Good morning. My name is Donna, and I'll be our conference operator today. At this time, I would like to welcome everyone to the Dollar General, First Quarter 2024 Earnings Call. Today is Thursday, May 30, 2024. [Operator Instructions] Today's 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. I would now like to turn the conference over to Mr. Kevin Walker, Vice President of Investor Relations. Kevin, you may 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 and Events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, strategy, initiatives, plans, goals, priorities, opportunities, expectations or beliefs about future matters, and other statements that are not limited to historical fact. The statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include, but are not limited to those identified in our earnings release issued this morning under risk factors in our 2023 Form 10-K filed on March 25, 2024, and any later filed periodic report and in the comments that are made on this call. You should not unduly rely on forward looking statements which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call, unless required by law. At the end of our prepared remarks, we will open the call up for your questions. To allow us to address as many questions as possible in the queue. Please limit yourself to one question. Now, it is my pleasure to turn the call over to Todd.

Thank you, Kevin, and welcome to everyone joining the call. We are pleased with our start of the year, and I want to recognize the great work of our entire team as they have fully embraced our plan to get back to the basics at Dollar General. On today's call, I will begin by recapping some of the highlights of our Q1 performance, as well as sharing an update on some of our plans for 2024. After that, Kelly will share the details of our Q1 financial performance as well as our current outlook for Q2 and the full year, and then I will wrap up the call with an update on our work in getting back to the basics across the business. Turning to our first quarter performance. Net sales increased 6.1% to $9.9 billion in Q1 compared to net sales of $9.3 billion in the last year's first quarter. These results included accelerated market share growth in both dollars and units in highly consumable product sales, as well as market share growth in dollars in non-consumable product sales. We opened 197 new stores during the quarter and are excited about our ability to continue to expand the number of communities we serve. Same store sales increased 2.4% during the quarter, which was above the top end of our Q1 guidance. We believe this result is a testament to the relevance of Dollar General in our communities and the ongoing positive impact of our back to basics work. The comp sales increase was driven by strong growth in consumer traffic of more than 4% and was partially offset by decline in average transaction amount, primarily driven by fewer items per basket. The comp sales increase was driven entirely by strong growth in our consumable category by customers relied on…

Thank you, Todd, and good morning, everyone. Now that Todd has taken you through a few highlights of the quarter, let me take you through some of the important financial details. Unless we specifically note otherwise, all comparisons are year-over-year. All references to EPS refer to diluted earnings per share and all years noted refer to the corresponding fiscal year. As Todd already discussed sales, I'll start with gross profit. For Q1, gross profit as a percentage of sales was 30.2%, a decrease of 145 basis points. This decrease was primarily attributable to increases in shrink and markdowns, a greater consumable sales mix and lower inventory markups. These were partially offset by a lower LIFO provision. Shrink continues to be our most significant headwind and with 59 basis points worse in the first quarter compared to prior year. As Todd noted, we are taking multiple actions aimed at reducing shrink, and I'll discuss our expectation for this headwind for the remainder of the year in just a bit. With regards to markdowns, we're seeing promotional levels more similar to 2019 levels as we anticipated coming into the year. As Todd noted, customers are seeking value and we saw strong take rates on promotional items during the first quarter. Turning to SG&A, it was 24.7% as a percentage of sales, an increase of 97 basis points. This increase was primarily driven by retail labor, depreciation and amortization, incentive compensation and repairs and maintenance. Moving down the income statement, operating profit for the first quarter decreased 26.3% to $546 million. As a percentage of sales operating profit was 5.5%, a decrease of 242 basis points. Net interest expense for the quarter decreased to $72 million compared to $83 million in last year's first quarter. Our effective tax rate for the quarter was…

Thank you, Kelly. Our focus continues to center on our four key 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. As we have discussed to advance these priorities in the near term, we have implemented a refreshed approach to getting back to the basics to enhance 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 supply chain, stores and merchandising. I will start with our stores where everything begins and ends for our customers. As a reminder, we have prioritized increasing the employee presence at the front end of our stores to provide a friendly welcome and elevated level of engagement to our customers, while also facilitating a positive checkout experience. As we have continued to move away from self-checkout in the majority of our stores, we believe this focus is even more important in serving our customers and supporting our sales growth. We have additionally focused more of our labor hours on perpetual inventory management in our stores by adding specific inventory management shifts and specified and specialized inventory training in each store. Our customers are taking note of these efforts as we have seen a significant improvement in their perception of our in-stock levels, which we believe is contributing to our growth in customer traffic, market share, and comp sales. Finally, we have also taken a significant action to make it easier to operate our stores while also enhancing the overall experience for associates and customers. Our supply chain and merchandising teams have made significant strides in serving our stores. In addition to the work we…

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

It's a multi-part question. First, why is shrink worse than you expected? And how have you been able to offset that while still being able to maintain your full year EPS guidance? And similarly, you mentioned that the promotional environment has gotten more intense. That's not surprising. Given all the announcements from competitors who've talked about price investments, what risk does that create to your margins in the second half of the year as you might have to respond to what's happening in the marketplace?

