Kevin Walker :

Thank you, and good morning, everyone. On the call with me today, are Todd Vasos, our CEO; and Kelly Dilts, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News and Events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, strategy, initiatives, plans, goals, priorities, opportunities, expectations or beliefs about future matters, and other statements that are not limited to historical fact. The statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include, but are not limited to those identified in our earnings release issued this morning under risk factors in our 2023 Form 10-K filed on March 25, 2024, and any later filed periodic report and in the comments that are made on this call. You should not unduly rely on forward looking statements which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call, unless required by law. At the end of our prepared remarks, we will open the call up for your questions. To allow us to address as many questions as possible in the queue. Please limit yourself to one question. Now, it is my pleasure to turn the call over to Todd.

Kelly Dilts :

Thank you, Todd, and good morning, everyone. Now that Todd has taken you through a few highlights of the quarter, let me take you through some of the important financial details. Unless we specifically note otherwise, all comparisons are year-over-year. All references to EPS refer to diluted earnings per share and all years noted refer to the corresponding fiscal year. As Todd already discussed sales, I'll start with gross profit. For Q1, gross profit as a percentage of sales was 30.2%, a decrease of 145 basis points. This decrease was primarily attributable to increases in shrink and markdowns, a greater consumable sales mix and lower inventory markups. These were partially offset by a lower LIFO provision. Shrink continues to be our most significant headwind and with 59 basis points worse in the first quarter compared to prior year. As Todd noted, we are taking multiple actions aimed at reducing shrink, and I'll discuss our expectation for this headwind for the remainder of the year in just a bit. With regards to markdowns, we're seeing promotional levels more similar to 2019 levels as we anticipated coming into the year. As Todd noted, customers are seeking value and we saw strong take rates on promotional items during the first quarter. Turning to SG&A, it was 24.7% as a percentage of sales, an increase of 97 basis points. This increase was primarily driven by retail labor, depreciation and amortization, incentive compensation and repairs and maintenance. Moving down the income statement, operating profit for the first quarter decreased 26.3% to $546 million. As a percentage of sales operating profit was 5.5%, a decrease of 242 basis points. Net interest expense for the quarter decreased to $72 million compared to $83 million in last year's first quarter. Our effective tax rate for the quarter was 23.3% and compares to 21.8% in the first quarter last year. This higher rate is primarily due to the effect of certain rate impacting items on lower earnings before taxes and expense recognition attributable to stock-based compensation. Finally, EPS for the quarter decreased 29.5% to $1.65, which exceeded the high end of our internal expectations. Turning now to the balance sheet and cash flow. Merchandise inventories were $6.9 billion at the end of Q1, a decrease of 5.5% compared to prior year and a decrease of 9.5% on a per store basis. Notably, total non-consumable inventory decreased 19.1% compared to last year and decreased 22.5% on a per store basis. The team continues to do great work reducing our overall inventory position, while simultaneously optimizing our mix and driving higher end stocks. We're pleased with the significant progress on this important goal, which not only frees up more cash in the business, but also helps to mitigate further shrink risk. And importantly, we continue to believe the quality of our inventory remains good. The business generated cash flows from operations of $664 million during the quarter, an increase of 247% as we improved our working capital primarily through inventory management. Total capital expenditures were $342 million and included our planned investments in new stores, remodels and relocations distribution and transportation projects, and spending related to our strategic initiatives. During the quarter, we returned cash to shareholders through quarterly dividend of $0.59 per common share outstanding for a total payout of $130 million. Overall, we're pleased with our progress and proud of these results, including gains in customer traffic and market share, significantly lower inventory levels, and improved cash flow from operations. Moving to our financial outlooks for fiscal 2024, while it's still early in the year, we believe our positive first quarter results reinforce the importance of our stores to the communities we serve, as well as the progress of our back to basics work. With that in mind, we're reiterating our financial guidance for 2024 and continue to expect net sales growth in the range of approximately 6% to 6.7%, same store sales growth in the range of 2% to 2.7% and EPS in the range of $6.80 to $7.55. This guidance continues to assume an estimated negative impact to EPS of approximately $0.50 due to higher incentive compensation expense and an effective tax rate in a range of approximately 22.5% to 23.5%. We also continue to anticipate capital spending in the range of $1.3 billion to $1.4 billion as we invest to drive ongoing growth. We continually evaluate and seek to optimize the use of this capital, and as a result we have updated our expectations for real estate projects in 2024. We now expect to remodel approximately 1,620 stores this year compared to our previous expectation of 1,500 remodels. To facilitate this increase in remodels, we're reducing the number of planned new stores to 730 compared to our previous expectation of 800 new stores. We continue to expect to relocate 85 stores. In total, this increases our expected total real estate project count from 2,385 to approximately 2,435. We're excited about this increase in projects and the expanded investment in our mature stores, and we believe this is an appropriate reallocation of our capital. As a reminder, our capital allocation priorities are unchanged and we believe they continue to serve us well. Our first priority is investing in our business, including our existing store base, as well as high return organic growth opportunities such as new store expansion and strategic initiatives. Next, we seek to return cash to shareholders through a quarterly dividend payment and over time and when appropriate share repurchases. Finally, although our leverage ratio is currently above our target of approximately 3x adjusted debt to adjusted EBITDAR, we are focused on improving our debt metrics in support of our commitment to our current investment grade credit ratings, which as a reminder are BBB and Baa2. Now let me provide some additional context as it relates to our outlook for 2024. Our customer continues to be very value driven and we anticipate they will continue to be price sensitive as we move through the year. With this in mind, we expect sales mix pressure to be above our original expectation, and as I mentioned earlier, we have seen and continue to expect the promotional environment reversion to pre pandemic levels as we move throughout 2024. As such, we expect our promotional markdown headwinds to gross margin will continue at least through the first half of the year. As Todd noted, shrink is currently trending worse than we initially expected coming into the year, and we now expect this headwind to be greater in 2024 than what was originally contemplated in the financial guidance we provided on our earnings call in March. We're taking aggressive and decisive action to mitigate this challenge, and we're expecting to see improvement later in the back half of 2024 than we had previously anticipated and more significantly into 2025. Turning to SG&A, our expectations are relatively unchanged from what we previously provided on our Q4 call. We continue to anticipate a significant headwind this year from the normalization of incentive compensation in 2024, as well as an ongoing headwind from depreciation and amortization, while we don't typically provide quarterly guidance, given the somewhat atypical cadence of this year and some of its specific headwinds, we're providing more detail on our expectations for the second quarter. To that end, we expect comp sales to increase in the low 2% range in the second quarter with EPS in the range of approximately $1.70 to $1.85. In summary, we're pleased with the solid start to our year, including exceeding our top and bottom-line expectations for first quarter. We believe our actions are resonating with our customers, strengthening our competitive position and reinforcing our foundation for future growth. We remain committed to maintaining our discipline in how we manage expenses and capital as a low cost operator with the goal of delivering consistent, strong financial performance while strategically investing for the long term. We continue to believe that this model is resilient and strong. We're excited about the long-term future of this business, including plans to drive profitable, same store sales and meaningful operating margin growth, healthy new store returns, strong free cash flow, and long-term shareholder value. With that, I'll turn the call back over to Todd.

Operator:

[Operator Instructions] Our first question today is coming from Michael Lasser of UBS.

Todd Vasos:

On shrink, I just want to make sure we referenced back to last quarter as we rolled out our back to basics program in earnest over the last few months. We talked about last quarter that some areas will take a little longer to manifest itself in a real positive manner. We called out shrink as being one of those because shrink has the longest tail to it. And quite frankly, we have many levers on shrink that we watch. And we look at each and every quarter. In saying that, the great thing here is that what we're seeing on the shrink front right now is what we thought we would. And that is of the shrink indicators that we watch. And by the way, we use a proprietary predictive model to look at this. We've had this for many years and as you know, over the years, our shrink indicators will would have indicated and have performed in a pretty good manner up until recently. And these predictive models are now flashing green or positive with the majority of the items that we look at for shrink. So in saying that, in a nutshell, we feel pretty good about what that would indicate for the back half of the year, and what that will indicate hopefully for ‘25 and beyond, just like we thought it would. It would come together a little softer in Q1, but again, green shoots, which is really great to see starting to perform. And Kelly, you may want to just mention how it affects the margin overall.

Todd Vasos :

And then Michael, I know you had a second part question and as it relates to the promotional activity and what we're seeing from that, as you may recall, we were probably one of the first ones to call out that we believe that the promotional environment would rise in 2024. We made mention that we believe it's going to be more reminiscent to free COVID times, so 2019 type levels, and quite frankly, in Q1, that's exactly what we saw. And we still see it, the same way, today as we move through Q2 and into the back half of the year. So, it's pretty much right on what we thought. And I would tell you that for us, here at Dollar General, we've always done a very good job, as of balancing that everyday value here on the shelf meeting our everyday price, and then seeding in that promotional activity to really show even more value to the consumer. We do that probably as good as anyone. And the great thing about Dollar General is that category management that Kelly just mentioned where we are a large player with almost every CPG company in America. And with that, allows us the opportunity to continue to work with them very closely to help mitigate margin risks from that promotional activity. So we feel good. Everything is contemplated in our guidance, as we move forward. And we feel good about that promotional activity to show good value to the consumer. And it's been resonating. Take a look at our sales for the quarter and our transactions for the quarter. I think the balance is being struck very well here.

Matthew Boss :

So Todd, maybe could you elaborate on customer behaviors that you saw as the first quarter progressed as we think about consumables relative to discretionary maybe what comp trend have you seen so far in May relative to your load two second quarter guidance? And then just larger picture, where does the back to basics strategy stand today relative to the overall opportunity? Thinking about near term opportunities, and then as you said, things that just may take a little bit longer.

Operator:

The next question is coming from Kate McShane of Goldman Sachs.

Kelly Dilts :

Yes, thanks for the question, Kate. And just to level set everyone. So we are reducing the number of new stores this year. It's by about 70 stores, and what we're going do is move them into 2025. So we feel really good about the locations that we have identified. We're just pushing them out into to 2025. And what that does is free up capital in order to increase the number of remodels and the total real estate project count that we have. So I have to tell you, we're really excited about this increase in projects with the expanded investment particularly in our mature stores. And we think this is absolutely the appropriate reallocation of capital, especially with our back-to-basics work. And so, stay tuned for 2025, but for right now, we feel really good about this reallocation.

Simeon Gutman :

My question is on longer term margins and Todd, we've talked about getting back north of seven over time. You've gotten now six months of reflecting on the business and there's some things that are there, puts and takes at the margin, maybe some things that are a little bit worse on margin shrink and promos. Do you think that level, now that you have six months of seeing how the business and the environment looks, those levels of margin are appropriate given what you are reinvesting? And then maybe a slightly different second part of the question. The consumers that you mentioned are buying more in promotion. How does that foot now with retailers actually investing in price? I'm sure you're watching it closely, but how do you think about that in the need to not just promote, but actually make structural and price investments?

