Good morning. My name is Robert, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General First Quarter 2023 Earnings Conference Call. Today is Thursday, June 1, 2023. [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'd like to turn the conference over to your host, Mr. Kevin Walker, Vice President of Investor Relations. You may now begin your conference.

Thank you, and good morning, everyone. On the call with me today are our CEO, Jeff Owen, our President, John Garratt; and our CFO, Kelly Dilts. 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 financial guidance, strategy, vision, initiatives, plans, goals, priorities, opportunities, investments, customer, expectations or beliefs about future matters and other statements that are not limited to historical fact. These 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 24, 2023, 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 otherwise required by law. [Operator Instructions] Now it is my pleasure to turn the call over to Jeff.

Thank you, Kevin, and welcome to everyone joining our call. In addition to our first quarter results and updated outlook for 2023, we'll spend our time this morning discussing the significant progress we have made on multiple fronts, including improving execution in our distribution centers and stores, an update on the rapidly changing macroeconomic environment and the important actions we are taking to support our customers. Despite a more challenging macroeconomic environment than previously anticipated, which has negatively impacted our sales and full year EPS outlooks, we are confident in Dollar General's ability to deliver strong and sustainable growth in the years ahead. As a reminder, Dollar General is uniquely positioned at the intersection of value and convenience. Regarding value, although we continue to feel very good about our price position relative to competitors as well as other classes of trade, we are always looking for ways to better serve our customers and provide them with the items they need at prices they can afford. And right now, we believe our customers need Dollar General more than ever. As it relates to convenience, with more than 19,000 stores located within 5 miles of approximately 75% of the U.S. population, we believe we are uniquely positioned to provide our customers with convenient access to everyday household essentials, particularly in rural America. We delivered progress across multiple fronts in Q1, including our supply chain recovery efforts as we ended the quarter with our best distribution center service levels in nearly 2 years. With our previously announced investment in incremental store labor hours, we continue to enhance the customer experience, including a material improvement in customer satisfaction scores since prior year-end. And while we are pleased with our progress on these fronts, we are focusing even more structurally, strategically and operationally on serving…

Thank you, Jeff, and good morning, everyone. I also want to thank John for his outstanding leadership during his time at Dollar General as well as for his mentorship as I step into this role. It's a tremendous honor to serve as CFO of this great company and work with this incredible team to serve our customers. I'm excited about the opportunity we have in front of us as we drive growth and create long-term shareholder value. Now that Jeff 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. Jeff has already discussed sales so I'll start with gross profit. For Q1, gross profit as a percentage of sales was 31.6%, an increase of 34 basis points. This was primarily attributable to higher inventory markup, decreased transportation costs and a decreased LIFO provision. These were partially offset by increases in shrink, markdowns and inventory damages as well as a greater proportion of sales coming from the consumables category. SG&A as a percentage of sales was 23.7%, an increase of 94 basis points. This increase was driven by certain expenses that were a greater percentage of sales in the current year period, the most significant of which were retail labor, including a $27 million targeted incremental labor hour investment, as well as repairs and maintenance and depreciation and amortization. These were partially offset by a decrease in incentive compensation. Moving down the income statement. Operating profit for the first quarter decreased 0.7% to $741 million. As a percentage of sales, operating profit was 7.9%, a decrease of 60 basis points.…

Thank you, Kelly. We have a clear vision for the future of this company, which is to be a force for opportunity for our customers, employees, communities and shareholders. To bring this vision to life in the years ahead, we have developed a strategic framework to serve as our road map into the future. I want to briefly introduce this framework today and we'll provide further detail and updates in the quarters ahead. We call this road map DG Forward, and it is focused on the powerful combination of execution and innovation. For us, our execution is driven by our operating priorities. While these priorities are not changing, we are going to sharpen our strategic focus in 4 key ways. First, we are going to focus even more on rural by doubling down on serving and providing our rural customers with what they need when they need it. This company was founded to serve the underserved, and today, approximately 80% of our stores, many of which are in rural America, serve communities with fewer than 20,000 residents. Second, we are going to extend our reach. We will focus on expanding the DG universe by serving new customers through new formats or existing customers in new and differentiated ways. Third, we are going to fuel our growth by strengthening and modernizing 3 critical components to improve execution: our operating model, our supply chain and our IT foundation. We will fuel our best-in-class growth by investing in resources to enable our team to execute at the highest levels to serve our customers. The fourth and most important area of focus with DG Forward is that it's all powered by our people. We believe Dollar General is truly powered by the best team in retail, and we are leaning into 3 specific areas…

