Dollar Tree, Inc.
Q1 2020 Earnings Call Transcript

Published: 28 May 2020

[Operator:]

Good day and welcome to Dollar Tree, Inc.'s First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Randy Guiler, VP-Investor Relations. Please go ahead, sir.

[Randy Guiler:]

Thank you, Shanon. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the first quarter of 2020. On today's call will be CEO, Gary Philbin; Enterprise President, Mike Witynski and CFO, Kevin Wampler. Before we begin, I would like to remind everyone that various remarks that we will make about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, included in our most recent press release, most recent 8-K, 10-Q and annual report, which are on file with the SEC. We have no obligation to update our forward-looking statements and you should not expect us to do so. At the end of our prepared remarks, we will open the call to your questions. [Operator Instructions] Now I will turn the call over to Gary Philbin, Dollar Tree's Chief Executive Officer.

[Gary Philbin:]

Thank you, Randy. Good morning everyone. First from all of us, our report today is against the backdrop of the COVID-19 impact across our country. Our hearts go on to all those affected. Today's Q1 report reflects a number of accomplishments and comments during the quarter that was impacted unlike any other due to the impact of COVID-19. First our results around the core businesses of both businesses speak to the resiliency and strength of both Family Dollar and Dollar Tree in the communities we serve. The investments we have made in our Family Dollar business in our H2 stores and assortment have been highlighted during this critical time. Second, we took quick action to detect individuals with enhanced cleaning protocols to keep the facilities clean and sanitized. We encourage social distancing guidelines as recommended by the CDC and provided PPE supplies, including masks and gloves. Additionally, we have installed more than 16,000 plexiglass shields at store checkouts. Third, our efforts to get the right products to the distribution centers and stores have been the key priority for merchants across both banners. We work closely with vendor partners to support and streamline shipments of needed essentials. And finally, all of that could not have been accomplished without the leadership of our teams across 48 States in five Canadian provinces, with their efforts have been remarkable and it is humbling to see the dedication they have for their teams in both the communities. I could not be more proud of all these and the many other accomplishments against the COVID-19 crisis that's impacted our country and company. Family Dollar’s comp was 15.5% reflected the initial impact of household stocking up on basic goods in March related to the disease. The consumable side of business delivered 17% plus comp was strong throughout the quarter. On the discretionary side, comps were positive up to research and then we saw an acceleration through the end of the quarter around our home and other discretionary categories resulting in discretionary comp of just under 9% for Q1. Operating income for Q1 improved 230 basis points, despite the impact of selling record volumes of lower margin consumables and incurring additional costs related to COVID-19. Dollar Tree’s comp decreased 90 basis points driven by the impact on Easter selling and our party business in general from the executive orders for shelter-in-place mandates, the combined impact of the party, candy and Easter categories negatively affected Dollar Tree overall comp by 490 basis points. While our Easter discretionary comps are nearly flat for the remainder of the quarter, operating margin was 9.2% reflecting the negative top line comp in the heavier consumable mix along with COVID costs. Our COVID costs related – all related COVID costs incurred for wage premiums and for frontline associates, guaranteed sales bonuses for field management and supplies for keeping our facility safe totaled just over $73 million. Now I'll turn the call over to Mike.

[Mike Witynski:]

Thank you Gary and good morning. Before I get into the details regarding our Q1 performance, I want to share a little bit about the associates and their remarkable work and dedication. I want to thank our teams for all they accomplished each and every day for the last nine weeks. Our entire leadership team is inspired and very much appreciative of their individual commitments and their collective team efforts across Dollar Tree and Family Dollar, in our stores and our DCs and in our store support center. I am very proud of the dedication of all our associates. Regarding Dollar Tree’s response to COVID-19, our company took aggressive and decisive actions early on to protect our teams and our shoppers. In early March, we activated our business response team led by risk management and human resources with representation from each functional area in the company. The group worked around the clock to assess the situation, develop policies and procedures and take action where necessary. I would like to recognize the leadership and efforts of our business response team to support our frontline workers. The steps we've taken to provide clean and safe environments include, our store associates are practicing social distancing as recommended by the CDC and we continue to ask the customers also follow these guidelines. We dedicated the first hour each morning to serve at-risk customers. We continue to provide store teams with hand sanitizer and cleaning supplies for high frequency enhanced cleaning protocols. We closed stores at 8

