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 Fourth Quarter 2023 Earnings Conference Call. Today is Thursday, March 14, 2024. [Operator Instructions] This call is being recorded. [Operator Instructions] Now I'd like to turn the conference over to your host, Mr. Kevin Walker, Vice President of Investor Relations. Kevin, you may now begin your conference.

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 & 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. 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 required by law. At the end of our prepared remarks, we will open the call up for your questions. [Operator Instructions] Now it is my pleasure to turn the call over to Todd.

Thank you, Kevin, and welcome to everyone joining our call. I want to begin by thanking our associates for their commitment to serving our customers and their communities this year. I'm proud of the team's resilience and sense of purpose in fulfilling our mission of serving others. I was reminded again recently of the tremendous opportunity we have to serve as America's neighborhood general store as we celebrated the grand opening of our 20,000th store in Ellis, Texas. Our entire team takes great pride in serving the communities we call home with value and convenience every day. On today's call, I will begin by recapping some of the highlights of our Q4 performance as well as briefly sharing some of our plans for 2024. After that, Kelly will share our Q4 financial update and our financial guidance for 2024. And then I'll wrap up the call with an update on our work in getting back to the basics in our execution across the business. Turning to our fourth quarter performance. Net sales decreased 3.4% to $9.9 billion in Q4 compared to net sales of $10.2 billion in last year's fourth quarter. This decrease was primarily driven by lapping sales of $678 million from the 53rd week in fiscal 2022. Our net sales performance was highlighted by accelerating market share growth in both dollars and units in highly consumable product sales as well as market share growth in dollars in nonconsumable product sales. Same-store sales grew 0.7% in Q4 and increased sequentially each period of the quarter, which we believe is a testament to the positive early impact of some of our Back to Basics work. The increase was driven by growth of nearly 4% in customer traffic, which was positive in all 3 periods of the quarter, and partially offset…

Thank you, Todd, and good morning, everyone. Now that Todd 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. As Todd already discussed sales, I'll start with gross profit. For Q4, gross profit as a percentage of sales was 29.5%, a decrease of 138 basis points. This decrease was primarily attributable to increases in shrink and markdowns, lower inventory markups and a greater proportion of sales coming from the consumables category. These were partially offset by decreases in LIFO and transportation costs. Notably, year-over-year shrink headwinds continued to build during the year, increasing more than 100 basis points for both the fourth quarter and full year. We are taking multiple actions aimed at reducing shrink in 2024, which Todd will discuss in more detail later in the call. Turning to SG&A. It was 23.6% as a percentage of sales, an increase of 189 basis points. This increase was primarily driven by retail labor, including the remaining $50 million of our targeted labor investment as well as store occupancy costs, depreciation and amortization, repairs and maintenance and other services purchased, including debit and credit card transaction fees. These increased expenses were partially offset by a decrease in incentive compensation. Moving down the income statement. Operating profit for the fourth quarter decreased 37.9% to $580 million. As a percentage of sales, operating profit was 5.9%, a decrease of 327 basis points. Interest expense for the quarter increased to $77 million compared to $75 million in last year's fourth quarter. Our effective tax rate for the quarter was 20%…

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. To advance these priorities in the near term and following the period of evaluation of the challenges and opportunities in front of us, we have implemented a refresh approach to getting back to the basics to improve store standards and the associate and customer experience in our stores. I want to take the next few minutes to provide an update on these efforts in our stores, supply chain and merchandising. To better inform these efforts, the leadership team has spent a significant amount of time over the last couple of months directly engaging with our associates throughout the organization, including listening sessions in stores, distribution centers and our store support center. We also hosted more than 400 field leaders in Nashville in February, and then several of us spent time on the road with more than 1,000 additional leaders across the country. These sessions allowed us to follow up on the feedback we've received, share our action plans and commitments and align our expectations with our teams across the organization. We continue to prioritize this direct engagement with our associates and value the actionable feedback we gain to continue enhancing the way we support our teams and serve our customers, all while strengthening the sense of pride and purpose we all share at Dollar General. I want to start with our stores, where everything begins and ends with our customer. We completed the investment of $150 million in store labor during the fourth quarter, with the additional hours primarily focused on the 2 areas we discussed on our last quarterly call.…

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

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?

