Good morning. My name is Rob, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General Third Quarter 2020 Earnings Call. Today is Thursday, December 3, 2010. [Operator Instructions] This call is being recorded. Instructions for listening to the replay of this call are available in the company's earnings press release issued this morning. Now I'd like to turn the conference over to Mr. Donny Lau, Vice President of Investor Relations and Corporate Strategy. Mr. Lau, you may now begin.

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. 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 strategy, plans, including, but not limited to, our 2021 real estate outlook, our initiatives, goals, priorities, opportunities, investments, guidance, expectations or beliefs about future matters, including, but not limited to, beliefs about COVID-19's future impact on the economy, our business and our customer, and other statements that are not limited to historical facts. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections, including, but not limited to, those identified in our earnings release issued this morning, under Risk Factors in our 2019 Form 10-K filed on March 19, 2020, and in our Form 10-Q filed this morning, and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law. We also may reference certain financial measures that have not been derived in accordance with GAAP. Reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which, as I mentioned, is posted on investor.dollargeneral.com under News & Events. At the end of our prepared remarks, we will open the call up for your questions. [Operator Instructions] Now it's my pleasure to turn the call over to Todd.

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. We continue to closely monitor CDC and other governmental guidelines regarding COVID-19 and are evaluating and adapting our safety protocols as that guidance evolves. As one of America's essential retailers, we remain committed to being part of the solution during these difficult times. And we believe we are well positioned to continue supporting our customers through our unique combination of value and convenience, including our expansive network of more than 17,000 stores located within 5 miles of approximately 75% of the U.S. population. At the same time, we remain focused on advancing our operating priorities and strategic initiatives, as we continue to meet the evolving needs of our customers and further position Dollar General for long-term sustainable growth. To that end, and from a position of strength, I'm excited to share an update on some of our more recent plans. First, as you saw in our release, we plan to further accelerate our pace of new store openings and remodels in 2021. In total, we expect to execute 2,900 real estate projects next year as we continue to lay and strengthen the foundation for future growth. As previously announced, we recently introduced our…

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 I specifically note otherwise, all comparisons are year-over-year and all references to EPS refer to diluted earnings per share. As Todd already discussed sales, I will start with gross profit, which was positively impacted in the quarter by a meaningful increase in sales, including the impact of COVID-19. Gross profit as a percentage of sales was 31.3% in the third quarter, an increase of 178 basis points and represents our sixth consecutive quarter of year-over-year gross margin rate expansion. This increase was primarily attributable to a reduction in markdowns as a percentage of sales, higher initial markups on inventory purchases, a greater proportion of sales coming from nonconsumables categories and a reduction in shrink as a percentage of sales. These factors were partially offset by increased distribution and transportation costs, which were driven by increased volume and our decision to incur employee appreciation bonus expense. 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. Moving down the income statement. Operating profit for the third quarter increased 57.3% to $773 million compared to $491 million in the third quarter of 2019. As a percentage of sales, operating profit was 9.4%, an increase of 240 basis points. Operating profit in the third quarter was positively…

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. Starting with our cooler door expansion program, which continues to be our most impactful merchandising initiative. During the first 3 quarters, we added approximately 49,000 cooler doors across our store base. In total, we expect to install more than 60,000 cooler doors this year, the majority of which will be in our higher capacity coolers, creating additional opportunities to drive higher on-shelf availability and deliver an even wider product selection. Turning now to private brands, which remain a priority as we look to drive overall category awareness and even greater customer adoption through rebranding, repositioning and expansion of select brands, as well as the introduction of new product lines. We're very pleased with the continued progress across these fronts, including the successful rebranding of 6 product lines and the introduction of 2 new brands so far this year, and we're excited about the continued momentum we're seeing across the portfolio. Finally, a quick update on our FedEx relationship. During the quarter, we completed our initial rollout of this convenient customer package pickup and drop off service, which is now available in more than 8,500 stores. We're very pleased with the reception this offering is receiving from our customers, and we continue to explore innovative opportunities to further leverage our unique real estate footprint to provide even more solutions for our customers in convenient and nearby locations. Beyond these sales-driving initiatives, enhancing gross margin remains a key area of focus for us. In addition to the gross margin benefits…

