Good morning. My name is Sia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Fourth Quarter 2018 Earnings Call. Today is Thursday, March 14, 2019. [Operator Instructions] This call is being recorded. Instructions for listening to the replay of the call are available in the company's earnings press release issued this morning. Now I would like to turn the conference over to Ms. Jennifer Beugelmans, Vice President of Investor Relations and Public Relations. Ms. Beugelmans, you may begin your conference.

Thank you, Sia, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; and John Garratt, our CFO. After our prepared remarks, we will open up the call for questions. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events. Let me caution you that today's comments will include forward-looking statements about our expectations, plans, future estimates and other non-historical matters, including, but not limited to our fiscal 2019 financial guidance and real estate plans; our long-term performance goals; our planned investments, strategies, initiatives and capital allocation strategy and related expectations; and economic trends or future conditions. Forward-looking statements can be identified because they are not statements of historical facts or use words such as may, should, could, would, will, believe, anticipate, contemplate, expect, assume, intend, outlook, estimate, guidance, plans, opportunities, focused on, long term, confident, potential or goal and similar expressions that concern our strategies, plans, intentions or beliefs about future matters. Important factors that could cause actual results or events to differ materially from those projected by our forward-looking statements are included in our earnings release issued this morning under Risk Factors in our 2017 Form 10-K filed on March 23, 2018, and in the comments that are made on this call. We encourage you to read these documents. 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, except as may be otherwise required by law. During today's call, we also will reference certain financial measures not derived in accordance with GAAP. Reconciliations to the most comparable GAAP measure is included in this morning's earnings release, which as I just mentioned, is posted on investor.dollargeneral.com under News and Events. [Operator Instructions] Now it is my pleasure to turn the call over to Todd.

Thank you, Jennifer, and welcome to everyone joining our call. We ended 2018 on a strong sales note, with a 4% comp in the fourth quarter. While we certainly faced various challenges throughout the year, we believe 2018 was a great year for our employees, our shareholders, and we remained squarely focused on taking care of our customers. As we head into 2019, we are excited to have so many new opportunities ahead of us. During today's call, I will cover 5 main topics. I'll start with key highlights from the fourth quarter results. Then I'll update you on our progress and outlook for our digital and non-consumable initiatives. Third, I'll lay out 2 new strategic initiatives we are excited to be launching. Fourth, I'll give you an update on the results we are achieving with our operating priorities. And finally, I'll finish with our operating plans for fiscal 2019. John will provide you with some 2018 financial highlights, guidance for fiscal 2019 and our perspective on Dollar General's long-term growth. Turning to our fourth quarter and full year 2018 financial performance. We delivered a very strong top line in the fourth quarter, with net sales increasing 8.5% to $6.6 billion compared to net sales of $6.1 billion in the fourth quarter of 2017. For the full fiscal year, net sales increased 9.2% to $25.6 billion compared to net sales of $23.5 billion in fiscal 2017. The strong net sales performance throughout fiscal 2018 was a balance between performance from both new stores and mature stores. During 2018, we continued to gain market share in highly consumable product sales, which was a key driver of our strong sales performance. Syndicated data shows that we had mid- to high single-digit growth in both units and dollars over the 4, 12, 24…

Thank you, Todd, and good morning, everyone. I would like to walk you through the financial results for the fourth quarter and full year, and then I'll take a few minutes to discuss our fiscal 2019 financial guidance. I'll also provide you with some thoughts on our long-term business perspective. Unless I specifically note otherwise, all comparisons are year-over-year. As Todd already discussed sales, I will start with gross profit, which as a percentage of sales, was 31.2% in the fourth quarter, a decrease of 91 basis points. This decrease was partially attributable to higher markdowns. As Todd mentioned, this quarter, we proactively invested in promotional activities to drive traffic and market share, and we believe we remain well positioned against all classes of trade and across all geographies where we operate. That said, pricing is always competitive in discount retail and we watch the environment very closely. In 2019, our strategy is to further optimize our promotional activities as we focus on driving profitable sales and traffic growth. Gross margin in the fourth quarter was also negatively impacted by lower initial markups on inventory purchases, an increase in the LIFO provision, a greater proportion of sales coming from the consumables category, which generally has a lower gross profit rate than our other product categories, and the sales of lower-margin products comprising a higher proportion of sales within the consumables category. Partially offsetting these items was lower inventory shrink. SG&A as a percentage of sales was 21.6%, a decrease of 34 basis points. The decrease was driven by reductions in repairs and maintenance expenses, benefit costs and incentive compensation expenses and lower utilities as a percentage of net sales. Partially offsetting those decreases were approximately $11.7 million in hurricane-related expenses due to 2 hurricanes which occurred during the third quarter…

