Good day, and welcome to the Dollar Tree, Inc. 2Q 2021 Earnings Conference Call. Today's call is being recorded. After today's prepared remarks, we will have a question and answer session. And one follow-up question if necessary.
At this time, I would like to turn the conference over to Randy Guiler, Vice President of Investor Relations. Please go ahead.
Thank you, Madison. Good morning, and welcome to our call to discuss the results for Dollar Tree's 2nd fiscal quarter 2021. With me on today's call are Mike Wieczynski 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 risks and uncertainties that could affect our actual results, please see the Risk Factors, Business At Management's Discussion and Analysis of Financial Condition and Results of Operations sections in our annual report on Form 10 ks Filed March 16, 2021. Our Form 10 Q for the most recently ended fiscal quarter, Our most recent press release and Form 8 ks and other filings we make from time to time with the Securities and Exchange Commission. 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 your questions I'll now turn the call over to Mike Wietinski, Dollar Tree's President and Chief Executive Officer.
Thank you, Randy, and good morning, everyone. On this morning's call, we're going to discuss our strong operating performance, talk through some of the headwinds facing our industry and share details on the robust and accelerated strategic initiatives we have underway to drive short And long term value creation. I am proud of our team's continuing efforts, especially in our stores and distribution centers To adapt and react in this dynamic environment, to serve customers and deliver improvements in both operating margin and earnings, Our 2nd quarter earnings per share of $1.23 represented a year over year quarterly increase of 12% And 62% when compared to Q2 of 2019. We continue to see strong performance in the And our key initiatives including H2, Dollar Tree Plus and the new combo stores are delivering compelling results. All three concepts have performed very well and we are significantly accelerating these initiatives in 2022 and beyond.
Regarding the continuing and well publicized challenges in the global supply chain, as well as higher freight costs and other inflationary pressures, Our teams are working hard to navigate these issues, while staying focused as always on delivering the value and convenience our shoppers expect. I want to share more details on these challenges, how they affect our business and the actions we are taking to best manage and mitigate the impacts. In recent quarters, we have spoken about the freight cost environment, both international and domestic. As you have certainly seen in the media and elsewhere, freight costs have reached unprecedented levels as a result of increased demand, For context, 3 months ago, the Shanghai Containerized Freight Index, Which reflects spot rates on ocean freight from China was already at an all time high, up more than 2 80% year over year And more than 400% since 2019. Now these rates have continued to rise and have increased more than 20% since we last reported on May 27.
According to the recent Journal of Commerce annual ranking of the top 100 importers, Dollar Tree ranked as the 5th largest among retailers. Dollar Tree brings in nearly 90,040 Foot Containers Per Year, predominantly for the Dollar Tree banner. As you can see in the slide deck on the Investor Relations portion of our website At dollartreeinfo.com, we believe the Dollar Tree banner imports more containers per $100,000,000 in sales than other large retailers and combined with our low $1 price point, we have an outsized impact from freight costs. After the Q1 of 2021, our updated freight outlook assumed that our regular ocean carriers would fulfill only 85% Other contractual commitments and assume we also assume the higher spot market rates. However, we are now projecting that our regular carriers will fulfill only 60% to 65% of their commitments and the spot market rates will be much higher than previously estimated.
This shortfall is caused by a variety of factors such as equipment shortages, equipment situated in wrong location, Significant backlogs and delays in both China and U. S. Ports, outbreaks of COVID causing labor shortages or closure of entire terminals And the lingering effects of the Suez Canal blockage. To give you a real life example of the kinds of challenges we're seeing, One of our dedicated charters was recently denied entry into China because a crew member tested positive for COVID, Forcing the vessel to return to Indonesia to change the entire crew before continuing. Overall, the voyage was delayed by 2 months.
With the current pressure on carriers, once disruptions in the supply chain occur, there is not enough capacity to make it up. During a recent transportation webinar, a San Francisco based freight forwarder stated the transit times from Shanghai to Chicago That more than doubled to 73 days from 35 days. Another transportation executive from Carrier recently estimated that voyages Are now taking 30 days longer than in previous years due to port congestion, container handling delays and other factors. The Dollar Tree banner is more sensitive to freight costs than others in the industry. Our products have lower price points than other retail importers.
And as a result, our freight costs are a higher percentage of our gross merchandise margin. The good news is our initial product margin, which exclude freight, have been improving as evidenced by our most recent overseas product Included from manufacturers in more than 2 dozen countries. Even in this inflationary environment, We continue to meet or exceed our desired initial product margins at values attractive to our customers. As freight costs moderate in the future, we are confident when paired with our team's significant efforts To enhance our supply chain, this will become a material tailwind contributing to a better product margins. Industry experts expect the Ocean's shipping capacity will normalize no later than 2023 when many new ships come on mine.
