Q4 2025 Earnings Call Transcript

Greetings, and welcome to the Dollar Tree Q4 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Daniel Delrosario, Senior Vice President, Investor Relations and Treasurer. Daniel, please go ahead.

Good morning, and thank you for joining us to discuss Dollar Tree's fourth quarter fiscal 2025 results. With me today are Dollar Tree's CEO, Mike Creedon; and CFO, Stewart Glendinning. Before we begin, I would like to remind everyone that some of the remarks that we will make today about the company's expectations, plans and future prospects are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward-looking statements.

For information on the risks 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 section in our Annual Report on Form 10-K filed on March 16, 2026, our most recent press release and Form 8-K and other filings with the SEC. We caution against reliance on any forward-looking statements made today, and we disclaim any obligation to update any forward-looking statements, except as required by law. Also during this call, we will discuss certain non-GAAP financial measures.

Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided in today's earnings release available on the IR section of our website. These non-GAAP measures are not intended to be a substitute for GAAP results. Unless otherwise stated, we will refer to our financial results on a GAAP basis. Additionally, unless otherwise stated, all discussions today refer to our results from continuing operations, and all comparisons discussed today for the fourth quarter of fiscal 2025 are against the same period a year ago.

Please note that a supplemental slide deck outlining selected operating metrics is available on the IR section of our website. Following our prepared remarks, Mike and Stewart will take your questions. [Operator Instructions] And with that, I'll turn the call over to Mike.

Thanks, Daniel. And before I begin, I want to welcome you in your new role and congratulate you. We're excited to have you stepping into this next chapter with us. I look forward to working closely together as we continue sharpening our execution and communicating our story with clarity and discipline.

Good morning, everyone. I'd like to use my time today to step back and frame what this quarter represents, more importantly, what it tells us about the underlying trajectory of the Dollar Tree business. At Investor Day, we laid out a clear road map for Dollar Tree, expanding and modernizing our assortment through multi-price, strengthening operational execution and managing costs with agility while driving disciplined capital allocation. The fourth quarter is an important proof point that those strategic pillars are translating into measurable results.

We delivered 9% revenue growth in the fourth quarter with a comp of 5%. The comp performance reflected continued ticket growth and expected decline in traffic, strong seasonal execution and high discretionary engagement with the customer. As we exit fiscal 2025, we're doing so from a stronger earnings base than we contemplated at Investor Day, reflecting the operational progress made in the back half of the year and positive customer response to our expanded assortment and value offering. The fourth quarter included approximately 40 basis points of comp headwind from 2 winter storm events late in January that led to widespread store closures.

We don't typically call out weather as those impacts tend to normalize over time, but the severity of these storms makes it appropriate to address. At the peak of the disruptions, nearly half of our store fleet was impacted by closures. The team executed our storm playbook effectively, prioritizing safety, maintaining operational control and reopening stores quickly for the communities that we serve. Despite the headwind from the January storms, comparable sales were still at the midpoint of our outlook range, supported by improved mix and strong seasonal demand.

Year-end holiday performance was especially strong, reinforcing customer engagement. Importantly, these results reflect more than just quarterly momentum. They demonstrate the continued progress we are making across the business. In 2025, we made strong progress on our transformation initiatives.

We completed the sale of Family Dollar, continued to test, learn and sharpen our multi-price and merchandising strategy, modernized key operational capabilities and laid the groundwork for sustained execution against our long-term algorithm. What we built this year is a stronger foundation for the next phase of growth. We are now, once again, a focused single-banner enterprise: Dollar Tree. We successfully navigated unprecedented tariff volatility and demonstrated the flexibility we've gained for responding to future macroeconomic factors via our multi-price assortment.

We scaled multi-price with discipline, expanding assortment breadth, increasing sales productivity in converted stores and broadening our addressable market while preserving price leadership. We demonstrated measurable progress against strengthening our store standards. That's meaningful change for a 9,000-plus store system and validates our strategy, reinforcing that disciplined execution, clear priorities and operational focus are translating into stronger fundamentals and a durable long-term growth plan. Over the past 3 months, we've seen an acceleration in Dollar Tree household growth.

Dollar Tree U.S. households reached a record 102 million, adding 6.5 million net new households in Q4, which represents a meaningful acceleration versus Q3. The growth in households continues to be broad-based and accelerated sequentially. As we shared with you at Investor Day, increasing trip frequency is a significant opportunity where even modest gains in annual visits translate into meaningful incremental sales. Taken together, the data shows multi-price and assortment expansion are not just driving spend; they are expanding Dollar Tree's addressable market. Let's turn now to comp.

The 5% comp in the quarter was ticket driven, with average unit retail increasing to approximately $1.51 versus $1.34 last year. Mix was a key driver in the quarter. Discretionary categories outperformed consumables, with multi-price driving outsized strength in seasonal, party and toys. Multi-price was also a tailwind to our Christmas performance, driving strong engagement across seasonal and discretionary categories.