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

No, absolutely. So it takes a little while for some of that improvement to show up in our financial results, which is why we're calling it out. So we do expect to see improvement in the second half of the year and even more meaningfully into 2025 as we work through that. I think your other question was just what are we doing to work to offset any of those risks? And I'll tell you, we have a lot underway as we typically do, where our goal is always to improve margins. And so, some of the underlying drivers that we still have in place as we work through the shrink piece include DG Media network. So, looking for some meaningful contribution there. We still have private brands which generate better margins than some of the national brands, and it's certainly something that our consumer is looking for now. We have got global sourcing category management, which is just huge here at Dollar General. And certainly, a way to offset any of the risks that we see in the near term. And then of course, inventory optimization, which the team has done just a fantastic job of focusing on and finally supply chain efficiencies. Certainly, we are continuing to look for those efficiencies as we move through this year and frankly as we move through each and every year. So I think with all of those underlying drivers and just delivering on our back to basics actions on driving sales and lowering shrink, we feel good that we're strengthening that foundation for the long term and into the back half of the year.

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

The next question is coming from Matthew Boss of JPMorgan.

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

Matt, what we're seeing from the consumer overall is what we pretty well called out in March, and that is, it's a cautious consumer, I think is the best way to put it. She has definitely flea the value, especially in the lower income stratas. But what we're seeing, like we saw in Q4 what we're seeing is that the next cohort and the one above that, so let's call it middle to upper middle income, and then in some of the upper income stratas, we're seeing the trade down still come in. So we feel good that we're getting new customers in. We can see it in our data, and that we're retaining at a high level those core customers of ours in that lower income strata. She is definitely making trade-offs in the store and at the shelf. And feeding her family and taking care of her family is her number one priority. Inflation has and continues to be top of mind for her. While she does say in our recent work, as you know, we go out each quarter and talk to the consumer. In our recent work, she does indicate, overall year over year, the inflation has slowed down, but what she keeps pointing out is that the inflation that has happened to her over the last couple years is still there. It hasn't gone away. So it's in the base, if you will. And as we had pointed out a couple quarters ago, we don't believe that that is probably going to dissipate as we continue to move forward. So our core consumer is still continuing to figure out her overall spending rates. Now, the great thing and as your second question asked was that consumable versus non-consumable mix. And what we saw in Q1…

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

The change in the real estate plan. Just wondering if you could talk through why you're changing it at this point in time and longer term. Is this something maybe we should expect in terms of breakdown for real estate priorities between refreshes remodels and new store growth?

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

The next question is coming from Simeon Gutman of Morgan Stanley.

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

Let me actually answer the second one first and I'll turn it over to Kelly for your first question. Again, the promotional environment is nearly exactly what we thought it would be. A little higher in Q1, but I would tell you that we knew this is the way the consumer was going to react. And we knew, and we said this in Q4, the way CPG would react because they're looking to move units as well. So, I would tell you that, this is probably both a CPG and a customer push into some of this promotional activity. Now, in saying that we feel great about our everyday price, as I indicated on the prepared remarks, we are right in line with everyday price against all classes of trade. We feel good about that. We continually invest in price and imp, impress and value at the shelf. And then the other thing to keep in mind is our expansive and growing private brand business has been very stable and solid, and growing quite frankly in Q1. And that important and magic $1 price point continues to be one of our best performers in the quarter. So we're showing value at all different spots for the consumer. And it's resonating. I mean, when you look at that transaction growth across Q1, I think, one would say it's resonating heavily with the consumer at this point. So we feel good about all of our pricing across the board, but we continue to watch it. We'll continue to watch all classes of trade. We will make adjustments if need be as we move through Q2 and beyond. But right now, the customer is reacting exactly like we thought she would, we know how to do this. We've been doing this for a long time and this category management team that we have here built in 2008 continues to be strong and continues to be working all the levers that we know how to do here at Dollar General.

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

The next question is coming from Paul Lejuez of Citi.

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

Yes, I would tell you that our non-consumer discretionary business, as I mentioned earlier, it's still alive and well. It's just the consumer is making those trade-offs in the store and at the shelf. But I would tell you again, during those important times when discretionary is important to her family, she has the ability to spend. So that shows you that and gives us confidence that we have the right products for the consumer at the right value and price. And as we continue to move through Q2 and beyond, we believe layering in some promotional activity and discretionary, like we are in our core non-consumable areas, excuse me, was -- is probably the right thing to do. So we believe a nice balance of both will help the consumer stay engaged in the discretionary side of the business. I have seen, looked at seen and are am very pleased with the holiday lineup we've got coming up. I know it's a little premature, but it never is when we start talking about holiday because it has such a long lead time coming in. And the lineup we have this year is very strong for the back half of the year as well. So more to come. I believe we've got all the right building blocks in place for the discretionary side of the business to continue to get healthier and healthier as we move through the back half of the year.

