Good day, and welcome to the Dollar Tree, Inc.'s fourth quarter 2021 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Randy Guiler. Please go ahead, sir.
Thank you, Ashley. Good morning, and welcome to our call to discuss results for Dollar Tree's fourth quarter and full year 2021. With me on today's call are Mike Witynski and Kevin Wampler. Before we begin, I would like to remind everyone that various remarks that we will make about our expectations, plans, and prospects for the company constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, and our actual results may differ materially from those indicated in these forward-looking statements.
For information on the risk and uncertainties that could affect our actual results, please see the Risk Factors, Business, and Management's Discussion and Analysis of Financial Condition and Results of Operations sections in our annual reports on Form 10-K, filed March 16, 2021, our Form 10-Q for the most recently ended fiscal quarter, and our most recent press release in Form 8-K and other filings we make from time to time with the SEC. We caution against reliance on these forward-looking statements made today, and we disclaim any obligation to update or revise these statements except as may be required by law. Following our prepared remarks, we will open the call to your questions. Please limit questions to one and one related follow-up. I'll now turn the call over to Mike Witynski, Dollar Tree's President and Chief Executive Officer.
Thank you, Randy. Good morning, and thank you for joining us on today's call. I'm extremely proud of the team's strong performance during our transformative fourth quarter. We delivered comparable sales increases at Dollar Tree and Family Dollar, both representing improvements from the prior quarter on a two-year stack basis. Our EPS of $2.01 exceeded our $1.69-$1.79 guidance range. Importantly, we recently completed a successful conversion to a $1.25 price point across all Dollar Tree stores in the United States more than two months ahead of schedule, which significantly enhances our ability to provide a meaningful assortment at extreme values to our shoppers.
We continue to have terrific performance on other key strategic initiatives, including the expansion of our $3 and $5 plus assortments to another 1,500 Dollar Tree stores, as well as our combo stores and H2 renovations at Family Dollar. The Dollar Tree segment delivered a comp sales increase of 3.1%, cycling a 2.4% increase from the prior year's quarter. The 5.5% two-year stack quarterly comp was our best of the year and represented a sequential improvement of 90 basis points from Q3. Discretionary continues to perform extremely well at a 5.4% comp. We are continuing to experience record sell-throughs of our seasonal and holiday merchandise. The strongest performing categories included candy, Christmas seasonal, party celebrations, crafts, and stationery.
For the quarter, discretionary represented more than 57% of our sales, up 130 basis points from the prior year's quarter. For the Dollar Tree banner, December was the strongest comp month of the quarter as we were cycling a slight negative from the prior year. November was a low single-digit positive comp, and January was our lowest comp month as we cycled the strongest comp month of the prior year's quarter. Family Dollar delivered a positive 1.7% comp against the 8.1% increase a year ago. This represented the fourth consecutive quarter the Family Dollar two-year comp stack exceeded 9%. The consumable side of the business comped just below a positive 3%, while the discretionary was a low single-digit negative as we were cycling stimulus dollars from the prior year. The Family Dollar business continues to gain share.
The strongest performing categories include pet, candy, and snack and beverage. For the quarter, consumables represented just over 73% of sales. At Family Dollar, November was our strongest comp month of the quarter, closely followed by December. Both periods were above the quarterly comp of 1.7%. January was a negative comp as we cycled a double-digit comp from the prior year related to the release of stimulus dollars. Additionally, retail in January was impacted by Omicron variant, much colder and stormier weather than the prior year, and the lapsing of the monthly child tax credit advanced payments. The comps at both banners were again driven by an increase in average ticket, partially offset by a decline in transaction count.
Last week, we completed the rollout of our $1.25 price point initiative to every Dollar Tree store across the U.S., more than 7,800 stores. This milestone, completed more than two months ahead of our targeted date, is a testament to the commitment and teamwork between our support teams, our merchandising organizations, and our field leadership teams, demonstrating our ability to execute. This strategic endeavor will enable Dollar Tree to ultimately drive store traffic and productivity, customer loyalty and operating performance, while enhancing our ability to navigate the business through higher periods of higher cost. We have been considering this move for some time. In recent years, we have lost many items that are customer favorites and key traffic-driving consumable products from our assortment due to the constraints of the dollar price point.
Additionally, we have been operating through a higher cost environment as it relates to inflation, tariffs, supply chain, and labor costs. The new $1.25 price point enhances our ability to materially expand our assortments, introduce new products and sizes, and provide families with more of their daily essentials at a great value. In preparation for this move, our merchandising teams have taken on the Herculean task of reviewing thousands of product, SKU by SKU or item by item, to reassess the value through comp shops of our competitors. Many of our products, especially on the seasonal and discretionary side, are still considered to be an extreme value at the new $1.25 price point.
For those products that are considered new or to be reinvested in with larger quantities or package sizes, we have a very clear, focused, and urgent plan to bring that product into our stores. These assortment changes will be taking place throughout the year, but we do expect 50% of the categories, new and reinvested in products to be in the store by mid-year. Examples of the products already in the stores are carbonated beverages and salty snacks, all at the $1.25 price point. I could not be more proud of our team's smooth execution of the transition to the $1.25 price point. Initially, we rolled out the program to a diverse segment of more than 100 stores across the U.S. Then we expanded to nearly 200 stores across three metropolitan markets.