Expanded price bands and a more relevant assortment increased category breadth and gifting choice, driving basket expansion. Stores with more mature, multi-price assortments delivered stronger seasonal demand and higher average tickets, reinforcing the incremental nature of the strategy. We see discretionary outperformance as an indicator of customer receptivity to expanded value, with shoppers gravitating toward broader assortments and higher-value options. As we have underscored in the past, Dollar Tree maintains laser focus on real-time quantitative benchmarking of the value in our stores versus the competition.

On an aggregate basis, our relative value proposition was even stronger as we exited 2025 than when we entered and versus our historical average. This is, of course, after pricing actions in response to tariffs and increased multi-price penetration. I'd also like to highlight that, on average, the relative value of our multi-price offerings is even higher than that of our entry-price SKUs. Gross margin performance continues to improve, supported by favorable mix, freight moderation and disciplined mark-on management, even as we absorbed higher markdowns and continue to manage tariff volatility.

Robust comp and margin performance, coupled with an incredible and expanding value proposition for our customers reflect the strength and durability of Dollar Tree's fundamentals. Let me turn to multi-price, which is a core pillar of our growth strategy and central to how we are expanding the business. In Q4, multi-price represented approximately 16% of total sales. Over the course of the year, we rolled out roughly 2,400 additional in-line 3.0 multi-price stores, bringing the total to approximately 5,300 locations.

While the distinction between our different store formats is becoming less pronounced as multi-price elements are integrated across all stores, our in-line multi-price stores continue to deliver meaningfully higher sales productivity than legacy formats, reinforcing the structural productivity benefits of the model as we scale. By maintaining $1.25 leadership and introducing more price points, we've increased flexibility, improved relevance and deepened basket potential through complementary new offerings, delivering thrill of the hunt wow value. Approximately 85% of our opening price point assortment is $2 and below.

And more than 80% of the assortment is unique to Dollar Tree, reinforcing the differentiated, discovery-driven nature of our model. We remain in the early innings of Dollar Tree's multi-price evolution. The results we have achieved to date give us building excitement on the opportunity ahead. I'd like to take a moment to discuss traffic trends at Dollar Tree.

Traffic declined in the quarter, in line with our expectations. I want to zoom out now and share how we're currently thinking about traffic more broadly. As we shared at Investor Day, everything we're doing is deliberate, from how we're modernizing pricing to how we're strengthening execution across the fleet. With that context, let me put our traffic trends in perspective.

We have successfully worked through the restickering process. It is now largely behind us. That process was a system-wide reset, new signage, improved price clarity and assortment updates designed to modernize the shopping experience. We've only adjusted pricing twice in our history: first, breaking the dollar in 2022; and second, targeted price actions in response to tariffs in 2025. Historically, with pricing resets at Dollar Tree, while overall comp sales remain robust, there is a temporary mix shift in the same-store sales composition between traffic and ticket.

What we're seeing today is directionally consistent with that pattern. That being said, as we look at the data, we see a traffic trend that is above prior reset levels, outperforming our historical experience. Importantly, we were more strategic and deliberate with our assortment during our current price adjustment cycle. As Stewart will outline in more detail shortly, our 2026 outlook reflects an expectation for a more balanced contribution from traffic and ticket.

In fact, we saw sequentially improving traffic in Q4 and we're pleased with our quarter-to-date trend. Larger picture, what matters most is how customers are behaving during a pricing transition. If engagement were deteriorating, we would expect to see pressure first in discretionary and impulse categories. Instead, in Q4, discretionary outperformed, seasonal was strong and multi-price adoption increased.

That is the profile of a customer who is engaging and responding to expanded assortment and incremental value. Let me shift to execution. This is where we've made some of the most important progress. Operational metrics are improving across the fleet.

Since midyear 2025, we've seen improvement in store-level performance indicators. For example, on a net basis, more than 1/3 of our stores have improved against our internal operating standards, driving greater consistency across the fleet. Importantly, stores that perform at the highest levels across key operational indicators are outperforming the fleet with higher levels of comp and profitability. This reinforces a simple principle.

When store leadership is stable, schedules are optimized, shelves are stocked and processes are consistent, stores perform better. We've made tangible progress filling store manager vacancies, reducing turnover and minimizing early closes and late openings. Retail is local, and it's won store by store. That strengthening foundation extends beyond the 4 walls of the store and into our broader supply chain and inventory discipline, which I'll touch on next.

The foundation of our business is getting stronger, and that improvement is particularly visible in our supply chain. We're raising the bar across the organization and we're seeing strong delivery from our supply chain team as service levels, in-stock metrics and inventory discipline continue to improve. As we shared at Investor Day, those gains are driving greater operating efficiency including higher throughput per distribution center and improved shipping productivity and giving us confidence in our expectations. We also navigated meaningful cost volatility this year.