[Kevin Wampler:]

Thank you, Mike and good morning. Consolidated net sales for the first quarter increased 8.2% to $6.29 billion comprised of $3.21 billion of Family Dollar and $3.08 billion of Dollar Tree. Enterprise same-store sales increased 7% and on a segment basis comps for Family Dollar increased 15.5%, Dollar Tree decreased 0.9%. Overall gross profit increased 3.9%, $1.79 billion, gross margin of 28.5% compares to 29.7% in Q1 2019. Gross profit margin for the Dollar Tree segment decreased to 31.9% compared to 34.5% in the prior year quarter. Factors impacting the segments gross margin performance for the quarter, including merchandise costs, including freight increased approximately 140 basis points. Dollar Tree saw a 4.2% shift in mix to lower margin consumables from higher-margin discretionary merchandise related to the soft Easter selling season and pandemic demand. Higher cost from the impact of an incremental $18 million of tariff costs and higher freight costs were partially offset by improved mark on. Markdown costs increased approximately 40 basis points, resulting from increased seasonal markdowns to the lower Easter sell-through. Distribution costs increased approximately 30 basis points, primarily due to higher payroll costs and depreciation. DC payroll costs included approximately $3.5 million or 10 basis points of hourly premium pay for all hourly DC associates for hours work since March 8 and guaranteed sales bonuses. Occupancy costs increased approximately 30 basis points due to loss of leverage on the comp sales decrease in the quarter and shrink increased to approximately 25 basis points based on unfavorable inventory results and an increase in equivalent. Gross profit margin for the Dollar Tree segment improved 60 basis points to 25.4% during the first quarter. The year-over-year improvement was due to the following

[Gary Philbin:]

Thank you, Kevin. The current macro environment was obviously not contemplated when planning our business for fiscal 2020. Our performance in Q1 validates that Dollar Tree and Family Dollar are important to shoppers in the times of need especially for their daily essentials. With more than 38 million Americans filing unemployment claims in just the past nine weeks, we believe families need value and convenience more now than ever before. We have a resilient business model, a very strong balance sheet an experienced leadership team and a tremendous opportunity to continue serving customers with both values and conveniences they seek. I cannot say enough about our store and distribution center teams. They have been up to the challenge and being nimble and agile in a quick changing work environment. And committed to running the business through an unprecedented time. To recognize their efforts, we have rewarded our every store and DC associates with wage premiums going back to March 8. This investment in our frontline associates has totaled approximately $95 million – to $63 million incurred in the first quarter. We were also pleased to welcome more than 25,000 new associates to the organization during the quarter. Q1 is in the books. We finished the quarter strong. The momentum has carried into our second quarter. While we are still less than four weeks into the quarter, I am pleased to say that business has been good at this point. At Dollar Tree, we have seen an improvement on the discretionary side of the business. In fact, with the exception of party pay for all discretionary categories are comping positive in Q2. Categories performing well include, crafts, kitchenware, lawn and garden, hardware, toys are all performing well. We had a strong Mother's Day and school graduation sales. Crafter’s Square, like Mike discussed, continues to gain momentum and is now available in more than 3,000 Dollar Tree stores. And the balloon business, which was hindered in 2019 by the helium shortage has bounced back nicely. The comp performance at this early stage in the quarter has returned to a level we are accustomed to seeing from Dollar Tree. At Family Dollar, we believe the current environment with families staying close to home has provided us an opportunity to showcase improvements. We have been working very hard on in recent years. Our investment in the Family Dollar store base with our H2 renovations has been a key driver since we accelerated our renovations a year ago. Now with customers and communities needing us more than ever, they are being introduced into a format that has a better shopping experience when they need it most. I'm also pleased with the work of the merchant team and the traction we are seeing on the discretionary side of the business. Our customers have moved from all things essential to more purchases to support their at home and outdoor living. Discretionary momentum that we saw late in Q1 has certainly continued into the second quarter as well. Q2 is off to a very good start in Family Dollar. That said, we do expect this to continue to be an extremely volatile consumer environment. Factors impacting retail will continue to be evolution of the macroeconomic factors, including unemployment rates, variability and vendor supply chains being able to meet product demands, volatility in consumer demand related to the crisis, the value and timing of government stimulus, the duration degree and geographic breadth of bearing shelter in place mandates, the evolving competitive landscape across retail and restaurants. And our incremental costs related to managing the business during the COVID crisis. We continue to focus on making meaningful progress to grow and improve our business for both brands. We believe we are well positioned in the most attractive sector of retail to deliver continued growth and increased value for our shareholders. The combination of more than 15,300 Dollar Tree and Family Dollar Stores provides us the opportunity to serve more customers in all types of markets. Operator, we're now ready to take questions. Thank you. [Operator Instructions] We will take our first question from Edward Kelly of Wells Fargo.

