Good morning. My name is Robert, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Second Quarter 2024 Earnings Conference Call. Today is Thursday, August 29, 2024. All lines have been placed on mute to prevent any background noise. 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. Kevin, you may begin.

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. 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 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 our call. I want to begin by thanking our team for their continued dedication to serving our customers while executing our back-to-basics plan across the organization. This dedication was on full display at our leadership meeting earlier this month as we had the opportunity to host more than 1,500 leaders of our organization here at Nashville. This event served as a powerful reminder of the passion and talent of this team and the mission of serving others that unites us. On today's call, I will begin by recapping our Q2 performance, I will then share updates on our back-to-basics work as well as an update on our plans for the remainder of 2024. After that, Kelly will share the details of our Q2 financial performance as well as our updated financial outlook for the full year. Turning to our second quarter performance. We continue to make important progress on our back-to-basics plan. However, we are not satisfied with our overall financial results. On the top line, net sales increased 4.2% and to $10.2 billion in Q2 compared to net sales of $9.8 billion in last year's second quarter. Importantly, despite a weaker sales environment for our core customer than we had anticipated, we continue to grow market share in both dollars and units in highly consumable product sales. Same-store sales increased 0.5% during the quarter, which was below our expectations. The increase was driven by a 1% growth in customer traffic and was partially offset by a 0.5-point decline in average transaction amount, which was driven by lower average unit retail price per item. The comp sales increase was driven entirely by the growth in our consumable category, as customers continue to focus their spending on the items, they need at most…

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 the second quarter, gross profit as a percentage of sales was 30%, a decrease of 112 basis points. This decrease was primarily attributable to increased markdowns, increased inventory damages, a greater proportion of sales coming from the consumables category and increased shrink. These factors were partially offset by a lower LIFO provision. With regards to markdowns, we are now seeing promotional levels greater than we had anticipated coming into the year. As Todd noted, customers are increasingly seeking value in their purchasing behavior in addition to an overall increased promotional environment. Shrink was a year-over-year headwind of 21 basis points in Q2, which was in line with our expectations coming into the quarter. And I want to note that while shrink continues to be a significant headwind, we are pleased with the progress we're making and believe our actions, including our self-checkout conversions, are having a positive impact. Turning to SG&A. It was 24.6% as a percentage of sales, an increase of 57 basis points. The primary expenses that were greater percentage of net sales in the current year period were retail, labor, depreciation and amortization, store occupancy costs and utilities. These factors were partially offset by a decrease in incentive compensation. Moving down the income statement. Operating profit for the second quarter decreased 20.6% to $550 million. As a percentage of sales, operating profit was 5.4%, a decrease…

Thank you, Kelly. As we wrap up, let me say again that 2024 is about executing on our foundational back-to-basics plan, and we are pleased to be on schedule and making great progress against the goals we have previously outlined. We are confident that the actions we are taking will strengthen our foundation for the long term. This team is energized and laser-focused on our strategy to restore operational excellence while delivering value for our customers and shareholders alike. I want to close by thanking our more than 193,000 employees for their commitment to fulfilling our mission of serving others. It is a privilege to serve alongside them each and every day, and we are looking forward to all we can accomplish together in the back half of the year. With that, operator, we would now like to open the lines for questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Michael Lasser with UBS. Please proceed with your question.

Todd, the market is saying that Dollar General and the small box value model is to simply structurally challenge either because there's too many stores, it's not as sufficiently exposed to the online channel or not attracting enough incremental customers perhaps due to competition. So why is that wrong? And as you are trying to invest in markdown and promotions to regain customers, how do you build back the margin over time? Is it simply a function of leveraging sales growth?

Thank you, Michael, and I appreciate the question. Yes, I fundamentally -- we fundamentally don't believe at all that the model is structurally challenged. But there are challenges to the business as this quarter indicated. Let me first start by saying that our new store productivity as well as our strong returns in new stores continue to serve us well. We continue to gain market share with these new store openings. And cannibalization with these new stores continue to be very much in line to where it's been historically. So, we don't believe that by slowing down to any large degree new stores would be the answer here. What we do believe is that this quarter, in particular, with a 0.5 point of comp versus last quarters of a fairly strong 2.4% comp, as I look at what transpired here, I would tell you that it appears to us very strongly that, one, this lower end consumer continues to be very much financially strapped especially as it relates to her ability to feed our families and support her families. As I look at our results throughout the quarter, I would tell you that, from our perspective, the last week of the calendar month of each of the calendar months was the weakest by far. When you couple that with private brand being as strong as it is for us, our value, value, which, as you probably recall, Michael, is our $1 or below offering inside of our store, which by the way, still 2,000 items, we've never walked away from that $1 price point. It is, by far, the strongest planogram that we have out there. And I would tell you that all those points would indicate that this is a cash strapped consumer right now, even more so than…