Tariff expense increased substantially year-over-year. As we've discussed, we continue to actively deploy the 5 mitigation levers we've historically used to manage cost headwinds, including supplier negotiations, product reengineering, country-of-origin shifts, assortment adjustments and targeted pricing actions, all to maintain strong profitability while preserving value for our customers. Gross margin expanded despite this volatile tariff backdrop. We managed corporate expenses with discipline, are rightsizing the organization post separation, improved free cash flow and returned significant capital to shareholders.

This is a structurally stronger enterprise than it was 12 months ago. When I step back, what I see is a resilient, high-quality business that has navigated through a period of unprecedented change while advancing a broad set of strategic initiatives. At Investor Day, we laid out a clear set of assumptions and a path forward. And in the back half of the year, we outperformed the earnings expectations embedded in that framework.

That performance reinforces both the resiliency of the model and the early progress we're making against the plan we shared with you. We're exiting the year with an expanded, more relevant assortment driven by disciplined multi-price execution, a stronger customer connection and accelerating household growth, improved store operations and greater consistency across the fleet and agile cost management in a volatile environment, supported by supply chain excellence and disciplined financial management. That combination positions us well going forward. In summary, Dollar Tree today is simpler, more focused and structurally stronger than it was a year ago.

We're confident in the durability of this model and in the direction we are heading. With that, I'll turn it over to Stewart to walk through the financial details.

Thank you, Mike, and good morning, everyone. For the fourth quarter of fiscal 2025, Dollar Tree delivered strong results, extending the momentum we've built throughout the year. Comparable sales increased 5%, gross margin expanded 150 basis points and adjusted diluted earnings per share increased 21% year-over-year. I'll walk through the key drivers for the quarter, and then we can discuss our outlook.

Fourth quarter net sales increased 9% to $5.5 billion, driven by a 5% increase in comparable store sales and a 4% contribution from net new store growth. As expected, comps were driven by a 6.3% increase in average ticket, reflecting strong holiday performance. Traffic was down 1.2%. By category, consumables increased 3.6%, while discretionary delivered a 6.2% comp, with notable strength in Christmas party, paper and toys on the back of an enhanced multi-price assortment.

Gross margin expanded 150 basis points year-over-year driven primarily by higher merchandise margin, lower freight costs, favorable mix toward higher-margin discretionary categories and occupancy leverage. These benefits were partially offset by tariffs and higher markdowns. Moving down the P&L. Dollar Tree segment adjusted SG&A delevered 170 basis points year-over-year, primarily driven by higher store payroll and general liability claims.

We absorbed approximately $30 million for restickering costs in Q4, bringing the full year total to approximately $100 million. As I'll discuss momentarily, we will cycle the majority of these costs in the current fiscal year. Adjusted corporate SG&A net of $23 million of TSA income was $138 million, down 3% year-over-year and leveraged 40 basis points. We continue to make progress on this line item and remain on track toward our longer-term target of corporate SG&A at approximately 2% of sales by fiscal 2028. Taken together, adjusted operating margin expanded 20 basis points to 12.8% and adjusted operating income dollars increased 11% year-over-year.

Below the operating line, net interest expense was in line with our expectations, while the effective tax rate and average diluted share count were modestly favorable. During fiscal 2025, we returned significant capital to shareholders through share repurchases, reducing shares outstanding by approximately 8% year-over-year. Turning to the balance sheet. Inventory was down 7% versus the prior year, while sales increased 9%, resulting in a favorable inventory-to-sales spread.

Our continued focus on improving inventory turns supports fresher assortments for our customers, working capital efficiency and stronger free cash flow generation. We ended the quarter with $718 million in cash and no commercial paper outstanding. We generated over $1.2 billion in cash from operations and invested $264 million in capital expenditures, resulting in free cash flow in the quarter of approximately $970 million. For the full year, we generated more than $1 billion in free cash flow.

During the quarter, we repurchased 2.2 million shares for $232 million. For fiscal 2025, we deployed nearly $1.6 billion towards share repurchases at an average price of $91. Subsequent to quarter-end, we repurchased approximately $190 million of stock. We ended the year with a strong liquidity position and remain well positioned to fund growth and return capital to shareholders. Our capital allocation priorities remain unchanged: first, invest in the business to support growth; second, maintain a strong and flexible balance sheet; and third, return excess capital to shareholders.

Before reviewing our outlook, I want to briefly address the tariff environment. We have considered all of the recent changes. And while there may be some upside, we remain cautious because of the potential for further near-term changes and because of the potential for negative freight and other costs related to the conflict in the Middle East. It is also important to note that our current inventories have capitalized the tariff rates in place before the recent Supreme Court decision, and those costs will flow through the financials over the next quarter or so.

As a result, any potential benefits will come after that. Turning to our outlook for fiscal 2026. We expect net sales in the range of $20.5 billion to $20.7 billion, reflecting comparable store sales growth of 3% to 4%. We expect diluted earnings per share in the range of $6.50 to $6.90, which is consistent with our Investor Day framework and represents high-teens earnings growth for the year. We expect top line growth to be driven by continued multi-price expansion, improved space productivity and assortment optimization, new store openings and improving store conditions.