[Edward Kelly:]

Hi guys. Good morning. I wanted to ask you about the comp cadence, could you talk a little bit more about the trends that you saw in April both leading up in the Easter and then after Easter. And then what we have seen so far each banner? And I know you provided some qualitative commentary. I'm curious if you could provide some more specific color on May and what you have seen to date from a comp perspective?

[Gary Philbin:]

Ed, this is Gary. Let me characterize it this way. Obviously, on the Dollar Tree side, Easter was the first week of April. So we really saw the impact of short-term place mandates going in. Traffic dropped and Easter was not on anyone's mind going into the holiday. So the bigger seasonal impact to Dollar Tree was the Easter holiday basically evaporating. But post Easter, traffic will negative moderated. And maybe more importantly, what we saw people buying also change too from the boarding of essentials, move to some of the other elements of what people were buying around stay at home, which meant children around a school, so more stationary, more back-to-school, toys for kids. And Family Dollar was maybe slightly a little different, not as big of a holiday effort at – for Easter and a Family Dollar and at least around peer Easter. But the things that get impacted the Family Dollar are things like people grill out is a family celebration, it's apparel. But I would describe it the same way. Post Easter holiday, we saw folks get back into buying more of what they needed around home living and outdoor celebration, I would call it. And with more folks at home, obviously, we're experiencing the essentials spiking of both banners. So as we go into May, while we see some traffic down, we've seen baskets go up and we see the breadth of what folks are buying being expanded beyond clearly beyond the essentials. So we like what we see going into end of April, and it's carrying on into May.

[Edward Kelly:]

All right. And then maybe just a follow-up from the margin perspective, particularly around the core Dollar Tree business. This has been a 35%, 36% gross margin business for a very long time. You've had some headwinds recently. A lot of it seems like it could just be transitory. Is there any reason to think you can't get back to that range? And can you get back there soon? Meaning Q2, Q3 at some point this year.

[Gary Philbin:]

Well, I don't have a crystal ball that says what's going to happen exactly the macro environment. There's no reason Dollar Tree can't get back to 35% and 36% with what we see on how we're selling our assortment. Even now, unlike how the mix is occurring at Dollar Tree. The impacts that we're experiencing from COVID, everything on the supply chain. And it's everything from how we need the DCs to run on the priorities of getting key vendors into the DCs and out to stores, we're spending extra on. When we are buying low-value essential, big queue low-value that impacts the cost of the freight coming in and out of our margin as well, and obviously, we ended the current wage premiums. Long term, there's no reason. I don’t know that I see it in Q2 or in the back half of the year, I dare make a guess on how the retail environment will be. But what we're buying in the value for Dollar Tree is as great as ever. Mike called out craft. I mean here's a category that really didn't even live in Dollar Tree last year to any extent. And our customers have welcomed it wildly in the stores that we put it in, and that's the nature of Dollar Tree. We find something, we build it. You're on the new thing. And that's really the underpinning to what's going to drive margin. The thing that we've got to handle on the expense side, I've always said, given enough time, we'll scare around the rocks. But the key to Dollar Tree's magic is keeping the magic of incredible value in front of our customer on the product we're selling.