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

This is Michael Kessler on for Simeon. First question, so Dollar General has encountered some supply chain, labor, macro challenges in the midst of changes in management as well. And it does seem like issues are continuing to kind of creep in a bit. As you -- Jeff, as you look backwards over the last 6 to 9 months, can you diagnose maybe what the root -- if there is a root of these issues, if any, of what I just mentioned is intertwined at all? And how do we and investors get comfortable that, I guess, the full extent of the challenges, I guess, are known today?

Yes, Mike, thank you for the call -- the question. I'd say when I think back on the supply chain, we mentioned in Q3 and Q4, we had challenges. We said we would get better in Q4 and we did exactly that. And we also said we'd improve in Q1. And quite frankly, our supply chain improved at a faster rate than even we expected. And you heard me in my prepared comments talk about we ended that quarter in the best position service level-wise in 2 years. On the store side, certainly, we tested and learned increasing our labor hour investment in the store. We liked what we saw last year. We said we would continue that in 2023, primarily through labor hours. And we liked what we saw in Q1 as well. Our customer is telling us they're seeing the improvement. And as a result of that, we're going to do more. And when you think about how we came into 2023 and started the year, we started strong. In February, our comp was actually 4.8%, as we mentioned, and was ahead of our expectations. And in mid-March, as we mentioned on our call, we're watching 2 significant events that disproportionately, we believe, impact our customer, tax refunds and SNAP. And unfortunately, that impacted her even more than we expected and, quite frankly, more than she expected. And so in March, she simply pulled back. And back half of March, we saw her pull back and really pull out of spending. The good news is in April, she started to return and she continues to return in May as well. Now as you know, at Dollar General, we know our customer, we believe, better than anybody. And she certainly is telling us she's under pressure. And we have…

Our next question is from Matthew Boss with JPMorgan.

So Jeff, on the rapidly changing backdrop that you cited, could you maybe speak to the changes in customer behavior that you're seeing today relative more so to 3 months ago, if we broke it down with traffic versus ticket? And then can you elaborate on some of the drivers of the May comp improvement? And just where exactly do you stand today relative to that 1% to 2% updated full year comp guide?

Thanks, Matt. If you recall back to the Q4 call, we talked about our customer, and we talked about the fact that her financial situation was getting worse. And quite honestly, what we do in our survey work and talking to our customers as we do and our first-party data that we have really tells us that our customer's even under more pressure as we have progressed into 2023. And quite honestly, it's some of the most pressure we've seen in quite some time. The good news is she's still employed. That's always an important factor in her health, so that's a good thing to see. But quite honestly, our customers, some of the details, food inflation continues to persist. And even though it's moderated somewhat, if you think about the 2-year stack, it's almost 20%. And our customer certainly is seeing that pressure. And then quite honestly, when you think about the child tax credit and the removal of that and how that impacted her tax refunds, that's an incredible buffer for her, that quite frankly surprised her on the level of refund she did not receive. And in some cases, some of our customers are saying that they're even having to pay taxes this year, which is something that they typically don't have to do. So when you think about that, they're saying to us, you look at those 2 shocks to her also with the SNAP benefit and the $95 reduction on a per household basis, last year and last time this happened, we saw through our first-party data, they were able to shift to other types of tender. But quite frankly, in this environment, and we have the luxury of having first-party data, we're seeing they're not able to do that. And not only are the…

Great. And then maybe, Kelly, as a follow-up, so just in light of this backdrop, how do you feel about your pricing position today? What actions might you take? And then could you just overall walk through the puts and takes that you've embedded in your gross margin forecast for the second quarter or the back half of the year relative to the expansion that we saw in the first quarter?