Our full year comp outlook assumes a positive contribution from traffic. As previously shared, we are targeting approximately 400 gross new store openings and 75 closings. We expect gross margin to be roughly flat, driven by improved markdown performance, partially offset by higher freight costs. We continue to deploy our 5 merchant levers to mitigate tariffs and other cost-related headwinds.

With respect to SG&A, we plan to tightly manage store labor while continuing to support improved store conditions. We're also taking actions to rightsize our corporate cost structure, keeping us on track to achieve our longer-term SG&A targets, including corporate SG&A of approximately 2% of sales by fiscal 2028. For 2026, we see corporate SG&A in the range of $470 million to $490 million net of TSA. Overall, our outlook reflects modest SG&A leverage as we continue to manage operating costs tightly. For modeling purposes, let me walk through the key items we expect to lap this year.

In the second, third and fourth quarters, we will lap the stickering and price implementation costs incurred in 2025. In total, these costs were approximately $100 million, spread relatively evenly across those 3 quarters. As the TSA winds down this year, we anticipate roughly $70 million of TSA income in fiscal 2026 weighted towards the first 3 quarters of the year. Putting it all together, we expect year-over-year operating margin expansion to be the greatest in the second and third quarters of the year. Below the operating line, we expect net interest and other income of approximately $85 million, an effective tax rate of 25.4% and a diluted share count of approximately 199 million shares, which does not assume any additional share repurchases.

Our balance sheet remains strong, and we're well positioned to continue returning capital to shareholders. In fiscal year 2026, we expect CapEx in the range of $1.1 billion to $1.2 billion, which represents a slight year-over-year decrease in capital intensity driven by normalizing supply chain spend. Lastly, on the cash flow statement, we expect to utilize our NOL balance to generate roughly $165 million of cash tax benefits. Turning to the first quarter.

We expect net sales in the range of $4.9 billion to $5 billion, reflecting comparable store sales growth of 3% to 4%. Adjusted diluted earnings per share are expected to be in the range of $1.45 to $1.60. In closing, we remain focused on disciplined execution of our Dollar Tree strategy and on delivering against our long-term earnings growth targets. We are encouraged by the progress we've made strengthening our fundamentals, improving store execution and driving a more productive and relevant assortment for our customers. In 2025, we returned a record amount of capital to shareholders.

With a strong balance sheet and multiple levers to drive growth, we believe we are well positioned to deliver consistent profitable growth and to create long-term value for our shareholders. With that, I'll turn the call back over to Mike. Mike?

Thanks, Stewart. Over the past year, we have simplified the enterprise and sharpened our focus on what matters most: building a stronger stand-alone Dollar Tree. We're scaling multi-price with discipline, the assortment is more relevant, customer engagement is higher and converted stores are delivering improved productivity. Execution is improving across the business.

Store performance is strengthening. The supply chain is operating with greater stability and efficiency is increasing across the fleet. At Investor Day, we laid out a clear road map, disciplined growth, stronger returns and a structurally more productive enterprise. In 2025, we delivered a financial performance that exceeded our Investor Day outlook.

As we exit 2025, our strategy is translating into measurable progress. Dollar Tree is simpler, more focused and better positioned for the future. The fundamentals are strengthening, the organization is aligned, and we are confident in our ability to deliver sustainable, profitable growth over the long term. Thank you.

And with that, we're ready to take your questions.

[Operator Instructions] Our first question today is coming from Matthew Boss from JPMorgan.

Congrats on a nice quarter. So Mike, could you provide some additional color on your monthly comp cadence in the fourth quarter and elaborate on what you saw in traffic? Just what you think were the key drivers? And then quarter-to-date, could you speak to how the comp is trending relative to the 3% to 4% guidance?

Yes. Thanks, Matt. Let me just start by saying we were pleased with the 5% comp in Q4. And it would have been higher if not for some of the weather events that I spoke about at the end of January. If I look at the quarter by month, December was our strongest month on the back of a really exciting multi-price led Christmas.

I would say November was a very close second. And then January, of course, experienced a significant impact from the storms. Now within those monthly comps, we were excited because we saw traffic improve sequentially as the quarter unfolded. P12 better than P11, P11 better than P10. And really, it wasn't until the end of January that we saw that disruption.

In terms of the start to the year, the quarter-to-date trend, as I said in the script, we're pleased with what we're seeing. Relative to the 3% to 4% guidance for the first quarter, we feel comfortable. Let's remember, Easter is earlier this year, and historically, that's been a headwind for the business. And we've, of course, tried to account for that in the comp guide.

So overall, we feel good about our comp trend, and we like where we've started quarter-to-date.

Great. And then as a follow-up for Stewart. On gross margin, can you speak to some of the puts and takes within the outlook for roughly flat? And then additionally, just how should we think about potential upside from tariff changes? And when could that flow through?