Yes, absolutely. So yes, just how do we build that margin back over time? I think it's important to call out, one, you nailed it. It's a softer sales environment. So, with the top line, that does put pressure on our fixed cost leverage, specifically labor and rent and those type of things as you well know. But as Todd talked about, I think, in the near term, one is just going on the offense and taking the markdown investment that we need to take on a go-forward basis to drive sales and to be there for our customer. And to kind of put that in context, I would say that what we're looking at in this back half is going to be markdown rate to what we saw last year in the back half as well. So more than we had anticipated, but absolutely the right decision and not necessarily one that we have to think about over the long term as that can come back in line when circumstances change. The other piece of this, and we've talked a lot about it, obviously, is shrink and mix headwinds. And so, we're certainly experiencing those. Although, I think we have a lot of good news here to report on the shrink side of things starting to see that trend bend. It just takes a while to flow that through the financial statements. And then, the damage piece of this as well is putting a little pressure on the second half. But again, all the things that we're doing on a back-to-basics efforts are going to help to mitigate that as well as just having a focused team on that. So, I think those are kind of the near-term things that we'll be dealing with that will get in line. And then over the long term, our underlying long-term drivers are still in place. We still have a long runway for new store opportunities with high returns. We have higher returns with the opportunities that we have with our existing stores. And then you saw, this period, our cash from operations was up 127%. So, we are still generating a significant amount of cash flow, which gives us the ability to invest in the business. So, we feel good about the long-term potential of getting those margins back over time.

Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question.

I have two parts in one question. Todd, I want to ask if this transition period changes the way you think about reinvestment now going forward, thinking about all the levers of pricing and merchandising and labor, meaning that even if the business comes positive, that margins just stay subdued for an extended period of time while you get all the pieces in order. And then, the second part of it is, are there any cohorts of stores where it would make sense to rationalize them because they're under comping and/or they're margin dilutive to the overall chain?

Yes, Simon, thanks for the question. And as we continue to move through this transformation period, obviously, as we said, it's never a straight line to the top. There's bumps in the road. The margin is one of those. As we've indicated right from the start, the biggest opportunity we have in the margin that's a differentiator than just a few years ago is in that shrink area. We believe we've got ample opportunity there to get our shrink back in line. As Kelly indicated in her prepared remarks, we're starting to see some benefit from all the work that we've done around that. And we still very much believe that it will turn to a tailwind as we move into Q4 and then much more substantial of a tailwind into '25. Now shrink is a constant battle, it's work every day, but it's that pick and showable work that we know how to do, and we know how to do very well here at Dollar General. The other thing I do want to point out, Simeon, is that, as we continue to move, I would tell you our back-to-basics plan has started to really show some signs of life here. And when I say that, when I look at our operations, as an example, we've been using a football analogy for the last few quarters. And I would tell you that we, across the 50-yard line last quarter in Q1, I would tell you, we're around the opponents 40-yard line at this point, which is good to see. We're making progress. We're making progress in a lot of fronts there, one being our staffing at the front ends, the reduction takeaway of the self-checkouts and moving those to assisted lanes, it was in full swing. Our customers are telling…

Our next question comes from Matthew Boss with JPMorgan Chase. Please proceed with your question.

Great. So, Todd, just to take the cadence of comps, maybe a step further, could you elaborate on underlying traffic versus ticket as the quarter progressed? Any concerns that are now more top of mind today relative to, call it, three months ago from your survey work on the low-income consumer? And have you seen any improvement in August comps?

