- Strong Sales Growth & EPS Outperformance: Q3 net sales rose 9.4% to $4.7B, driven by 4.2% comp growth (ticket-driven), while adjusted EPS hit $1.21, 12% higher than prior year.
- Discretionary Mix Improvement: Discretionary business mix improved 40 bps to 50.5%, with comp sales up 4.8% in discretionary and 3.5% in consumables.
- Customer Base Expansion: 3 million additional households shopped with Dollar Tree, including 60% from higher-income demographics, driving broader customer reach.
- Halloween Sales Success: Halloween assortment generated record $200M in sales, highlighting the effectiveness of the multi-price strategy and product innovation.
- Margin & Cost Management: Gross margin expanded 40 bps to 35.8%, but SG&A increased 160 bps to 26.2% due to payroll and restickering costs, offset by $56M in SKU write-offs.
Segment Performance
The company's discretionary business saw a positive year-over-year mix shift, with a 40 basis point improvement in discretionary mix to 50.5%. Comp sales increased 4.8% in discretionary and 3.5% in consumables. The multi-price strategy continues to drive growth and profitability, with the Halloween assortment generating over $200 million in sales, an all-time record. As Michael Creedon noted, customers, whether new or frequent, find what they need at Dollar Tree, particularly in terms of affordability.
Operational Highlights
Inventory decreased $143 million, or 5%, versus the prior year, while sales increased 9.4%. The company generated $319 million in cash from operating activities and had capital expenditures of $376 million, resulting in negative free cash flow of $57 million. Year-to-date, the company generated $88 million of free cash flow and completed $1.5 billion of share repurchases.
Outlook and Valuation
The company expects Q4 comps to be between 4% and 6%, supporting net sales of $5.4 billion to $5.5 billion and adjusted EPS of $2.40 to $2.60. For the full year, the company expects comp growth of 5% to 5.5% and adjusted EPS of $5.60 to $5.80. With a current P/E Ratio of -7.78 and an EV/EBITDA of 16.52, the market appears to be pricing in some level of risk. However, the company's focus on value, convenience, and discovery is expected to drive loyalty across all income brackets.
Management Insights
Regarding traffic trends, Michael Creedon noted that the company looked at sales across all income cohorts and saw that core customers, earning around $60,000 a year, had the highest comps. Stewart Glendinning mentioned that SG&A came in better than expected due to savings targets and a focus on reducing costs.