Sure, Matt. Thanks for the question. We're pretty pleased with what we've seen in our short run here on getting back to the basics. You can see it in our comps in Q4, you can see it in our traffic numbers and we can see it in our customer data as well. So all good signs that we're on track to where we want to get to, to get back to the basics here at Dollar General. In saying that, you saw the comp guide for Q1 at 1.5% to 2%. Obviously, that is a more robust comp than we've seen here for a better part of the year. And I think that really goes to the -- to a couple of things. One is our commitment and -- as well as our confidence in the Back to Basics work that's being done. Let me just quickly recap a couple of those so that you all can have confidence as I do and the team does here on why we believe. One is, we have done a lot of work in ensuring we've got the right amount of labor inside of our stores, $150 million in labor investments in 2023. I think most notably here as well is in Q4, the reallocation of that labor to areas that mean the most to our stores and to our customers. And so ensuring that we've got somebody at the front register to ring out 100% of the time, check, we're actually doing that, I believe, at a very high level now. Second of all, ensuring that we put labor in to keep our on-hand and perpetual inventory counts more accurate. We, through Q4, have implemented that program, including extensive training to make sure that we feel confident long term that it will…

Our next question is from Simeon Gutman with Morgan Stanley.

Todd, I wanted to ask you something that kind of puts together some of the comments you made as well as what Kelly said. I wanted to ask what's gone well since you joined, what's sort of taking longer. You mentioned some things need a little more attention. And as the construct of getting back to 7-plus margins, I think we talked about it theoretically by '25. Is that something that's still achievable? And listening to the finer points and some of what Kelly spoke about, like promotions being a little bit higher, it seems like shrink is about where you thought it would be. I don't know if you were trying to signal that it's a little worse that you're taking more action, but those type of puts and takes sort of what's gone well, what's not, and then something around the 7% in the future.

Yes, Simeon, thank you for the question. I'll start and then pass it over to Kelly for that second piece. So what -- I've just covered a few of those what went well. But again, we feel good about those sales-driving activities and customer satisfaction activities that we've taken in our Back to Basics work. I believe that if you look at outside of shrink, and I'll get to that in a moment, here's how I would characterize where we are in getting back to the basics. I think this is a fundamental way to think about it. When we started this journey in middle October of last year, I'd say, unfortunately, we were about our own 10-yard line if you think about a football analogy. I'd say that as we exited Q4 and now entering Q1, we're just crossing the 35-yard line, our own 35-yard line. I feel that we are on the right track to cross over the 50-yard line as we move through Q1 and into Q2 and start to really look at how we drive further into '24 and into '25 and get into our own red zone, if you will. So that's how I'm looking at this. So some things are manifesting themselves and happening in real time very quickly at the store and through our customers' lens. Some will take a little longer. Now one of those things is shrink that's going to take a little longer. As you know, we take physical inventories once a year in our stores. So anything we started to do as of October of last year will take a year to manifest itself within the financials and, by the way, a little longer in some instances as things take hold, some quicker on the shrink side, some take…

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. As we move past some of the significant headwinds that Todd just talked about and getting back to all the mitigating actions that we're doing to combat those headwinds, we still have a lot of really good fundamentals in this business even with where we are and they're only going to get better. We're seeing momentum and growing share. We're growing traffic. We're starting to see healthy comps again, all the while, we've been generating a lot of cash flow. So this model is absolutely intact. And when we think about it, we've still got a long runway for growth. We think 700 and 900 stores are certainly still in our future. We've got a lot of remodel progress that we have on our plates as well. And that, as you know, contributes 150 to 200 basis points of comp contribution, so still really solid there. And we've got a lot of long-term drivers, some new, which Todd just talked about, making sure that we're reducing shrink. The inventory optimization gives us a lot of efficiencies, both in the store and in the distribution centers. But then we have those long-term drivers that we've had in place for a while and continue to benefit of, the DG Media Network, private brands, the global sourcing, category management, all of those things that we've had for a while are certainly still in place. And with that, we expect to continue to generate cash and are looking forward to being able to return that cash back to shareholders, not only through the dividend, which we're doing now, but also through share repurchases over the long term. So lots of reasons to believe back in that 10% to 10% EPS growth, and we feel good about the future.