Yes, I'll start with the pricing. We feel great about our pricing position. And just like Jeff said, we're investing in a targeted everyday low-price investment. And in this environment, we feel like it's really important to do so on those key items that are important to our customer. And what I would say is that is embedded in our gross margin guidance. I'm just stepping back on guidance, just taking a look at it from a high level for the full year. Our revised guidance is really a function of the macroeconomic environment, and it's putting pressure on 2 things, and that's sales and shrink. And as Jeff alluded to, we're taking actions to address both as well as actively managing the rest of the P&L, our working capital and our capital investments. We're not going to sacrifice long-term growth as we do that either. So we do expect this customer to remain under pressure for the foreseeable future. The depth and the duration of that is really difficult to predict. But as history always tells us, they'll ultimately recover and get their budgets back in line. So when we think about that and think about then the cadence of the year, really I want to focus on Q2. And that's where we're going to see the most pronounced headwinds and probably the highest decrease in EPS. And to your point on gross margin, Q2 is going to be the toughest year-over-year lap on the gross margin rate. And then we've got some other pressures this year to consider. So one is shrink, and it's going to be the most difficult comparison on a year-over-year basis. And then the other one is that targeted pricing investment will put some pressure on gross margin. So with that, we're expecting the…

Our next question is from Michael Lasser with UBS.

Jeff, the market had long measured Dollar General's market share against some of its large publicly traded competitors like Walmart, Family Dollar and others. And on that metric, Dollar General has been a share gainer for a long time. Now it's arguably having to work its P&L harder to generate sales growth or not experience share gains. Why is that the case? Is it that Dollar General now has 19,000 stores, invigorated competitors and it's just much more difficult to gain share or more expensive? And as a result, Dollar General is going to have structurally lower margins moving forward?

Well, thank you, Michael. When you think about the quarter, and certainly, you're right, Dollar General has historically been a share gainer and we will continue to be a share gainer. When you think about this quarter, in the highly consumables area being flat overall, it really was, again, I go back to the comp cadence in a second, but we were flat overall in the highly consumables but we did grow share on the non-consumable business. So I want to be clear that I share that with you. But as you walk through the comp cadence of the quarter, it really is the story. And when you think about that macro pressure and the fact that we believe our core customer was disproportionately impacted by that, we started to see our share. Actually, when you start the year in February, we actually had a very healthy comp and healthy share gains. And as we went into March, March is when she simply pulled out of the market and had to adjust. And she came back in April, as I mentioned earlier, where we saw share gains resume, and we continue to see share gains resume in May. And quite honestly, as we think about being there for the customer, the majority of the actions we've taken as it relates to our ability to pull forward the labor investment, the supply chain improvements we've made and getting even sharper on the price, that really didn't happen until late in the quarter. So when you think about the share gains and the returns, what we're seeing is our customers coming back to Dollar General as we expect they would. And we believe that the actions we're taking will only make it a more compelling offering for our customer. We're there for her in affordability and value, and we'll provide her with the consistency in the shopping experience that she's grown to be accustomed to at Dollar General. We'll make that even better as we move forward. And so as we think about that, we feel real good about our ability to continue to grow share and also provide healthy operating margins. And as you know, we've made tremendous investments over the years to enable us to structurally be able to do that. When you think about the comp and the composition of our sales mix and the highly consumable sales mix that we're seeing, it's pretty impressive that Dollar General's structural profitability has allowed us to continue to be much more profitable even in an environment like that. And we continue to see where areas that we can grow margin and provide us with the ability to not only serve this customer sustainably grow share but also provide healthy returns, and that's something that we are very excited about the ability to do that as we move through this year and then also as we move even stronger into '24 and beyond.