Thank you, John. I'm proud of the team's execution that led to a strong result this year and feel confident that we're making the right investments and operating decisions that will allow us to extend our runway for profitable growth. Now I'd like to spend a few minutes providing you with an update on the progress we have made on our digital and non-consumable initiatives and outline 2 new transformational strategic initiatives that we are launching. Starting first with digital. In 2019, our digital strategy will remain focused on using technology that further enhance the in-store experience. We are confident that we can use technology to create a more personalized and convenient shopping experience for our customers. In 2018, we launched the DG GO! app, which allows customers to use their phones to scan items as they shop, see a running total of the items in their basket using our cart calculator and then skip the checkout line by using the DG GO! kiosk. The app has been popular with our customers, and through the end of fiscal 2018, we had more than 140,000 downloads and exited the year with approximately 25,000 monthly active users despite only having DG GO! kiosk in approximately 250 stores. Pending performance data, our goal in 2019 will be to expand this offering to more stores. We have engaged with our customers to understand how they are using the app to learn how we might improve it further. One key learning is that our customers are using the cart calculator frequently, even when they're not using DG GO! kiosk to check out. We believe they are using the cart calculator to stay within their budget and optimize their shopping dollars. Based on this, we recently launched cart calculator in approximately 200 stores. Throughout the first…

[Operator Instructions] The first question will come from Vincent Sinisi with Morgan Stanley.

So I just wanted to go, of course, to the incremental investments on the initiatives this year. Obviously, still early stages around Fresh and whatnot. Can you just give us a little bit more of a sense for that $50 million specifically, like how much, at least directionally, of maybe a lift to comps do you think that could provide earlier on? And then how much of that may be recurring as you ramp some of these initiatives going forward? I guess, obviously, everyone kind of on the line today is just saying kind of, okay, a bit below the double-digit growth algorithm for this year. But when can that maybe return, if that's, of course, helpful context?

Okay. A couple of questions there. I'll start with the first one around the initiatives. As you look at the initiatives, we said we see these as being accretive as early as next year. The 2 new ones we talked about are Fast Track and Fresh. We're very excited about both. As you look at Fresh, we see both of them helping the top line and the bottom line. As you look at Fresh, the immediate impact we see from that is helping our gross margin, helping reduce our product cost. Now that does come with upfront expenses, particularly in SG&A, and it's a trade-off for SG&A for gross margin. But we're very excited about what that can do not only to our cost, but then also our flexibility and longer term what that can mean in terms of as we expand our Fresh offering and in-stock availability there, we think that can be a meaningful sales driver. On Fast Track, that has 2 parts to that. You have the self-checkout piece and then you have the one-touch shelf stocking piece. The latter will have a more immediate impact, and we're starting to do that now, and we'll scale that over the course of the year. The self-checkout will take a little bit more time with the technology involved in driving the adoption on that, though. These are sizable investments this year that will pressure the SG&A. But as we look out, we see them as being accretive as early as next year, having a meaningful impact on our overall operating margin, EPS growth and really positioning us with the long term in mind to drive double-digit EPS growth over the long term.

Okay. All right, perfect. that's helpful. And then if I could, last quarter you guys had mentioned, and we've been getting quite a bit of questions around it, just kind of your internal surveys. The confidence was looking a little bit shaky potentially for kind of later this year. It was nice to see, of course, in the release today that ticket and traffic were both positive. So any updates there? Any work, any thoughts around what you see in the basket around the health, that would be great?

Yes, Vinnie. I would tell you, we talk to our core customer each and every quarter. And while she is feeling better about having a bit more money in her pocket, she continues to tell us that it is definitely from productivity, meaning working more hours and in some cases, multiple jobs. But what she is also telling us is that she is feeling a little less confident than she was at the middle of last year to the end of last year, which gives us a little bit of pause from the standpoint that we think that our core customers are starting to weaken a little bit, which obviously we do very well in all economic cycles. So we're positioning ourselves for the back half of the year for a little weaker consumer as we move through the year.

The next question is from Matthew Boss with JPMorgan.

So maybe can you speak to the proactive promotional actions that you took in the fourth quarter? Any higher-level change within the competitive landscape that drove the change? And just how best to think about markdowns in gross margin in 2019?