Yes. Look, I'll start by saying that 2025 was a pretty strong performance. I mean we were up 59 basis points in the year. I think that's a big increase.

You'll also notice the guidance that I've given you is now tighter than the plus/minus 50 bps I was sort of going into the year with because we have, in some places, a better view and, in some places, more volatility. But let me give you a little bit of perspective. So guidance is to keep that better performance versus last year, flat in this year. I think that's a good starting point.

If you look forward, we've done a stronger job of buying. You'll keep in mind that now sort of tariffs have settled in, our teams have that chance to get out and employ the 5 levers. Multi-price mix is helping. And we've seen strong performance in our supply chain from a productivity perspective.

All these things are setting up positively for next year. On the offset side, I did call out last quarter that we expected to see some reversion in freight, and freight was a big benefit last year, absolutely. We're hanging on to that benefit in other ways, but freight is likely to come back to be more expensive this year. And certainly, with the current fuel prices, there's going to be some volatility in fuel.

On the tariff side, we are paying slightly lower tariffs at the moment, although the administration has pointed out that they expect to get back to where we were. And so we've taken that into account as we planned this year. And while there might be some small upside in the early days, although keep in mind, because of the cycle of our inventory, it will take about 4 months as the inventory cycles through before we start seeing the benefit of that. But I think some of the benefit of the tariff might be offsetting to some of the fuel increases we're seeing.

And on fuel, we'll have to see what that looks like for the rest of the year. So overall, we think we've given some strong guidance, and we expect to deliver it this year.

Next question today is coming from Seth Sigman from Barclays.

I wanted to follow up on traffic. Can you just elaborate on how you think that plays out through this year? Specifically, when do you think traffic could actually inflect positively? And maybe you could also elaborate on that point that your experience this time around regarding elasticity has been maybe better than the past.

Yes. Sure, Seth. I really look at traffic with 2 lenses. One is the lens of today.

We saw the restickering we had to do in Q3. That continued in Q4. You see that in how the costs played out. And that restickering, it's not a onetime disruption, it's kind of that disruption throughout the quarters. That's disruptive to our people, in the store, our associates, but also to the customer. That's now behind us.

And what I'm pleased with is that we continue to improve in the traffic as you look throughout the quarter. So when you look at, like I said, P12 was better than P11 and P11 better than P10. As we got away from those restickering, we really saw that improvement. And then the second lens is the historical lens. We've only taken price twice in our 40-year history.

And so when I go back to break the dollar, you can go back and look, the traffic declined 4% and was negative for more than a year. We look now and say, okay, we're down 1%. So it just hasn't fallen as much, and we expect that duration to be shorter as well. So a more muted response for a shorter duration.

And why? Because we were more strategic this time around in where we took price, before the entire store went up, leaving a good percentage of the store just not at value and so our merchants had to go work that through buying cycles and get back in line. This time around, you were able to be more strategic. And as a result, we were sharper on the pricing and we've seen a more softer response in terms of the -- not declining as much.

Okay. Great. Very helpful. And then, Stewart, for you, on the SG&A outlook, I guess that's one of the big changes versus 2025. There are a lot of moving pieces and things that you're lapping from last year.

Can you just frame the leverage that you're expecting to get here on SG&A on an underlying basis? And how are you thinking about some of the SG&A investments going forward? And just ultimately, what do you see as the drivers of operating leverage here?

Great. Thanks, Seth. Let's take this in 2 pieces because I think it's helpful to look first at the segment SG&A and then to look separately at corporate SG&A. First of all, we said last year, we were going to go aggressively at expense, and we wanted to see ourselves driving leverage, and that has remained the goal.

And I think we did a good job in 2025 of bringing those corporate SG&A costs down. But let me start with the segment. I mean on the segment last year, we did have higher wages and some investment in hours, which we called out this time last year. Those were -- that was money that was well spent because we started to see improvement in our stores and we saw a much bigger comp.

If you think about the other big item, which we'll cycle this year, it was about $100 million, which related to all of the stickering and the price resets, so that won't recur this year. If you pull out the $100 million, all of our efforts have been focused around managing the rest of the SG&A costs on our payroll, which is about 2/3 of our total SG&A. We've done a good job of planning this year. We're implementing new workforce management software, and we expect to keep a lid on our increases.

So if you take into account the small investments, I'd say, small investment in marketing, on an underlying basis, you'll see a very small amount of leverage or flat. And that is a big difference to prior years. On corporate SG&A, as you know, of course, we're driving that down, and you will see absolute leverage on corporate SG&A as we continue to take those numbers lower.

Our next question is coming from Rupesh Parikh from Oppenheimer.

So I was hoping you can help us to understand how your team is thinking about the impacts to your business related to higher gas prices on the consumer front, some of the raw material impacts and higher freight costs. And I think it would also be helpful to hear how your team is quantifying the impact of higher diesel prices. And finally, I just want to get a sense of [ your team's ] spot exposure and whether the latest higher level of energy prices have been factored into your guidance?