We are not counting on material improvements in 2022, especially in the 1st portion of the year. As a result, We are working proactively to reduce the freight cost impact and otherwise improve gross margin merchandise. Examples of steps we are taking include using dedicated space on chartered vessels for the first time, Including one large vessel contracted for 3 year term, which is scheduled to make its first voyage within weeks. We are expecting to add more charters this year. We're adding alternative sources of supply, both domestic and international that do not rely We expect some of this shift could become permanent.
As an example, Dollar Tree and Family Dollar were well prepared for back to School season with alternatively sourced domestic product. We're taking a fresh look at which SKU should be prioritized for import And which should be alternatively sourced? Prioritizing containers based on seasonality, the margin impact and our overall inventory needs. We will be continuing to pull forward seasonal purchases by 30 days. We're optimizing which China and U.
S. Ports we use to take advantage of the shipping availability. And Our operations team is delivering shrink improvements through technology, enhanced processes and disciplined execution. We are confident that our teams will allow us to navigate through this period of global supply chain challenges. In addition to the supply chain channel, we are also being impacted by labor shortages in our distribution centers and stores.
Steps we are taking to combat these trends include hosting national hiring events, paying sign on bonuses, Offering enhanced wages in select markets, paying tuition reimbursement and more, all designed to be more competitive In a tight market for tailwind. We're continuing to optimize our DC network by reducing stem miles, Partnering with supplies to optimize and minimize length of haul for inbound freight testing, validating and expanding self checkout in our stores And developing and utilizing more efficient processes, both in our stores and DCs. Despite these challenges affecting our industry, I'm very pleased with the team's performance to deliver a 62% improvement in EPS and Q2 when compared to 2019. Now, let's talk about the exciting path forward. I'd like to highlight some of the key initiatives we have in place, especially Dollar Tree Plus and our combo stores, which are helping to position our company for the We are incredibly excited about the results we are seeing.
As we have discussed in the past, we are well positioned to serve customers across All types of markets, urban, suburban and rural. The Family Dollar H2 continues to perform very well. In Q2, we renovated 4 35 stores into the H2 format and now have a total of approximately 3,000 300 H2 Stores. Importantly, we are accelerating the expansion of Dollar Tree Plus initiative and the rollout of combo to better serve customers' needs and drive sustainable long term value. We have been carefully improving and calibrating our Dollar Tree Plus initiative with a better understanding of the multi price offerings and greater values.
Customers are increasingly embracing the Dollar Tree Plus concept, which provides extraordinary value in the discretionary categories they most desire, While enhancing store productivity. As we have refined the Dollar Tree Plus concept, The operating metrics have achieved strong results and have provided us valuable insights that are enabling accelerated expansion. On average, stores with Dollar Tree Plus are experiencing an overall sales lift of approximately 6% With a similar lift in gross profit, improved contribution of approximately 13% And a payback on investment of less than a year. For obvious reasons, we are focused first on large stores And we are already seeing similar positive results as we are now implementing into smaller stores. We currently have the multi price assortment in about 3 40 stores and we expect to be at 500 stores by year end.
Building on this continued success, we are planning to add Dollar Tree Plus to an additional 1500 stores in fiscal 2022 And we aim to have at least 5,000 Dollar Tree Plus stores by the end of fiscal 2024. Many of our new stores will also be opening up as Dollar Tree Plus stores. This past March, we announced our newest store format, Combo store, leveraging the strengths of both banners under one roof to provide shoppers with extreme value and merchandise excitement. These stores represent another way to introduce the multi price assortment to Dollar Tree shoppers and the $1 assortment to Family Dollar shoppers, A major benefit from the Dollar Tree and Family Dollar combination. We currently have 105 combo stores And I believe we can reach 3,000 of these stores in rural markets alone.
Demonstrating our great confidence in combo stores as a Strategic format, more than 85% of our new Family Dollar stores will be combo stores in fiscal 2022. We anticipate 400 new renovated or relocated combo stores next year. We are also in the process of validating combo store concept And other demographic markets and are excited about the possibilities. Our larger combo stores on average are delivering 23% more sales, 31% more gross margin dollars, approximately 120% more cash contribution dollars and are reducing payback time by approximately 30%. New combo stores compared to similar sized stores Are showing sales increases of 17% and even more encouraging, our renovated or relocated combo stores Are delivering greater than 40% more sales when compared to Family Dollar stores that have not been renovated or relocated.
Details about our combo stores are available at www.familydollar.com/combostores. I will now hand the call over to Kevin to provide details on Q2 performance and our outlook.