Yes, I'll start and then turn it over to John for '19. We really went after some targeted markdowns in Q4. As you know, Q4 has the highest traffic count across retail, not only at Dollar General. And we've got a track record here of working the price levers pretty well, and we know which ones to work for the stickiness of the customer, meaning we pulled some promotional levers in the fourth quarter that we believe will sustain that traffic growth into Q1 without having to be nearly as aggressive. And we thought -- we went at it from a position of strength, and we saw a real opportunity to take share as we went through Q4. It did exactly what we thought it would do and positions us very well going into the first quarter here in 2019.

And as Todd said, with this helping drive traffic and taking share and our belief that we can retain these customers, we believe we're very well positioned going into 2019 to further optimize our promotional activity while at the same time driving profitable sales and traffic. So we feel we're very well positioned.

Great. And then just a follow-up on same-store sales. So how best to think about the cadence this year relative to the 2.5% for the year? It sounds like we should anticipate the first half better than the back half just given what you've seen in your surveys. But have you seen the momentum continue in the first quarter despite tax refunds and some pressures that others have cited?

Yes. I'll start by saying the fundamentals are very strong. We're really pleased with the impact that our initiatives are having and the share we're taking. There is a bit of a timing impact to start the year. We talked about the benefit from the acceleration of SNAP payment from early Q1 into late Q4. That did have a bit of an impact on the beginning of the quarter, not necessarily dollar-for-dollar. But I would draw that timing to your attention. Other than that, it's a pretty smooth year in our mind and yes, I think we're firing at all cylinders.

The next question is from Rupesh Parikh with Oppenheimer.

Just going back to your commentary in the press release, just about generally double-digit EPS growth going forward. Is that more of a reflection that this year it's going to be below 10% and you expect to get back to it potentially next year and beyond? Or is there something the changes your confidence in that metric?

No, the comment we made there, and I'll start by saying we continue to see ourselves as double-digit EPS growers over the long term. That comment just meant to say that we reserve the right in some years to make targeted investments to drive that long-term growth and protect that 10% growth.

Great. And then just on gross margins, I appreciate the color that you provided on Q1. It sounds like we should expect as comparisons get easier that, that decline versus what we see in Q1 should progress to get better as the year progresses. Is that the right way to think about the cadence?

Yes, I think you're thinking about that the right way. We talked about a couple of pressures at the beginning of the year. One thing we talked about is changes to inventory replenishment. We've seen a very high correlation between on-shelf availability and sales. And as such, we're making an investment at the beginning in the year bringing more inventory in to make sure we're right in stock. This will have a Q1 price tag due to the impact on product mix, but as we cycle through that, that will normalize. The other thing is as the year progresses, we expect to start to see some benefits from the initiatives we're putting in place like Fresh and others to enhance gross margins. So as you look at the year on a year-over-year comparison, we expect that to improve as the year progresses.

The next question is from Michael Lasser with UBS.

So if you're successful with some of the initiatives that you're rolling out this year, should we expect you to accelerate rollout of them next year such that 2020 would be another year of sub-10% EPS growth?

Michael, thanks for the question. As you know, here at Dollar General, we do everything very methodically, and we make sure that it has a solid return before we move to a broad scale rollout. In saying that, we really like what we see from DG Fresh early on, and we have great confidence in our Fast Track momentum as well, especially around some of the digital efforts that we have to include the self-checkout option that will be coming. In saying that, as John indicated, we believe that these initiatives will become accretive as we move into next year, so it should help offset some of those pressures as we continue a broader scale rollout. A little bit of a pay as you go, if you will, type of a rollout schedule.

So just to clarify, you're looking at 2019 as more of a transitional year into the algorithm over the longer run into next year?

As we indicated, there are start-up costs associated with this. As we start to scale these, as Todd said, it's more of it pays for itself as it goes, and we expect this to be accretive as early as 2020.

Okay. And then could you break down the gross margin from the fourth quarter in a bit more detail? You outlined the promotions. What piece of the gross margin drag was that? And then initial markups are now a drag on gross margin. How did that look?