Our next question is from John Heinbockel with Guggenheim Partners.

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?

Sure. Thanks for the question, John. And you and I have been talking about fresh and about these type of stores for quite a while. And I would tell you, when we put into place here years ago, our ability to grow cooler count, to grow fresh produce, the way we have over the years very methodically to be profitable at it as well as then enabling all of that and soon to be produced in the near future into self-distribution, I would tell you that we feel very good about that. Then as you think about municipalities across this country that are in food deserts and/or looking for help in more fresh options, that mini market, as you indicated, our DG Market is really a lifesaver for those areas and a true lifeline for those areas where the grocery have left years ago, and we're there and can be there to help them. So we believe in that concept greatly. And as you look at the economics, and I'll pass it over to Kelly to add a little bit more color to it. But I would tell you that we like the sales economics there. We do like the 4-wall profitability that's thrown off by that. As we continue to look at balancing it, I would tell you there are thousands of opportunities for that box across the U.S. Kelly?

That's right now and I think Todd hit on most of it. We really like the IRR. They're certainly at the upper end of what we expect from new stores and a payback of less than 2 years. We like the top line and the flow-through on the operating margin, and the 4-wall is strong. So we think it hits all cylinders. It's great for the business, but as Todd alluded to, it's also great for our customer.

Our next question comes from Rupesh Parikh with Oppenheimer.

So I have 2 related questions to gross margins. So Kelly, you commented on your expectation for the promotional backdrop to revert to pre-pandemic levels. Just curious if you're seeing any changes in the promotional backdrop today or whether that's just an expectation for the balance of the year. And then just on gross margins, we heard a lot about the headwinds. But just wanted any granularity in terms of whether you expect gross margins to be up or down as we think about '24.

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. The great thing about Dollar General, we talked about the levels of markdown, but the great thing about Dollar General is that with our size and scale, we're able to get a tremendous amount of CPG help when it relates to this higher level of activity. And so our margins usually tend to be okay, if you will, as we move through these higher markdowns -- promotional markdowns. But what it also does right now, Rupesh, I believe, is it just gives that customer that's looking for more and more value right now. And by the way, this customer is getting healthier and healthier every day. We're seeing it. She's figuring out her expenses. I think you probably remember, I talked about this quite often. It takes her a few quarters to figure out when she gets a shock to the system. And unfortunately, this inflationary environment we've lived in for the last couple of years has been a shock and maybe even a double shock to her. But she's starting to figure it out. You can see it through the transaction data. You can see it on the unit side, and you can see it even on the mix side. She's starting to pick up a little bit more of that nonconsumable-type items, that discretionary item a little bit more each and every passing week that we see. So there's a lot of reason to believe that this markdown activity will actually help encourage her to get out and spend more at Dollar General at a time where she needs us most.

Yes. And just to kind of give you a cadence just off of exactly what Todd was talking about, as we think about moving through the year, Q1 is certainly our [indiscernible] from a sales perspective. But as Todd talked about on the markdown side of things, it's really -- it's a cadence thing more than just being impactful on gross margin overall for the year. And so last year, our markdown cadence, because it was more clearance related, was back half heavy. This year, because we're leaning into the promotional cadence, just getting back to more normal rates, you'll see that spread a little bit more evenly over the quarters. The other thing that we're looking at is just annualizing the retail labor hour investment. And so that's going to put some pressure on Q1. And then the -- we talked about shrink being 100 basis points or more above in -- year-over-year in Q4. And so with that exit rate, you're going to see some pressure in the front half of the year as well. I think importantly, as we think about the cadence overall, the momentum of the actions that we are taking, we're certainly pleased with what we're seeing now, but that's going to continue to build. And we're going to see top line improve as we move through the quarter and a strong bottom line growth as we move into the back half of the year. If we think through just the components -- and back to your original question just on the gross margin piece, from a headwinds perspective, you've heard us talk a lot about shrink, but we do think with all of the actions that we're taking that we're going to be able to bend that trend as we move into the…

Our next question comes from Kelly Bania with BMO Capital Markets.