Thanks, Mike, and good morning. Our 2nd quarter EPS of $1.23 per share is an increase of 12% from the prior year's quarter And 62% compared to the Q2 of 2019. Consolidated net sales increased 1% to $6,340,000,000 comprised of $3,260,000,000 at Dollar Tree and $3,080,000,000 at Family Dollar. Enterprise same store sales decreased 1.2% as we cycled a strong 7.2% from a year ago, Representing a 6% increase on a 2 year stack basis. Comps for the Dollar Tree segment decreased 0.2%.
Family Dollar same store sales decreased 2.1%, cycling a very strong 11.6% increase from last year. On a 2 year stack basis, Dollar Tree comps increased 2.9% and Pembina Dollar increased 9.5%. Dollar Tree's comps was comprised of a 1.1% increase in traffic, offset by a decline in average ticket. Family Dollar experienced a 3.5% decline in traffic, partially offset by an increase in average ticket. We do believe that Dollar Tree's traffic Continued to be hindered by a lack of shopper mobility as more than half of the workforce continues to work remote.
Gross profit was $1,860,000,000 for the quarter. Gross margin was 29.4% compared to 30.5% in the prior year's quarter. Gross profit margin for the Dollar Tree segment declined 130 basis points to 32.4% when compared to the prior year's quarter. Factors impacting the segment's gross margin performance included merchandise costs, including freight, Increased 175 basis points, driven by increased freight costs, which was partially offset by favorable mix net of markdown. Occupancy costs increased 10 basis points as a result of loss of leverage due to the comparable store sales decline.
Shrink improved 55 basis points related to favorable inventory results and a decrease in the shrink accrual rate. And distribution costs decreased 5 basis points cycling COVID-nineteen related expenses in the prior year. Gross profit margin for the Family Dollar segment declined 110 basis points to 26.1% in the 2nd quarter. Year over year delta included the following. Merchandise costs including freight increased 175 basis points related to higher freight costs And increased sales of lower margin consumable merchandise.
Occupancy costs increased 35 basis points as a result of the comparable store sales decrease. Shrink improved 50 basis points related to favorable inventory results and a decrease in the shrink accrual rate. Distribution costs improved 20 basis points compared to the prior year quarter due to the lower COVID-nineteen related costs And markdown costs decreased 25 basis points compared to last year based on civil unrest costs incurred a year ago. Consolidated selling, general and administrative expenses improved 150 basis points to 23% of total revenue compared to 24.5% in Q2 last year. For the Q2, the SG and A rate for the Dollar Tree segment as a percentage of total revenue improved 170 basis points to Decreased COVID-nineteen related store payroll costs.
Other SG and A decreased by 20 basis points, resulting from lower general liability insurance costs, Primarily offset by increased debit and credit card fees. Store facility costs decreased 5 basis points due to lower repairs and maintenance costs. And for the Family Dollar, the 2nd quarter SG and A rate as a percentage of total revenue was 21% compared to 21.9% in the prior year's quarter. Payroll costs decreased 95 basis points, primarily due to decreased COVID-nineteen related store payroll and incentive comp costs, partially offset by deleverage related to the comp store sales decline. Store facility costs decreased 30 basis points, driven mainly by lower repairs and maintenance costs due to expense incurred from civil unrest in the prior year's quarter.
Other SG and A expense increased 35 basis points, primarily due to increased advertising and travel expense compared to the prior year. Depreciation and amortization expense increased 10 basis points due to deleverage on the comp sales. Corporate and support Expenses as a percent of total revenue decreased 20 basis points compared to the prior year's quarter, primarily due to lower incentive and equity compensation. Operating income increased 7.3 percent to $402,200,000 compared with $374,900,000 in the same period last year Operating income margin was 6.3% in the 2nd quarter compared to 6% in the prior year quarter. The 2nd quarter of 2021 included total incremental operating costs of $3,000,000 for COVID-nineteen related expenses compared to 134,900,000 In the Q2 of 2020.
Non operating expenses totaled $33,000,000 comprised of net interest expense And our effective tax rate was 23.5 percent compared to 23.1% in the prior year's Q2. The Company had net income of $282,400,000 or 1 point 23 dollars per diluted share and this compared to net earnings of $61,500,000 or $1.10 per share in the prior year's quarter. Combined Cash and cash equivalents at quarter end totaled $720,800,000 compared to $1,420,000,000 at the end of fiscal 2020. Just approximately 7,000,000 shares of our common stock for $700,000,000 We currently have $1,450,000,000 remaining on our share repurchase authorization. Inventory for Dollar Tree at quarter end increased 13.1% from the same time last year, while selling square footage increased 3.7%.
Inventory per selling square foot increased 9%. Inventory for Family Dollar at quarter end increased 10.9% from the same period last year, while selling square footage increased 2.1%. Inventory per selling square foot increased 8.6%. Both banners store inventory levels are below 2019 levels at quarter end. Capital expenditures were $229,100,000 in the 2nd quarter versus $232,500,000 in Q2 last year.