[Edward Kelly:]

Great. Thank you. And good luck going forward.

[Operator:]

Our next question will come from Chandni Luthra of Goldman Sachs.

[Chandni Luthra:]

Hi, thank you. This is Chandni on behalf of Kate McShane. Could you guys talk a little bit more about stimulus in terms of sort of when did trends start to improve for you post Easter like has that continued? Because we're only starting to hear – we are also hearing from some customers, anecdotally that some customers are only getting payments right now. So could you talk about how you're seeing stimulus impact the business? And then is it a parallel to be drawn with tax refunds. We heard one dealer talk about it. So do you see that kind of a tailwind in terms of duration similar versus tax refunds? Thank you.

[Gary Philbin:]

Chandni, we're getting a lot of echo on your first question. Was it around how we're seeing customers with the stimulus check?

[Chandni Luthra:]

Yes, that is correct. So basically, my question is, is there a parallel between stimulus checks and tax refunds?

[Kevin Wampler:]

Yes. So yes, we are seeing some impact as the stimulus gets released into the market and the tax refunds, especially on the Family Dollar side. And as Gary described, we saw some nice momentum in our discretionary side of the business with our home and drilling and close. So we can see a correlation of the stimulus dollars being released and an increase in our basket size.

[Chandni Luthra:]

Got it. And then if I get a follow-up. I'm sorry, go ahead.

[Kevin Wampler:]

Yes. We were just wondering what your follow-up – your second question was?

[Chandni Luthra:]

Yes. So in terms of your global supply chain, in light of the disruption this year we've seen and then with tariffs last year, are there any efforts to kind of realign sourcing globally? Thank you.

[Gary Philbin:]

Well, the ripple effect of the COVID impact, obviously, started in Asia and then has moved to the U.S. side. And so initially, when we saw the disruption in Asia. Part of that was just the short-term effect of factories shutdown right after Chinese New Year. I would say that rebounded fairly quickly to the point that other than being measured a few weeks late on some shipments. That was something that moderated and now is not an issue for us. On the domestic side, however, the spike in demand on domestic essentials is something that all retailers are chasing and varies by vendor, it varies by geography and anything that's related to cleaning, toilet paper, paper towels. While they're all getting better and we're selling record amounts, it's still something that we're probably going to be chasing, I think, into June, and I would guess maybe July with some ventures. But getting better week by week, and we see it in our sales. But it's almost shifted more to the discretionary side now. Some of the things that folks are buying are imports. We're having to go back and take a look at orders on inbound and up those. So it's been a changing shift in dynamic from when that started, go all the way back to the impact to China. On supply chain, U.S. domestically and now what people are buying. And so I think about it almost in those three stages, how we're running our business and where the priorities are.

[Chandni Luthra:]

Great. Thank you so much.

[Operator:]

And our next question will come from Michael Montani of Evercore.

[Michael Montani:]

Great. Good morning. I just had two questions. The first was on the tariff front. I think initially, there was discussion of around $45 million plus of impact in the first half of this year. So I wanted to see if $20 million to $25 million is probably about right for 2Q. And then on the COVID expense side, you called out some of the initial labor costs to expect into 2Q, but I was hoping to understand if there's additional kind of PP&E safety equipment run rate that we should be factoring in here and how normal and ongoing that would be?