Yes, walking through the last year, we articulated the specific Q4 drivers. So I guess, stepping back and taking a broader look, if you look at the full year, our gross margin was down 32 basis points. But we're very pleased with the results where we drove traffic, we took share, delivered very good comps. We did invest some margins opportunistically in promotional activity, as Todd mentioned, but it's clearly resonating with our customers. It allowed us to take share that was a very high take rate here, and helped us deliver the sales. And we believe that this will stick and we'll be in a position next year to rationalize these investments. The other impact was the SNAP. While that did benefit our sales with that pull forward, there was a mix impact that came with that, in general, lower mix of those additional sales. And then the team managed through the headwinds of tariff and transportation costs. As we go into this year, as we said, we believe we're very well positioned that we could throttle back to be even more targeted in our promotional activity while still driving traffic and sales. We believe we have opportunities to increase margin over time with the new initiatives, like DG Fresh and the NCI initiative, shrink, where we had 9 quarters of year-over-year improvement, and the other lever that we talked about. We think we're very well positioned.

The next question will come from Peter Keith with Piper Jaffray.

I'd like to dig into the comps that you're getting from new stores and from remodels. Historically, that's been in the range of 1.5% to 2%. But the thing we're seeing with the DGTP acceleration and some of the Fresh initiatives, it seems like there's an accelerated lift. I'm curious if you're starting to move to the high end of that 1.5% to 2% range or you're potentially above it, sort of a structural impact to your comp?

Yes, thanks for the question. I would tell you that we're very happy with not only our new store pipeline, but our remodel relocation pipeline as well, and I think you're thinking of it right in that because of the ramp-up of our remodels, especially in the DGTP format to include produce in many of those stores, we're closer to the high end. I wouldn't say that we have broken out of that at the range that we talked about, but we're more at the high end of that range with some of the work that we've done.

Okay. I did want to dig into a little bit on how you're talking about the accretion benefits in 2020 from the growth initiatives. I guess, in reality when you look back at the last 3 years, and I have guidance for 2016, you really haven't been at 10% earnings growth in any of the years, if you exclude the tax changes. So do you think you will be at 10%-plus by 2020 and that the overall initiatives as a whole will be accretive to next year?

Yes. Just to reiterate that over the long term, we see ourselves as double-digit EPS growers. We're not able to give specific guidance at 2020 at this point, but we do feel very good about the initiatives and their ability to be accretive next year. As you look at the fundamentals of the business model, we feel very good about what we're seeing from our new store growth, with the great returns on the sales from those, with what we're seeing on a comp basis with the performance of the initiatives and the comps we're seeing. We see, as we said, a lot of opportunities over the long term to improve our operating margin. We really look at operating margin overall. And we believe we're making the right investments here to enhance that operating margin. It comes at a little bit of a cost now, but we believe this positions us better for the future. And we continue to generate a tremendous amount of cash, which allows us to reinvest in this business while paying back a significant amount to shareholders through share repurchases. So we don't see the future differently.

The next question is from Ed Kelly with Wells Fargo.

I just want to start with a clarification. When you talked about the impact of SNAP in February not having the same dollar-for-dollar impact, are you saying that the headwind in February was not as big as the benefit that you saw in January?

No, that's exactly what we're saying. We have not seen a dollar-for-dollar impact. I think that really goes to what I talked about earlier, some of those investments we made in markdown being very sticky. And we know our customer very well, and when you get to change her shopping patterns, she sticks with that. And we saw that as we moved into Q1.

And then just curious as to, I know you only have a couple of weeks, but how March has looked given that things kind of normalized there. Refund seems to be picking up. And then just one other question about all this. Did you mention that there was some conservatism built into the comp guidance around the back half of the year? I'm not sure if I heard that right.

I'll take the first one, but we really aren't talking really much about Q1 right now, obviously. But I would frame it this way. We feel very confident in our top line sales due to all of the initiatives that we have in place, including the investment we made in Q4. And just keep in mind, March has an Easter shift in it. I think that's important towards the end of the month. But for us, we'll equalize as we move through April. So we're bullish about the quarter, but we have a lot of quarter left to go. And John, you may want to address the other one.

Yes. As to the timing impact we mentioned, the overall year comp that we guided to reflects our current views of the year.

Okay. And then I had just one quick follow-up for you. On DG Fresh, why now on self-distribution? Can you just help us understand the benefits? What type of margin opportunities here from doing this yourself? Can your stocks improve with more frequent deliveries? And what it tells about your plans for Fresh?