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. Starting with our nonconsumable initiative, or NCI. As a reminder, NCI consists of a new and expanded product offering in key nonconsumable categories. The NCI offering was available in 5,200 stores at the end of Q3. And given our strong execution to date, we now expect to expand the offering to more than 5,600 stores by the end of 2020, including approximately 400 stores in our NCI Light version. This compares to our prior expectation of more than 5,400 stores at year-end. We're especially pleased with the strong sales and margin performance our NCI stores, once again, delivered in the quarter. We also continue to benefit from incorporating select NCI products and planograms throughout the broader store base, and we are pleased with the performance of our light stores, which incorporates a vast majority of the NCI assortment but through a more streamlined approach. 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…

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

Great. And congrats on another nice quarter. Todd, so clearly, the company is hitting on all cylinders today. What do you think DG takes from this pandemic following a vaccine? Meaning any categories that you believe the company is taking multiyear market share. What are you seeing from new customer acquisition? Just kind of thinking about the after versus, obviously, the clear momentum that you're seeing today?

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. And again, I think we're encouraged as we look at the first 2 stores on what that customer response has been. On the customer acquisition side of the equation, we're very pleased with the amount of new customers that we've seen. And what really encourages us is that, that's a little different customer, one that is very adjacent to our core customer, but as I said, skews a little younger, more digital savvy and a little bit more ethnically diverse. And that really gives us the opportunity to speak to her a little differently. And I'm happy to say that, toward the end of Q3, we actually launched our new customer acquisition platform through social media and a few other means that we won't talk about exactly, we don't want to give away too much. But suffice it to say, we're happy with some of the early response that we've even seen from that. So more to come. We're doing everything that we believe is appropriate right now while we're in the midst of the pandemic to retain and keep those customers as we move into 2021.

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?

Great question, Matt. First, I'll start by saying we're very pleased with the gross margin expansion we've seen with 6 consecutive quarters of year-over-year expansion. As you mentioned, 178 this quarter. I'll maybe start by talking about the drivers this quarter and that can help inform as we look ahead. I think it's important to note that the initiatives, like DG Fresh and NCI, are really contributing and impactful to the 3 biggest drivers we saw this quarter. First, lower markdowns. With the strong sell through on nonconsumables, we didn't have to take as much clearance markdowns as well as, as we've been talking about for a number of quarters now, we're just -- continue to be more and more targeted on promotional activity and have less promotional activity necessary. Secondly, when you look at higher initial markups, that was primarily driven by DG Fresh. We continue to see that same substantial cost takeout and that only grows as we scale. And then third, the mix benefit. Again, the key driver there was nonconsumables. Obviously, there's been a shift in wallet, but I would say that we really positioned ourselves very well with what we've done to that part of the box with the impact of NCI and spreading the learnings from that, as evidenced by the 10 consecutive quarters of noncon comps. In addition to that, we did have lower shrink, which we were pleased to see as a percent of sales. Now partly offsetting that was higher distribution and transportation costs. So as we look ahead, as you alluded to in Q4, we are not providing specific guidance given the uncertainty of the environment. But I think factors to consider, as you look ahead, consider first that we expect -- anticipate higher transportation and distribution costs in Q4…

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

And congratulations from me as well. Thinking -- and I hate to focus on 2021, but I think that's what everyone is kind of concerned about as it relates to the tough compares. And -- so I wanted to ask a couple of questions. I appreciate there's a lot of unknowns. But is there any way to kind of provide a framework with respect to puts and takes? And I would ask that in the context of while I understand you definitely can't predict sales, how are you thinking about freight into 2021 year-over-year? And then how are you thinking about wages specifically? Because you outlined, I guess, $173 million in bonuses, but you also probably will have around $53 million in COVID expenses. But once you've offered these bonuses, how do you think about taking them away? Maybe a little color on both of those would be great.