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?

Yes. No, I think the teams have done a lot of nice work on inventory, and you're absolutely right on what you're thinking about as far as trajectory. I think that they've done a really good job here threading the needle. And so we're seeing both sides of that. We're seeing the nonconsumable side inventory drop on a per store basis. And to your point, we're seeing the consumables increase. But that's us getting improvements in our in-stock, which is helping to drive sales. So they're doing a good job of balancing both of those things. As we move into 2024, inventory continues to be a high priority for us. We see opportunity to reduce our inventory on a per store basis as we move through. And then as you know, as we do that, the benefits just continue for us. It lowers our carrier costs, and it continues to drive efficiencies both in the stores and in the distribution centers. It takes pressure off of both shrink and damages. And frankly, with the improved in-stocks, that just positions us better to serve our customers.

Our next question is from Chuck Grom with Gordon Haskett.

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?

Yes. Chuck, thanks for the question. And I would tell you, what we feel good about right now is getting back to the basics here. All the work that we're doing, as I indicated, we're probably just crossing over that 35-yard line. And so a lot of moving parts yet, but I think you could tell by my voice, and I can tell you, if you were here in this building, you could see the enthusiasm and in our stores of what is starting to really start to take hold. And that is getting back to the fundamentals that have made this company successful over the years. And a lot of it, the majority of it is not recreating the wheel, as I've said last quarter. It's taking tried and true items as well as processes and procedures and ensuring compliance. It's that simple in many instances. Now some of these, though, unfortunately, that had gone awry in the last 12 to 18 months. We really need to take some time to get those back in line. So those -- some of those are margin related and those components of, but as those start to heal, shrink being the largest one of those, I believe that we'll be in a really good position, as Kelly indicated, especially to start delivering on that EPS growth of 10% plus. And that is really some of the good health of the business that would start to show up. I feel good about that long-term algorithm. I feel good about this business as good as I ever felt. And quite frankly, I believe we have more drivers at our disposal today on driving that top line than we've ever had in the past, especially around the fresh network that we've got, the fresh food as well as all the work that we've done on NCI over the years and nonconsumables. That is just waiting for the customer to come back in. And as I indicated earlier, we're starting to see glimmers of her starting to come back in to that discretionary side. And we stand ready, willing, able with inventory, fresh inventory to get that done. So stay tuned. You know me, we're not going to stand still. We're going to push hard and get this thing moving as fast as we can, and we're off to a great start already here.

Our final question is from Corey Tarlowe with Jefferies.

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?

Yes, sure. I'll start and pass it over to Kelly. Yes, the very back half of Q3, we started to see some good glimmers of positive traffic. And then as we move through Q4, we saw that sequentially increase. And not that we're giving Q1 guidance, but that's continued into Q1. And so we feel very good about what we're seeing on that traffic side. And we believe, again, by all these actions we're taking on getting back to the basics should manifest itself in a strong traffic growth as we continue to move into the quarters ahead. And that's why the comp guidance that we gave is so important because we believe that we can see that positive traffic. Not only that, but all the work that we're doing to get back to basics here, get in stock not only helps that traffic. But what we're starting to see is -- and gives us confidence is that for the first time in many quarters, we're starting to see the trade down come back in. And we hadn't seen that for a few quarters. And quite frankly, it's been across every cohort, a customer that we track. So not only that higher income, all the way down to the lower income, we're seeing share gains. So great to see that. That means the work that we're doing is resonating and should also mean and manifest itself into long-term growth on that top line.

Absolutely right. And then on the wage side of things, I'll tell you, we feel really good about our wages. We've increased wages almost 30% since 2019 and feel we're in a good position there. We're not seeing a lot of stress on the wage front. So a more normalized annual wage growth is what we're expecting. And then with all of the investments that we've made in the labor hours, we feel like we are well positioned on that front in 2024. And all of that's considered in the guidance that we gave. So feel good about that as well.

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