Starting in December, we embarked on seven waves of multi-state introductions. The signage, training, and talking points equipped our field leadership teams to execute the stores checklist to complete the transitions. The teams embraced the project, rolled up their sleeves, and got it done. Feedback from our shoppers has indicated they clearly understood the change in pricing, stores were easy to shop, and the signage was very clear. The key has always been, and always will be, enabling us to deliver extreme value to our customers. We are focused on exceeding shopper expectations for the value at a $1.25, just like we have been at the $1 price point for more than 30 years. We have been closely tracking the performance of converted stores on a daily basis, item by item, category by category.
We have seen relatively consistent reaction and performance across various demographics, geographies, and store sizes. Among our findings are the following: Our new and reinvested SKUs are driving improved performance in their categories, including in the foods, snack, and beverage, which are all very important traffic-driving categories. Our seasonal and discretionary continue to outperform consumable, but we believe this can balance out as we continue to modify the assortment on the consumables and deliver greater value for our customers. As you would expect, we are seeing comp lift sales to the stores that have transitioned to $1.25, partially offset by a decline in unit sales in the teens%. As we go through the year, we expect to see a greater lift to the gross margin in the first half of the year as we sell through the current inventory.
Importantly, as I have stated before, we have confidence we can get back to our historic 35%-36% annual gross margin range this year, even with the continuation of elevated freight costs. As we reinvest in the key categories to deliver extreme value, we expect to see improved traffic and productivity as we move throughout the year. I've shared much about the $25 price point as it is where many investors are focused and it is transforming our company. I want to be clear that we are very pleased with the continued progress we are seeing across each of our strategic initiatives. Regarding Dollar Tree Plus, we finished the year with the multi-price product in approximately 660 stores, well beyond our original target of 500 stores.
At Dollar Tree, our $3 and $5 plus assortment will be expanded to another 1,500 stores in fiscal 2022. Customers are responding very well to holiday, seasonal, and discretionary categories, and we will continue to grow and improve this initiative. At Family Dollar, our combo stores are working. Customers love shopping the best of Family Dollar and Dollar Tree in one easy-to-shop local store in their community. The stores are driving a material comp sales lift, increased productivity, higher gross margins, and improved operating performance. We ended the year with more than 240 combo stores and are planning to add another 400 combo stores this year. We ended the year with 3,815 Family Dollar stores in the H2 format.
We are planning for another 800 H2 store renovations in fiscal 2022, which we believe will bring our store fleet current and will enable us to reallocate time, effort, resources and capital from the renovation program to other value-creating initiatives as we move forward. I will now hand the call over to Kevin to provide details on Q4 performance and our outlook for fiscal 2022.
Thanks, Mike, and good morning. For the quarter, consolidated net sales increased 4.6% to $7.08 billion, comprised of $3.92 billion at Dollar Tree and $3.16 billion at Family Dollar. Enterprise same-store sales increased 2.5% as we cycled a 4.9% increase from a year ago, representing a 70 basis point improvement from Q3 to 7.4% on a two-year stacked basis. Comps for the Dollar Tree segment increased 3.1%. Family Dollar same-store sales increased 1.7%, cycling a strong 8.1% increase from last year.
On a two-year stacked basis, Dollar Tree comps increased 5.5%, which was a 90 basis point improvement from Q3, and Family Dollar increased 9.8%, which was a 70 basis point improvement from Q3. Dollar Tree's comp was comprised of a 6% increase in average ticket, partially offset by a 2.8% decline in traffic. Family Dollar experienced a 4.6% increase in average ticket, partially offset by a 2.7% decline in traffic. Gross profit was $2.14 billion for the quarter. Gross margin was 30.2% compared to 31.8% in the prior year's quarter. Gross profit margin for the Dollar Tree segment declined 50 basis points to 35.6% when compared to the prior year's quarter.
Factors impacting the segment's gross margin performance included merchandise costs, including freight, increased 110 basis points driven by higher freight costs, partially offset by increased initial mark-on and increased sales of higher-margin discretionary merchandise. This increase was partially offset by shrink that improved 30 basis points related to favorable inventory results and a decrease in the shrink accrual rate. Distribution costs improved approximately 20 basis points, resulting primarily from lower COVID-19-related expenses and sales leverage, partially offset by higher hourly wages. Occupancy costs decreased approximately 10 basis points as a result of the leverage from the comp sales increase in the quarter. Gross profit margin for the Family Dollar segment declined 320 basis points to 23.4% in the fourth quarter.
Year-over-year delta included the following. Merchandise costs, including freight, increased 220 basis points related to higher freight costs and an unfavorable sales mix, partially offset by higher initial mark-on. Markdowns increased 90 basis points, primarily related to our recent product recall in our Arkansas distribution center and 404 Family Dollar stores. Consolidated selling, general, and administrative expenses increased 40 basis points to 22.1% of total revenue, compared to 21.7% in Q4 last year. For the fourth quarter, the SG&A rate for the Dollar Tree segment as a percentage of total revenue increased 50 basis points to 20.6% when compared to the prior year's quarter.