For fiscal 2021, we now expect that consolidated capital expenditures will be approximately $1,100,000,000 Depreciation and amortization totaled $176,100,000 for Q2 compared to $168,100,000 in the Q2 of last year. And for fiscal 2021, we expect consolidated depreciation and amortization to be approximately $720,000,000 Our outlook for the remainder of 2021 includes the following assumptions. We expect continued pressure on wages due to Current shortage of workers available for our distribution centers and stores. Ex shrink will continue to be a tailwind as we go through the back half of the year, but not at the same rate as we begin cycling improved results from the prior year. Net interest expense is expected to be approximately $34,000,000 in Q3 And approximately $134,000,000 for fiscal 2021.
We estimate consolidated net sales for the 3rd quarter will range from $400,000,000 to $6,520,000,000 based on a low single digit increase in same store sales for the combined enterprise. Diluted earnings per share are estimated to be in the range of $0.88 to $0.98 Consolidated net sales for full fiscal 2021 are expected range from $26,190,000,000 to $26,440,000,000 based on a low single digit increase in same store sales 3.4 percent square footage growth. The company now estimates diluted earnings per share will range from $5.40 to $5.60 Freight costs for fiscal 2021 are now expected to be $1.50 to $1.60 higher than fiscal 2020, Expressed in terms of the impact on diluted earnings per share, the updated outlook includes $0.60 to $0.65 per diluted share or $185,000,000 to $200,000,000 of additional freight costs since our prior guidance on May 27, As Mike noted earlier, the market conditions for freight have continued to deteriorate since our update in May. These changes include the significant difficulties our regular contract carriers are having in meeting their original commitments as well as continuing increases in the spot market rate. These disruptions have affected the timing of inventory receipts and have affected sales and mix.
Our outlook assumes a tax rate of 22.7% for the 3rd quarter and 23 percent for fiscal 2021. Weighted average diluted share counts are assumed to be 225,900,000 Although as I said before, we still have $1,450,000,000 remaining on our existing share repurchase authorization. I'll now turn the call back to Mike.
Thank you, Kevin. Our core business is strong. As Kevin stated, our updated outlook for fiscal 2021 is $5.40 to $5.60 per share. It's unfortunate that the global supply chain is in the condition it is, Which is expected to result in a year over year drag to our business of $1.50 to $1.60 per share. If freight costs this year were similar to what we were just a year ago, we estimate that our earnings per share Would be in the range of $6.90 to $7.20 for this fiscal 2021.
The work of our teams has been remarkable. Our store and distribution center teams continue to demonstrate their commitment to serving our shoppers Each and every day. Our customer satisfaction survey scores have never been higher. We have seen improvements across the board For store cleanliness, assortment, service and speed of checkout. The merchants are delivering greater value store customers That are meeting or exceeding our initial merchandise margin targets.
Our buyers are disciplined, nimble and committed. While it represents a smaller part of our overall business, our digital team saw a 70% increase in sales versus the first half of twenty twenty one. We're also pleased with the solid performance of our local delivery program through Instacart. Our initiatives are driving improved results. Customers are responding to Dollar Tree Plus, the H2 format and our new combo stores.
We are pleased to accelerate both these initiatives in fiscal 2022. The supply chain issues, which we are confident are transitory in nature, We'll take some time until the global demand and supply for equipment is rebalanced. Importantly, we believe the foundation of our business is Stronger than ever. We believe we are in the process of materially improving the long term earnings power of our business for years to come. Before we get into questions, there's another topic I want to quickly touch on because it's important to all of us here at Dollar Tree.
Recently, Morning Consult reported that the public views Dollar Tree as one of the 10 most trusted retail brands in America. We see this as a validation of our core mission of delivering value and convenience to our customers, But it also reflects our commitment to the broader communities we serve. As I wrote in our 2021 Corporate Sustainability Report, Dollar Tree strives to be the best corporate citizen for all stakeholders in the thousands of neighborhoods, towns and rural markets Where our stores are located and that means taking concrete actions to implement our sustainable vision. One recent step I can share, we are executing on our climate goals by pursuing 2 new solar projects for our stores and distribution centers. These will provide up to 6 megawatts of renewable power, taking that usage off the carbon grid for years to come.
These and other efficiency projects show that our efforts to build out the infrastructure for sustainable growth are now taking root. Additionally, our executive leadership team has leaned in on commitment to fostering an inclusive work environment where the individual differences Understood, respected and appreciated as a valuable source to strengthen our company. This strategy is designed to evolve our culture and sustain momentum through the guidance of our Executive Council that ensures leadership accountability To our very important DEI objectives, we constantly seek to improve all aspects of our business and that includes areas like store safety, healthier product offerings and many others that are so important to our associates, Our customers, our neighbors and our shareholders. You should know that we always strive to be transparent on these topics. I look forward to providing future updates on the strides we are making.