[Kevin Wampler:]

Sure. Michael, it's Kevin. As it relates to the tariffs. Again, to your point, we – at the beginning of the year, we stated the fact that tariffs were an incremental $47 million this year, primarily on the Dollar Tree side. And again, part of it is annualization of List three at 25% and then obviously List four as well. And as we called out $25 million at that point in time at the beginning here, we said $25 million in Q1. It actually annualized. It came in about $23 million, $18 million at Dollar Tree and $5 million at Family Dollar. As we look at Q2, again we do expect roughly – I think it's a little less than what we probably initially expected. We really expected it to be around $20 million. I think it may be closer to $15 million. Part of that is just due to some timing as we continue to work with supply chain and what comes in when. But I do believe it will be about $15 million roughly in Q2. As it relates to COVID and the costs there, again, obviously, we did have significant cost in Q1 as we ramped up PPE supplies. Again, we also did, as Gary mentioned, 60,000 Flexiglass shields in our stores, which is probably a bigger cost than the supplies at the end of the day, to put in place in a very rapid order. As we go forward, we are expecting, again, to incur additional supply costs as we continue to make sure that our stores have the PPE, they need pass plus and accordingly as to keep them safe and as mandated in many areas. As well as additional cleaning supplies and sanitizers in our stores, additional cleaners to – for the enhanced cleaning protocols we have on a daily basis in our stores. Again, it's hard to predict what it will be for Q2, but it will continue forward. And again, that's one of those unknowns and one of the reasons why we really can't give guidance going forward.

[Gary Philbin:]

Michael, I would just add, the biggest lion's share of that once you get past these initial expenses is, obviously, the wage premium. Our folks are on a biweekly repay cycle in advance of each one. We give them our announcement that it's continued. Right now, we are out to mid-June with our associates on wage premium, so they can plan around that, too. So that's where we are right now.

[Michael Montani:]

Thank you.

[Operator:]

And our next question will come from Paul Trussell of Deutsche Bank.

[Paul Trussell:]

And good execution in a volatile and challenging marketplace. First question is on Family Dollar. Maybe just touch a bit more detail on what you're seeing there. Should we think that 2Q is more or less in line with 1Q results? Also, what's the feedback been from customers as they return to the format potentially for some for the first time in a few years and how you plan to keep those customers there? Also, just curious on any updates on the H2 front and how you feel about your inventory and overall merchandise assortment, especially on the discretionary side, which we were planning to kind of change over the issue. Thank you.

[Gary Philbin:]

Well, let me start. I'll have Mike Witynski in on some of the – what we've seen on the categories. I think Family Dollar has responded, maybe even better than we might have thought going into what we didn't know what was ahead of us and our customers came in and shopped the store hard because it's – when you think about it, its think about it, its convenience, its value. And with the early and quick work we did. I think we also got a graph being a safe place to shop, with all of our protocols in store. I think we are recognized for that, with some of our internal measurements that we saw. I think we also saw more folks sign up for our Family Dollar app, which was a pretty good signal that we've gained some new folks for the first time into the store. So I think early on, we got – folks needed us. I think it has moved to some recognition on even some of the early work we've done on assortment in having in stocks. Now I would tell you, our supply chain, we'll be capable on supply chain around the world, but we are stressed on the domestic supply chain, like a lot of other folks in essentials. And we send the essentials to stores every week. They used to last about two hours. I would tell you now, it's probably lasting between a day and a half to four days depending on who's getting what amounts. But as much as anything, it's done maybe our folks that have risen to the occasion in their neighborhoods and communities. And we can – when I just see the amount of thank you that come into our stores, it's anecdotal, but I can only tell you folks that really count on the Family Dollar banner during this time. I think what's interesting are some of the categories sells, I'll let Mike give you some color on that.