Other SG&A increased approximately 50 basis points, resulting from higher card transaction fees and operating taxes, along with marketing and store supply costs associated with the transition to the $1.25 price point. Payroll costs increased 10 basis points, resulting primarily from higher store hourly payroll costs due to minimum wage increases and higher healthcare costs, partially offset by lower incentive compensation. Depreciation costs decreased 15 basis points, primarily due to lower store impairment write-offs and leverage due to the increase in comp store sales. For Family Dollar, the fourth quarter SG&A rate as a percentage of total revenue increased 10 basis points to 20.7%, compared to 20.6% in the prior year's quarter.
Other SG&A expense increased 25 basis points, primarily due to lower miscellaneous income, an increase in card transaction fees, and an increase in insurance costs related to general liability claims. Depreciation and amortization expense increased 15 basis points due to higher store asset impairment charges and expenditures associated with the store renovation program. Store facility costs increased 5 basis points, primarily due to higher repairs and maintenance expenses, including snow removal, partially offset by lower telecommunication expenses. Payroll expenses improved 35 basis points, primarily due to lower incentive compensation and field management vacancies, partially offset by higher store hourly payroll resulting from higher labor rates. Corporate support and other expenses as a percentage of total revenue were flat when compared to the prior year's quarter at 1.4%.
Operating income was $578.8 million, or 8.2% of total revenue in the fourth quarter. Non-operating expenses totaled $79.6 million, comprised primarily of net interest expense, including debt extinguishment costs of $46.5 million associated with our debt refinancing in the quarter. The effective tax rate was 9% compared to 22.3% in the prior year's fourth quarter, resulting primarily from a deferred tax benefit related to state entity restructuring. Company had net income of $454.2 million or $2.01 per diluted share. This compared to net earnings of $502.8 million or $2.13 per diluted share in the prior year's quarter.
Combined cash and cash equivalents at year-end totaled $984.9 million compared to $1.42 billion at the end of fiscal 2020. Outstanding debt as of January 29th was $3.45 billion. For the year, the company repurchased $950 million in shares at an average price of $103.75. The company did not repurchase shares during the fourth quarter as our board is engaged in discussions with Mantle Ridge. We currently have $2.5 billion remaining on our share repurchase authorization. Compared to the prior year, inventory levels increased 39% at Dollar Tree and 17% at Family Dollar.
The higher levels of inventory are comprised of significant increases in goods on the water year-over-year as we rebuild inventory levels, as well as increased capitalized rate costs based on much higher rates during the year. We do not anticipate any additional material inventory markdowns related to the recent Family Dollar voluntary product recall. Capital expenditures were $271.6 million in the fourth quarter versus $191.8 million in Q4 last year.
For fiscal 2022, we expect the consolidated CapEx will be approximately $1.3 billion, which will be focused on 590 new stores consisting of 400 Family Dollar and 190 Dollar Tree stores, 1,500 Dollar Tree Plus additions, and 800 Family Dollar H2 renovations, the addition or replacement of frozen or refrigerated capability to select Dollar Tree and Family Dollar stores, supply chain construction and upgrades, and information technology system projects. Depreciation and amortization totaled $188.7 million for Q4 compared to $182.9 million in the fourth quarter last year. For fiscal 2022, we expect consolidated depreciation and amortization to be approximately $750 million. Our initial outlook for fiscal 2022 includes the following assumptions.
For same-store sales for the enterprise, we are forecasting low- to mid-single-digit positive comps for the year. Considerations for 2022 include the following. The company incurred approximately $33.5 million in COVID-19 related costs in fiscal 2021. We expect these costs to be minimal in fiscal 2022. We will be cycling the third round of stimulus checks that totaled an estimated $386 billion in March 2021. Later in the year, we will be cycling the monthly advanced child tax credit payments that began in July 2021. We expect continued pressure on store and DC payroll based on competitive markets, states increasing minimum wages, unemployment levels, and completing the company's many initiatives.
We expect to incur more than $165 million in store minimum wage changes and market adjustments. In addition, we are investing more than $30 million in DC hourly wages. We continue to partially offset these average hourly rate increases through productivity and efficiency initiatives. Import and domestic freight will present cost pressures due to the annualization of fiscal 2021 rates in the first half of 2022. In addition, diesel fuel prices are expected to be significantly higher in 2022. We cannot predict future currency fluctuations, so we have not adjusted our outlook for the currency rate changes. Net interest expense is expected to be approximately $33 million for Q1 and approximately $129 million for fiscal 2022.
We estimate consolidated net sales for the first quarter will range from $6.63 billion-$6.78 billion based on a low single-digit increase in same-store sales for the combined enterprise. Diluted earnings per share estimated to be in the range of $1.95-$2.10. Consolidated net sales for full fiscal 2022 are expected to range from $27.22 billion-$27.85 billion. The company estimates diluted earnings per share will range from $7.60-$8, which at the high end implies a consolidated operating income margin of 9%. Our outlook assumes a tax rate of 24.3% for the first quarter and 24.1% for fiscal 2022.