Kelly Dilts :

And just if -- as taking a look at the longer term and we talked about this just a minute ago, we're certainly doing everything with our back to basics actions to strengthen that foundation for longer term growth with driving sales and working on lowering shrink. We still feel great about the fundamentals of this business. We're growing share, we're growing traffic. We had good healthy comps. We're generating a lot of cash, so the model is absolutely intact. As we look forward, we still have a nice long way -- long runway for growth, and that that's new stores and our remodel program. So feel good about that. We feel good about generating a significant amount of cash flow and the investments that we're making in our business now as we look forward to how that will return in the future. And then of course, soon as we reach the target of our debt leverage, we'll be returning cash back to shareholders when appropriate on in the form of share repurchases. And so, given all of that, I would say that where we're at right now from an operating margin perspective, we know we have a lot of opportunity and we are always looking to improve our operating margin. You heard me talk about a lot of the longer-term levers that we have and some in the shorter term around the gross margin side of things, but we also have our save to serve approach to controlling costs, which is also a huge benefit to drive operating margin as well. So we certainly feel like we can do that from here. And I would tell you that we believe this business is going to return to a 10% to 10% plus EPS growth on an adjusted basis over the longer term.

Paul Lejuez :

Can you talk about the comps that you assume in the non-consumable categories for the rest of the year and how those assumptions have changed? I think you said the business mix is a little bit worse of a drag than you thought. I thought you said the same for shrink and also maybe for promos. So just curious what the offsets are there as well to help keep your guidance. Thanks.

Operator:

The next question is coming from Rupesh Parikh of Oppenheimer.

Kelly Dilts :

Yes, thanks Rupesh. I would say we are certainly pleased to be able to reiterate our guidance that we gave and to your point, it does indicate a stronger back cap and we really see the momentum of our actions on all of our back to basic work. We'll fuel that back half and looking forward to a strong top line and bottom-line growth in the back half.

Seth Sigman:

Despite the comment about shrink being worse than expected, it sounds like answer to prior question is that it was only a little bit worse. And then there was also another comment about your internal models flashing green. So I'm trying to reconcile all of that, but I guess my real question is around the level of investment required to address shrink, which has been a concern in the market, just cost of doing business going higher. So how confident are you that the investments you're making and including what you've done from a payroll perspective is really fully baked in here and is not going to have to step up again?

Operator:

The next question is coming from Scot Ciccarelli of Truist.

Todd Vasos :

Yes, we don't believe it's a permanent shift. And let me step back and say again, I believe we're doing exactly the right thing at the right time. You may recall over the years, I've always said we at Dollar General go with the consumer wants us to go, and right now, because of her finances, meaning with the inflation over the last couple years and those pressures that have come with that, this is where she needs us to be right now for her. And we doubled down on that, right? Because we need to take care of her. I believe you see in our comp for Q1 and our transaction growth in Q1 would all benefit what I just said. Meaning that consumer is resonating with that. Now, the thing I do want to point out is that all the work we did around our non-consumable initiatives, through the pandemic and even exiting the pandemic is still alive and well in our stores. And again, when the consumer needs the spend around discretionary right now, she has what she needs at Dollar General. It's proven. We see it, we see it in her spend. So we don't believe that this is a permanent shift. We believe it's temporary. How long we'll wait to see, again, the consumer will tell us that, but in the meantime, we'll go where she wants us to go. We'll have the right products for her that she needs to feed her family, take care of her family in the meantime, but at the same time continue to foster and grow that discretionary side of the business with either even more options and more value as we continue to move through this year and into the back half of the year standing ready and willing and able to serve her when she's ready to start spending more freely on that side.

Michael Montani :

I just wanted to dig into a little bit further the inventory side and supply chain. So on the inventory front, should we expect kind of further reductions at this point, or do you feel like you have what you need and you could start to grow inventory a little bit again. How are in stocks looking? And then just on supply chain, Todd, what's your vision there with the two additional DCs coming in line this year? When can we get kind of optimal product flow back?

Todd Vasos:

And then Kelly, I'll just add on the second part of your question. Again, as I reiterated I'll reiterate, I'm sorry. As I said, we feel good about where our supply chain is right now, and as we bring little Rock Arkansas on later this year and a little closer in our Colorado DC, it'll give us even more confidence as we move forward. Matter of fact, as we also said, out of these temporary facilities that we had we we're already out of seven of those. And the remaining five will come out in 2024. And really the catalyst there will be these two facilities that we open again in Colorado and in Little Rock, Arkansas. So again, I believe that we're well on our way. The consumer is definitely telling us in all the consumer work we've done, they're also saying they're seeing the benefit of that at the shelf, meaning finding what they need more often inside Dollar General. Are we perfect yet? No, but boy, we are light years from where we were and continue to grow that in stock level inside the store. So, all systems seem green there right now, and we continue to benefit from that in stock level and that on time levels from our supply chain.

Joe Feldman :

Wanted to ask, have you seen any initial green shoots, like you said, in the 12,000 stores that you've remodeled? I know 3,000 just happened in May, but like maybe the original ones that you did, I know it's only four months, but -- if removing the self-checkout has made any kind of measurable difference, I'm wondering if it's changed the flow, has it created longer lines or is it just better for the customer because they're engaged with an associate?

Operator:

Ladies and gentlemen, that is all the time we have for today. We would like to thank you for your interest in Dollar General and your participation on today's conference. You may disconnect your lines at this time or log off the webcast and enjoy the rest of your day.

Moving to our financial outlook for fiscal 2024. While we continue to make progress in our Back to Basics work, the full benefits from these actions will not be realized in a single quarter, and we anticipate they will build as we move throughout the year. With that in mind, we expect the following for 2024:

net sales growth in the range of approximately 6% to 6.7%, same-store sales growth in the range of 2% to 2.7% and an EPS in the range of $6.80 to $7.55. We currently anticipate an estimated negative impact to EPS of approximately $0.50 due to higher incentive compensation expense. Our EPS guidance assumes an effective tax rate in the range of 22.5% to 23.5%.

Todd Vasos:

Thank you, Kelly. We remain committed to our 4 operating priorities of driving profitable sales growth, capturing growth opportunities, leveraging and reinforcing our position as a low-cost operator and investing in our diverse teams through development, empowerment and inclusion.

Matthew Boss:

Congrats on the improvement. So Todd, I think it would be helpful if you could maybe speak to the top line and traffic self-help improvement that you're seeing, just given the volatile macro backdrop. So as you break down your 2024 comp guide, could you elaborate on the Back to Basics strategy? What's working today that supports the first quarter comp guidance relative to maybe incremental opportunity that you see potentially building throughout the year, particularly in the back half?

Operator:

Our next question is from Simeon Gutman with Morgan Stanley.

Todd Vasos:

Yes, Simeon, thank you for the question. I'll start and then pass it over to Kelly for that second piece.

Kelly Dilts:

Yes. No, I think Todd told you all the reasons that we really believe that we're strengthening our foundation for long-term growth. And we really believe that this business is going to return to 10% to 10% plus EPS growth on an adjusted basis over the long term.

John Heinbockel:

Todd, I wonder if you can address the mini-market format, your thoughts on potential -- how many stores you think you could have if we're talking several thousands. And then remind us of the economics of that. I know it's relatively new. But when you think about whether it's sales per store, sales per foot, 4-wall margins, how that might look versus other formats that you use?

Operator:

Our next question comes from Rupesh Parikh with Oppenheimer.

Todd Vasos:

Rupesh, let me start, and I'll pass it over to Kelly. Yes, as we look out into 2024, we do believe that the promotional environment will have an uptick here. We believe that it will revert closer to where pre-pandemic levels were. In 2023, we saw an increase as well. So this isn't an immediate left- or right-hand turn here. This is what we had anticipated, quite frankly, over the last couple of years that as we enter '24, we would probably start to see this. And by the way, I think our CPG partners, and I'm sure you've seen, have signaled this for quite a while now in that they need to move units and through that, encourage, if you will, some of that promotional activity to occur.

Kelly Bania:

Just wanted to talk a little bit more about inventory. I think the total inventory was up and with the decline in discretionary inventory, I think it means that the consumable inventory might have been up maybe 19% or 20%. So I was wondering if you could just talk about that, if that's related to SKU changes. And just in general, when do you expect to get into a normalized inventory position really across both categories?

Charles Grom:

I just want to circle back a little bit on Simeon's question, but just looking at it from the margin angle. It looks like operating margins this year are going to finish in the high 5%, low 6%, if we back out the incentive accrual. So when you look back to pre-COVID, you guys were running in that, call it, high 7%, mid-8% range. Just curious when you look ahead, now that the business is starting to stabilize, how quickly you think you could get back to those levels? And when you look at the P&L, what are the key ingredients to get you there?

Corey Tarlowe:

Great. You've seen now positive traffic for 2 quarters in a row, I believe. I was curious to get your thoughts. And within your outlook, what's embedded for traffic and ticket within your guide? And then if you could also maybe just touch on what you're expecting ahead from a wage standpoint and what's embedded in your guide as well there?

Operator:

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

Todd Vasos:

Thank you, Kevin, and welcome to everyone joining our call. Let me start by saying how excited I am to be back at Dollar General. I have a deep passion for this company and for the customers we are privileged to serve. I continue to believe in this model, our future growth prospects and our ability to deliver value and convenience for our customers, a positive experience for our employees, and long-term value for our shareholders.

Operator:

[Operator Instructions] Our first question comes from Rupesh Parikh with Oppenheimer.

Todd Vasos:

Yes. Thanks for the question. I'll take the second part of that and then pass it over to Kelly. We hear a Dollar General have gone back to the basics. You heard that in my prepared remarks, and I have to say, it has truly energized this company at all different levels.

Simeon Gutman:

Welcome back, Todd. When you rejoined, you talked about you having an opportunity to revisit the financial profile of the business. And if there was a time to look back and reset and invest deeper that you could take that opportunity. As the business looks to be forming a bottom in margin and thinking about getting to 7% or plus in a reasonable time frame, do you have any updated thoughts on that? Does it make sense to lean in so that when you start building back, it builds back sustainably, do you think the business needs a little more investment than you thought 1.5 months ago?

Operator:

Our next question is from Matthew Boss with JPMorgan.

Kelly Dilts:

Yes. No, absolutely. And so an 18% return in this environment is fabulous, and Todd noted it, it's still a great use of capital. The new unit economics are still very strong as we move into '24. And it has a great payback period still of less than 2 years.

Operator:

Our next question is from Seth Sigman with Barclays.

Todd Vasos:

Thanks, Kelly. And as you look at our results in Q3 and how that relates to any activity around clearing this inventory, I would tell you that I feel very good about the balance here. While there was some activity there, actually, some of the bigger activities is really slated for Q4, if needed.

Operator:

Our next question is from Michael Lasser with UBS.

Todd Vasos:

Yes, thank you, Michael. As both Kelly and I have both said, I don't see anything that gets in the way longer term to getting back to some of our historical ways that we return to our shareholders and our customers. We feel that we're on the right track with our back to basics moves here, both in our labor investments, in our inventory investments as well as in our supply chain and merchandising.