Yes. Sure, Rupesh. Why don't I -- I'll take the consumer piece and then I'll let Stewart talk to the P&L. Higher prices at the pump impact all households.

And so what we see is in the middle to higher income households, we see accelerated trade-in. So those customers are turning towards Dollar Tree. And then our core customer, the lower-income shopper, our pack sizes are what really help them stretch their paycheck and make their budgets work for them. So the price impacts everyone, but for us, Dollar Tree is really that key tool that helps them manage their budgets and deal with these higher prices.

And when you look back and see, I mentioned this in the press release, for 20 years, Dollar Tree has been posting positive comps. There's a lot of economic cycles in those 20 years. And the one constant is that Dollar Tree continues to be the answer across all income levels as people help live and celebrate their lives. Stewart?

Yes. So on diesel prices, and we obviously have a very close watch on this and we know exactly by increase how much that's affecting the P&L, I think we plan in the short run here, as I mentioned in the answer to the earlier question, we'll have some offset in the short run between diesel increases and some of the tariff benefits. We also will employ the 5 levers. If this looks like it's going to go longer, then we've got other actions we can take.

I've been quite clear, I think last quarter in pointing out that we manage to a margin, we buy to a margin. And any of these kinds of price increases that we see, if we think they're going to be permanent or long-lasting, we're going to be taking other operating decisions and choices to try to drive -- to drive out that increase.

Great. And then my follow-up question, just going back to Q4, I think it would also be helpful if you can provide more color on the Q4 gross margin and also on the 170 basis points of SG&A deleverage that we saw.

Well, Q4 margin was heavily influenced by a much lower freight costs. And again, that was something we saw throughout the year. We were pleased with that benefit. I think it's a good thing, actually we're hanging on to that benefit in the following year's margin guidance, notwithstanding the potential reversion in freight costs.

But there are other drivers also. And I mentioned those, we continue to see sourcing improvements as our merchants have had more time to wrestle with the higher costs coming through from tariff and inflation. And of course, we've had favorable mix from multi-price, which has been helpful to us. On the supply chain, as we actually saw Q4 was strong performance in productivity there as our warehouses work aggressively to be more efficient.

And we shared some of that at our Investor Day. We're starting to see that come to fruition. The SG&A pressure in the quarter was the same story as it was in the last 3 quarters of the year, which was really all of the onetime stickering costs, which we don't expect to repeat this year. We did see a continuation of higher insurance and general liability costs, but those broadly, they're smaller costs.

They don't move the P&L around as much.

Our next question today is coming from Bobby Griffin from Raymond James.

I guess, Mike, I want to start on multi-price points. If you could speak a little bit about those higher price points, and more importantly, what you're seeing at the level of productivity gains out of those stores? And then taking that a step further, just as multi-price point mixes up or continues to mix up, how are you in the team looking at where you stack up competition-wise on those new or higher price points? And can you tie that back into what we're talking about with traffic and your confidence there?

Yes, absolutely. Thanks. We continue to see really strong customer acceptance for multi-price, particularly in that $3 to $5 range where the assortment expansion is driving incremental demand rather than substitution. And multi-price is improving store productivity.

With higher sales per square foot and larger basket sizes in those converted stores, the broadened assortment and the increased relevance really both benefits the customer. And then in terms of our associates, it's fewer things to put on the shelf. And so there's some nice productivity and our stores love it. The ones that haven't been converted can't wait to be converted.

And I want to be clear though that this is not simply about raising prices. This is about us having better items, larger pack sizes, the right pack sizes and categories that just weren't available to us at a strict dollar or even $1.25 price point. So even at those higher price points, we remain incredibly competitive with a better assortment. And in fact, in multi-price, our value proposition is significantly better than anyone we see in terms of mass or grocery or other alternatives.

So as a result of that, we're just not seeing resistance from the customers. Instead, and you saw this in the great household growth, we're seeing customers come to Dollar Tree. And that accelerated household growth in Q4 is just a great proof point of that relevance and that incremental benefit to the customer. I really look and say multi-price items deliver an incredible relative value, while the entry price point continues to be what drives people as a destination to Dollar Tree.

And our customers are telling us, they're telling us with their footsteps to the store and with their baskets. And we believe, as I mentioned, when we get their frequency up, that's when you really start to see that traffic take off. But right now, I love where we're at in terms of more and more households finding Dollar Tree and finding this incredible assortment.

And maybe just a quick follow-up for Stewart. Just on -- I appreciate the comments on the SG&A. Maybe can we go back on the corporate SG&A. I think the guide is maybe modestly higher than what we would imply coming out of the Investor Day at the midpoint. So can you talk about that and just kind of the glide path back to 2%, what the timing there? Has anything changed?