In summary, there's a lot of inspiring news at Dollar Tree. We are excited that our strategic store formats, our accelerated growth plans and many key sales and traffic driving initiatives, Along with our robust balance sheet and commitment to sustainable growth will enable us to deliver long term value for our stakeholders. Operator, we are now ready to take questions.
Thank We'll go ahead and take our first question from Matthew Boss with JPMorgan. Please go ahead.
Great, thanks. Great, thanks. So Mike, maybe overall, how do you feel about the health of the Dollar Tree banner today? Any factors to consider That impacted the Q2, should we expect similar comp performance in 3Q? And just overall, How do you see Dollar Tree concept relative to 2% to 3% sustainable comps looking back As we look forward.
Yes. Thanks, Matt. Yes, we feel very good about Dollar Tree looking forward, Especially in the inflationary times where the $1 price point will mean more to customers than ever And our ability to continue to procure the product at the margins that we expect. The second quarter, There was still some trip consolidation going on due to the COVID implications out there. And we saw that in the summer, Of course, everybody in the country went on vacation twice to make up for last year.
And there's Between that and there's not really any huge holidays during the summer that Dollar Tree does so well on. What I do like and what I'm really encouraged about is our average ticket is continuing on a 2 year stack to be at 20% to 21%. That's amazing growth over 2019. And if we can get the Dollar Tree Traffic going along with that basket size, I really believe we're going to like the results. And especially as we look ahead of us, we've got back to school, Fall, Halloween, Thanksgiving and Christmas.
And with schools opening back up and offices hopefully opening back up and traffic Moving around and the trips aren't so consolidated. I believe there's upside for us. And we saw a little bit of it. While we weren't happy with The traffic in Q2, it was positive for the first time in 4 quarters. So we're very confident that Dollar Tree It's going to have sustainable growth in that low single digit comps.
Great. And then maybe just a follow-up, Maybe for Kevin and maybe also Mike at the end. Just outside of freight, your underlying core business guidance This year, and you kind of walked through this in your opening remarks, actually increased by $0.20 I think at the midpoint. So maybe just Any way to speak to the factors that drove the increased outlook outside of freight this year? And I guess my second part of that question is as we look forward, Are there any impediments preventing the acceleration of the Dollar Tree Plus concept that you announced today From being accretive to the bottom line profile as we think multiyear.
Sure, Matt. So I'll start. So obviously, the outlook we gave today, really the message there is that The freight is the change in the guidance for the most part basically. I think the other thing you got there is a little bit Benefit in the back half from the shares we repurchased in Q2. So I think otherwise we look at the business As much like we did in Q2, all pieces outside of freight, so very stable And feel good about where we're at from that perspective.
We've done a good job controlling our SG and A costs And everybody is very on top of those and doing a good job. So we feel good about that. And so now it's about Driving that top line and working through the supply chain issues that we've documented in For everybody today, so I think a lot of good opportunity. Your question as it relates to Dollar Tree Plus and being additive, yes, I mean That is the whole reason to do that. If it's not additive to the bottom line, we don't want to spend our resources Certainly doing that.
So that is the expectation. And with the mix change from the initial Version that was very consumable driven to one that is now very discretionary driven, that obviously plays well. It's part of what we are known for. Our customers embracing it and it allows us to drive that bottom line. And then obviously the top line Help us leverage some of the fixed costs.
Yes. Just to add here, finalize that, we see nothing that's going to Be a barrier against us to continue to drive the things that you said, top line growth and margin dollars in our stores.
Great. Best of luck.
We can go ahead and take our next question
I wondered with regards to the issues with freight and thank you for all the detail. How are you balancing the prioritization The cost of freight versus getting inventory on the shelf, is airfreight ever an option or something that you're using increasingly more? And how much were you able to make up by shifting to some of the domestic solutions you highlighted in your prepared comments?
Yes. Kate, thanks for your question. At the dollar price point, unfortunately, air freight just is cost prohibitive and there really isn't that much So our teams are our global supply team. We've got a sourcing team that's over there Working with our merchants and working with the logistics team, those 3 are working hard to pick the right source and prioritize the right product based on Inventory needs margin and seasonality. And just as an example on the Switching to different sources domestically.
Our team saw this problem and we wanted to be right for back to school. So we very quickly shifted both at Family Dollar and Dollar Tree to procure product for the back to school season here domestically, So that we could have it on the shelves and drive that important season for us.
Thank you. All right. We can go ahead and take our next question from John Heinbockel with Guggenheim Partners. Please go ahead.