Our weighted average diluted share counts are assumed to be 226.5 million shares for Q1 and 226.7 million shares for the full year. Our outlook does not include any share repurchases. As previously mentioned, we currently have $2.5 billion remaining on our existing share repurchase authorization. I'll turn the call back over to Mike.
Thanks, Kevin. I am more encouraged and enthusiastic about our business and the opportunity than ever before. After a few years of Dollar Tree delivering operating margins lower than we like, I believe we are poised to benefit from our initiatives to deliver materially improved operating performance. Because of our team's dedication, focus, and execution, we have one of the most important milestones behind us, converting more than 7,800 stores to the new pricing strategy. Providing value to our customers and a meaningful assortment is at the forefront. As we reinvest in end market, the extreme value assortment at Dollar Tree, we are confident store traffic and productivity will improve throughout the year, which will contribute to shopper loyalty. Value and convenience is more important than ever to our customer in today's environment. We are dedicated, aligned, and focused.
The ability to execute our key initiatives is paying off and setting a solid foundation for improved operating performance. We delivered an EPS of $5.80 in fiscal 2021, and the high end of our guidance range this year is $8, representing a 38% increase. I believe we are at an inflection point to exhibit our earnings power in the years ahead. This year, we are laser focused on meeting our customer needs while driving our initiatives that are delivering the best returns. These initiatives, combined with our robust balance sheet, will position us to deliver long-term value for our stakeholders, customers, associates, suppliers, and our shareholders. I would like to once again thank every one of our more than 200,000 associates for all they have accomplished over the past two years.
Through the unprecedented challenges presented with COVID-19, supply chain issues and labor shortages, our teams are there every day to serve millions of shoppers across the U.S. and Canada. We have accomplished quite a lot in the last 18 months, but in many ways I feel that we are just getting started. The future is bright for Dollar Tree and Family Dollar. Before we take your questions, I'd like to provide a brief update on our ongoing engagement with Mantle Ridge. We continue to have constructive dialogue with Mantle Ridge and our shareholders, and indeed, we have been meeting weekly with Paul Hilal of Mantle Ridge and Rick Dreiling. Accordingly, we will not be addressing any Mantle Ridge related questions during the Q&A portion of our earnings call. Operator, we are now ready to take questions.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. We do ask that all participants limit themselves to one question, and if necessary, one follow-up question may be allowed. Again, that is star one to ask a question. We will now take our first question from Scot Ciccarelli of Truist Securities. Please go ahead.
Good morning, guys. Thanks for the information. Mike, given your comments on the decline in units at Dollar Tree, is it fair to assume that the Dollar Tree stores are roughly generating high single digit comps after the price conversion? Secondly, are you surprised at the magnitude of the unit decline? I guess it doesn't quite seem to reconcile with some of the comments that the consumers have been really accepting of the price changes. Any color there would be helpful.
Yeah, thanks. On the unit decline, I mean, we have the same exact sensitivity models that many of you do on units, comps, transactions, and then margin enhancement. Going into it, you know, we've been watching this for the last 18-24 months, and because of the vendor cost increases on our key consumable items that drive traffic for the last 18 months, you know, vendors have eliminated items, downsized items or raised the price on items that we have lost in our assortment. Over those 18-24 months, we have seen unit declines and transaction reduction because of that. It wasn't a surprise to us. We knew where we needed to invest our dollars. As we rolled this out and tested it really confirmed, and our customers told us, here's where we needed to do our work.
That's why it does three things for us. We were able to improve our assortment and move to the $1.25 and really bring back items that consumers like and that are extreme value and high traffic driving categories. That will improve our traffic and our consumable sales going forward. The other thing it does is it, you know, it enables us to get, again, I keep saying, get back to 35%-36% gross profit margins in this high cost environment. Then lastly, it allows us to improve our operating performance in a higher cost environment and offsetting. You know, as Kevin said, and we shared, our high end of our range, EPS range is $8, a 38% increase. That's absorbing the $600 million in freight that we assumed last year.
Then Kevin just shared another $200 million in labor between the stores and DCs. That's why this strategy is so important to us. The unit decline, as we see the new items come in, we see the customers responding very quickly. Many of you even pointed out, as you've done your store inspections, you've seen some of the new products in our carbonated beverage, in our salty snacks, in our meat snacks, and we expect those sales to slowly improve. Even with the unit decline where it's at, you've seen how it's translated to an improved operating income as you saw that we beat fourth quarter by $0.25. No, we're not surprised.
Yes, we are working diligently to get the new product in to reverse that trend that's been existing for 18 months and really deliver what the customer wants at that extreme value on both the consumable side to drive traffic and the discretionary side that they know us for.
Okay. Thank you very much.
We'll take our next question from Matthew Boss of JP Morgan. Please go ahead.
Great. Thanks, and congrats on a nice quarter. On the top line, could you help provide maybe a comp forecast by banner if we broke apart the low single digit comp guide for the first quarter? Mike, what are you seeing from your low-income customers so far in February? Just how best to think about the delta between low single digits in the first quarter and low to mid-single digits for the year on the comp side.
We haven't broken out by banner. You know what? Our customer, you know, last year, as you know, they had a lot of stimulus dollars in their hands between the stimulus dollars, the child tax credit, and then the food stamp environment, and then the extra unemployment. Many of those are going away. Not only are they going away, but then on the other side, it's the highest inflation you've seen in 40 years. They are starting to see pressure on, you know, their rent bills, their heating bills, their gas bills, their utilities, and their food bills.