Karen, let me start, and then I'll have John chime in as well here. As we look out to 2021, again, we're really squarely focused on is controlling what we can control. And that is really in our key initiatives, ensuring that we execute at a high level, retain as many of these new customers as we possibly can through the means that we have talked about and also, again, with our key initiatives being a nice backdrop to that new consumer. She can do a much fuller shop inside of our store than she ever has been able to do in the past. As you start to think about 2021 and the labor side, to your point, wages, again, we don't have a crystal ball, so we don't know exactly what the pandemic is going to look like in the first part of the year, or how fast this vaccine will be given. We've got some hints, obviously, from the CDC and through the government. But the one thing I think just to take away is that, we are going to do what's right by our employees first, right? And so we'll continue to watch that. We'll continue to keep them safe through this pandemic until a vaccine is widely available. And if we do need to pay additional bonuses to reward our frontline workers for taking care of the customers, then we'll do that. But again, I think it's too early to tell in Q1 exactly what's going to happen at this point.

Yes. I think the only thing I'll add to that, as you mentioned, it's challenging in this uncertain environment, given the fluid nature of the pandemic and the impact that can have on the economy and the consumer to say what sales look like. But to Todd's point, what we're focused on is controlling what we can control, and that's accelerating virtually all our strategic initiatives, which we feel great about and are really pleased with what we're seeing them contribute to the top line and the bottom line. And again, those will continue to have an increased impact as we scale those. And so we're focused on that as well as, as Todd alluded to, doing whatever we can to take care of those customers, those new customers trading in, to keep them coming back as they've indicated they intend to and also keeping those baskets gets bigger. And I think what we've done to make the box more relevant than ever providing that fuller fill in trip positions us well. So focused on controlling what we can control. In terms of puts and takes, we feel great about, I'll tell you, the fundamentals of the business, the strength of the business model, the initiatives and having a model that performs well in all cycles of the economy. In terms of a couple of specific things you mentioned. You mentioned freight, and it remains to be seen. I think a big part of freight is the capacity constraint right now and the heightened volume. So it remains to be seen. That's something that -- this is the time of the year with the holiday seasons, it's usually at its peak. And certainly, all the volume is straining that now. Hopefully, that is something that would normalize over time. And certainly, we have a lot of mitigating efforts to go after that in terms of further scaling our private fleet, continuing to expand and diversify our carrier base and then ongoing efforts around stem mile reduction, load optimization and DC productivity efforts. And then the other thing I pointed to in Q4 around gross margin is, we have, over the last 2 quarters, gotten additional benefit from that mix shift into nonconsumables. We feel fantastic about the nonconsumables business as we continue to scale NCI, as we continue to import the best ideas from that to the rest of the chain. So we feel great about that piece of the business, but it remains to be seen if you can continue to get that kind of mix shift and would imagine that, that would, over time, moderate somewhat. And so I think that's just some of the considerations for next year, but I feel fantastic about the fundamentals of the business.

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?

Karen, this is Jeff. In terms of the rural versus urban, the nice thing about our model is consistency really across the store base. But specifically to rural, we did see our rural stores perform well and outperformed our urban stores. So we're pleased with that performance and continue to be real pleased with our remodel program, our new store development program and the fact that we're within 75 -- 75% of the U.S. population is within 5 miles of our store network. So that unique footprint continues to serve us well. You mentioned about the trends in terms of the sales piece. We did mention, as John said earlier in our prepared remarks around the sales. And so we're pleased, we're ready for the fourth quarter. I can tell you that in terms of the team's ability to set holiday. We've made great improvements in our in-stock position and the inventory side. So we are certainly ready to serve that customer and excited about the remaining parts of the fourth quarter.

Next question is from the line of Simeon Gutman with Morgan Stanley.

A little bit along the lines of Karen's question, maybe unanswerable around 2021. I want to ask through the lens of the top line. And in the past, you've been fairly deliberate around some of your sales drivers, like bottoms-up, new store remodels, sales initiatives. I think we talked about a recession uplift. And all of this is on top of, I think, normally, some inflation. Are you still thinking about '21 in this way? Can you share your thoughts on any of these items? And then I don't know how you think about stimulus, if that's part of a sales plan or not for next year?