Yes. I don't want to talk too much about August, but I would tell you that what we've seen in -- so far in this quarter is in our guidance and feel that we're on track there. So very much I believe in that guidance that we put out there. Now I would tell you that while we're happy with the 1% that we gained on traffic. We believe there's more to gain there. And as I indicated in my first question answer there, I would tell you, Matt, that what we saw is the guys down in Bentonville are doing a pretty nice job in garnering the available traffic that's out there from other retailers. We haven't seen a deterioration on our side. But what we saw in Q1 was a greater pickup from the available share maybe from other classes of trade, grocery and drug. While we got some of it, we didn't get our fair share, at least what I would consider to be our fair share. And that's why we're attacking this and going on the offense. We believe that as we continue to be there for our customer in this regard will help us gain momentum into the back half of the year and hopefully a springboard into 2025. And Kelly, you may want to elaborate a little bit on the other side.

Yes. No, absolutely. So yes, taking a look at second quarter comps on a cadence basis, so June was our strongest month and then it started to turn negative in July. And so, what we really saw kind of in that mid-quarter time frame just a general step down, and it was all around the transaction side of things to Todd's point. So, when we think about what we are contemplating as we went into Q2, I would tell you that on the basket side, we were pretty much in line with our expectations. It was on the transaction side, which is what the teams are going to run hard after driving sales and making sure that we get the customers the value that they need right now. So that's really the cadence. The other thing I think that's really important to point out is the of each of the calendar months were the softest comp weeks of the quarter. And for us, that really indicates that she started to run out of money by the end of the month. And what we saw in some of our survey work is just that our core customer says that they're feeling worse off financially than they did six months ago. And so, again, it just goes back to the point of in this back half, making sure that we're playing offense on driving sales and taking the markdown investment that we need to do.

Next question comes from Rupesh Parikh with Oppenheimer. Please proceed with your question.

I have two quick ones. So first, on the guidance, is there any more conservatism than normal with this particular guide? And then, second, as you look at the promotional offers that you've done, I guess, in Q2 and then what you plan to do in the back half of the year, how is the consumer response versus your expectations versus what you typically see when you run these increased promotions and markdowns?

Thanks, Rupesh. Yes, no, to give a little bit color on the guidance, let me walk through a couple of things. I'll tell you that, in the back half, it was primarily of obviously the softer sales trends that we saw in Q2, but also the impacts associated with those sales. So that sales mix-related margin and then the markdowns that we've been talking about. There's a lot of other puts and takes that we talked about in our prepared remarks, but those are really the primary drivers. So, to that, just to give you a little bit of color on the sales side, what I'll tell you, while we're doing all the right things to strengthen our foundation through our back to basics and the markdowns that we're looking ahead for our core customer is obviously struggling. And so, this guidance really as more of a macro neutral to a slight softening of that consumer. And so, the low end of the guidance takes that into consideration. So, we are looking at it a little-different ways than what we may have historically. I think that's important to call out as well. So, on that lower end range, we're looking at a comp similar to the comp that we had in the second quarter, whereas the higher end of the range would assume that there's some acceleration. But I think it's important to unpack that a little bit. In analyzing where we're heading in the second half, the one- and two-year trends have a lot of noise in them just given the volatility that we had last year and then the recent step change that we had in the middle of the second quarter. So, if you take a step back, we think really looking at the CAGR from 2019 is probably a more relevant view. And that's for a couple of reasons. One is, it's a similar holiday schedule to 2024, which is important. It eliminates that noise of the pandemic and the stimulus as well as inflation as we've seen inflation steady a little bit this year. So, we're really using that kind of as a basis of what we're looking for. So, with that, on the high end of our '24 guide, what we're assuming now is that a stable CAGR rate to 2019 very close to what it was in Q2. So just continue kind of where we are and that the consumer and the environment don't necessarily get much worse from here. And then on the low-end side of things, it provides for some further softening on our core customers' ability to spend. And so that's how we're thinking about the potential outcomes of what we're seeing today.