Katharine McShane:

We were wondering how you would frame the risk of deflation across your box into next year? And how do you think about the puts and takes across the P&L as a result?

Operator:

Our final question is from Chuck Grom with Gordon Haskett.

Todd Vasos:

Thank you, and thanks for all the questions and your kind words for welcoming me back. As I said last year that serving this team at Dollar General has been the highlight of my professional career, and I feel the same sense of honor today.

Operator:

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

Jeffery Owen:

Thank you, Kelly. Last quarter, we introduced our DG Forward strategy, which is how we will position Dollar General to be a force for opportunity for our customers, associates, communities and shareholders. DG Forward is an execution and innovation strategy, and we remain focused on driving execution through our operating priorities, including driving profitable sales growth, capturing growth opportunities, leveraging and reinforcing our position as a low-cost operator and investing in our diverse teams through development, empowerment and inclusion.

Our third area of strategic focus is to fuel our growth. These efforts are comprised of strengthening and modernizing 3 critical components to improve execution:

our supply chain, our operating model and our IT foundation. We plan to fuel our best-in-class growth by investing in high-return projects and resources to enable our team to execute at the highest levels to serve our customers. Within our supply chain, we have made significant progress adding capacity and increasing the productivity and efficiency of operations within our distribution centers. And with 3 additional facilities under construction in Colorado, Arkansas and Oregon, we are on pace to add significant incremental capacity in 2024.

Operator:

[Operator Instructions] Our first question comes from Michael Lasser with UBS.

Jeffery Owen:

Thank you, Michael. This is Jeff. On the labor front, I'll start with that. We feel really good about the labor investments that we've made. I think you got to keep in mind at Dollar General, we've invested in wages and have a strong foundation for quite some time. And really at store level, what's important is stability in the supply chain. And when you have stability in the supply chain, that leads to stability inside the store. And so now that we're seeing our supply chain which, quite frankly, we've had some significant challenges over the last couple of years stabilizing, we're seeing that show up in more stability inside the store.

Kelly Dilts:

That's absolutely right, Jeff. And just to give you a little bit more color on the labor and what gets us comfortable there. We did pull forward a significant amount of our investment into Q2 so that we could do what we always do here at Dollar General, which is test and learn. And so as we went through that process, we really like, to Jeff's point, the smart teams and what that was paying off. But on the labor hours piece, we did a lot of work around just various store attributing, understanding what the optimal level was of the inventory -- of the labor hours associated with the stores. And so we feel like we did get to that optimal level of investment.

Kelly Dilts:

Yes. I'd say, as usual, we won't give '24 guidance. But what I can say is everything that we're doing is focused on the long term and delivering results and delivering what we need to deliver for our customers. So we feel good about the investments that we're making, the ability for those to set us up for '24 and beyond. I'd say this model got, and you pointed it out, just an incredible history of delivering results. And so we feel good about getting back to driving profitable sales. And we're going to strengthen our foundation and continue to focus on being a low-cost operator. I think that the actions we're taking are really only going to strengthen that great business model.

Operator:

Our next question is from Chuck Grom with Gordon Haskett.

Jeffery Owen:

Yes. Thanks, Chuck. This is Jeff. Our real estate model continues to be the core strength of this business. And I am very, very pleased with the new store returns we're seeing, also the pipeline that we have. And our format innovation really is what's allowed us to really cater to communities. This larger store, we like the productivity we're seeing. And I'm going to tell you, the operational excellence that we're going to return to, especially with the investments we just announced, is only going to benefit not only the core, but it will benefit our new store opportunities as well.

Charles Grom:

Okay. Great. And then for Kelly, just looking at the change in the guide, can you help us think about the shape of the back half in a little bit more detail and a little bit more context between the third and the fourth quarter? I guess, would you expect the third quarter comps to be outside of the band that you provided, the down 1 to up 1? And any help on how much compression we should expect to see in both the gross margin line and operating margin line in the third and fourth quarter just so we can true up our models.

Operator:

Our next question is from Matthew Boss with JPMorgan.

Jeffery Owen:

Thanks, Matt. On the customer, she still is challenged, and we talked about that in the first quarter and that continues. Our customer, what she's telling us is that certainly as gas prices are less than last year, but they're accelerating throughout 2023, and she's still feeling the headwinds of the SNAP reduction and also the lack of tax refunds. And her savings are gone. And so certainly, she is still living with the inflationary pressure. So certainly, the customers are challenged. But quite frankly, our customers is frequently challenged and we know that. And we've made actions, and I'm very pleased with the actions we took to help her in her time of need, which is exactly why we did it in the first quarter. So we feel good about our ability to offer value to her and also be there for her.

Kelly Dilts:

Yes. So I'll start with the structural piece first and break it down a little bit between gross margin and SG&A. And so we really think that the current headwinds are more transitory, specifically when we talk about shrink and damages and markdowns. We think we're well positioned on supply chain efficiencies with structural improvements on the horizon, as we talked about a little bit with the automation piece of that and certainly the private fleet continuation. DG Media Network should provide significant gross margin opportunity as well and, again, DG Fresh and NCI as we move forward and maybe mix into more nonconsumables over the next couple of years. We also continue to see some opportunities in private brands.

Kelly Dilts:

Yes, absolutely. So I think just going through priorities, we still believe in the capital allocation priorities that we've laid out, making sure that we're investing in the business and high growth opportunities, as obviously our first priority. Next would be dividend payments and then, of course, any share repurchases with the remaining cash available for that. You're right on the leverage ratio. Right now, we're above our target. The good news here is that this model has a strong history of generating significant cash flow, and we continue to believe that, that strength will continue over time. We think this leverage ratio will probably be with us for a little while, but we are working to get back to our targeted leverage ratio in the near future.

Simeon Gutman:

I wanted to first ask around the comps and where they're performing. If you could put it all together and summarize what you attribute to some of the underperformance, too. It does sound like traffic is underlyingly okay and it's just lapping some tickets. Curious how you diagnose or rank pricing, if it's merchandising, anything related to the stores. So how should we think about that?

Simeon Gutman:

Fair enough. And then as a follow-up, there's labor investments and you're going to clear some merchandise, it sounds like, in a couple of places. It sounds like the new stores are doing well and the prototypes are great. Just thinking about managing the business from a practicality standpoint. Is slowing stores even a consideration just temporarily so that the leverage is managed properly? Nothing to do about how the stores perform in the out years, but just thinking about balancing the SG&A to make the leverage point a little bit lower.

Rupesh Parikh:

So I wanted to go back to the commentary on the $170 million of investments. I was curious what you view as more onetime in nature versus permanent.

Kelly Dilts:

We have a high confidence level that we're going to deliver in this range. And really, the width is around the sales piece primarily, Rupesh. And just how quickly the customers are going to respond to the actions that we're taking. I mean, we feel good about getting back to operational excellence, that we're doing all the right actions and taking all the right actions that we need to take. And it will just be a function of her response to us. But we'll be ready, and we think after a couple of quarters we'll be back to it in 2024.

Paul Lejuez:

Curious, what was the inflation impact in 2Q versus 1Q? And what are your expectations for inflation in 3Q and 4Q and the consumables business specifically? And just how has that changed versus how you were thinking 3 months ago? And then just one clarification. I'm sorry if I missed it, but are you expecting a positive comp in 4Q? And I'm just curious what your transaction versus ticket assumptions are around that.

Operator:

We have reached the end of the question-and-answer session. I would now like to turn the call over to Jeff Owen for closing comments.

Operator:

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

Kevin Walker:

Thank you, and good morning, everyone. On the call with me today are Jeff Owen, our CEO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News and Events.

Jeffery Owen:

Thank you, Kevin, and welcome to everyone joining our call. I want to begin by thanking our associates for their dedication to serving our customers and communities this year. I am inspired by this team's commitment to our mission of serving others and the passion they have for helping our customers save time and money every day.

John Garratt:

Thank you, Jeff, and good morning, everyone. Now that Jeff has taken you through a few highlights of the quarter and full year, let me take you through some of the important financial details. Unless we specifically note otherwise, all comparisons are year-over-year, all references to EPS refer to diluted earnings per share and all years noted refer to the corresponding fiscal year.

Jeffery Owen:

Thank you, John. Let me take a few minutes to update you on our operating priorities and strategic initiatives, which have transformed this company in recent years, resulting in strong growth and enhanced profitability.

Operator:

[Operator Instructions] Our first question comes from Simeon Gutman with Morgan Stanley.

Jeffery Owen:

Well, Simeon, thank you for the question. I first want to say, certainly, the last 2 quarters have been challenging. And I can tell you, we're disappointed in our results. This team takes great pride in delivering on our commitments and we've been doing that for the almost 30 years I've been here. And that is something that is not changing. And I can tell you, we have a tremendously deep and outstanding team that's laser focused on executing and innovating over the long term.

Jeffery Owen:

Yes. We absolutely do, Simeon, and that's one of the -- that's a great distinction. Here, at Dollar General, for the 85 years we've been around, the store has always been the company. And our ability to serve local communities is something that we do better than anybody and we take great pride in that.

Matthew Boss:

So Jeff, could you speak to recent behavior that you're seeing from the low-income consumer? Or maybe any changes in the ranking of their priorities from those customer surveys that I know you run regularly?

Jeffery Owen:

Well, thanks, Matt. I'll start, and then I'll kick it over to John. As you think about the customer, one of the good things about Dollar General is we're an all-weather brand. And we've shown over the last 3 decades how we can serve that customer in any economic environment.

John Garratt:

Yes. So in terms of the customer, as Jeff said, we're continuing to see an increasingly economically strained customer, and we're seeing shopping behaviors indicative of this environment.

John Garratt:

Sure. I'll start by saying that our capital allocation priorities have not changed. Our first priority remains investing in the business. When you have high return growth opportunities like new store growth, remodels and our strategic initiatives, that's where we focus our capital.

Operator:

Our next question is from Peter Keith with Piper Sandler.

John Garratt:

Yes. I'll elaborate on SNAP a little bit, and then I can talk about tax refunds and then talk about COLA. In terms of SNAP, it's interesting. You had an increase -- a pretty good increase in the tender over the last few years since the pandemic, as states enacted the emergency allotment benefits. Over the last couple of years, we've seen about 18 states roll off -- some of our key states. And what we saw is with the elimination of this, we saw an offset in other tender methods. And we didn't see an overall impact to our sales.

John Garratt:

Yes. The way to think about this is very significant LIFO charge last year. We don't expect a deflationary environment this year, so we do expect a LIFO charge. But we are assuming a more moderate LIFO charge. So less of a headwind this year.

Operator:

Our next question is from Scot Ciccarelli with Truist Securities.

Rupesh Parikh:

I also wanted to ask on CapEx. So historically, CapEx has been about 3% of sales. And last year and this year, it's about 4%. So just want to get a sense of where you think the normal level of spending could be in a normalized environment as a percent of sales or any other commentary?

Jeffery Owen:

Rupesh, you're right. We are very excited about what we're seeing on our DG Media Network. And quite frankly, our digital acceleration in general. One of the things that we've learned over the last couple of years when we started this journey was how digitally savvy our customer is and how much it helps her to be more connected and more loyal to Dollar General and it shows up in her ability to spend with us.

