflecting on what Kevin mentioned from March 4 of last year, our comparable sales in consumables were solid low single digits each quarter. Our focus needed to be on the discretionary side. In December, Rick McNeely took on the role of lead merchant for both banners to leverage synergies and enhance capabilities for the Family Dollar team. Throughout the pandemic, we didn't just survive; we thrived, transforming our disciplines and strategies. In merchandising, we reassessed our basic assortment, emphasizing sharper price points for better value, and we will not revert to our previous methods; instead, we will improve. The pandemic accelerated our inventory turnover from last year, resulting in new receipts that are selling well, with stronger sell-throughs, fewer markdowns, and better inventory turns. Regarding our stores, our customer satisfaction scores have improved across the board for three quarters. We have made significant investments in store initiatives, and our customers are responding positively. We will maintain this momentum compared to the pandemic period. As Kevin mentioned, we now have a clear format strategy. Our H2 format continues to yield 10% comparable sales after renovations, and we plan to renovate another 1,250 locations this year. Additionally, our new combo store model in small towns is generating a 20% increase in comparable sales, which we did not have prior to the pandemic. Our balance sheet, as Kevin discussed, is strong; we have generated a lot of cash flow and currently hold $1.4 billion, giving us flexibility to pursue growth without the burden of significant annual debt repayment. This flexibility allows us to advance the company and enhance shareholder value. On the Family Dollar side, we are just beginning to enter the digital and omnichannel space, and our partnership with Instacart is receiving a fantastic response from customers, allowing us to reach a wider customer segment. Furthermore, we will continue to grow the Dollar Tree Plus! initiative and explore new categories. Our Crafter's Square initiative was implemented in all Dollar Tree locations in January, and we aim to drive that throughout the year. However, Dollar Tree faced challenges due to COVID-related restrictions. In November, our comparable sales were impressive, and January performed the best it has in two years. Unfortunately, the lockdowns in December, driven by a spike in COVID cases, affected celebrations, which are significant for Dollar Tree. Our products support celebrations in schools, churches, and at home, and sales in our party categories suffered greatly in the days leading up to Christmas. Despite these challenges, we achieved a 2.4% comparable sales increase in a quarter that exceeded our fourth quarter in 2019, despite the COVID impact. We delivered over a 36% margin and a 16% operating income at Family Dollar, which I believe we can surpass next year. So, to answer your question, I am confident that both banners will experience a successful year for these reasons.
Operator, Operator
And we'll take our next question from Paul Trussell with Deutsche Bank.
Paul Trussell, Analyst
I wanted to follow up on your comments with some broader questions looking beyond 2021. I'm curious, since 2020 was quite unusual, if you could provide some insights on the long-term margin potential for Dollar Tree and Family Dollar, considering the developments with merchandise and new formats. What do you think the timetable might be to navigate the headwinds and possibly return to some of the levels we experienced in previous years?
Kevin Wampler, CFO
Yes. Paul, this is Kevin. I'll start, and I'll let Mike chime in if he has anything. But I guess, I think about it in a couple of ways. One, one of the words you guys have all heard me use before, and I think it's very true within our company, is continuous improvement. We go into every year expecting to improve in all aspects of our business, and whether that's driving sales, reducing costs, and being a more efficient company. And so that's just the way our mindset is. And so while I don't know that I have a timetable to give you in a sense of certain milestones, as I sit here today, and again, part of that is obviously the uncertainty of what's going on out there in the world with the pandemic. But we would expect continuous improvement. And I think Mike has shared a lot of that with all of you this morning.
Michael Witynski, CEO
Yes. Paul, I agree with Kevin that we will continuously improve and drive our path on Family Dollar's side. As you've heard me, we have not arrived yet, and there is upside because we just cycled through our first year, and we are continuing to look at our assortment, our allocations, and improve upon the products that we have and price points. I think on the Dollar Tree side, we have things ahead of us, just like the tariffs. Once we got it in front of us, we know how to manage around it. And I would say the short term, the freight issue, once we're aware of it, we're going to figure out how to mitigate it and grow the margins and grow Dollar Tree. Dollar Tree, for 14 years, has had a quarter-after-quarter of positive comp store sales growth, except for the first quarter last year, and here we are cycling that right now this year. So yes, I feel very strong that we can continue to grow both sides.
Paul Trussell, Analyst
And this year, you're opening up maybe 600 stores and remodeling like 1,250 Family Dollars or so. Is that, in your mind, kind of a good go-forward run rate? Or do you see a scenario where you guys may actually want to accelerate in the future given the different formats and opportunities that you have? And just any updates on long-term store count potential?