[Mike Witynski:]

Yes. Gary described in his comments, that first with the huge demand for those first three weeks, it was very weighted heavily towards the consumables side and the cleaning products and paper products. And post Easter, it shifted to at home, our apparel business is very strong, soft home elsewhere, home decor, toys and hardware. And the good news is you asked about our inventory position going into the year we were very strong in inventory position on those categories. So we are able to maintain this good in-stock position for the back half of the first quarter. And now we're – as Gary is saying, the good news is we're replenishing those sales. And as you heard from me on March 4, talk about at Family Dollar. Those were the categories that we're going to work really hard on to turn around our discretionary business, with basic products, with sharper price points and trying to get it into our stores in our sets and our H2 and that's what we're replenishing with now. So we sold through our inventory. What we're buying now and the changes of our replenishment, as you heard from Gary, it is selling just as fast as we are bringing it in. So the good news is we're chasing that product and its turning best. And the product that we are buying now with our new disciplines is turning and the customers are reacting to it. I would say one other piece of the pie that we didn't plan on, but it's starting to show up is in the Closeout business. We believe there's going to be a lot of value at Family Dollar and Dollar Tree for Closeouts going into the next several months.

[Gary Philbin:]

And Paul, you asked H2, and obviously hard to look at March and the pandemic effect. But I would say this as we got post-Easter, H2 continue to have tenant lift even during this time. And it's interesting that as you get into the April timeframe post-Easter, our overall H2 that we have most of them outpace the urban locations. And that's not entirely surprising when you think about some of the hotspots affected the urban locations more than rural. So we're still pleased with the H2. I think just in time, I think back to 2008 it’s different crisis, but that's about the time Dollar Tree has gained to our prototype the way we wanted it. I don't think that’s just similar to 1,500 H2 that we have out there that are helping drive the business now.

[Paul Trussell:]

That's really helpful color. Thank you. My follow-up is just to get any other comments that you can provide as it relates to guidance. I know that you're not giving anything specifically, but anything else that we should keep in mind as it relates to 2Q or the balance of the year on some of the items you've mentioned were impacted in the first quarter, things like the merchandise costs or mark downs and other pressures.

[Kevin Wampler:]

Yes, Paul this is Kevin, I think as we think about it, in Gary's comments he alluded to the fact that the Dollar Tree business mix have become may be we call more normalized and so obviously I do believe that as we look at Q2, that can be a positive compared to Q1. I think another item to continue to think about is, as we look at diesel fuel costs for Q1 they were down on average about 12% year-over-year and they started the beginning of Q2 down 25%, now it's like small piece of the overall freight rates being that’s helpful. The other thing I would mention is we began the year with the expectation that we would see increases in our import freight contract that begins in May we didn't see the increase maybe that we thought we would see, so I think there's a little benefit in the back half related to that as we go-forward. So a lot of moving pieces, I think distribution costs. I think if you look at that, I think there's going to continue to be pressure on our building, the throughput is very high right now, as you can imagine, as we try to get our inventory – the essential inventory caught up and along with the normal business. So I think there could be a little pressure as we continue there. I think a complete work on a lot of things and as always, I think we did a good job of controlling expenses in general in Q1. And I think we'll obviously have a huge focus to continue to do that as we go through the year no different than any other year and try to keep that SG&A grow at a very reasonable point.

[Paul Trussell:]

Thank you, I will pass it.

[Operator:]

[Operator Instructions] We'll take the next question from Peter Keith of Piper Sandler.

[Peter Keith:]

Hi. Thanks. Good morning, everyone. Gary, you commented that Dollar Tree is now running, I guess, in May at a level you're accustomed to seeing, so the two questions on that is, would that imply kind of an up-look single digit run rate for the quarter? And then secondly, just thinking about the exposure sort of party and celebrations, is Dollar Tree being negatively impacted at this point because there's still fewer get together's and potentially fewer celebrations?

[Gary Philbin:]