And my follow-up question is, Jeff, your discussion around price investments come on the heels of one of your large competitors making price investments last year. And so this has sparked the narrative within the investment community that there's just going to be a race to the bottom and a never-ending price war within the small value retail sector. How do you prevent that? And recognizing you're not going to provide guidance for 2024 as of yet, can you still make these types of investments and get back to your double-digit EPS growth algorithm within a reasonable time frame?

Yes. Michael, first of all, as we've said historically and continue to say, our price position relative to competition continues to be strong. And quite honestly, our philosophy on price has not changed. Our pricing goal continues to be at parity with mass, plus or minus, call it 2%, 3%, and we're well within that targeted range, and we feel good about that position. But we believe our customer, and we've said this for many years, that we reserve the right to be there for the customer when she needs us most, and we believe this is a time for that. And we think there's an opportunity to get even sharper on certain items that matter most. And so we believe, again, this is a very targeted structural approach -- excuse me, targeted and surgical approach to being able to be there for this customer. And we've done this over the last few weeks. We're pleased with the response we're seeing. But again, our philosophy and our goal has not changed. We still have the same pricing gap targets that we've had for quite some time, and the actions we've taken are in the guidance that we contemplated. And I'll turn the back half of the question over to Kelly.

You're absolutely right, Jeff. The guidance does contemplate that. And really, the guidance range is a function of the flow-through of the sales scenarios and with that additional shrink risk largely being offset by the costing actions that we're taking in SG&A. And so we're getting a benefit from that as well. I think as we move into the year with all the actions that we're taking, I'm confident in delivering this EPS guidance. And I think with the impact of those actions that Jeff talked about, that we continue to see Dollar General as a 10% EPS grower over the long term.

Our next question is from Karen Short with Credit Suisse.

So actually, just following on that line of thinking, you've basically grown sales per square foot by 15% since 2019, and you're looking at EBIT margins that are below where they were in 2019. So I guess the question is, what do you think a sustainable EBIT margin actually is? And then I guess what I'm still confused by is you were pretty adamant in March that you weren't seeing impact from SNAP reductions. And I understand that other things kind of came into play. But that obviously changed during the first quarter. So what -- like what visibility did you not have in March? And then I guess, sorry, my third question would be, you've obviously always outperformed in a weaker macro with a trade down in your format. So do you still feel confident that, that's doable?

Okay, Karen. I'll try. There are several questions in there, so I'll start with the -- let me try to start with the SNAP question first. And then we'll talk about the macro and then I'll toss it over to Kelly to talk about the EBIT margin question. So when you think about the SNAP, when we sat here in Q4, what we talked about was there are 2 pending changes that we're watching. And at that point in time, you're right, we had not seen the impact of SNAP. What we did say was we've trended it off our first-party data and what states that had pulled back previously and how that customer responded. But we also mentioned and we continue to feel it's in a much different spot for this customer when that actually took place. So our customer today is certainly in a much worse off position than she was a year ago when those changes happened in those previous states. And so since then, what really happened was, certainly, we saw the customer pull back, really a combination of 2 things. I think the tax refund component is the other one we talked about that we had not seen, quite frankly, any impact from that. And as you look at our comp cadence, it pretty much matches the tax refund reduction and it's a very high correlation there. So those are the 2 things that, quite frankly, we saw that changed in the back half of March and persisted into April. I think the good news is, and you're right, we believe this model is built for all seasons, and it's proven that it can deliver to our customer in any economic environment. We continue to believe that. But we also see opportunities, which we see right now for the ability to serve our customer even better than we've served her in the past. And that's what we're doing and that's what we're squarely focused on is responding to the macro environment, taking care of our customer, but also positioning Dollar General long term to be able to continue to serve this customer. And when you think about it, 80% of our stores are serving communities at 20,000 or less. So we're uniquely positioned to be able to do that, and we're squarely focused on delivering on that.