Hey, Mike. Just wanted to start, do you have any color By brand, right, we'll give some color on cadence and consumable versus discretionary, other than discretionary with strong. Do you have some color on that, seeing how the quarter unfolded?
Yes. So geographically, we pretty much saw Consistent across geographies other than weather events are but normally it's they're both behaving similarly Across the geography, on the Family Dollar side, what we like, what we're seeing is we are seeing Consumables sale our consumable market share continues to gain market share. And it's the addressable market Opportunity is so large. So we really focus on continuing to drive that market share and Family Dollar It's been doing a great job at continually quarter after quarter to have a year over year look in enhancing our market share on the consumable side. And then on the discretionary side, as you called out, remember, the team did such a great job with apparel and toys and home and seasonal.
And we are maintaining that 2 year stack of high double digit market share in the teens that is really helping our business.
Okay. And then maybe as a follow-up, when you think about Dollar Tree Plus, so two issues there. So it sounds like it's probably is a penetration, right, mid single digit penetration of baskets, Right. So I think the basket, right, is 2x with the Dollar Tree Plus item. Where do you see that going, Right.
When you think about adding more items to the mix or more SKU intensity. And then what's the bottleneck on, I know you're going to do 1500 next year. Can you do more and what's the bottleneck to doing more next year in 2023?
Yes. We're really excited about doing the 15 Because of the impact it has on a 6% sales lift. And I would say, as we the beautiful thing about this is it gives The flexibility to do what we need to, to grow our overall productivity of the store. And I'm referring to your, do you grow the categories and or assortment inside the multi price. We will watch this And over time, we will make great decisions to keep an eye on our overall margin dollars and top line sales And ebb and flow as we did with Dollar Tree product and categories, just like we did with Our snack zone, we use that to drive.
So we increased our assortment in there and space allocated to it. And On our crafter square, we did the same thing there. So I see this is the we keep doing the same ability to ebb and flow based on whatever Our customers are responding to and whatever is driving our top line and improving our margin dollars.
Okay. Thank you.
Okay. We'll go ahead and take our next question from Joe Feldman with Telsey Advisory Group. Please go ahead.
Yes. Hi, guys. Thanks for taking the question. I guess, What gives you confidence at this point that you've properly forecasted the impact of these increases? I guess, Were we conservative or were you conservative with the forecast for the second half?
Was it based just on what's happened to date? I guess I'm trying to understand Why we're not going to have another quarter like this where we hear another well, we had to take numbers down again because freight was more expensive?
Yes, Joe. This is Kevin. So obviously, as always, when we give a forecast, we use the best information we have And what we know about our business, in this case, what we know about the external factors And the changes and again, it's very dynamic as anybody would tell you. And again, but I don't know that we can with 100% certainty say that it won't change. There could be another COVID outbreak.
There could be A lot of different things that could affect it. I just think you have to think about the fact that it is probably the most dynamic thing We may have ever seen as it relates to that marketplace. And again, we always put it together with the idea of what do we know, How we're thinking about it? And do we and this is our best estimate at this point in time. And I'm hoping in the sense that we have it tight this time, but there are never any guarantees
And I guess a follow-up kind of related to it is, if you guys are assuming Now it will your receipts will be more like 60% to 65% of what you had previously thought. I guess how What gives you confidence that you'll get to the low single digit comp guidance that you've given? Because if you don't have the inventory, will you be able to how do you sell it?
Yes. Let me that's a great question because I do want to bring clarity to that. The 60% to 65 That is the contractual agreement that we have at the lower freight rate. We have a contract that's 100%. We forecasted
it first as well, they're going to
at least meet 85% of that. And where I said they're not even meeting that, we think it's going to be 60% to 65%. What that means is the other 30% to 35% then will be at the market rate, at the higher rate and all those Rates are calculated into our freight that Kevin described going forward.
Got it. Thanks for clarifying that. I appreciate it. And best of luck with this quarter guys. Thank you.
And we'll go ahead and take our next question from Paul Lejuez with Citi. Please go ahead.
Hey, thanks guys. You made a comment about favorable product merch margin and pricing that you're seeing. I'm just Curious what's driving that? Are you adjusting pack sizes? Are you actually seeing declines in like product?
And then on the Dollar Tree Plus Store rollout next year. How are you thinking about that geographically? Are you taking a regional approach? Or are you going to look will you open a bunch of Dollar Tree Plus stores in one region at a time or are you looking to have a Dollar Tree Plus presence across a broad range of your markets? Thanks.
Yes. And your first question is, was the question about our initial markup, the margin That we're able to get with all the inflationary pressures going on, was that your question?
Yes, correct. And what's driving that?
Yes. Thanks for the question, because I want to brag about our merchants and the great job that they do. When you sell everything for a dollar, There are, as you've read about, there's inflationary pressures all over the board. And we've got a very experienced and knowledgeable team And then they're supported by a best in class global sourcing team that worked really hard. And they're not just negotiating the end product you see on the shelf.