Karen Short:

And John, sad to see you go. It's been great working with you. I just wanted to go back to the overall algorithm for DG. Obviously, there's noise in '23, and we all appreciate that. But can you just maybe give a little bit of an update on what you think the long-term algorithm should be as we get beyond '23?

Jeffery Owen:

Yes, it's Karen. I'll take the first part of that question, and then John, I'll kick it to you for the algorithm question. But Karen, we don't disclose our average hourly rate. But what I can tell you is, as I said earlier, is we have and we continue to pay very competitive wages. And I think the one nuance to Dollar General that I frankly believe is underappreciated is the ability to come into this company as a part-time sales associate and grow into a career. .

Karen Short:

So is it fair to say or reasonable to think that, that's more of a '24 return? I mean I know you haven't given guidance, but just some...

Operator:

Our final question is Corey Tarlowe with Jefferies.

Jeffery Owen:

Well, Corey, first of all, we are very pleased at the market share gains that we've been able to achieve, both on the consumable and on the nonconsumable segments of our business. And when you think about our customers as well, we're also incredibly pleased with the fact that we were able to increase our productivity with really all segments of our core customer.

Corey Tarlowe:

Great. And then just a follow-up for John. So it sounds like there's a couple of moving parts in terms of the gross margin, specifically as you look out over this year, and I recognize it's a first half, second half story, but could you maybe stack rank the drivers that you anticipate from maybe most important to least important, to be affecting the gross margin line this year? I recognize mix shift is also a fairly prevailing factor in this. So how does that also factor into how you're thinking about the consumables mix shift as we look ahead for the next 12 months?

Jeffery Owen:

I'd like to thank you all for your questions and your interest in Dollar General. And while our operating environment is dynamic for our customer and business, we are staying focused on the things that we can control, which is continued innovation and execution in our business.

Jeffery Owen:

Thank you, Kevin, and welcome to everyone joining our call. I want to begin by thanking our entire team for their ongoing commitment to serving our customers, communities and each other.

Jeffery Owen:

Thank you, John. Let me take the next few minutes to update you on our operating priorities and strategic initiatives.

Operator:

[Operator Instructions] Our first question comes from Matthew Boss with JPMorgan.

Matthew Boss:

That's great. And then maybe, John, on gross margin and just to break down some of the components.

John Garratt:

Sure, Matt. I'll start with the question around the supply chain costs. And as we called out versus previous expectations, the supply chain costs were a significant headwind more than $40 million above our previous expectations for Q3. And we do see this as near-term. And we're making very good progress toward resolving our storage capacity constraints as more capacity comes online.

John Garratt:

You asked about markdowns as well. I didn't want to miss that question. As you look at markdown risk, while up from the unusually low levels last year, markdowns are still well below pre-pandemic levels. If you look at the majority of the inventory growth, it's really driven by inflation.

Operator:

Our next question comes from Simeon Gutman with Morgan Stanley.

John Garratt:

So as you look at the drivers of the additional pressure on Q4, it's the same drivers as Q3, the order is a little bit different. As you look at what we anticipate as the key pressures on Q4 margins is still healthy flow-through, but less than previously expected.

Corey Tarlowe:

Congrats on the continued top line momentum and share gains that you've witnessed.

Jeffery Owen:

Yes, Corey, I'll start and then I'll let John fill in on some of your questions around returns.

John Garratt:

Yes. And just -- echoing Jeff's comments, we're very pleased with the results we're seeing. As he mentioned, we're above pro forma in sales, which puts us ahead of schedule in terms of the IRRs. Again, we target a 20% to 22% after-tax IRR based on the sales. And as we outperform in sales, that puts us a little ahead on the returns as well.

Michael Lasser:

John, I want to hopefully get some frame of reference on 2 factors that are impacting the gross margin. So, a, you mentioned $40 million of supply chain costs that are above and beyond what you expected, does that go to $30 million in the fourth quarter? And if that's in the right ballpark, you used the term of beat, which you can interpret a lot of different ways. I think what most of the market wants to know is, does abate mean you're going to incur $70 million this year that will go away because those are extraordinary costs next year?

John Garratt:

No. No. Thank you, Michael. I'll try and tackle each of these. In terms of the carryover impact of the supply chain costs. We didn't give a specific number on that. It will be less, but still a meaningful impact to us.

Michael Lasser:

Okay. My follow-up question will be less a bit picky. I'm sorry. The -- we've seen now some cost pressure at Dollar General. This follows a significant decline in profitability your largest competitor. Should we take these as onetime event? Or is there anything to say that just the overall profitability of the small box value convenience sector is permanently under pressure or long-lasting under pressure because of some of the competitive dynamics? Because of the shift to consumables and other factors? Or would you expect that this is not a trend that's going to be long lasting?

Paul Lejuez:

Curious on the storage capacity and supply chain inefficiencies. If there was a sales impact during the quarter as well as the cost impact that you talked about. Maybe if you could frame that, also, same question, if you expect there to be a sales impact in 4Q? And related to that, was the pressure any region in particular where you saw the cost and/or sales impact? And how much of a differential was there in terms of the performance of that region versus your others?

Rupesh Parikh:

So just going back to your commentary on shrink. I was curious if you can provide more color in terms of what's driving the higher shrink lately opportunities you guys see to reduce that going forward? If there's any way to quantify how you think about the headwind for Q4 or even what you saw in Q3?

Rupesh Parikh:

Great. And then maybe just one quick follow-up question. So just on trade-in, I know your team expect to trade in to continue into Q3, and I believe Q4 as well. At this point, the trade-in that you're seeing, is that consistent with what you'd see in a recession? Or is it -- would you say it still below what you typically see in downturn?

Operator:

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Jeff Owen for closing comments.

Operator:

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

Rupesh Parikh:

So first, Todd, congrats on all the success over the years. And Jeff and John, congrats on your well-deserved promotions.

Jeffery Owen:

Thank you.

Todd Vasos:

Yes. Rupesh, this is Todd. I'll take that one. We feel great about our price position. I just want to remind everybody, well over a year ago, we took a very aggressive price stance, as you may recall me talking about over the last 18 months or so. And it positions us so well in the pandemic and now exiting the pandemic time frame. And we feel great about where we are on prices against all classes of trade, and of course, against even our chief competitors, we're in really good shape. And obviously, as we continue to move forward with this environment, we'll continue to look at how we service our customer.

Rupesh Parikh:

Great. And then my 1 follow-up question, maybe for John. So there was pretty significant deleverage on more than 4% comp. So anything unusual to happen in Q2 that doesn't repeat for the back half of the year? And then just any more color in terms of how to think about SG&A for the back half.

Operator:

Our next question is from Matthew Boss with JPMorgan.

Todd Vasos:

Yes, Matt, thanks for the question. Yes, I would tell you that as expected, the customer is reacting just like we thought she would. And that is she's shopping closer to need. She's being very intentional in her shopping patterns, as well as her shopping while she's inside the 4 walls of the Dollar General store. It is a little bit more skewed to need based, which we thought would also occur. But the great thing is what we're seeing is that if we do have the right product out there, which we do, on the discretionary side, she's shopping that as well. As an example, our harvest in Halloween is off to a fabulous start, well over what we expected.

Matthew Boss:

That's great. And then maybe, John, on gross margin. How best to think about the components in the back half if we're thinking about mark on LIFO or mix? And then just larger picture, holding the earnings guide today despite the better sales outlook, so is this solely the targeted investments that you cited that's holding back incremental model flow through?

Matthew Boss:

Congrats again, best of luck.

Simeon Gutman:

Probing a bit on the sales guidance for the back half, I recognize that the 1-year comp is guided to accelerate. If we look at the 3-year stack, it looks like Q2 accelerated quite a bit and that the second half actually doesn't imply much of an acceleration. So curious given the trade down and, I guess, where the customer is going, seems to benefit you right now. Any assumptions other than conservatism that you're thinking about in terms of sales for the second half?

Simeon Gutman:

And maybe the follow-up, just honing on the gross margin a bit. Q2 was quite good and at a structurally higher level. Can you talk about the sustainability of this? And if there was some -- maybe some puts in and takes, but it feels like we're run rating at a higher level, and not thinking about guidance into '23, but are the drivers actually accelerating? You mentioned some relief on input costs. Are the drivers accelerating such that this is only going to build from here?

Operator:

Our next question is from Michael Lasser with UBS.

Todd Vasos:

I'll start it out, Michael. I would tell you that obviously, you're zeroing in on our chief competitor there. So I'll just say this that it's been not only a long journey for them, I would say it's been even tougher than that. We've heard over the last 7 years that they're getting traction and they're doing this and doing that, and we're still talking about that. So I think we're still talking about it.

Michael Lasser:

Super helpful. My follow-up question is on the outlook for this trade down. Your comp in the quarter was obviously well above your algorithm, you're guiding conservatively for the back half of the year seemingly so. You have a lot of inventory. Why wouldn't this above algorithm comp continue well into next year, assuming that the macro environment stays where it is, and if it gets a little worse that trade-down benefit will be even greater?

Operator:

Our next question is from Kate McShane with Goldman Sachs.

Todd Vasos:

I would tell you, what we're seeing on that higher-end consumer is that she does shop a more holistic part of the store. And I made mention on the harvest and Halloween as an example, very discretionary, but doing extremely well. And some of that comes from that trade down, right? Because that consumer does have a little bit more money to spend. And as you think about how sticky that customer is, well, dial the clock back just a bit to the pandemic and now coming out of the pandemic, we've retained a lot more of those customers than we thought we would. So we're very happy on that retention. So we know that they're sticky because, again, that consumer -- was that consumer making -- the majority of them making that 50 to 75 range. So this one extends up to 100. But again, the experience is very, very similar to those, for those consumers when they come in. So we believe that, that will be sticky as well.

John Heinbockel:

Congratulations. Todd, I wonder if you can talk to, you referenced this strategic journey, which is one of the most significant things I think you brought in. Where are we on that in terms of the pipeline of things? Well, First of all, I think you're looking out, right, 2 or 3 years with that effort. Where is the pipeline versus where it's been historically, right? Is it fuller? And then where do you think -- you're not going to talk specifics, but when you think about kind of functional areas, right, merchandising, marketing, where do you think there's the most fertile ground, right, to use those strategic ideas to further the DG brand?

Jeffery Owen:

Yes. I would tell you, John, thank you for the question. And I think, we've never been more excited about the future. And to Todd's point earlier, it's not 2 to 3 years out. I mean, one of the things you got to think about is our, first of all, our pipeline for growth. I mean, that 17,000 additional opportunities, 13,000 general stores, 3,000 pOpshelf stores and 1,000 DGX. So First and foremost, our pipeline is extremely robust, and we're very pleased with this larger store format that we've been rolling out. 80% of our stores this year will be in that larger store format, and we're seeing the sales per square foot perform extremely well. So we're very pleased at how our new store performance is beating our pro forma expectations.