The next question is coming from Rupesh Parikh of Oppenheimer.

So just going back to the commenter on the failure guidance, so it implies a pretty strong second half profit recovery. So I just want to get a sense of the confidence and driving the acceleration in the key drivers as you guys look out to the back half of the year.

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

The next question is coming from Seth Sigman of Barclays.

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

Yeah, I just want to reiterate shrink was worse than we thought. It would've been in Q1 but we are seeing those green shoots, which gives us confidence to reiterate our guidance long term. Just want to make sure, we got that point across. But I would tell you that as it relates to all the work we're doing around back to basics, it will continue, we believe, to gain momentum. Everything would show that and many, many of those opportunities that we have to gain momentum directly affect the shrink line. As Kelly indicated, and I also indicated earlier, when you look at inventory levels across the store, I mean a pretty aggressive but impressive reduction in inventory in light of rising sales. And so when you think about that with a 9.5% reduction in per store inventory in 22.5% on our non-con business or discretionary business, we believe all those actions will help that shrink line because too much inventory or over inventory in some instances always leads to additional shrink. So we continue to watch that carefully. Now, the great thing is our inventory is in really good shape as far as the quality and always has been. But we want to make sure that at store level, that it gets to the shelf when it comes in and it gets in front of the consumer as quickly as possible and those levels are so important to make sure that happens. And then as I look at other levers and all the other work we're doing, the expense lines, as you mentioned, we feel confident on where we are today. Wage rates being the largest $150 million investment last year in wages was a strong commitment to grow that consumer awareness and grow our stores in a…

The next question is coming from Scot Ciccarelli of Truist.

As you guys reduce skews and consumables continue significantly outpace discretionary sales, and that certainly appears to be the case in the stores as well. How do you eventually balance out the relative growth rates of consumables versus discretionary? So you can alleviate some of that margin pressure from mix, or don't you, it just becomes more of a permanent shift in the mix. Thanks.

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

The next question is coming from Michael Montani of Evercore ISI.

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

So I'll start on that with the inventory question and I'll say reducing inventory still really remains a high priority for us. So we're going to focus on reducing that per store inventory. What that does is really simplifies things both upstream in the supply chain as well as in our stores. And so, we continue to look at that as a high priority. The other piece of that is really around focusing on inventory optimization. And so, we talked a little bit last quarter about some investments that we're making in technology. Those are starting to pay dividends. And so we are really looking on how to right-size the inventory over the next 12 to 18 months from just what we're carrying in the stores and making sure that we are in a better position to serve our customers from an in stock level. We are seeing in stocks. And so we are happy to do that. And I know I've had a shout out to the team a couple of quarters now, but they have just done a fantastic job of both reducing inventory and improving our in stocks. And I'll tell you all along, we have felt really good, and Todd said this earlier about the quality of our inventory, so that's really not our issue. It's really just about getting those levels down so that they're more manageable in the store and in the DCs. And again, felt great about the decreases. Todd called out the numbers, but just to reiterate, we've got a 22.5% decline in that non-consumable inventory. Just huge there. And then, if you don't mind, I'm just going to segue a little bit into cash. One thing that we did see on the inventory management side is what that did for our cash flow. So, our cash from operations was up 247% to last year. And so this is a really important driver, not only from the operations standpoint, but also just lowering our carrying costs and being really impactful to our cash.

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

Our final question today is coming from Joe Feldman of Telsey Advisor Group.

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

There is no doubt we're getting positive customer feedback across the board on the 9,000 and quite frankly, some of the 3,000 that we did in May. A couple of them have many of them have been for a couple weeks now. So, we're getting that feedback. It's always positive from what we're getting, the vast majority of it from our consumers because they like the interaction at the front of the store. And with that interaction then also comes having somebody at the front of the store very visible at all times, which as you recall was not always the case in 2023. So with that should come as we continue to move through ‘24, better shrink results from that action. Now, we'll watch and see what we believe those are some of those green shoots that we'll start to see even more as you move to the back half of the year and into ‘25. But the overall, reaction from the consumer is, thank you. We like the checkout with someone that we can interact with at all times at the front. That is overwhelmingly what we get. So that really gave us that confidence if you will, to take the other 3,000 and move it to an assisted lane in May from all the good work that we saw happen from the 9,000 we did earlier in the year. And again, that consumer response, which we rely on across the board for all actions that we take, because everything starts and stops with that consumer in the store.

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