We think that this value segment that we're in and this undeniable value that we're gonna deliver at $1.25, and our great values at Family Dollar at convenient locations are really poised well to deliver what the customer is looking for.
Maybe just a follow-up, Kevin, on gross margin. Could you walk through maybe some of the moving pieces embedded this year in the forecast? Specifically, what are you embedding for freight and how best to think about gross margin drivers from here at both the Dollar Tree banner and Family Dollar.
Yeah, I think as you look at the gross profit section of the P&L, so obviously the biggest headwind continues to be freight. As I spoke to the first half in particular, so you know as we went through 2021, rates climbed quarter to quarter until they kind of you know kind of finally flattened out at the back half of Q3. The first half of the year continues to see some pretty good pressure there. That shouldn't be a surprise to anybody, I think. As we look at the year, we do not see things getting better in the supply chain world of and moving product and the you know the rates that are required to continue to move goods.
It's not just the rates to pay for the goods, it's also the rates you pay once it gets into the port, it's costing more to move the product. Drayage is more, storage costs are more, you know, everybody's trying to charge for equipment. There's a lot of pressure on a lot of different places as it relates to moving products. I think that's a big one. The other one is diesel costs. Diesel costs are up basically, I think just over $1 year-over-year at this point in time right now. That adds a significant amount to the pressure as well as we think about it.
I think, you know, to your point, I think we face stimulus dollars, in particular in the Family Dollar business in Q1, the discretionary business, if you remember a year ago in Q1 at Family Dollar, had a very large comp, a double-digit comp. We would see unfavorable mix in Q1 as it relates to our Family Dollar business. Those are some of the things that are some of the moving pieces that are kind of going on. I think the other thing we think about from a, and Mike kind of, you know, talked about it already, is the investment, the reinvestment in the product that we're making at Dollar Tree. You know, the consumers let us know where we need to continue to look at our value proposition.
The merchants are doing a great job working through that, and we're flowing new goods, and we'll continue to flow goods throughout the year. I think that'll be an important piece of it.
We'll take our next question from Michael Lasser of UBS. Please go ahead. Please go ahead, Michael. Your line is open.
Good morning. Thanks a lot for taking my question. What is the comp list that you are getting from the $1.25 price point move, and how wide does the list vary across stores and geographies? As part of that, how has the move to $1.25 impacted customer shopping frequency? Have you seen some customers who just aren't coming back after realizing the price change?
Yeah. Thanks, Michael. You know, the consumer was a hugely important part of this, and our ability to deliver meaningful assortment to them. We did consumer research, in-depth research back in October, and we just recently finished it up. I've seen some of the analysts have done their own in-depth research. The most important thing is the research tells us that they trust Dollar Tree, and that Dollar Tree is the most recognized and trusted brand in the value dollar segment, period. This is after the $1.25 price change. They expressed a likelihood to continue to shop of above 85%. They still wanna recommend our stores above 77% of our shoppers. There's an emotional connection still.
Our customers still believe they're getting a good value for the money. We receive higher marks than our competitors at a good value, even at $1.25. Bringing our customer along is critical. The reason that's enabling that is on our discretionary side, it's $1.25. All comp shops still tell us where we are winning. When I said a Herculean task, our merchants, starting, you know, last fall, so November, December, and January, and a little bit into February, went item by item.
They did complete category reviews and reviewed item by item, line by line, and went out and comp shopped them, every item, and brought it in and wanted to make sure that at a $1.25, this item still stood up as a great value to the competitive market. Where we saw that, we see the unit sales where we would expect them. Then to your point, you see unit declines where we aren't competitive, and we knew that over the last 18 months. What the breaking the dollar does in going to a $1.25 is really lets us get the new assortment in, and we're so excited about it. Over the last 3 months, our entire merchant team not only went through a line review category by category, but they also did our January trip.
Our January trip that we bought for the back half of this year is some of the most exciting items that we've had, and our customers are gonna be wowed by compared to what they're seeing in the marketplace. Then the new items where we're delivering, we're seeing an improvement in unit sales as we bring those in. We absolutely believe that throughout the next six to seven months, as the consumable side and those new items start to flow in, we will see units begin to come up, and we will see our sales come up accordingly, and we will maintain that customer loyalty from our customers. They still believe we're the number one value in the dollar segment because they're seeing the inflation, the highest in four decades.
They see what's happening in the marketplace, and they trust us. Our merchants have worked very hard. I think over the first half of the year, we will slowly get better and better in units and in our traffic going forward. The most important thing, even with the extra costs that Kevin talked about in our freight in the first half, we still believe we can deliver that 35%-36% margin. It's the, it's the flow-through that's gonna be so important, while we're bringing in the new items to drive that top line. To answer your question, across geographies, we really don't see any difference in unit declines across geographies, competitive makeup, or demographics. It's really similar.
When we had a foot in both camps, our dollar 25 stores moved very similar to our dollar stores. The gap didn't get worse or better. It just moved very similar. It was very consistent across that perspective too, which gave us permission to move as quick as possible to get that new assortment in and really leverage this for our customers going forward.