Corey Tarlowe:

Congrats to Todd on a successful career with Dollar General, and to Jeff and John for your new elevated roles. So first, there was an announcement intra-quarter about the 3 DC openings out west. Are we to read into that, that there are perhaps the more incremental store opportunity ahead lies in the regions where those new DCs are, in fact, being built out west in the U.S.?

Corey Tarlowe:

Great. And then just a follow-up for John. How are you thinking about your expectations for freight expenses throughout the back half of this year within the overall margin guidance that you've given?

Operator:

We have reached the end of the question-and-answer session. I would now like to turn the call back over to Todd Vasos for closing comments.

Operator:

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

Donny Lau:

Thank you, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; Jeff Owen, our COO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events.

Todd Vasos:

Thank you, Donny, and welcome to everyone joining our call. We are pleased with our strong start to 2022, and I want to thank our associates for their unwavering commitment to serving our customers, communities and each other.

John Garratt:

Thank you, Todd, and good morning, everyone. Now that Todd has taken you through a few highlights of the quarter, let me take you through some of its important financial details. Unless we specifically note otherwise, all comparisons are year-over-year, all references to EPS refer to diluted earnings per share, and all periods noted refer to the corresponding fiscal period.

Moving to an update on our financial outlook for fiscal 2022. Despite the ongoing uncertainties arising from cost inflation and continued pressure in the supply chain, we are confident in the business. As a result, and as Todd noted, we are increasing our sales outlook for 2022 as we now expect the following:

net sales growth of approximately 10% to 10.5%, including an estimated benefit of approximately 2 percentage points from the 53rd week; and same-store sales growth of approximately 3% to 3.5%. Additionally, we are reiterating the remainder of our financial guidance for 2022, which includes EPS growth of approximately 12% to 14%, including an estimated benefit of approximately 4 percentage points from the 53rd week; share repurchases of approximately $2.75 billion; and capital spending in the range of $1.4 billion to $1.5 billion. Our updated outlook reflects our strong year-to-date top line performance and current sales expectations for the remainder of the year as well as updated margin and expense expectations.

Jeffery Owen:

Thanks, John. Let me take the next few minutes to update you on our operating priorities and strategic initiatives. Our first operating priority is driving profitable sales growth. We are off to a great start to the year as we continue to make good progress across our portfolio of growth initiatives. Let me take you through some of the recent highlights.

Operator:

[Operator Instructions] Our first question comes from Karen Short with Barclays.

John Garratt:

Sure. I'll take that question, Karen. With respect to sales -- and with both of these, that's obviously factored in. With respect to sales, feel very good about the raised guidance that we've provided there. We have taken into account that the overperformance was really driven by consumables, so that's been factored into the margin as well. So we continue to feel great about both sides of the business but have reflected the fact that it is more driven by the consumables. And the team has done a fantastic job of proactively adjusting the orders accordingly to minimize markdown risk.

Karen Short:

Okay. And then just to clarify, in terms of April meant 2Q off to a strong start. Any more granularity you could provide on that?

Operator:

Our next question comes from Michael Lasser with UBS.

Todd Vasos:

Yes. Thanks for the question, Michael. I'll take that. And I'll tell you that the consumer, overall, has been fairly resilient through this hyperinflation that we've seen, not only in the products that she has to buy, but the fuel she has to put in her car and other means. So I would tell you that the consumer is holding up well, and it really goes toward what I've talked about all along. And that is as long as she's gainfully employed, that makes the biggest difference in how she shops and gives her that confidence to spend.

Michael Lasser:

And at the risk of being a little bit of a downer, and I apologize for that, one of your big competitors this morning announced they're going to be making some investments to narrow the price gap. Do you think you'll need to take down your prices further and maintain that price gap to continue to enjoy the success that Dollar General has achieved?

Matthew Boss:

Congrats on another nice quarter.

John Garratt:

Thank you.

Todd Vasos:

Yes. Matt, thanks for the question. I would tell you that our initiatives continue to push forward and also drive that top line. So if you think of DG Fresh, that continues to be our top driver. But one area that we have started to talk about recently and we'll continue to hear more and more about is our digital initiative, and I would tell you that, that digital initiative will continue to help propel that top line as well. It's driving not only our current customer but a different cohort of customer into Dollar General, and that is that cohort that is a little bit more digitally savvy.

John Garratt:

Sure. No, great questions, Matt. I'll start with the first part of the question, just around how we're looking at gross margin. I'll start by saying we're very pleased with what we've been able to do to hang on to that gross margin goodness. While we were down about 1.5 points this quarter, we were lapping over 2 points of expansion last year. And if you go back to pre-pandemic levels, we're still 1 point above where we were. I think it really speaks to the impact of the initiatives.

Operator:

Our next question is from Simeon Gutman with Morgan Stanley.

John Garratt:

No. I wouldn't say we see cost pressures getting worse. We mentioned the cadence around the inflation. I would say the moderation is going to be more gradual than originally thought, but we still are seeing moderation. We still expect moderation, and that's why we see that sequential improvement in EPS and overall margins as we move through the year.

Simeon Gutman:

And Todd mentioned that there's some tightening that's happening, that the maybe trade down is starting to pick up steam. Are you willing to share was that built into your plan? Are you seeing it happen quicker than the way your plan was built?

John Heinbockel:

Todd, maybe to start with, right, the business is in a far better place than it was in '08 and '09, right? We did extremely well. How does the recession playbook look differently than back then in terms of -- and how quickly do you play that? What do you have to see to want to lean into that playbook?

John Heinbockel:

And then maybe secondly, right, on your -- the health and beauty assortment, maybe it's too early to tell. But when you look at those items in the basket or the people who are buying them, what are you seeing, right, in terms of frequency of shop, basket size, co-purchases? And that's typically a very loyal customer. Do you think that will drive more frequency? Is that the primary benefit you think you'll see?

Operator:

Our next question is from Rupesh Parikh with Oppenheimer.

Todd Vasos:

Rupesh, it's Todd. Real quickly, obviously, we've seen what others have seen on that. We're in a little different spot, though, and our product mix is much different than the broader retail spectrum. So I would tell you that we're seeing, on average, a lot less cost pressure than what you would find in retail in general. That's number one.

Rupesh Parikh:

Great. And then maybe just one follow-up question. Just on your discretionary categories, just given many of the concerns out there, did anything differ versus your expectations during the quarter? I know weather did have an impact potentially on some of the categories but just curious if you've seen any changes in consumer behavior within those discretionary categories.

Operator:

Our next question is from Kate McShane with Goldman Sachs.

John Garratt:

Yes. It continues to be elevated over pre-pandemic levels. The Thrifty Food Plan is still a benefit there. And while you have some states pulling out of the emergency waivers, it's been very gradual. And so it's still mixing quite a bit higher than norm, just not at the same peak level it was in the middle of last year, but doing very well there, continue to gain share with that customer and serve them very well.

Todd Vasos:

Yes. I would tell you that we actually closed out Q1 with a positive traffic number, which was really good to see. And as I indicated in my opening comments, like what we see on our start to Q2, and I think you can actually take from that, that our traffic number is looking much better than it was. So we feel as we get further and further away from that stimulus lap that John referred to, we believe we've got the right products, initiatives, price points, especially in this environment to drive that traffic long term.

Corey Tarlowe:

Firstly, on international as it relates to Mexico, can you provide an update as to where you are on progress for expansion into that region?

Corey Tarlowe:

That's great. And then just a follow-up question for John. As it relates to capital allocation, how are you thinking about the balance sheet and cash levels, balancing the dividend, close to $3 billion in share repurchases and then $1.5 billion in CapEx?

Todd Vasos:

Thank you, Donny, and welcome to everyone joining our call. We are pleased with our fourth quarter and fiscal year results, and I want to thank our associates for their unwavering commitment to meeting the critical needs of our communities, particularly over the past 2 years of the COVID pandemic.

Matthew Boss:

Great. So maybe to kick off, Todd, with a number of moving pieces between employment and inflation, could you speak to health of your low-income consumer? How do you view the opportunity to potentially take share in this environment? And just drivers of top line improvement that you see as the year progresses within your 2.5% comp guide.

Operator:

Our next question comes from Karen Short with Barclays.

John Garratt:

Sure. I would say, as you think about the 10% plus model, every element of that is very well intact. Starting at the top, we've never had a bigger pipeline of new unit growth with the -- for everybody in discount retail, about 17,000 potential opportunities there, not to mention Mexico.

Operator:

Our next question comes from Simeon Gutman with Morgan Stanley.

Simeon Gutman:

The 20% of the merchandise mix. How do you think about that? Is there debate about changing that?

Michael Kessler:

Right. This is Michael Kessler -- oh. Simeon, you got this?

Todd Vasos:

Yes. Right now, we haven't seen a lot of trade-down yet. The great thing, though, Simeon, is we actually have a lot of that trade-down already embedded in, and I think there'll be more as inflation comes in. And the reason I say it's embedded in is that we are extremely, extremely confident and glad to see that the gains that we got during COVID, so call it the 2020 gains, we've kept a lot more of those customers than we even thought we would have kept.

Operator:

Our next question comes from Rupesh Parikh with Oppenheimer.

John Garratt:

No, great question. There's 2 pieces of that. And we have been, for the last few years, a little above 3%, but rounding down to 3%. This year, we're rounding up to 4%. And there's really 2 things I'd point to there.

Michael Lasser:

There's puts and takes with your margin outlook for this year. But if you assume you take on a little bit of leverage to buy back stock, it could imply that your operating margin is flat to maybe down 20 basis points versus last year. And if that's right, have all the initiatives that you've deployed translated to Dollar General's operating margin now being about 100 basis points higher than it was in 2019? And to what extent could this be eroded moving forward by a return to promotions and discounting in the broader retail environment?

Todd Vasos:

Yes. So Michael, this is Todd. I would tell you that there's nothing that we see that doesn't suggest that our share gains won't start to come back to historical levels as we move through 2022. There's nothing structural that says that our comps won't get back to a more algorithmic level over time.

Charles Grom:

Todd, could you size up for us the impact that in-stocks have had on comps over the past couple of quarters? Particularly in your traffic trends. And looking ahead, where you are on the restoration of those in-stocks.

Charles Grom:

Okay. Great. That's helpful. And then one for Jeff. You called out that sales per square foot in the 8,500 square foot stores is 15% higher than the typical box. I was wondering if you could just unpack the delta, where you're getting that greater productivity from?

Operator:

Our final question comes from Edward Kelly with Wells Fargo.

John Garratt:

Yes. We've seen a modest decrease as we moved through the year. It peaked middle of the year around May. We've seen it come down a little bit as some of the states rolled off the emergency allotments. But with the Thrifty benefits -- Thrifty Food Plan benefit still in place, it's remained elevated. So if you look at Q4 this year versus Q4 last, still well above where it had been, just not quite where it was at the peak in May.

Edward Kelly:

Great. And then just a follow-up on self-distribution. You talked about significant expansion, doubling this year. Can you talk a bit more about the benefits operationally? I think you mentioned significant competitive advantage. Maybe more detail on what you mean there.