Well, let me answer the second one first, clearly we did see the impact of shelter-in-place. Obviously, parties took the biggest hit to that, but I think that the resiliency of our customer gets the creativeness that we've seen out there with the drive through birthday parties, what's been happening with graduation. We actually comped on graduation balloons last week which I thought was just remarkable for our business. Now party's a big category for us, we put into our celebration and papers, and celebration is actually doing quite well and the party papers, we call them out before the piece that's flagging. On the other hand, crafts, a category that we didn't talk about a year ago, is now a significant category in dollars. The comp is something that customers have responded to and I think it sort of speaks to, families are trying to figure out how to entertain themselves with the magic of product that you can buy from Dollar Tree, and even at Family Dollar toys and some of their homemade essentials there, anything related to kitchen, bathroom, bedroom, outdoor lighting, I’d sort of put into those buckets. So, that's how I think about it. And then, we are earlier into the quarter, I think what we want to call out on what we see in Dollar Tree was it's a new normal, but it's certainly at least in terms of their categories that we are seeing respond feels a lot more than call it used to. We don't have any huge categories or maybe celebrations, holidays until that go to the back half, go from Memorial Day, outdoor grilling, back to school, that turn generally fall after Easter, we'd like what we'd see, we're not going to have the same kind of impact on the seasonal side that we have all got to respond one week in April of Easter. So I think that also led to sort of spread our opportunity out there in the store and what we merchandise and now we put on display. And I think we're encouraged with the things that our customers needed, they have found in both stores at bothered and elevated levels. Now really Family Dollar starting with the April time frame and now it seems like Dollar Tree is getting back to its normal cadence.

[Peter Keith:]

Okay. Thank you for that. I want to ask a separate question and maybe asking you and team to put your economist hat on, which I know can be a little bit dangerous but it's on the federal unemployment benefit that's being paid out right now of $600 per week that at present time is set to expire at the end of July. And obviously no one can predict what will happen, but if that were to expire, do you view that as a notable negative to the business and maybe to the spending power of your core customer or conversely does it allow you to pick up some share with your value offering?

[Mike Witynski:]

Hey, this is Mike. We think about it as that goes away, that we will be in a great position as a valued retailer when people are unemployed and they don't have that source of income, they will need value more than ever. And we should be in a great position to provide that for them.

[Gary Philbin:]

It's not 2008 for all the obvious reasons and it's – what our customer has right now is money in their pocket, that's obviously a tail wind for anybody that has doors open. In 2008, folks lost jobs too and they needed us and the founded us and I think that's some of what we're fighting for as we take into our crystal ball here back half of the year in the 2021.

[Mike Witynski:]

Okay. Sounds great, guys. Thanks a lot. And good luck.

[Operator:]

Our next question will come from Michael Lasser of UBS.

[Michael Lasser:]

Good morning. Thanks for taking my question, Gary what percent of Dollar Tree’s sales relate to gathering? Because you know the party is a big piece of that, but it extends also across seasonal and discretionary as well, if you say 10% of sales, 20% higher than that.

[Gary Philbin:]

Well, that’s tough one. I mean, I would just put on sort of what we've seen is that we've seen, if we just take a look at Easter alone was impacted was obviously the pure Easter product along with that party and candy was the 490 basis points impact for that holiday. But I think it spreads a little more once you get past that big holiday, I think party is where we've obviously made it one our key categories, so bifurcating into what people can buy right now for celebration, parties – birthday parties are still going on, they're just happening in a different way. Graduations are still going on, they're just happening in a virtual environment. The things that get sober[ph] at them, now we're trying to see some sign close to the same like we saw before. The party papers go different, like go to some gift giving and some other things that I think catch up over time. It's just a slower burn, plus that – that it's just a category like stationary, it means kids are home, it was parents trying to teach virtually or online and they needed school supplies and so a category like that picked up, I mentioned craft, but you go down a discretionary line. People are still buying now, I think on a normal cadence of what they have been on to say a normal shopping trip, while we're just saying, as they're coming in shopping our content, they're coming in to buy a soft drink and a candy bar they're coming in because they have a need in light now Dollar Tree and Family Dollar for them.

[Michael Lasser:]

Thank you. And my follow-up is on the Family Dollar gross margin is up year-over-year, but against a really easy comparison, particularly on a two year basis. So how should we think about the trajectory of the gross margin of Family Dollar understanding that mix might've has had some issue in the first quarter, but it's going to take to be able to get the business 26%, 27% gross margin and how quickly you would expect that's going to happen. Thank you.