Michael Witynski, CEO
Yes. I will address this and then hand it over to Kevin for further insights. From my viewpoint, we definitely have 1,250 renovations planned for this year. We expect to have another 1,250 next year. The strength of our balance sheet and capital structure allows us to support and accelerate this growth. As we complete the renovations over the next two years, our focus will shift to total store growth. We are optimistic about the various formats we have in the pipeline. Therefore, I anticipate an increase in new store openings as we finish our renovations for the next two years and then move on to expanding our store count.
Kevin Wampler, CFO
Yes, Paul, in response to your point about the total number of stores, the most recent figures we provided indicate that Dollar Tree has approximately 10,000 stores and Family Dollar has around 15,000 stores. We haven't updated these numbers recently, but it's something we are considering. The evolving nature of our stores influences our perspective on potential growth. As we discuss the new combo store, we need to reassess the marketplaces. Currently, we believe we have a minimum of 3,000 stores in this category, and we plan to provide updates in the future. This presents a significant opportunity. Additionally, with a strong balance sheet, we are well-positioned to support our growth, especially as some retail spaces become available. This second-hand space has historically provided us with great opportunities for expansion, allowing us to grow steadily moving forward.
Operator, Operator
Looks like we have a question on the line from John Heinbockel with Guggenheim Securities.
John Heinbockel, Analyst
Mike, why don't we start with sort of strategic impact for the combo, right? So one, do you think it allows you, given the margin mix, to get sharper if you need to on Family Dollar pricing, number one? And then secondly, can you take learnings from the combo and put them into non-rural stores that may not overlap with Dollar Tree? Or are you pretty sensitive to that?
Michael Witynski, CEO
We are continuously learning and refining our formats to maximize productivity and enhance the margins and profitability of our brands. I'm particularly excited about this format because it targets small towns where we wouldn't establish a Dollar Tree due to economic factors. Instead, we opt for Family Dollar and decided to introduce the best aspects of Dollar Tree, including seasonal items, party supplies, stationery, and crafting materials, to meet the needs of small-town America. Family Dollar also supports families in their daily lives. This Combination Store approach is successful for us due to its strong product mix, attractive margins, and overall store productivity. Additionally, we will keep analyzing the successful categories. Remember, in our H2s, we have around 20 categories featuring $1 items from the Dollar Tree banner that enhance the value proposition in those stores and support the H2 format. We will continue to evaluate this, John.
Operator, Operator
And we'll take another question from Matthew Boss with JPMorgan.
Matthew Boss, Analyst
Great. So Mike, at the Dollar Tree banner, fourth quarter, low single-digit comps overall, basically matched the concept's historical run rate, despite I know there was some volatility in there with December and January. So as we think about the first quarter relative to the 2% to 3% comp in the fourth quarter, I guess, overall, any puts and takes to consider? And similarly, for the full year, any impediments to driving low single-digit comps in your view for the year at Dollar Tree?
Michael Witynski, CEO
Yes. Overall, we don't see any structural or counter impediments. Last year, at Dollar Tree, Easter, as you know, did not happen just because it was at the peak of the beginning of COVID. It did two things. It really impacted our first quarter sales at Dollar Tree and our margin at Dollar Tree because we didn't sell the high-margin Easter goods. And as you look throughout the year, I believe that as the country opens up and people get back to their routines and occasions start to increase inside the churches and schools and families and weddings and all those things that are great for Family Dollar business, I see some upside throughout the year. Then as you just heard, at Christmas, the 10 days or two weeks leading to Christmas, because of COVID, completely shut down in traffic. So yes, I believe there's upside this year for Dollar Tree.
Matthew Boss, Analyst
That's great. And then just a follow-up on gross margin at the Dollar Tree banner. I guess when we put together the anniversary of the first quarter headwind, I think you were down 250 basis points plus, and then we consider the freight headwind that you walked through, how should we think about Dollar Tree banner gross margin this year versus that 35% to 36% target range?
Kevin Wampler, CFO
Yes, there are various factors to consider, as always, Matt. We have mentioned in previous quarters that we believe we can return to the 35% to 36% range. However, one factor that may hinder this as we enter 2021 is the changes in freight, which is a relatively new challenge. Overall, I think our mix continues to be strong, and markdowns should remain favorable, but freight will certainly be a significant challenge. Shrink could also play a positive role, and after a couple of years of increasing distribution costs, we may see a slight stabilization in that area. There are many factors at play, but I don’t see us reaching above 35% in 2021 given the freight challenges. That doesn’t mean it’s impossible, but it will be a bit of a struggle.