Rupesh, on the other part of the question, as Kelly indicated, we started to see that softening. It was really evident in the month of July. And so, with that being the last period of the quarter, we really started to ramp up our promotional cadence middle of that month, as you would imagine. It takes a little time to get moving, but not as long as it used to because we used our digital tools, which we've done a very nice job over the last many years in enhancing those. And so, we were able to go out fairly quickly with some promotional activity, which now has ramped up even further as we moved into August and will continue to ramp up as we move into the third -- end of the third quarter and in the fourth quarter of this year. And I would tell you, just like we anticipated, we're seeing the response from the consumer. It was almost immediate. She continues to engage, especially with those digital tools. And I would tell you that we're really good at doing this. We've done it many times. We always said we reserve the right to invest in price, and, for us because of our great everyday low price and continue to be in a very great shape there, it's really that promotional lever that that we reserve the right. And so, we know exactly what the consumer wants and needs. We talk to her each and every quarter, and that's exactly what we're offering her right now, and we'll continue to do so. So, we believe that those promotional cadences will continue to garner more and more customers and more and more transactions as we move through this quarter and into next.

Our next question comes from Peter Keith with Piper Sandler. Please proceed with your question.

Todd, in the past, you've always talked about how in tough times your customers need you even more, and certainly, this is a tough time with inflation and your core customers are suffering a bit. How come you don't think you're seeing the normal share gains or spending behavior from your customers like you have in the past?

That's a great question, Peter. I would tell you a couple of things that we're noticing. First of all, what we normally say, right, is that during any step change, which we saw in Q2, to Kelly's point toward the end of Q2, especially, it takes her a few quarters to come out of that, meaning our core customer. What we also see is it takes a quarter or more for the trade-in to come in at a higher rate. Now in saying that what we've noticed is the trade-in has been slower to come in to the channel than what we had anticipated and/or have seen in the past. I believe that's -- there's a couple of reasons why. I think the main reason, and I believe this is true because it appears in every piece of data that we have is that the job market is still pretty decent, right? It's not as robust as it was, but also unemployment hasn't spiked greatly, if you will, in the last quarter or so. Normally, it takes that jolt to get the trade-in to come in at a heavier clip, if you will. Now the middle and the upper middle income are still looking for value. So, I don't want you to believe that they're not. But usually, to get them to trade-in at a higher rate, usually takes something a little bit more substantial than we've even seen to occur. I'm not suggesting I want to see that happen to customer, but we stand ready and willing to serve her when that happens. The other thing that we've noticed is more and more online activity comes from that cohort. Our core customer continues her online journey pretty much the way she was. It's pretty static, if you will. But we've noticed that middle to upper middle continues to rely on online a little bit more. And so, as that occurs, I believe the trade-in slows a little bit on that side. So, it's incumbent upon us to take a look at how we offset that piece as well. And I would tell you on that, just stay tuned.

Our next question comes from Seth Sigman with Barclays. Please proceed with your question.

I wanted to follow up on pricing just given the price investments and the comments about the promotional environment being worse than expected. Can you talk about how your competitive price gaps have evolved through this year; however, you look at that? And maybe just elaborate more on the actions that you're taking? How much of the assortment are you looking to mark down here, maybe the categories that you're focused on? And I guess just the last piece of that as we try to bridge the guidance, how much of that guidance change reflects those price investments? If I recall, last year, you had about $95 million of markdown impact. It sounds like you're saying something similar to that, so I just want to clarify, is that another $95 million?

I'll start, Kelly, and I'll turn it over to you. I would tell you that we feel very good about our everyday price position. As a matter of fact, we track it, and we graph it, as you would imagine, every which way. And it's fairly flat to where we've been over the last many quarters against all classes of trade. So, our everyday retails are in good shape. If you recall, when I came back in, in October last year, I did call that out as one of our shining stars that I found coming back is that our everyday low price was very competitive and continues to be even to today. So that gives us great confidence and a very good springboard to launch this promotional activity that we know exactly how to do, and we've done it many times in my time here in the last 16 years to stimulate that customer and to build a bridge the end of the month for our core customer because she's running out of money. And while I'm not going to give you the exact playbook because that wouldn't be too smart, right? But I would tell you that it will be in categories mainly that really drive that traffic for us, but more so, what that customer was looking for to bridge that time. So, if you think about things like the food categories, things like cleaning and paper where she really needs us, again, to bridge her family's gap at the end of the month, those are those areas that are best suited for this type of activity. And that's exactly how we've approached it in the past and have so far approached it, and we'll continue to approach it as we move through the back half of the year.

Yes. No. And then just on the markdown investment as we're thinking about it in the back half. I'll tell you, it's not a certain dollar amount that we're considering. It's just overall level of promotion and markdowns that we need to take. So similar to kind of what I said before. What we're expecting is in that second half that the rate would be similar to last year. And then as we think about it more on a full year basis, what that does is get us back into kind of that markdown our promotional range that's very similar to where it was in 2019. And certainly, from a front half, back half perspective, the back half now would be heavier than the front half of the year.