Mike, in the past, you've helpfully provided the comps lift that Dollar Tree saw from the Dollar Tree Plus, which is 6%. Is there an equal number that you can give us for the $1.25? How did you turn this into a longer-term comp driver for the business to make sure it just doesn't. It's not just a one-and-done impact for 2022, and then the business goes back to experiencing some challenges longer term? For example, does this open the door to move from a $1.25 to a $1.50 that could provide even more merchandising flexibility to drive the business down the road?
Yeah. What the $1.25 going forward enables us to do is, you know, really going forward, the $1.25 will allow us to bring in great assortment to drive traffic and meet the customer's need at a fixed price point and differentiate us, just like we've been differentiated for 30 years. We think the $1.25 allows us to do that. To your point, then how do you continue to drive our comp store sales at the Dollar Tree Plus? That's why we're accelerating that to another 1,500 stores. I've shared we wanna get to 5,000 stores going forward.
We think that the growth in Dollar Tree, similar to a lot of you have referred to, Dollarama up in Canada, we believe that this is gonna be a point where we can continue to drive comp store sales, improved assortment with our $1.25, $3, and $5 dollar assortment. Going forward, we're gonna do 1,500 this year. We're gonna continue to grow another, a large amount of stores the following year. Then we're also at a Dollar Tree Plus items at the $3 and $5. We're planning for and looking to expand it in 2023. Not only grow the store count, but expand the assortment and depth inside the store. That will enable continuous comp growth year over year as we move forward.
To answer your question, we just completed the assortment. We will share more as we go forward on the comp store growth with the unit decline. You know, we are very confident we can be in that low- to mid-single-digit comps. Even at that, it translates and flows through at that higher margin and leveraging throughout the P&L to a 38% increase in our EPS. That's why we're very excited about the improvement that this year will bring. As we move forward, now that we have the whole fleet on there, you know, in the prior quarters, we'll definitely share more details because it will be the whole fleet and in a consistent timeframe.
You know, throughout the last three months, we were just in, you know, December. We had a few thousand stores, but it was during the Christmas. January, we're rolling out more stores, but it was in a, you know, cycling. January was a tough month for retail. February was in our cycling bad weather from last year, and we had one of the best Valentine's we've ever had. There's just been a lot of moving parts. Once it stabilizes and we have the whole fleet on here, we'll absolutely share it. It is doing exactly what we thought it would, and it's delivering that EPS we expect it to.
Just to clarify, just because you don't want to provide it at this point, the market should not interpret it that the response, the comp lift response has been disappointing.
Not at all. No. No, and it's evident by our 25% beat in the fourth quarter and 38% increase in EPS. The key is, this really enables us. I can't stress enough, it enables us to bring back those key items on the consumable side that over the last 18-24 months have just slowly disappeared. They were one by one, it wasn't all at once. Over time, we lost unit sales on the consumables and comps on the consumables, which ultimately lost transaction counts the last 18 months. You, you've seen it in our reporting every quarter. What this enables us to do is bring back all of those items and then even more new items. I'm so excited about the assortment that you're going to see flowing in there, and our customers are excited.
Our end caps with the brand name leaders of carbonated beverage, four feet of meat snacks that we brought back, are really going to be key traffic driving items that we see will accelerate as they increase throughout the first half of this year.
As a reminder, please limit yourselves to one question and one follow-up question if necessary, so that we may accommodate all callers. Our next question comes from John Heinbockel of Guggenheim. Please go ahead.
Hey, Mike, I want to start with what do you think happens to total assortment inside the Dollar Tree, let's say, over the next year and then broader than that, right? Because you don't want the assortment, I would imagine, to get, you know, significantly larger than it's been historically. What do you do with, you know, you guys don't have the kind of tight planograms that some others do. Do you go back and do a strategic replanogramming and space allocation, maybe giving more to consumables? You know, when would that happen?
Yeah, no, it's a great call. We can, you know, this line item review, we went category by category, and we strategically look at what drives traffic and give it the appropriate space needed. We aren't planogrammed, and that enables us to bring in great new items and bring out closeout items and invest in wow items and thrill of the hunt items to really get that customer excited about seeing newness in our stores. As we look at the store, the $1.25 items and then this $3 and $5, I believe going forward, we will monitor the productivity in dollars and profitability. Our stores don't have a shelf stretcher inside our stores. You're right, there is only a set amount of linear footage.
We believe we can continue to optimize based on the customer's reaction on the $3 and $5. When we have those items, they are highly productive and deliver higher penny profit and more efficiencies throughout the supply chain and inside the store. We will manage that going forward. We'll continue to look at the space we need for the right consumables to drive the traffic, and then we will grow the discretionary based on the productivity and continue to manage that going forward. Just as we have over the last 35 years, we've flexed the space accordingly.
Maybe as a follow-up to that, right? You know, if you talk about reinvesting some of this gross margin benefit, is that more likely to be in consumables, right, to drive traffic for discretionary? Once you get to that 35%-36%, you know, would you like to run that kind of margin neutral and whatever benefit you get on EBIT margin is leverage, right, from the higher comp?