[Kevin Wampler:]

Yes. Michael, I think as part of the timeline that's maybe the harder part of the equation there. I think obviously we're very happy with where we're headed, no with H2 renovations are a big part of that and just the overall work that the merchant team is doing under the discretionary, it's not as a business also plays a big role in this. And again, I think our opportunity here is to get more people in the store, show them the assortment and the re-assortment and get them excited about their Family Dollar store that they shop. And I think so the opportunity is there, I think again, honestly, increased volume always helps. But I think changing our trajectory of mix potentially plays a bigger role on an overall basis. We sell more consumables with discretionary categories play a bigger role, and then there's other things that we have to do a better job, right. We've talked about shrink in the last couple of years and it's not where we want it to be in our Family Dollar stores. And we have work, we’ve got a team is working hard. But there's more work to be done there. I notice often improvement in Q1. I think if you look at other line items in there, obviously markdown to them heavy the last couple of years, I think they feel better about that as we get through this year, we talked about Q1 there are more markdowns originally when we went into the plan, because of the fact that we'd be working on discretionary re-assortment. But I think we've moved through that with the sales that we've seen. So I think going-forward, we have this opportunity and I think the team is working hard to make that consumer realize that it is a new assortment and new mix, and I think it'll be exciting to them.

[Michael Lasser:]

Can I just clear one thing, one of your competitors reported this morning and they noted that they are seeing moderation in their comp trends in recent days are you seeing the same thing.

[Gary Philbin:]

I don't think that's something that we would comment on, Michael.

[Michael Lasser:]

Okay. Thank you very much. And good luck with the current period.

[Operator:]

Your final question will come from Paul Lejuez of Citi.

[Paul Lejuez:]

Hey, thanks guys. I'm curious on the Family Dollars side. If you have any idea about the number of new customers that may have come into the network over the past several months, and then second, just to go back to the Dollar Tree gross margin, curious, if we take the mix out of the equation, if maybe you can talk about the gross margin within categories relative to themselves on a year-over-year basis, where you're seeing increases and decreases> Thanks.

[Gary Philbin:]

Well for the, Family Dollar, I had mentioned, I would tell you in a go away, we see from our folks in the field that tell us, they're seeing new customers coming in and to your point we do track it as a customer feedback that we see folks who identify themselves as new customer and then on a week-in week-out basis we see the number of folks that actually sign up for the first time using Family Dollar app, which we saw a spike on as people were looking for essential. So, that's our vector on the two outs that we had an opportunity here to showcase our H2 stores, but also just improvement in our store base with Family Dollar, so that's a positive us. For Dollar Tree on the margin mix, when you think about that 490 basis point shift, I mean, I guess there are start there, I mean, that was the low point of us losing right amount of business on a key holiday and the discretionary business. And we're getting that back to normal now. And I think if you're asking a question around, we want to think of like in mix in markdown. Well markdown is just fine, when we took a look at categories like craft now that are comping outside the norm, that's going to be a help. So as we get back to a more normal mix, the markdowns, that's fine. And then to Kevin's point, the things that have aligned that still deserve our attention, we do have to do better on shrink. We are willing to spend more on our DCs right now to get essentials to our stores, that's probably going to be what goes through a lease queue to grasp that. And what I mean bringing in essentials that does have an effect on the fact that you're saying, basically the same fright on lower value trailers of paper towels or whatever it is compared to the normal mix. Those are sort of the near-term and short-term things that the way I'm thinking about it, but we're going to have different plates on mix right now. And we would expect Dollar Tree’s, gross margin to get the help from those that I called down.

[Paul Lejuez:]

That's it. Thank you. Good luck.

[Operator:]

And now I am going to turn the conference back over to Randy Guiler for any additional or closing remarks.

[Randy Guiler:]

Thank you, Shannon. Thank you for joining us for today's call and especially for your continued interest in Dollar Tree and Family Dollar. Our next quarterly earnings conference call to discuss Q2 results is tentatively scheduled for Thursday, August 27, 2020.

[Operator:]

That does conclude today’s teleconference. Thank you all for your participation. You may now disconnect.