I'd say we're squarely focused on delivering operating margin expansion as well. And I think if you look back to '19, you'll see that we're expecting to continue that expansion as we move into 2024 and get through this macro environment. We have a lot of initiatives in place to drive that operating margin profit, and we are making sure that we invest in those even during these times. So we feel good about that on a go-forward basis.

So just a follow-up on that then. What do you think your structural margins -- could EBIT margin could be? Like say not '23 obviously but '24, '25?

Yes. I don't want to comment on that year right now but I would just say that everything that we're doing right now sets us up for a successful '24.

Our final question is from Rupesh Parikh with Oppenheimer.

So I just want to go back to the comp shortfall that you saw in the quarter and your updated expectations for the full year. Just curious why you believe it's more -- the comp [ link ] is more driven by macro weather versus changes in competitive dynamics.

Yes, I'll start that, Rupesh, and I'll turn it over to Kelly to add any color. But again, I think it goes back to the comp cadence. I mean, a couple of things. First, as I said earlier, our February started out extremely strong. And as you look throughout the quarter, March and April, we saw the pullback in March. We saw April continue and then we've seen it respond nicely in May. So that's why we -- when you look at the macroeconomic shock to our customer primarily in the 2 areas I talked about, combined with a really cold and wet spring, we're seeing our customer continue to respond. And we're liking what we see as we enter into the second quarter as it relates to her ability to rebound and spend with us. And also, again, I go back to the operational improvements. I mean, our supply chain hasn't been this good since 2 years ago. Our store conditions continue to improve. Our customers are seeing it. They're telling us that. And we haven't seen that movement, quite frankly, in quite some time. Our movement from Q4 to Q1 was significant and we're excited about that. We're also excited about how we're seeing the ability to accelerate that in the second quarter because of our supply chain improvements. And then also, we believe that value is always incredibly important to our customer, and we've been able to show value for many, many years. But we believe now, with the ability for us to be there for her and be even sharper on the things that matter most to her, will drive traffic into the store, will allow us to serve her better and gain share as we've talked about historically doing and we will continue to do here at Dollar General.

Great. And then one follow-up question. Your inventory balance was up, I think, 20% year-over-year. Just curious how you feel about the health of the inventory position and opportunities you see to improve from here.

Yes. We continue to feel good about the quality of the inventory. But I will say inventory management remains a focus for us. So inventory growth was relatively consistent with Q4, although we had hoped that it would come in somewhat lower this quarter. The good news here is what I would say is we made some progress on working down the non-consumable inventory. It was offset, though, by improved consumable in-stock levels. And as Jeff noted, with the supply chain health, that's where we got those in-stock levels from. So just a couple of facts for you. We reacted pretty quickly to the current environment by reducing non-consumable receipts. And frankly, I'd say we acted historically as well because some of those receipts were pulled back almost a year ago and in reaction to the discretionary spend trends that we were seeing. So in Q1, our non-consumable receipts were actually down over 30%, and we expect that trend to continue into Q2. And with that, what we saw was a 3% reduction in non-consumable inventory per store from Q4. So nice movement there. And we do expect it to get more normalized levels in the back half of the year. Again, at the same time, our supply chain service levels improved faster than we expected, and that drove some consumable products to the store, which was one of the main contributors, as you look, on either a year-over-year basis or a quarter-over-quarter basis. So I'd just end with, we know that inventory remains an opportunity for us, and we're going to continue working on reducing those levels with the goal to remain in line with sales, and we believe that the new structure we put in place will make sure that we get that done.

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

Thank you for all the questions, and thanks for your interest in Dollar General. If I can summarize our discussion today, let me leave you with these 3 things. First, Dollar General is built for times like this, and we have a keen focus on enhancing our ability to serve our customer. We are investing and adapting structurally, strategically and operationally to serve our customers even better in this environment, which we believe will drive momentum later in the year and into 2024. And we have a clear vision and a powerful growth strategy for the future. Thank you for listening, and have a great day.

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