Jeffery Owen:

Ed, this is Jeff. First of all, thank you for the question. Our private fleet is something we started several years ago. And I think you nailed some of the reasons why we're so excited about it.

Todd Vasos:

Thank you, and thanks for everyone joining the call and for all the questions. And thanks for your interest in Dollar General. I'm proud of this team, which continues to execute at a high level, even in a consistently evolving environment. As you heard today, we're excited about our initiatives and plans for 2022, which we believe positions us well to grow same-store sales, new stores, operating profit margins and market share over time.

John Garratt:

Thank you, Todd, and good morning, everyone. Now that Todd has taken you through a few highlights of the quarter, let me take you through some of its important financial details. Unless we specifically note otherwise, all comparisons are year-over-year. All references to EPS refer to diluted earnings per share and all years noted refer to the corresponding fiscal year. As Todd already discussed sales, I will start with gross profit.

For 2021, we now expect the following:

net sales growth of approximately 1% to 1.5%; a same-store sales decline of approximately 3% to 2.5%, but which reflects growth of approximately 13% to 14% on a 2-year stack basis; and EPS in the range of $9.90 to $10.20, which reflects a compound annual growth rate in the range of 22% to 24% or approximately 21% to 23% compared to 2019 adjusted EPS over a 2-year period. Our EPS guidance now assumes an effective tax rate of approximately 22%. Finally, our expectations for capital spending, share repurchases and real estate projects remain unchanged from what we stated in our earnings release on August 26, 2021.

Jeffery Owen:

Thank you, John. Let me take the next few minutes to update you on our operating priorities and strategic initiatives. Our first operating priority is driving profitable sales growth. The team did a great job this quarter executing against a robust portfolio of growth initiatives.

Operator:

[Operator Instructions] Our first question comes from Simeon Gutman with Morgan Stanley.

Todd Vasos:

Simeon, it's Todd. I would tell you that our core consumer continues to be in pretty good shape. You're 100% right that a lot of the stimulus money has now dissipated. But I've always said, and our core customer has always said, as long as she is gainfully employed, that is probably the biggest driver of her confidence to spend. And there is no doubt that she is gainfully employed right now and can work as many hours as she may or may not want to. But as we look through the remainder of this year and into next, we believe that she'll continue to be gainfully employed. And with that, will have money to spend.

Simeon Gutman:

And maybe transitioning to the fourth quarter, more of a near-term financial question, it implies that the fourth quarter EBIT margin is going to be pretty below where it was 2 years ago, I think, by about 80 bps, even though year-to-date, you're up nicely versus 2 years ago and even Q3 was as well. So besides the typical conservatism in the way you model, anything else can we speak to discrete incremental expense for investments?

Matthew Boss:

Congrats on a nice quarter. So Todd, the high end of your full year comp guidance implies a 12.7% stack in the fourth quarter. I think that's more than 100 basis points improvement from the third quarter. Any drivers behind the recent reacceleration in business? Is this value in convenience as you cited in the face of rising cost of living for your core consumer? Or is this confidence based on what you've seen in November? Just any color on the fourth quarter so far.

John Garratt:

You're right, Matt. This is John. And you're right. As you look at the implied 2-year stacks, it is a significant outperformance versus pre-pandemic levels. And I'd really point to 2 things. You mentioned and Todd mentioned the retention of the new customers that came into the brand. And the other piece I would point to is the larger baskets, growing our baskets on top of basket growth last year.

Operator:

Our next question is from Michael Lasser with UBS.

Todd Vasos:

Yes, this is Todd. I would tell you that the way we've been looking at this all along this year has been on a 2-year stack basis, right? Because some of our laps are pretty difficult as you know, Michael. But we're happy with where our 2-year stacks are right now on market share. And quite frankly, in some of our key initiative categories like Fresh, it will outpace where we thought it would be on a market share basis.

John Garratt:

Michael, this is John. I'll take the question. What I'll say is it's early to provide specific 2022 guidance, we'll do that on the next call. But as you think about next year, I would tell you, as we said in our prepared comments, we've never felt better about the business model. We feel great about the fundamentals and the initiatives as well as the performance of the real estate, including the new formats that further boost sales.

Operator:

Our next question is from Karen Short with Barclays.

John Garratt:

I'll take that, Karen. If you look at -- obviously, there's a lot of year left, and it's a pretty dynamic environment. Certainly, there's uncertainties that creates -- that we thought it was prudent to keep the range wide, although narrowing it in half and taking the top half of our earnings and sales guidance. But as we looked at the key pressures and unknowns in Q4, certainly, supply chain remains elevated, and we expect that to remain elevated. And it's unclear as the pandemic continues to evolve, what that's going to mean specifically in terms of supply chain costs, but we do believe that's going to remain elevated as well as with the LIFO provision, that also is a pressure.

Karen Short:

Okay. And then just maybe switching gears to unit opportunity. I guess maybe a little more color on why Mexico, maybe what makes the market attractive? Any color you could give on where your first stores will be and how the supply chain will work? And I guess I ask it also in the context of the fact that, as you point out, there's so much growth opportunity domestically. Do you really need to go into another -- or another country, I guess?

Operator:

Our next question is from Kate McShane with Goldman Sachs.

Todd Vasos:

Yes. This is Todd. Yes, the traffic number continues to be a little bit soft. But I would tell you that it definitely has been -- it's sequentially better than it was when you look from Q2 to Q3. And as you continue to think about our core consumer, and this is what's so important to continue always to keep in mind, when times are good for her and she has more money, she tends to come less often and spend more. What we've seen in our basket continue to be pretty strong throughout. And so that always happens with our core customer in better times economically for her, and that's what she's seen.

Katharine McShane:

Okay. And I just want to ask one question on pOpshelf. You had mentioned several times, it's exceeding expectations. We were just wondering if there were certain merchandise categories that have been stronger than expected. And just what the quarter looked like for this concept, given the majority of what you're selling is discretionary?

Operator:

Our next question comes from Rupesh Parikh with Oppenheimer.

John Garratt:

I'll take the first part of that question, Rupesh. I think it's important to note, and Todd touched on this in his prepared comments, that as we look at pOpshelf, we see this as additive to our Dollar General banner growth plans. And the other thing we've noted is we see over time, as many as 3,000 additional store opportunities from this, incremental to the 13,000 DG banner opportunities. We're accelerating it rapidly, effectively tripling the number of stores next year as we add 100 on top of 50, and then look to have 1,000 by the end of 2025.

Jeffery Owen:

And Rupesh, I'll talk about the store-within-a-store concept that you mentioned, like pOpshelf, we're very excited about what we're seeing here as well. This is obviously very new here, just been in stores just a few months. But very pleased with what we're seeing again from the customer. And when you think about this store-within-a-store concept, really what it is able to do is it takes about 70% to 80% of the pOpshelf assortment and right inside this Dollar General Market.

Paul Lejuez:

Can you talk about what you tend to see when a drug store closes in your trade area? Any quantification of any lift that a nearby DG store might get?

Todd Vasos:

Yes. This is Todd. I'll take that. If you think about the drugstore business, the drug business has been our biggest donor of share over the many years, we've been very vocal about that. And with our health initiatives, we continue to gain more and more share from consumers around health and beauty in general. And so when any competitor, as you can imagine, goes out in the marketplace, it does -- it gives us an opportunity to garner more share in that area.

Operator:

Next question comes from Krisztina Katai with Deutsche Bank.

Jeffery Owen:

I'll take the first part. This is Jeff. And when you talk about the geographic footprint of our stores, first of all, we're pleased with the balance in terms of our sales performance, and that's one of the real beautiful things about this company is, is just how evenly distributed and how well the company is performing across all geographic.

Todd Vasos:

Thank you for all the questions, and thanks for your interest in Dollar General. I'll wrap up things by saying we're very pleased with the third quarter results, which I think speaks to our strategy, our culture, and the great execution by our team, even in a constantly evolving environment.

John Garratt:

Thank you, Todd, and good morning, everyone. Now that Todd has taken you through a few highlights of the quarter, let me take you through some of its important financial details. Unless we specifically note otherwise, all comparisons are year-over-year, all references to EPS refer to diluted earnings per share, and all years noted refer to the corresponding fiscal year.

Rupesh Parikh:

So Todd, I wanted to go back to one of the comments you made in the script. You said Q3 is off to a good start -- or great start, you said. Any more color you can provide in terms of what you guys are seeing?

Rupesh Parikh:

Okay. Great. And then maybe just one follow-up just on the gross margin line for John. Any more color you can provide in terms of the puts and takes to think about on the gross margin line in the back half of the year? And then if you look at the distribution of freight pressures, would you expect them to persist into next year?

Matthew Boss:

So Todd, maybe could you speak to new customer acquisition that you're seeing today coming out of this crisis? Maybe if we compared it to customer acquisition or customers that shop Dollar General for the first time coming out of the financial crisis. And with that, if you think about the behavior that you're seeing near term, how would you map out traffic versus basket moving forward, just again, given the current customer behavior that you're seeing today?

Jeffery Owen:

Thank you, Matt. This is Jeff. I'm really proud of the team's ability to really, as you know, they do such a great job of knowing what the customer wants, talking to our customers, but also our category management skills, and our supply chain and our operators give us a lot of flexibility to be able to serve that customer the way she wants to be served. And so very pleased with our DG Fresh rollout and the ability that gives us to continue to broaden that assortment in that very important category for that customer. So very pleased that the gains that we're seeing there.

Operator:

Our next question comes from Simeon Gutman with Morgan Stanley.

John Garratt:

Yes, Simeon, I'll start by saying that we feel great about the fundamentals and I've never felt better about the algorithm. I'm not going to obviously give any specific guidance on 2022 as we don't normally at this point. And obviously, things are fluid in terms of the duration and depth of the pandemic and how long these inflationary pressures persist.

Simeon Gutman:

Okay. And then the follow-up is regarding the second half, the SNAP and child care tax credits, how much, if any, is factored into your second half top line guide?

Karen Short:

I just -- to the guidance and the implied second half. So you obviously raised your top line guidance for the full year, but not obviously raised in the second half. But when we look at the guidance for the EBIT margin implied guide for the second half, that's come down despite the higher sales. So I realize you did call out 1 or 2 things, but I still can't get it to quite account for the change in what the implied EBIT margin guidance is for the second half. So maybe a little more color there. And then I had another big picture question.

Karen Short:

Okay. That's helpful. And then I guess there's kind of this view that in general, that the lower-end consumer will really struggle next year as all these benefits lap. And I think there's some perspective that, that will negatively impact you disproportionately. I'm not sure I agree with that. But how do you think about the puts and takes to DG, if that is true in general in terms of your core customer feeling much more challenged?

Operator:

Our next question comes from Michael Lasser with UBS.