Yes, Simeon, as we look at the sales number for '21, again, way early. We're not giving any guidance here yet by any means. But I would tell you that a lot of the long-term algorithms are still well intact. Our new store algorithm is still very strong. As you saw, we're going to be opening more stores next year at the same and accelerated pace. And I think that should show you that we're very, very pleased with our store performance -- our new store performance. And quite frankly, our remodel program accelerating next year is also a great sign that we're seeing tremendous value, and our consumers are seeing tremendous value coming out of those remodels. So all of the fundamentals around the top line, including our initiative drivers, are well intact. Stimulus, we'll have to wait and see. We don't want to guess what may or may not come. But any stimulus that does come would be a tailwind for us, and I'm sure many retailers. But we'll watch and see what happens there. We're not betting on that right now until we see it. What we are big on here, and I'll keep saying it, is controlling what we can control, and that is driving that top line through our long-term strategic initiatives. And I think they have served us well over the many years and are set up to serve us well for many years to come.

My follow-up, it's related to margin. The second call out in the release, the initial higher markups. I think we presume that's the DG Fresh. And Todd, I think in your prepared comments, you said it's building, and that's my question. I wanted to ask if you could talk about the rate of, I guess, sequential momentum there because, I think, it was initially called out in last year's fourth quarter. And so trying to think about how that ramps into '21, is it ratably, or is there some step change that we should expect from that item alone next year?

Yes. I think the way to think about that is -- and you're exactly right that, that is the primary driver of that initial markup benefit that we've been talking about for a number of quarters now. It's already accretive to the business. And to your point, it will grow over time, not only literally as you add more stores, but you have economies of scale as you serve more stores from existing DCs, as you get the efficiencies of operating that -- the team, it's been amazing how quickly we've gotten this up and running and gotten quite efficient at this. So you get both benefits. So it continues to grow as it scales, both in terms of the gross margin benefit, that substantial cost take out. But then the other thing we've talked about is, is the sales benefit. We are already seeing in those stores served by our self-distribution, better in-stocks, better sales, and that's -- we expect that to grow -- that benefit to grow. And then the other thing is now we're free to improve the assortment. We had agreements before, which precluded us from carrying certain competing brands in private label. This opened that up, and as we mentioned, we're already adding new SKUs there. And then longer term, it unlock -- we see the opportunity to unlock further expansion of produce to more stores. And so we think it's the gift that keeps on giving, both in terms of cost and margin, but also in terms of sales.

Our next question is from the line of Michael Lasser with UBS.

So Dollar General reported a 17.5% comp year-to-date. If you had to guess or maybe put some analysis behind it, how much of that 17.5% is due to market share gains? And then how much is due to other factors like wallet share gains?

Yes. We're not going to probably, Michael, get into too much of that due to competitive reasons, obviously. But I would tell you that we're really happy with the share gains that we've seen. Those share gains are -- continue to come from a multitude of different disciplines that are out there. Drug continues to be the largest share donor that we've seen. But some new emerging trends that we've seen and have some evidence of is that in the discretionary areas, we're taking some share at a rapid rate as well. And in many cases, that's probably from some of the consolidation that has happened on that side of the equation recently. And so couple that with our initiatives around NCI and now POP SHELF, I believe we're well positioned as we move into '21 to capitalize and keep those customers that we're seeing there in the share gains that we've already gotten in 2020.

Got it. And then my follow-up question is around your expectations, your initial thoughts on as there is a slower environment for consumable retail, presumably the promotional environment is going to increase. And would you use price and all the good margin expansion potential that you have and reinvest that back in price to gain a disproportionate amount of market share in a softer consumer -- consumable environment overall?

Well, we always say we always reserve the right to lower price to ensure that we keep those footsteps coming into Dollar General, and more importantly, service that consumer. As we sit right now, though, Michael, we don't see any evidence and/or need to pull a price lever. The promotional activity, the everyday price activity across retail right now seems to be pretty tame and about the same as it has been for many quarters now. But as we continue to watch the environment, we'll do whatever we have to do to ensure that we're priced right. But I think it's also important to note, in the 12 years that I've been here, this is the best competitive positioning we've ever been in on price, the very best. So from a position of strength, we've already lowered price, got it where it needs to be and is in -- and are in very good shape as we move into 2021.

The next question is from the line of Paul Lejuez with Citi.