So let's start with the 2%. We're still pushing for 2% by '28, and we think that's reasonable. In terms of the actual guide of $470 million to $490 million, we had targeted $470 million at Investor Day. So we're still at the bottom -- the strong part of the guide is still a possibility.

I think it's important to just recognize that we finished 2025 in a really powerful way. We started the year with $660 million of SG&A. We anticipated $95 million of TSA. We only got $55 million.

We only got $55 million out of the $95 million. So we had to go out and cut a lot of costs just to get to the number. And actually, what happened, we actually over-delivered. So we ended up being -- instead of being at $565 million, we were $35 million better.

So a good result in 2025. In 2026, similarly, we think that those TSA numbers will be slightly lower, and we're actively removing cost. But against the $500-and-some million, we finished up with $530 million, we start with $15 million of inflation. So we've got to pull out the inflation, then take out the next chunk of costs. So I think we're doing a good job.

And I would also say, by the way, that while we're pulling out that cost, we're continuing to invest in the business. And so think about -- we're spending in the back office money on various IT investments to try to automate tasks, which will allow us to flatten out that SG&A curve as we move forward. So all in all, on track for the 2%. Our organization is structurally simpler.

And we're going to keep pulling out costs. I think we're going to meet the guide.

Next question is coming from Michael Lasser from UBS.

If we look at your guidance, there's a fairly narrow range for your top line expectations for 2026, yet there's a pretty wide range for your earnings expectations for this year. And that's despite what seems like a decent amount of flexibility between the restickering costs fading away, some relief on the tariff side. So, a, what is going to drive you to the top end of your earnings expectation for the year versus the bottom end? And b, if we look at that wide range, coupled with the fourth quarter that just was basically in line with what you expected despite a slightly better comp, are you still at the point where it's difficult to have a full handle on managing the profitability of the business?

And at what point do you think you have more visibility into that outlook?

Yes. Well, thanks, Michael. I think, look, when you look at the guide, I mean, there's still $200 million, of course, of revenue separating those 2. I understand the point about what that looks like below. There are a lot of moving parts, both in margin, I mentioned, of course, roughly flat.

We're dealing with tariffs, we're dealing with freight. So these are some of the things that might pull us down. What could pull us up, freight ends up being better, the war in the Middle East ends quickly and we end up being positive there. And of course, if we do see a more powerful return of traffic in the back part of the year, all of those things should be a help to us.

Multi-price from a mix standpoint is beneficial. So we obviously have planned for a level of multi-price. We'd like to see that working in our P&L. When you get down into the SG&A lines, we've given you some spread, obviously, on the corporate SG&A side.

And on the segment SG&A, I think the risk there is related mostly to utilities and to general liabilities. The wage number is so big, I mean, 2/3 roughly of our SG&A, that small movements there can have big impacts on the bottom line. So I think those are the big moving pieces.

Okay. It was interesting that you did not mention the prospect of reinvestment either within the stores or within the merchandising, especially if you see traffic that does not meet your expectations. So, a, how have you factored in reinvestment back into the business? Is that going to be more or less static?

And b, have you already seen traffic turn positive such as that gives you confidence that there is the right level of investment in the business today?

Yes. Thanks, Michael. Let me talk about investment. I think we've actually had quite a good deal of investment in the business.

And we've spoken at Investor Day to investments in CapEx to redo stores. Our merchants now are on top of the changes coming out of tariffs and, of course, have been investing appropriately and ensuring that we have the right level of value. And as I mentioned in one of the earlier questions, we're investing in a number of back-office systems to help manage our SG&A. So I think that's the right level of investment.

On the top line side, we spoke at Investor Day about marketing. We have injected a small amount of marketing investment this year. We think it's going to have a good strong return. And so I would say there's a great deal of reinvestment being made in the business to ensure the flywheel is accelerated.

Mike, maybe you want to talk to traffic.

Yes. Michael, I mean, we're confident in what we're seeing both in the sequential improvement we saw in Q4, despite that significant -- remember, almost half of our stores were closed for multiple days as we ended the year. And then we're pleased with what we're seeing to start the year. And yet in your mind, you're still saying, okay, I've got an earlier Easter, which is still ahead of us and we have a very robust Q2 last year that was very strong.

But absent all that, the sequence, the start to the year, the earlier Easter, the Q2, I look at the full year and say we expect a meaningful contribution from both traffic and ticket to our year. Everything we laid out at Investor Day is really working for us and I'm incredibly confident about the full year.

Our next question is coming from Edward Kelly from Wells Fargo.

I just wanted to follow up on store standards. I was curious if you could just take a step back and maybe assess where you stand there, as part of this, issues like in-stocks, price clarity, cleanliness, et cetera. Is there still work to do here? And if so, can you do that in the context of tightly managing SG&A?

Yes. Thanks, Ed. First of all, we've been on this gold path for a while now. And when I first got here, it was whack-a-mole, you improve one store, another one would break, almost in that ratio.