John Garratt:

Yes. In terms of -- when you strip out the noise of the freight costs, it is the same fundamental drivers, and we continue to see huge benefits from initiatives like DG Fresh, NCI. And again, we've been talking for several quarters around as we kept calling out the 3 biggest drivers, it was lower product costs associated with DG Fresh. It was lower markdowns and favorable mix, and a big driver of that was NCI. So we're continuing to see those benefits. They're continuing to grow. I don't want to give a specific number on that, but I would say, that continues to be the biggest drivers of -- when you strip out the noise of what's been the biggest levers to improve our gross margin.

John Heinbockel:

Todd, I got two, but I want to start with -- you guys have always said the biggest share donor to you are the drug stores. So I'm curious about your thoughts on health care. And then in particular, when you think about services, product, maybe is there an opportunity to partner with independent pharmacists in a way? How do you think about the sources and magnitude of that opportunity? Does that rise to a NCI type of opportunity do you think in magnitude?

Todd Vasos:

No, John, we've got a smaller version of the DG Market already. As a matter of fact, we continue to grow that. And that -- the genesis of that was the Walmart Express stores that we bought back a few years ago. And we've cultivated those 44 stores we bought and have grown that format as well. We don't talk about it a lot, because we believe that over time, it could be a big piece, though, of our rural strategy, especially you just mentioned in that combo piece.

Operator:

Our next question comes from Kelly Bania with BMO Capital.

Todd Vasos:

Yes. I would tell you that the majority of the headwind is coming from the import side of that equation. We have seen some tightness in the domestic market, but pretty manageable overall there. It really is the import side that we feel is the headwind here.

John Garratt:

Yes. What we have seen is when you look at the employee environment, I'll start with that. What we initially saw as those states rolled off the enhanced unemployment benefits. What we did see was an initial nice pickup in applicant flow and staffing. The good news now is we're seeing that across the system. And so it's hard to discern that impact now because everything is up. And so that's been helpful.

Operator:

Our last question comes from Michael Montani with Evercore ISI.

Todd Vasos:

Yes. I would tell you, Michael, I think the discretionary headwind that we talk about really stems from the robust number we had last year. Last year, other retailers were either shut down still, limited hours, one-way aisles. I think you remember all of that. We were pretty much in full swing last year, helping out all the communities that we serve. So it was really on a 2-year stack basis, we couldn't be more happier or proud of our discretionary business. As a matter of fact, feel very robust about it going into the back half of the year and in years to come because of our NCI initiatives, because of our pOpshelf initiatives and many other things that we're working on.

Michael Montani:

Okay. Great. And then just wanted to clarify on the 2-year traffic stack for 2Q and 1Q. Was 2Q a high single-digit decline on traffic, if you do a 2-year stack? Just trying to see how that's been trending.

Todd Vasos:

Well, thank you very much for all the questions, and thanks for your interest in Dollar General. I want to start by saying how proud I am of this team, which continues to execute at a high level, resulting in another great quarter.

Jeffery Owen:

Thank you, John. Let me take the next few minutes to update you on our operating priorities and strategic initiatives. Our first operating priority is driving profitable sales growth. We are off to a great start to the year as our team continues to drive strong execution across our portfolio of growth initiatives.

Our third operating priority is to leverage and reinforce our position as a low-cost operator. Over the years, we have established a clear and defined process to control spending, which governs our disciplined approach to spending decisions. This zero-based budgeting approach, internally branded as Save to Serve, keeps the customer at the center of all we do while reinforcing our cost control mindset. Our Fast Track initiative is a great example of this approach where our goals include:

increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability. We continue to be pleased with the labor productivity improvements we are seeing as a result of our efforts, both around rolltainer and case pack optimization, which have led to even more efficient stocking of our stores.

Simeon Gutman:

My first question is on the business, a look maybe 1 year later or 1 year after this COVID started. Can you talk about the traffic? I know the rural store bases across retail seem to do well. Can you talk about how you're doing on the lap? And then anything changing in the basket that you're seeing, whether you're doing well and still in the consumables or how the basket may be evolving?

John Garratt:

Yes. In terms of -- you're right in terms of the stack in terms of the cadence. If you look at the cadence of the quarter, it picked up nicely with the onset of the stimulus, where we're very well positioned to get more than our fair share of that. You did see sequentially on a 2-year stack basis, it moderates somewhat but remain very strong and very strong across the board when you look at 2-year stacks, both on the nonconsumables as well as the consumables but particularly when you look at the nonconsumables, just a fantastic 2-year stack as we shared.

Operator:

Our next question comes from the line of Matthew Boss with JPMorgan.

Todd Vasos:

Yes, Matt, I'll try to weave all that in. But I would tell you that we're very happy with what we see on that customer acquisition side. Let me try to go to one part of your question, that is financial crisis coming out of that compared to what we are seeing now on the back side of COVID. Very similar from the standpoint that, that consumer is still very engaged. I think the biggest difference here is the amount of stimulus that is in the system right now.

Todd Vasos:

Yes, you heard Jeff's prepared remarks. But if I step back and take a look at NCI as an example, we'll be completely rolled out by the end of '22. So I would tell you, we're probably halfway through the game as we go through this year and then into next, which feels really good.

Matthew Boss:

Great. It sounds like a lot of balls still to play. Best of luck.

Operator:

Our next question comes from the line of Karen Short with Barclays.

John Garratt:

Yes. So if you look at May, we gave the May -- through the 23rd, comp sales were down 7%, but obviously, as we mentioned, a pretty strong 2-year stack in the 14th. There was a question also in terms of did that month-to-date differ from the full month, and it didn't change much at all. So strong performance continued and we saw continued strength in our nonconsumables, but also the consumables when you look at a 2-year stack, so very strong performance from both sides of the box.

John Garratt:

Yes. Obviously, we're not giving '22 guidance just yet. But what I'd tell you is this, is you look at the performance in gross margin. We've delivered 8 consecutive quarters of gross margin growth, up 208 basis points this quarter, lapping 49 basis points this quarter last year. And when you look at the drivers of that, again, there was some tailwind from nonconsumables from the stimulus.

Edward Kelly:

Nice quarter. Maybe the first one turns out to be a little bit of a follow-up now. But as it relates to product cost inflation, can you just talk about what you are seeing and what you're expecting from product cost inflation standpoint, especially in consumables? And then what are your expectations for pass-through? And to what extent are you in the driver seat? To what extent do you kind of need to follow what Walmart does? Are you seeing anything out there to suggest that you wouldn't be able to pass through higher product cost inflation if that happens?

Jeffery Owen:

Ed, we have seen some pressure as many retailers have said. But you know what, I'm so proud of what our team has done to respond. And certainly, in April, we announced our national hiring event with a goal to hire up to 20,000 additional employees. And I'm very pleased that already we have beaten that goal by 50%. So I think it points to the thing we've said all along, and that is Dollar General is such an amazing place to start a career.

Michael Lasser:

Your 2-year compound annual growth for consumables grew 12% in the fourth quarter -- 12% in the third and fourth quarter last year. You grew [ 11% ] in the first quarter [indiscernible] only by 100 basis points. How much of that slowdown would you attribute to consumers going back out to eat and so they don't need to visit Dollar General as often for those [ same ] interests? Or how much is it your expectation that some of that is due to consumers got a $1,400 check at least. And so they might be going to Walmart or Target or some other discretionary retailer and rolling up on a big-ticket item, and while they're there, purchasing other goods that's taking away a trip from Dollar General?

Michael Lasser:

The question is your 2-year compound annual growth rate for your consumables business slowed modestly from 4Q to 1Q. How much do you attribute that to the people going back out to eat so they don't need to fill in [indiscernible]? Or they got a $1,400 check, so now they're going to Walmart to buy a TV and while they're there, they're filling up their basket, which may also be taking away a fill-in trip from DG.

Michael Lasser:

Got it. On the gross margin, 200-plus basis points, John. You did provide the order of magnitude. But could you put a quantification around how much of the gross margin was due to factors that have been driven by your initiatives like DG Fresh, NCI, which should continue? Is it 100 basis points over the next couple of quarters versus other factors that might be temporary such as mix or lack of promotions within the environment? And are you already starting to see more promotions come back such that, that could be a risk factor to offset those factors that you have within your control over the next few quarters?

Todd Vasos:

Yes. We watch this very closely, Michael. And I would tell you, John hit it right on the head, and that is we're seeing a little bit more promotional activity than we did last year because it was absolutely none last year. But it is substantially, substantially lower than it was in 2019. And so I would tell you that, that tame promotional environment that we've been talking about even prior to the pandemic and through the pandemic still persists. We have not seen that whatsoever.

Rupesh Parikh:

So my first question is with the comp guide. I was curious how you guys are thinking about traffic for the balance of the year.

Todd Vasos:

I'm sorry, what was the question?

Todd Vasos:

Oh, surprise. Yes. I would tell you that we're very happy with what we're seeing. I believe that the biggest surprise probably was when you launch a brand from ground zero, you don't normally see the amount of traction and sustained traction that we are seeing and repeat customers that we're seeing.

Scott Mushkin:

Seeing that pOpshelf, it's just an insane format, one of the best I've seen in about 20 years, so I look forward to hearing more about it. But my actual question is on DGX, you guys didn't mention it. Maybe not as much sizzle as the pOpshelf but seems like it almost could supplant the normal convenience stores. It's about 10,000 7-Elevens. And I look at that store and say, "Gosh, like, why would I ever go to a 7-Eleven if there was a DGX in the neighborhood?"

Scott Mushkin:

And if I could have a follow-up -- I guess I get a follow-up. On the pricing side, kind of taking that and turning it on its ear a little bit. I mean if you look at what's going on in your business, you obviously talked about gross margin expansion possibilities as well as labor efficiency possibilities and, of course, the limited SKUs you guys offer. Why wouldn't I think that you can use -- and we've seen this, our pricing surveys kind of coming -- the gap coming down with Walmart. Why wouldn't we see that continuing? Like you have a lot of levers to pull.

Operator:

Thank you. Ladies and gentlemen, this concludes our question-and-answer session and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.

Donny Lau:

Thank you, Donna, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; Jeff Owen, our COO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events.

These factors were partially offset by:

increased transportation and distribution costs, which were impacted by increased volume, some of which is attributable to the COVID-19 pandemic as well as higher transportation rates and discretionary employee bonus expense for our distribution center and private fleet employees. SG&A as a percentage of sales was 22.2%, an increase of 48 basis points. This increase was primarily driven by incremental costs related to COVID-19, including appreciation bonuses paid to our frontline retail employees and health and safety-related expenses as well as increased incentive compensation expense and hurricane-related expenses. These items were partially offset by certain expenses, which were lower as a percentage of sales, including occupancy costs, retail labor and depreciation and amortization.

With this in mind, we currently expect the following for 2021:

net sales in the range of a 2% decline to flat; a same-store sales decline of 4% to 6% but which reflects growth of approximately 10% to 12% on a 2-year stack basis; and EPS in the range of $8.80 to $9.50, which reflects a compound annual growth rate between 15% and 20%, or between 14% and 19% on an adjusted basis over a 2-year period, which is well above our long-term goal of delivering at least 10% annual EPS growth on an adjusted basis. Our EPS guidance assumes an effective tax rate in the range of 22% to 23%.