Michael Witynski, CEO
Yes, Matt, this is Mike. I'm encouraged by what Kevin mentioned regarding our recently completed January trip, which is the largest purchase we make for the latter half of the year. Our buyers conducted it remotely, and the product's value, along with the excitement for the new items arriving in the second half of the year, is exceeding our expectations in terms of initial markup. As Kevin noted, there will be some challenges ahead, but we are confident in our ability to navigate them, similar to how we handled tariffs. As long as we are aware of these challenges in advance, we will manage them effectively. Additionally, we expect a favorable product mix at Dollar Tree, especially as Crafter's Square and discretionary items grow this year with the reopening of the country. This segment is likely to see the most benefits. Regarding shrink, it has been a challenge for both Dollar Tree and Family Dollar over the past three years. Although we made improvements last year, we anticipate further enhancements in that area to help alleviate some of the pressures we face.
Matthew Boss, Analyst
That's great color. So interpretation is just under 35% this year, but you have visibility, given the sourcing trips and the IMU that you're seeing to be back in that 35% to 36%, just given the lead times and as the freight dissipates. Is that kind of the best way to think about it?
Kevin Wampler, CFO
I think we've done our best to outline the positives and negatives at this point. The situation is quite dynamic, and we will keep you informed. We aimed to be very clear this morning about all the factors affecting us, and we'll provide updates as we move forward.
Operator, Operator
And it looks like we have time for one more question from Michael Lasser with UBS.
Michael Lasser, Analyst
So can you frame out the math a little bit that you provided? That was very helpful. So $279 million of COVID costs are going to roll off. You'll have $100 million that are going to be ongoing from the $25 million run rate that you provided for the fourth quarter. So that's a net $179 million benefit at the midpoint of the incremental pressure you're feeling from wages and freight, that $137.5 million. So all else equal, nothing else happens, your sales are flat, you should have $41 million of additional operating income simply from a mix of those two factors. And as part of that, can we then just kind of model out how we think sales are going to be and operating income would grow with sales, putting aside that other math?
Kevin Wampler, CFO
I understand the various factors you mentioned, Michael, and those are indeed the key numbers. There are certainly many variables that come into play each year. We're not providing specific guidance at this time. I believe I've shared as much information as possible this morning. However, I agree that the significant items we believe we can balance out. There are numerous other factors to consider at the end of the day, but we are confident about our business and where we see ourselves in 2021, along with the opportunities that lie ahead. I can't offer much more guidance beyond this.
Michael Lasser, Analyst
I just received several messages suggesting a counterargument to that perspective, which is that while everything mentioned is accurate, Family Dollar is expected to decline in the upcoming year and will need to overcome specific unique advantages. Can you provide any context on what was distinctive about Family Dollar in 2019 that is unlikely to happen again? I understand this is a significant area of uncertainty, but that seems to be the current situation. I also have one final question regarding Dollar Tree Plus.
Kevin Wampler, CFO
I mean, with Family Dollar, we've discussed our initiatives and the opportunities we see with the H2 and combo stores. We believe we are making significant progress in expanding our discretionary business, which is critical not just for sales but also for margin, customer satisfaction, and repeat visits. These are the areas we are diligently focusing on. It's difficult to predict factors like stimulus and the pace of economic recovery, but we feel confident about our current position. That's where we are today.
Michael Witynski, CEO
Yes. Mike, well, I just want to reiterate the enthusiasm I have for both banners and where we're at with our formats, with the strategy that our merchants are working on was cycling last year's pandemic. Again, our capital structure, we are in the best position we've been in, in five years, and we've got a bright future. Our merchants are going to continue to do the things they do every day and get better, and we're going to keep growing the company.
Michael Lasser, Analyst
Yes, and these reasons, very clear from the messaging you're providing. So that's helpful. And then my last follow-up is on the Dollar Tree Plus! concept. You stated that it's exceeding your plan. What's holding you back from rolling this out faster than the 500 locations that you're currently in the process of deploying to? And how does the overall financial performance of the Dollar Tree stores look in terms of sales, operating income dollars, and margin?
Michael Witynski, CEO
Yes. We're rolling it out to another 500 locations to continue testing. We had 120 stores where we purchased seasonal items and products for the latter half of the year, and we surpassed our expected sales. Our customers are responding positively. As I mentioned before, we will keep an eye on overall store sales, margins, and profitability, all of which we want to see improve. The challenge is that with everything that happened last year, especially due to COVID, it was difficult to determine whether the 10% of stores in the Dollar Tree Plus! program truly influenced those results. We will keep testing, refining, and expanding, but we are pleased with the results we've seen so far.
Operator, Operator
All right. And that concludes today's question-and-answer session. Mr. Randy Guiler, I'd like to turn the conference back to you for any additional or closing remarks.
Randy Guiler, VP of Investor Relations
Okay. Thank you, Jordan, and thank you for joining us for today's call and for your continued interest in Dollar Tree and Family Dollar. Our next earnings conference call to discuss Q1 results is tentatively scheduled for Thursday, May 27, 2021. Thank you, and have a good day.
Operator, Operator
And this does conclude today's call. Thank you for your participation. You may now disconnect.