Our next question comes from John Heinbockel with Guggenheim Partners. Please proceed with your question.

Two quick things. Todd, maybe how do you think about ROI of promotions? And I know a couple of years ago, you did promotions in the fourth quarter to jump start you going into the year -- the following year. And I think that lifted comps by a couple of hundred basis points. How do you think about this environment versus that? And then lastly, when I think about, right, your, -- the comp that you need to leverage expenses. I think it's still in the mid-3s. Is there an unlock -- a rolltainer-type unlock out there that can move that down materially, or we're kind of stuck with that 3% plus number?

Yes, John, thanks for the question -- the two-part question. So, I'll take the first one, and I will tell you that, yes, for us, as we continue to look at that promotional lever, we always look at what that return would be. And at this point, we believe that it's our best use of our gross margin because, to your point, what we've seen in the past when we've done this, and you alluded to one of the times in the past, but there's been multiple times in, again, the 16 years that I've been here. And each of those times came out of that a stickier consumer, right? And so, the return is normally very much intact as we pull out of the heavier promotional activity when the time is right. Now a few years ago as well, as you know, we rationalized how we promote, and so we're a lot smarter today. So, utilizing that rationalization approach and tools that we have embedded now in our process, I believe, will help us in this activity to ensure, one, it's driving the most traffic that we can drive, but also secondly, it is the best use of our spend. Because what we want to be able to do is utilize us to lift all boats as well, meaning not only the promotional pieces, but within those areas that we are promoting, again, food, paper, cleaning, pet, those areas that I talked about earlier, that we see overall lifts in those categories. And that's what this rationalization of our markdowns in the past have provided for us. So, we've got a great book to follow there. And then as it relates to the labor side, labor rates are up a little higher than we anticipated this year. The hours…

Our final question comes from Corey Tarlowe with Jefferies. Please proceed with your question.

I just wanted to ask on inventory. Inventories are down, yet in-stock levels are up, and seemingly markdown should also be increasing, so unit velocity should increase. So, I'm curious how you think about that dynamic? And then secondarily, consumable sales have continued to increase, but seasonal sales were only down slightly close to flat. I'm curious if you saw anything to call out in that category as well?

So why don't I start, Kelly, and I'll turn it over to you. Yes. So let me take the second part of that question. As we exited Q2, while we weren't happy with either side of consumables or our non-consumable business, but to your point, what we saw was a flattish non-consumable business quarter-over-quarter, but a deceleration of the consumable side of the business. And what that really showed was once again that core consumer is very, very price sensitive at this point and looking for value anywhere she can find it. That's another reason why we're stepping up that promotional activity to reengage even further that consumable side of the business, which we believe, and we've already have started this venture at the end of Q2 and now into Q3, we very much believe and are seeing that engagement start to come back in. So, as we continue to ensure that we're there for the consumer, I believe that transition into a little bit more of a promotional environment will continue, but will also continue to pay off for Dollar General. And then as it relates to a little bit of the inventory, before I pass it to Kelly, is I feel very good about the inventory that we're reducing versus having to restock based on sales. As you saw, we continue to reduce, at the highest level, our consumables business, and that's usually the slowest turn business as well. And the good thing, as we continue to look forward is, these goods are fresh, they're clean, and they're very sellable and, as you can see, are selling. So, it's good to see that, but I believe it's also good that we're seeing some of the reductions to make a little bit more room inside the stores for our customers to be able to enjoy that shopping experience.

Yes. And Todd is absolutely right. So, we feel really good about the quality of our inventory. And I think, and we called it out in the prepared remarks, this team has just done a remarkable job of reducing inventory while improving in-stock that is not easy to do. So, they're really focused on optimization, and you heard us talk about some investments last year that we put in place in order to help with that. And so, we're certainly rightsizing what we're bringing into our distribution centers and then out into the stores. And we have, I would tell you that the biggest unit decrease has been in our chain, which certainly helps with efficiencies and has driven some of the progress that we've made down that football field. And now we're starting to see it in stores as well. And so that's good to see. So, I would say that this is a real bright spot in the quarter.

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