Our merchants absolutely understand all the components To drive the cost of the product as well as the value that they need out in the marketplace to sell it. So they know the main commodity of the product, Whether it's resin or cotton or paper or copper, so they go in very knowledgeable on the cost and the components. They know the cost of a hand or a lid or stitching or the weight of the paper. And as they build that product And understand that. That's how they come up with.
They know the margin they need. They know what the retail is at a dollar And they know the sales that they have to obtain to drive the mix. So on this most recent trip, in our July trip, they were just wrapping up A couple of weeks ago, we bought $1,800,000,000 in receipts and they were able to The margin, the initial markup and actually beat it by a little bit and it's higher than 2019. So that's why with all the pressures they have and with that dollar price point, our merchants are able to navigate and manage that And look at all the components. So it's not only what's making that product, but it's the packaging, it's the plastic, it's how do we pack it in a case.
They're very knowledgeable and negotiable because pennies matter when you're selling things for a dollar and I couldn't be more proud of the work that they do. And when they read out and shared the products and they it gets down to the detail of how many petals are on that rose, what size of the petal, What size does the market have? Does that value look great? And then they produce this great product at the cost that they need to hit the margins we want At the dollar price point and they did it over and over again because on this last trip, I think it was 70% to 73% of the items That $1,800,000,000 buy had problems with inflation, the things that we had to solve for and they did it. They worked at it, they did it, and the presentations were spectacular, and I'm so excited about the value and product we're having at a dollar.
And I know it's hard to understand. That's why a lot of retailers can't do it, but we do it. We've been doing it for 30 years and they just did it in July. And that's why I said if you think about the components of our margin, we have the initial markup that we're very excited about that I just described how we got to it. You heard from Kevin that our shrink is very favorable.
Our markdowns are in line and then you have freight. So if you take the freight and set it to a more normalized, we feel really good about the future of Dollar Tree. And then to answer the second part of your the Dollar Tree Plus rollout, We're doing it probably regionally and by distribution center. So as we put the product into DC, then we're going to look at The available stores around that DC network and then we'll grow it that way. So it's going to be probably distribution center geographically Driven.
The
good news is that First up on that.
Well, right now we're in the we started out in the Southeast And then or the Southwest, I'm sorry. And then I shared that we are moving into the Mid Atlantic and we're going to we'll be rolling out from there.
Got it. Thank you. Good luck.
And we'll take our next question from Brad Thomas with KeyBanc Capital Markets. Please go ahead.
Hi. Thanks. Good morning. I wanted to ask a question about the Q3. First of all, your guidance implies Total sales and comps to accelerate for 3Q.
And I was just curious if that's something that you're seeing so far today, what gives you confidence in that and if you're seeing that in both
Yes, you're right. We gave we're back to giving guidance for the first time in well over a year And we guided low single digits at the 6.4 to the 6.52. And I can share that both banners are positive comps now, And they're aligned with the guidance that we've given.
Really helpful. And then a quick follow-up on the Dollar Tree Plus financial commentary that you shared today, very encouraging. As we think about that flow through, should we think about the 6% sales lift And the 6% gross profit lift has adding close to that to total operating margin for the Dollar Tree banner. How should we think about the flow through Of those gross profit dollars?
Yes. And I think that's exactly it's pretty in line with the other data point we gave, which was Basically a 13% lift in increase in contribution. So yes, it's Somewhat additive there, the 6 and the 6 kind of gets you to that same point.
Very helpful. Thank you so much.
All right. We'll go ahead and take our next question from Chuck Grom with Gordon Haskett. Please go ahead, Chuck.
Hey, thanks a lot. As you look at the tree business, I know you just said that August is a
little bit better, but when you think about the backdrop All
the money that's flowing out there and only delivering a flat comp. I guess I'm curious when you dissect why that is, I guess how would you unpack it for us?
So are you referring to the look forward or the Well, just
Just looking at the Q2 and the flat comp given all the stimulus and child tax credit money that's out there.
Yes. Well, Family Dollar responds to stimulus dollars a lot better than the Dollar Tree comp. And I've already shared The comments on the we think that there's still some trip consolidation. There wasn't any there's no big holidays. You saw and read about everybody went on vacation and then the Delta variant kind of hit towards the end of the quarter and kind of Slowed things down a little bit.
So, I think it's more of that. I'm really excited about looking forward with what we have ahead of us. But I think you bring up a great point on the opportunity ahead with The SNAP benefits out there. Our enterprise has increased the SNAP benefits In our as a retailer by almost double since 2019. And why that's important is Right now as an enterprise, we are the 6th largest Snap retailer.