Jeffery Owen:

Thank you, John. Let me take the next few minutes to update you on our operating priorities, including our strategic initiatives and plans for 2021. Our first operating priority is driving profitable sales growth. The team did a fantastic job in 2020, executing against our portfolio of growth initiatives. Let me highlight some of our more recent efforts as we look to further build on our progress in 2021.

Operator:

[Operator Instructions] Our first question today is coming from Michael Lasser of UBS.

John Garratt:

Yes, so I'll tackle both those questions, Michael. This is John. First of all, I'd say we're really pleased with what we did in 2020, expanding our operating margin 223 basis points. We didn't give specific guidance on operating margin or the components. But we did call out that some of the headwinds, the biggest headwind being the SG&A deleverage that goes along with lower comp sales this year.

Michael Lasser:

Understood. That's very helpful. And my second question is very myopic. And we're all just trying to figure out what's going to happen as we get through the next several months. And if we just take the math of down 16% versus the 34.5% in March of last year, it would imply a high teens 2-year stack. So can you give us some flavor for how March unfolded last year? Have you -- are you just now entering the toughest compares within the month such that a high teens 2-year stack would be kind of a false positive indication on what to expect over the next few months?

Michael Lasser:

That certainly does. Good luck.

Simeon Gutman:

A couple of questions. I guess, first, on the comps. The 10% to 12% that you mentioned in the release on a 2-year stack, it actually felt like that's a doable number going forward if you take all the initiatives. And so -- yet you're still going to have stimulus, at least in the first part of the year, probably now and for a little while longer. And so I guess the top line feels a little conservative in that regard. Just can you talk about that? Any thoughts around it? Why -- if the 10% to 12%, in our view, is doable, why couldn't the top line end up being a little bit stronger?

But we did note that -- and it's based on what we know, but what we did note was that we didn't include the impact of stimulus because it's really relatively unknown what impact it will have, to what degree it might help. So that's not taken into consideration in the guidance. It could be an upside. I hope it is. But there's just a lot of uncertainty when you think about:

one, compared to the previous stimulus rounds, which helped us, the economy is opening up now more. And so we are competing with other segments of the economy outside of retail for that share of wallet. So how much we get is uncertain.

Simeon Gutman:

Okay, that's helpful. And then my follow-up, and maybe take another shot at something Michael just asked. If you look at the gross margins versus 2019, and John, you mentioned some transportation costs, is there any reason why they shouldn't be higher than 2019?

Matthew Boss:

So Todd or John, maybe on the same-store sales acceleration to the mid -- that we've seen so far, what have you seen from discretionary versus consumables? And then on the double-digit 2-year stack that you forecasted for this year, how much of the acceleration, relative to the past 2 years, do you believe is driven by new customer acquisition or market share gains? Trying to get a sense for that 2-year stack of double digits relative to mid- to high single digits, the trailing 2 years. How much of this acceleration do you believe is sustainable?

John Garratt:

Yes. I'll tackle both of those. First, in terms of the COVID spend, obviously, we're going to do what's necessary to ensure the health and safety of our employees and customers. The guidance captures the best guess of the spending needs associated with that. That's, of course, going to vary based on the severity and duration of the pandemic. But safe to say, we've built in a considerable reduction of that, assuming an improvement of the situation there. And that's what's captured in the guidance. We didn't give a specific number on that, but it is a considerable step down.

Operator:

Our next question is coming from Scot Ciccarelli of RBC Capital Markets.

So 2 questions:

first, is that a fair assumption? And then related to that, assuming you maintain a pretty steady -- are you assuming that you're going to maintain a pretty steady sales per store cadence for the balance of the year? Or are you expecting a deceleration in kind of sales per store during the course of the year as we hopefully enter a more normalized environment?

Scot Ciccarelli:

But John, just to be clear, like in terms of sales per store, maybe a different way to look at it, did you see much of a change between February and March?

Operator:

Our next question is coming from Karen Short of Barclays.

John Garratt:

Yes. And then to the second part of the question, and I agree with you, there's just a lot of noise in 2021. I think one thing I would point to, as you look at over that 2-year period, lots of puts and takes. But when you get to the bottom line, a 2-year CAGR of 15% to 20%, I think, really speaks to the step-change performance in the top line and the flow-through. It makes you feel good about the future.

Todd Vasos:

Yes. Karen, I would also just say real quick and then get to the next question, is that I feel as good about this business than I have the 12, almost 13 years that I've been here. And the long-term outlook of this business is stronger than ever. And as John indicated, I think once we get through the noise of '21, I believe that algorithm is very much intact. And as you have seen, even prior to COVID, we were running at the top end of that algorithm and many of the components of it. And there's no reason why that shouldn't continue as we can -- as we go long term.

John Garratt:

Well, I think the way to -- yes, I think the way to look at this is, I think we did quantify the impact of the storm on operating profit, and a meaningful piece of that was the sales impact. So if you look at the overall dollars we quantified, about half of that was sales flow-through. So maybe that's the way to dimensionalize that.

Rupesh Parikh:

So I guess, John, first, starting with guidance. I was curious what your team is assuming for the promotional backdrop. And as your trends have turned negative and a number of other players are also starting to turn negative, I was just curious if you have seen any shifts in the promotional backdrop lately.

Todd Vasos:

Yes, Rupesh, I would tell you, from a position of strength last year, we've positioned ourselves to be in the best position in pricing than we've been in many, many years. And so if you take a look at our everyday pricing, we are better than we've been across all channels of trade. And as John indicated, the promotional environment has been pretty stable and tame, and quite frankly, has been that way for 1.5 years. So we feel pretty good about where we are but always reserve the right if we need to help our consumer out, we'll do that. But right now, we don't see that in the near future.

Todd Vasos:

Yes. I would tell you the consumer -- our core consumers always stretch, as you know, but I have to repeat that each time because she really is. And I would tell you that in the last 6 to 8 months, she's felt the stress of this pandemic probably a little bit more than she was feeling in the early part of the pandemic. And in some cases, because again, lack of work or not working that full 40-hour shift to that full-time that she was doing in many cases. And our core consumer is probably a little bit more stretched at this point.

Chandni Luthra:

I wanted to talk about these new banners that you spoke of today. And especially with POP SHELF, you mentioned doing a store-within-a-store concept with signage for both POP SHELF and the Dollar General banner outside. As you think about your core customer, what gives you confidence that the customers will not feel an alienation to the core banner with this double signage outside in a store-within-a-store concept? How do you think about that?

Chandni Luthra:

Got it. And my follow-up is around new customer retention strategy that you mentioned during your third quarter call around -- some strategy around basically retaining those new customers. Could you give an update on that as to what you're doing to retain new customers that you gained during this time?

Operator:

We're showing time for one final question today. Our last question will be coming from Paul Trussell of Deutsche Bank.

Jeffery Owen:

Paul, this is Jeff. Thank you for that question, and we are very proud of our accomplishments with DG Fresh. The team has done a fantastic job of accelerating that rollout and the capabilities that it's providing for us. So to be in 16,000 stores-plus is really an accomplishment. And originally, as we talked about, DG Fresh was all about reducing product costs, improving in-stocks and a broader assortment and we've hit on all 3. So that is performing very well.

John Garratt:

Yes. I'll start by saying our capital allocation priorities haven't changed. And the first priority remains investing in high-return growth opportunities like new store growth, remodels and the strategic initiatives that just provide fantastic returns. Then it's still continuing to pay a competitive dividend, which we recently increased 16.7%.

Operator:

Ladies and gentlemen, this concludes today's event. Thank you for your interest in Dollar General. You may disconnect your lines and log off the webcast, and have a wonderful day.

Donny Lau:

Thank you, Rob, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; Jeff Owen, our COO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events.

Todd Vasos:

Thank you, Donny, and welcome to everyone joining our call. I'd like to start by thanking our associates for their tireless work over the past several months in helping our customers and communities impacted by the COVID-19 pandemic. Despite continued significant uncertainty in the operating environment, our team members have been unwavering in their commitment to fulfilling our mission of serving others by providing affordable, convenient and close-to-home access to everyday essentials, at a time when our customers need them most. I could not be more proud of their efforts. As always, the health and safety of our employees and customer continues to be our top priority.

SG&A as a percentage of sales was 21.9%, a decrease of 62 basis points. Although we incurred incremental costs related to COVID-19, these costs were more than offset by the significant increase in sales. Expenses that were lower as a percentage of sales this quarter include:

occupancy costs, utilities, retail labor, depreciation and amortization, repairs and maintenance and employee benefits. These items were partially offset by increases in incentive compensation expense and hurricane-related expenses.

Jeffery Owen:

Thank you, John. Let me take the next few minutes to update you on our 4 operating priorities. Our first operating priority is driving profitable sales growth. The team once again did a fantastic job in Q3, executing against the portfolio of growth initiatives. Let me highlight some of our recent efforts.

Todd Vasos:

Thank you, Jeff. I'm proud of the great progress the team has made in advancing our strategic initiatives. Let me take you through some of the most recent highlights.

As noted earlier, we are also excited about the recent introduction of POP SHELF and the opening of our first 2 locations, which further builds on our success and learnings with NCI. POP SHELF aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience, delivered through:

first, continually refreshed merchandise, primarily in targeted nonconsumable product categories; second, a differentiated in-store experience, including impactful displays of our offering, designed to create a highly visual, fun and easy shopping experience; and third, exceptional value with approximately 95% of our items priced at $5 or less. Importantly, while POP SHELF delivers many of Dollar General's core strengths, including customer insights, merchandise innovation, operational excellence, digital capabilities and real estate expertise, it is specifically tailored to a different shopping occasion, will primarily be located in suburban communities and initially targets a higher-income customer, potentially unlocking additional and incremental growth opportunities going forward.

Operator:

[Operator Instructions] Our first question comes from the line of Matthew Boss with JPMorgan.

Todd Vasos:

Thank you, Matt. That's a great question because I here at Dollar General, we're always focused on that long term, right? And we believe that through the initiatives that we have in place, including DG Fresh, including our digital assets and Fast Track, including our cooler initiatives that we continue to benefit from and feel that we are still in the early innings of the ballgame on, we feel that those will serve us very well post pandemic. And let's hope that post pandemic comes sooner than later. But as we continue to look forward, we also are encouraged on some of the early initiatives we have around POP SHELF and that concept. Because we believe that there's a fair amount of white space out there for a discretionary format, like POP SHELF.

Matthew Boss:

Great, and then a follow-up maybe for John. On gross margins, if I look at expansion in the last 2 quarters, you've shown 150 basis points plus relative to multi-year second and third quarter historical level. So maybe could you just elaborate on the fourth quarter factors that you mentioned and is the point that we should expect moderation in growth margin expansion? Or do you actually see these headwinds outpacing the tailwind?

Operator:

Next question is from the line of Karen Short with Barclays.

Karen Short:

Okay. If I could just ask one more. Is there any pattern or anything you could point to on performance of rural versus urban stores? And then -- in the quarter, but then also with the acceleration that you saw into the quarter-to-date? Any pattern to point out there other than consumables accelerating in 4Q?