Yeah, we'd like to definitely get to 35%-36%, but we believe there may be upside beyond that. As you just said, it's the stick and rudder that a retailer always does. They want to do what they need to have great value and drive that top line and then at the margin that they need to deliver continuous improvement in EPS.
Okay, thank you.
We'll take our next question from Paul Lejuez of Citi. Please go ahead.
Hey, thanks, guys. Maybe just going back to the Dollar Tree comp impact from the move to $1.25. I think you said you didn't want to, you know, give a specific number, but you did share that units were down mid-teens, and I think, you know, all else equal, if units weren't down, you would've seen a 25% comp lift, if my simple math is right. Can you just confirm that you're actually seeing a net high single digit to low double digit comp lift in those stores? And if that is the case, is that how you're planning that concept comp for FY 2022? And are you ordering units down in that mid-teens rate that you've experienced thus far or something better than that?
I guess I'll ask my follow-up now. I'm just curious which categories you're seeing more or less elasticity. Thanks.
Yeah. I've as I said before, we haven't shared the comp on the rollout because we just got everything rolled out. We have shared, we believe in our forecast going forward and our guidance is low to mid-single digit comps that we're very confident we can achieve. Even with that, the lower units and the comp in that range still delivers a 38% growth in our EPS. What was the second part of the question?
Okay.
Oh, the categories. The elasticity is, it's exactly where we thought it would. You know, our customer gives us. We have such great value, and I've said this before. When we go to buy and create our seasonal items on the discretionary side, we go out in the comp shop, and we find $5 and $7 items. Our merchants will make those items at $1. That's why we're known for such great value on the discretionary side. When we move to $1.25, our discretionary units are still selling very, very well, and our customer research tells us that, and our sales tell us that. It also, as I've shared on the consumable side, is where we're seeing the unit decline.
As we bring in those new items, the unit decline, in fact, the categories are positive comp, where I've shared the last 18 months, they were negative, and we were losing units. Where we've already introduced the items and they're flowing in, it's absolutely reversed, and starting to trend, in a positive nature.
How does that influence how you plan units in terms of?
Oh, yeah.
Managing inventory?
Yeah. We're planning it to feed that growth that we talked about. We're buying on the discretionary side like we always buy, to continue to drive our seasonal and our discretionary side. The good thing is we're getting every consumable item we can right now in the marketplace. Our new items that we're bringing in, we're buying as many as we can. The timeline to replenish that is most of that is domestic, so we can keep feeding the sales growth and unit growth as it happens.
We'll take our next question from Edward Kelly of Wells Fargo. Please go ahead.
Hi, guys. Good morning. You know, Mike, I wanted to ask you know, rolling out the $1.25, you know, without the new product makes it difficult for you to showcase, you know, what this ultimately means for your customers over the long term. Are you—I mean, it doesn't sound like it, but based upon what you've seen so far, you know, when sort of like looking forward, are you concerned at all about the gap in time between the $1.25 and when the new product comes in, you know, and what that could potentially do to customer loyalty? Then as part of this question, can you just talk a bit more about, you know, how the merchandising from here changes the cadence around that? What percentage of the SKUs are actually, you know, gonna change for customers?
You know, how important is, you know, bringing things back, right, that you haven't sold historically? You know, any additional color on all that would be great. Thank you.
Yeah. It's extremely important to bring back items that they haven't seen. As I've reiterated several times in the last 18-24 months, we've seen our discretionary sales decline and it has accelerated, as everybody has seen, throughout last year. Our vendors were getting pressure, costs were increasing, and inflation is at the, you know, four-decade high. We needed to move for several reasons. One, to quickly get in that assortment that we wanted. Number two, we needed to be simple for the organization. We can't have our merchants buying a $1 assortment and a $1.25 assortment and mixing it up.
We needed to be crystal clear for them, and they went to task the last three to four months and went through that entire line item by line review and category review item by item, and now the items are flowing back in. So we didn't wanna confuse our customers and confuse our merchants and confuse our operators, so we moved to a $1.25 as fast as we did, and we're bringing our customers along with us. Absolutely, we're afraid of our customer thought process. That's why we did in-depth research back in October when we first introduced it. Our customers told us because of the increases they're seeing in the marketplace, that $1.25 is still an extreme value.
They also told us after we moved to a $1.25, Dollar Tree is their number one trusted store by far in the dollar segment and value segment. I think some of you have done research stating the same thing, that Dollar Tree's trust and brand loyalty is still there. Now, as these new items at the $1.25 flow in, it's even gonna increase from there. It's very important for us to get this item in as soon as possible. That's why we believe that throughout the year, as this flows in, we will see the units improve and the categories that we've addressed. The categories on the discretionary side are already a great value because the market has moved significantly around us.
We think we're in a great position when the customer is stressed more than ever, highest inflation in four decades. They're getting pressure on their rents, on their fuel for their cars, on their heating bills, and on their food bills. They're gonna come to Dollar Tree and Family Dollar now more than ever because of the great value that we have.
Just a quick follow-up. On the gross margin on Dollar Tree, you know, why wouldn't, you know, the early part of the year, particularly the first half, be, you know, much higher than 35%-36%, just given what's going on from a pricing standpoint, and then that normalize, you know, towards the end? Is that a fair assessment?