Curious if you could talk about some of the new customers that you've acquired earlier in the year. And if there are any retention metrics that you might have that you can share? And then second, just going back to your comments about lower markdowns. Just curious if that was true across both consumables and nonconsumables? And if you could talk about the gross margins within each of those businesses relative to themselves a year ago?

Sure. This is Jeff. First, on the new customer retention metrics you asked about, as Todd earlier stated, we're really pleased with the launch of our retention strategy that we did at the tail end of Q3. So first, I got to tell you, it's a little early, but one of the things here at Dollar General that we do very well is, we measure everything, and we are very focused on monitoring our efforts so that we can pivot if we need to or we can accelerate if we need to. And so what I can tell you is, is that initially, we're pleased with what we're seeing from the new customer retention strategy that we put in place. We think it's the right time to do that. When you think about that, not only from when we started acquiring new customers, call it, 6 months or so ago, and then also thinking about that as it relates to 2021 and our desire to try to retain as many as we can. So very pleased with the surgical digital approach that we're taking. Rest assured, we are measuring that. And I think, at a future your date, we'll be able to talk more about that. But right now, it's a little bit early. And then I'll toss it to John on the margin question.

Yes. On the markdowns, it really is both. We've been talking about lower markdowns as a percent of sales for a number of quarters. And the driver of that has been lower promotional activity. The team has gotten very targeted and got very sophisticated in the tools we've put in place and the processes to really go after what gives us the biggest bang for the buck, what really moves the needle on true incrementality of traffic and profitability. And so that's been throughout. But with the strength -- growing strength of nonconsumables and the better sell-through there, we have then, more recently, seen a reduction in the amount of clearance activity required to clear those goods. So it really is both consumables and nonconsumables.

The next question comes from the line of Rupesh Parikh with Oppenheimer.

So I want to go back to the launch of the POP SHELF concept. I am just curious in terms of the decision to launch the new concept right now during the pandemic, is that driven by maybe more real estate opportunities, or just any more color you can provide there?

Sure. As you can imagine, any concept of this magnitude, the work had begun long before COVID, the pandemic, or any of that. Probably, as you really dial the clock back about 18 months or so ago, really started that process. And I would tell you that the plan all along was to launch about this time that we launched it. So we were very much right on track to our initial launch times. Now, obviously, we didn't anticipate the pandemic that -- what we didn't anticipate either was the abundance of available real estate that would be out there. And that's been a real positive for us with some of the consolidation that we've seen from discretionary retailers that may no longer be in business at this point. We've seen some real opportunity to grab some very good real estate that we're able to open up this concept in. And that's why we're pretty bullish on the 30 by the end of 2021, both from a real estate perspective, but also the initial sales of this concept, at least in the first 2 stores, has been very, very strong and exceeding our expectations. So again, hitting on all cylinders on the initiative so far, but again, it's early. But rest assured, we are -- we'll do what we do best here at Dollar General, and that's executed at a high level and continue to refine this new concept to make it the best it can be.

Great. Maybe just one follow-up question. Any thoughts you can share in terms of what you guys are seeing thus far in the holiday season and how it's performing versus expectations? And I know your quarter-to-date trends accelerated, if you're to be driven by the consumables category. I was just curious if you think that the November -- almost the November performance was -- represented any pull forward of demand?

Sure. I think it's a little early to talk about what Q4 is going to look like in totality, a lot of selling left, month of December for retail, obviously, is very big. I don't have to mention that, but I will. But when you start to look at our numbers, the great thing that we saw was, our traffic numbers in November started to rebound pretty nicely, really came back to where we saw some of those traffic numbers in Q2. And so that was a great sign for us that the consumer was out shopping, not only the consumable side of the business, but the nonconsumable or discretionary side of that equation as well. The other thing, and Jeff alluded to it in part of his comments earlier, we really leaned in on inventory for Q4 around holiday. We knew it was going to be a good holiday season for Dollar General. We went in, bought more inventory from the closeout market mainly, and we are in some of our best inventory positions in holiday that we've been in, in many years and are very encouraged by the early sell-through of what we've seen in holiday. So encouraged, but a lot of selling left to go.

Thank you. And thank you to everyone who's joined us today. This will conclude today's teleconference. You may now disconnect your lines at this time, and we thank you for your participation.