And that's really important to us. We're just behind Walmart, Kroger, Ahold and Albertsons. So we are the number one largest retailer of SNAP benefits In the dollar channel and think about the benefits as you know that they announced that they're going to increase them in October significantly. And Family Dollar, what we really like about that is we've doubled it since 2019 inside Family Dollar, But then inside that basket of Snap, 42% of that customer buys a discretionary item. So if you think about all the work we've done on the discretionary side in that mix and looking forward and the basket, we think there's a big upside for us When the SNAP benefits continue to increase in October and then our capabilities that the merchants have been on the discretionary side And our customer willing to add that to the basket when they're in their store.
That's great. And my second question is on the combo stores. They look great. And the movement to 85% of the new Family Dollar in that format is pretty exciting. I'm curious what you do with the existing Family Dollar stores, is there an opportunity to remodel some of them to convert in certain markets?
I guess, how does that play out?
Absolutely. So there's 2 things. I mean, we also we're not slowing down. We've got 800 H2 renovations that we're going to continue to do And we like the results and the lift we're getting on those. And then to your point, in those 3,000 towns that we've identified, We're attacking the new ones, but we're also in a 1,000 of them already.
So our team, our real estate team is Diligently going through there, how long is that lease? Can we expand it where we're at? Can we relocate it? Or is it big enough already? So those are the things that we're going through on that 1,000 existing of the 3,000 opportunities.
So We've got a team effort going against both of those new and then the relocated And then our existing will be focused on the H2 renovations.
Okay, great. Thanks a lot, Matt.
All right. Unfortunately, we are getting close to the end of the call and only have time for one more question. We will take our last question from Michael Lasser with UBS.
Good morning. Thanks a lot for taking my question. Archery comp negative at a time when many other retailers are really experiencing robust trends. This comes on the heels of challenges from tariffs, now transportation costs and Family Dollar issues before that. So is it just too difficult to manage this business in an environment where Inflation is going to be structurally higher than it's been and all of this is translating to your earnings expectation For 2021 being on par with where your earnings were in 2018, At what point do you think you're going to be able to be in a position to start to resume growth in earnings That will be more consistent with what the market is accustomed to from Dollar Tree in the past.
Yes. I can't reiterate more about my confidence in Dollar Tree's ability to grow and our ability to manage through these inflationary times. You set this freight aside and we would be delivering exactly what you're describing. And I'm excited about the market And the beautiful thing is, as we've got these strategic initiatives that will grow well into the future. And more importantly, With everything you described, we still got a strong balance sheet.
We make a lot of cash flow. And with our cash Hello. We have the ability to keep growing this company, growing this infrastructure of the company and buying back shares to drive Total shareholder wealth. So I like our opportunity going forward for both Dollar Tree and Family Dollar.
Okay. Mike, the biggest source of pushback we've gotten from folks today is just on the core Dollar Tree comp being negative when everyone else is seeing robust Friends, putting aside Dollar Tree and putting aside some of the questions around traffic, what gives you the confidence that you can see The core of that business continue to improve independent of what's going to happen in the external environment. And as a quick follow-up, Kevin, could you walk us through the path for how freight costs are going to unfold beyond this year? Your comments were It's not going to see relief in fiscal 2022. You're saying if you add this back, you could earn close to $7 So when is it realistic for the market to expect you to earn this $7 target?
Yes. I couldn't I can't reiterate enough how confident I am in the Dollar Tree format, especially with the Dollar Tree Plus initiative that we're going to be driving to 5,000 stores in just a short few years. And then what I just described on what our merchants are able to do With a great value and the dollar price point. And keep in mind, this dollar price point is going to be more important than ever As other retailers are driving their comps by raising prices, that dollar price point is going to look good and I'm confident Going into the back half with our seasons, with our product that we have and what our merchants are delivering, we're going to continue to be able to drive this organization forward.
And Michael, as to your second part of your question as it relates to the freight. So obviously the marketplace In general, there's an expectation that it does not get better necessarily in the first half. And the other piece of what you have to remember is cost, some of the costs that will incur this year in freight at the end of the year Are attached to those goods that then get sold in the next year. So certain amount of freight gets capitalized into inventory As it comes in, so as your inventory turns is when you burn that off. So anything along the lines that we've been There's a piece of that that falls into next year.
So that's how you have to remember that. As far as $7 listen, Obviously, we know what we know today. A lot of things are going to change in the next 6 months and we'll know more than and when we give guidance In March of 2022 for the year, we'll again be in a Point where we'll put our best foot forward on what we know at that point in time. So beyond that, there's nothing to speculate at this point.
Understood. Good luck and thank you.
All right. Mr. Guiler, I'd like to turn the conference back
Great. Thank you. Thank you for joining us for today's call. Our next earnings conference call to discuss Q3 results