Yeah, I think as we think about it, Ed, there is that possibility, obviously, because we haven't changed as much of the product, it's you know in process. Again, I think the other side of that is just a little bit of the freight market and the diesel costs and some things like that. Obviously, you know, we obviously hope there's upside to that, but we've still got to go out and work through the quarter and prove it at the end of the day.
Understood. Thank you.
We will now take our final question from Simeon Gutman of Morgan Stanley. Please go ahead.
Hey, everyone. Good morning. I guess my one question is when we look at the guidance, on the face, it looked, it felt a bit conservative. Mike, you mentioned the units down mid-teens, and then there's some higher inventory costs. I wanted to ask you if there's points of conservatism, you mentioned that as you roll out new units, you're seeing a new product, the units look like they're getting better. I don't know much on, you know, how the costs flow through throughout the year, but can you talk about the points of conservatism that could be in this model, throughout the year?
Yeah. You know, we're and I'll toss it to Kevin on a few line items, but overall, we just completed and the merchants just went through their line-by-line items. It is a wait and see. We think that we're gonna see traction throughout the year to drive the comp and the improved unit decline and reverse its course. We put out based on what we know now to be a model of the low- to mid-digit comps. The most important thing is at that higher margin price point. We think there's you know as we see if the items start flowing in faster than what we want then yes we believe that then there could be some higher sales.
Yeah. I think as we look at it, as we've talked about some of the things, the bigger you know, headwinds, you know, obviously, labor is a big one, at the end of the day with the continued investments that we continue to make, in the workforce. I think we have to think about that. I think, again, as Mike has you know, said many times, as this assortment changes, it does give us the opportunity to potentially you know, hopefully outperform this guidance at the end of the day. I don't know that it makes sense to you know, go beyond where we're at at this point, to Mike's point, given the fact that we just got all the stores converted.
It's been, you know, somewhat lumpy from a business standpoint, given the January time frame and with Omicron and weather between January and February. There's a lot of different things. I think Mike's statement about getting into the first quarter and hopefully all of this kind of settles out, it will give us a much better read and give us, you know, obviously the data that we'll be able to speak to and, you know, make changes if changes are warranted.
Yeah. I would just reiterate, this transformation moving beyond the dollar price point enables us to unlock our assortment and really deliver 38% improvement in our EPS. For long term, you know, the way I think about it continues to move beyond that. Then we're bringing in 1,500 more Dollar Tree Pluses and growing that year after year going forward, and how that's gonna leverage our sales and productivity of our stores and margin dollars. Then when you look at our Combo Stores on the Family Dollar side and getting 400 of those going, you know, all of our initiatives will keep driving our top line at a better margin rate and enhance the EPS as we go forward, not only this year, but in the years to come.
Thank you.
We will now take our final question from Michael Montani of Evercore. Please go ahead.
Hi. Thanks for taking the question. I just wanted to ask on the inventory side if you could help us to understand, you know, what is the build there in terms of units, versus pricing, given some of the accounting, and how we can get comfortable with that relative to sales. I just had a follow-up question.
Yeah. I think as you look at inventory, you know, obviously the number, they sound like big increases. You got to remember that a couple things. One, there's more, you know, we've had a backlog trying to get inventory moved for some time now. We still have a backlog of inventory. It's taking longer to get goods, you know, from Asia, through the ports, and into our distribution centers. So, you know, there's an element of the goods on the water being higher that are just because of the fact that it's taking instead of being, you know, 30-40 days, it's now 50-60 days to get goods, from one place to the other.
I think the other side of it is, as I spoke to is, you know, the freight rates that we've talked about all this past year, you know, the additional $600 million of freight, you know, obviously that gets capitalized in the inventory and doesn't come through the P&L until you sell those goods. There's a large portion of freight costs that are also part of this build. What you got to remember is Dollar Tree imports significantly more than Family Dollar. That's why the Dollar Tree side of it is higher. We feel very good about our inventory position. I mean, obviously, I would tell you that, you know, our merchants would like to have more goods than they have right now in certain categories in particular.
We feel very good about where we're at from an inventory perspective. I think if we compared it probably to you know two or three years ago, probably three years ago, it would probably look pretty reasonable if we looked at it on a store basis.
Okay, thanks. Just to follow up on the ticket, if I could, for Family Dollar. If I heard correctly, that was up, I think 4.8%. Could you just give some color there in terms of like units per transaction versus inflation, and mix?
Yeah. I think as you look at it, you know, I think there is some obvious inflation in that number. I don't have it broken out, but I would guess it's probably about half of that number potentially, you know, maybe about 2%, as we look at the price increases that have been, you know, incurred over the last 12 months in particular. That's probably about where it falls out.
Got it. Thanks very much for taking the questions.
I would now like to turn the call back to Mr. Guiler for any additional or closing remarks.
Thank you, Ashley. Thank you for joining us for today's call. Our next earnings conference call to discuss Q1 results is tentatively scheduled for Thursday, May 26th, 2 0 22. Have a good day.
Thank you. That now concludes the call. Thank you for your participation. You may now disconnect.