And the work that the team has done and the acceleration we've seen in the last 6 months, that -- remember that number I said, net 1/3 of our stores have improved. So instead of you fix one, you break one, it's you fix several, one might go backwards. And so we're really seeing an overall improvement, and in a quarter, to net improve 1/3 of your stores, that's real meaningful progress. And I think that's showing up in the comp.

And then we're talking to our customers every week. We have our receipt-based surveys. We scrape websites, thousands and thousands of feedback every single week. We're seeing those improve every single month.

And that's a testament to the store standards. And then the work in the supply chain that Roxanne and the team have done is the flow to the stores is much better, so you're not kind of choking out a backroom. We're much more even in our flow. And as a result, the appearance on the shelf and the in-stock is much better.

You do those things well, and it's much easier to maintain the front room and keep the price clarity really clear. So I'm excited by the progress. I'm excited that we seem to have reached that point where we've started to accelerate the improvement. And as I look forward, you're always going to be managing the fact that there are some stores that might not be where you want them to be, but the overall level of the stores has moved to the right on our scale and the number of stores improving is far exceeding the ones that are declining.

And it just makes it much more manageable. And on the whole, the appearance to the customer is that much stronger. So I'm really excited about the work that Jocy and the team have done and the progress that they're making. And more importantly, the accelerated progress I'm seeing.

Okay. And then just as a follow-up, could you speak to what you're seeing in UPT? Did that essentially kind of mirror what's been happening on the traffic side? And then what's the expectation there as you think about '26?

Yes. So we look at it and say, traffic's important to us, ticket's important to us. We want to make sure we complete the shop. And so when I look at the relevance of the assortment, and being able to have a real gift to give, which is why we've made the investment in toys and you see how the Toyland for us is improving.

Those units are important. And so we're seeing, with multi-price, yes, you'll see a unit decline because of the higher price. But what's the basket look like and what's really the relevance of that basket? And that's what we're seeing improving and that's what we really are hearing from our customers that they love.

Next question is coming from Paul Lejuez from Citigroup.

Curious if you could talk about the inventory number. Can you talk about inventory in units compared to that dollar number that you reported? Also what the plan is for F '26? Start there.

Yes. So look, let's start with the fact that 2025 was a really good performance. I said at the beginning of the year that I thought there was improvement in terms of cycles. I think our merchant and supply chain teams did an excellent job of managing that, down 9% in inventory and up -- or sorry, down, I think, 7% in inventory, up 9% in sales.

This is a good -- really good result. So when you talk about units, actually, it's quite interesting. I haven't given any data, but I will say that the units actually are even lower, and that's because that's reflecting the fact that we've got a lot more multi-price items there, and therefore, we're handling fewer units. We expect, by the way, that, that has a positive impact on labor pressure in our stores.

For 2026, we haven't given any sort of balance sheet guidance, but you can expect that we will continue to focus aggressively on managing that inventory so that we've got balance sheet efficiency and higher returns on the capital invested in our business.

Stewart, can you frame that inventory units just given the higher tariff costs built in? I think, obviously earlier Easter, higher price point, what does that number look like in units?

Yes, sorry. Finish the question, forgive me.

I just also wanted to ask what you built in for shrink this year.

So let me take both of those. First, again, I'm not giving you a number on the units. I'm just telling you that the unit performance was even better than the overall performance in dollars. And so you can take that as an added positive.

In terms of shrink, we're optimistic about this year in shrink. We think that 2025 -- or 2026, forgive me, is the year in which we expect to start to flatten that shrink results. So that's where we sit currently. The changes we're making are the right changes, and we expect that the increases we saw last year will be blunted this year.

Our next question today is coming from John Heinbockel from Guggenheim.

My question, can you talk about traffic by cohort, maybe annual visits? When you think about the new households that have come in, the average household, maybe -- and then maybe your best ones right, and you frame that opportunity? And then what will drive that? I think about MPP, right?

And does discretionary drive that in the 3, 4 key holidays? And then consumable, right, cooler, the rest of the year? How do you think about MPP's role in that improvement?

Yes, John, thanks. We grew households across all income cohorts. So you saw that accelerated rate, and that wasn't just higher income. That was across all income levels, we saw our household penetration increase.

And so when I look at it and say, you look at the traffic drivers, it's not that one income group is accelerating and one is declining. That's not what we're seeing. We're seeing growth in household growth across all the income levels. The higher income does skew higher multi-price, no doubt about it.

And they do drive discretionary, and so -- and they are our fastest growing in terms of the household penetration. So we're definitely seeing an acceleration in trade-in. But our core customer, lower income, that represents half of our business. We're still growing that household and they are still loving what they find in multi-price.

So yes, consumables are a big driver that -- not a stock up, but that kind of in between, our pack sizes are a great fit for them. We see that, but we really see the relevance increasing across every income level.

We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Thanks, operator. I appreciate it. And thanks to everyone for joining us today. We appreciate your time and engagement, and look forward to updating you again when we get together next quarter. Thank you.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.