Yes. So why now? I think the best way to answer that is that we continue to expand our cooler program here. It's been one of the biggest traffic drivers and one of our biggest comp drivers that we've seen. We have a series of distributors out there today across the country, and those distributors do a nice job for us. But it comes at a cost, and that cost is very high, as you can imagine. In many cases, it's a full-service program. So we see a real opportunity from a position of strength right now to take that in-house and control your own destiny. And the way we see sales and margin enhancement here is a couple of ways. Number one, on margin, not having to pay that very hefty upcharge. We're going to build a bank, the majority of that with the little labor that we're putting into the stores to help work the goods, again coming off of the full-service program. But margins will be very accretive with this program. And then the second thing is sales. What you're going to see is our ability, one, to stay in stock; number two, longer term what you're going to find from us, as I mentioned, in my prepared remarks, is going to be a different assortment that's going to really take into account a lot of our private brand offerings, which will help our margins and our sales. But also on items that we don't carry today because of the distributor network that we have. So we're very excited about this. This is probably one of the biggest margin opportunities we'll have shorter term to really move the needle here.

The next question will come from Scot Ciccarelli with RBC Capital Markets.

I guess I'm still a little confused on some of the markdown commentary. I know you guys have talked about the pricing environment being pretty benign, and you're comfortable with where your pricing is. So can you help us understand a little bit better why you engage in that promotional activity that you did, number one? And number two, how does it benefit 1Q even as you pull back promotions? I guess, I'm a little confused on that.

Yes, sure. So the way we look at customer and customer traffic again, as I have mentioned, we talk to our customer every quarter. What she was telling us is that she was feeling a little weaker than she was middle of the year, and we took an opportunity from a position of strength to take share. We saw where we could take share in many different [ DMAs ] across the country. And we thought the best way to do that, which turned out to work pretty nicely, was to do it on a promotional basis because we feel very confident in our everyday shelf pricing that we have today. And so we did it on a promotional basis. And we know this customer very well. We know if we could change her shopping patterns, especially in the busy fourth quarter where we have her attention, she is very sticky. She'll stay with us. And I think we've seen some of that as we entered Q1, evidenced by the [ knock ] per dollar to dollar trade-off back on SNAP as an example. So we believe that it did exactly what we thought. And we've said in the past, we reserve the right to go in and make these investments periodically to continue to drive traffic and continue to take share, and that's exactly what we did in Q4.

Got it. That's helpful. And then just curious, was traffic positive kind of throughout the quarter?

Yes, it was pretty stable throughout the quarter. The back half, a little stronger than the first. But I would tell you, we are pleased overall with the traffic in Q4.

The final question will come from Robbie Ohmes with Bank of America.

Todd, I was just hoping you could talk a little bit more about the long-term profit outlook of DG Fresh. So can you just sort of create a picture for us? If you do roll this out over the next 3 to 4 years, how does the income statement change? Are you expecting sort of a secularly higher gross margin and a kind of permanently higher expense ratio? And what are the kind of long-term assumptions about what store sales productivity levels have to be to make this all work on a large-scale basis? And you've mentioned some -- how you're taking more of your distribution in-house a little bit. I mean, does that have to accelerate more significantly to support doing fresh on a very large-scale basis? Maybe just help us understand the 3- to 5-year outlook for how much this could change your entire store base. It's probably more complicated to operate this category as well.

Yes, that's a great question. And I would first start by saying that as we look at the DG Fresh initiative, we see a real opportunity to driving both the top line and the margin. So I would look at it this way. It will be a significant margin driver as we move into 2020 and beyond, and that's really driven primarily off of the distributor cost that we pay today, which has a substantial upcharge attached to it, substantial. And as we work with our vendors, which we've got relationships with all of them, what we're finding in the first 300 stores and the first DC that we put in were substantial reductions in cost of goods to move the product into our own DC and distribute it ourself. So I think you would need to look at it that way. On the top line, I think it will be a meaningful top line contributor as well as we continue to be better in stock because we know how to distribute goods. Fresh, shelf-stable, whatever it may be, controlling our own destiny there gives us high confidence that we can execute at a much higher level than we were seeing across the country. We have some distribution voids, quite frankly, across the country, and we still do with our distributor network because it is so complex and so large. By taking it in-house, we believe it will simplify our network and be able to execute that much better. And as you continue to look out, we see opening these DCs about the same pace as 2019, so an average of 5,000 to 6,000 stores a year for the foreseeable future until we're built out. And we believe that these fresh distribution centers, we will be able to leverage as well some of our dry goods that perhaps we can deliver out of there as well, taking some of the pressure off of our larger DCs. So we believe it's a win-win across the board, which should see substantial P&L ramifications on the positive side as we move into 2020 and then beyond.

Ladies and gentlemen, we thank you for your participation in today's conference call. You may now disconnect.