Good morning. My name is Rob, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Third Quarter 2024 Earnings Call. Today is Thursday, December 5, 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 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 & 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 a 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. We are pleased with our third quarter execution, particularly in light of significant impact of multiple hurricanes in the Southeast during the quarter. Before discussing our results, I want to express my appreciation for our team's tremendous efforts to serve our hometown communities following these storms. As an essential retailer and often the most convenient source of products our customers need, our teams worked diligently to reopen the stores as soon as we could safely do so in the impacted areas. In addition, we have helped those in need through the donations to the American Red Cross donating gift cards and through our own Employee Assistance Foundation. We further embrace the opportunity to help in recovery efforts by donating truckloads of products in these communities. Kelly will discuss the financial impact of these storms on our results later. But importantly, our thoughts remain with those impacted communities and we will continue to seek opportunities to partner with them in the months ahead. For today's call, I will begin by recapping our Q3 performance. After that, Kelly will share the details of our financial performance as well as our updated financial outlook for fiscal 2024. I will then wrap up the call with an update on our Back to Basics work before discussing our new same-day delivery pilot and our real estate plans for 2025, including Project Elevate. Turning to our third quarter performance. On the top line, while our core customer remains financially constrained, our results came in near the high end of our expectations for the quarter. Specifically, net sales increased 5% to $10.2 billion in Q3 compared to net sales of $9.7 billion in last year's third quarter. Importantly, we continued to grow market share in both dollars…

Thank you, Todd, and good morning, everyone. Now that Todd's taken you through a few of the top-line highlights of the quarter, let me take you through some of the other 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. For Q3, gross profit as a percentage of sales was 28.8%, a decrease of 18 basis points. This decrease was primarily attributable to increased markdowns, increased inventory damages and a greater proportion of sales coming from the consumables category. These factors were partially offset by higher inventory markups, lower shrink and decreased transportation costs. Shrink was a year-over-year tailwind of 29 basis points in Q3, which was better than our expectations coming into the quarter. While shrink rates as a percentage of sales continue to be higher than we would like to see in our stores, we are making progress as we work to get closer to pre-pandemic levels and believe our actions are having a positive impact. Now turning to SG&A. As a percentage of sales, it was 25.7%, an increase of 111 basis points. The primary expenses that were greater percentage of net sales in the current year period were hurricane-related costs, retail labor and depreciation and amortization, partially offset by a decrease in professional fees. As Todd noted, our stores have been heavily impacted by multiple hurricanes in recent months. While we believe the net impact of these storms was immaterial to both sales and gross margin, they resulted in a negative impact to SG&A of $32.7 million during Q3. Moving down the income statement, operating profit for the third quarter decreased 25.3% to $323.8 million. As a percentage of sales, operating…

Thank you, Kelly. I want to take the next few minutes to provide an update on our Back to Basics efforts in our stores, supply chain and merchandising. When I spoke with you one year ago and announced this plan, we noted that our customers rely on Dollar General to provide the products they need at great values in convenient, friendly and easy-to-shop stores. And when we step back and look at our business through the eyes of the customer, we weren't meeting that goal consistently across our chain. We laid out several important goals for the team to address these concerns, and I'm proud to note we have made substantial progress executing on these objectives and improving the overall customer experience. With that in mind, I want to share a little about our progress in each area. I'll start with our stores, where everything begins and ends for our customer. Our goal in our stores is to deliver value and convenience in a clean and friendly shopping environment. We have made significant progress on this front with a meaningful increase in the number of stores that we believe meet or exceed our expectations as well as those of our customers. As we view our stores through the eyes of the customer, we have seen this notable improvement continue to develop in our own unannounced store visits and, more importantly, our customers are telling us as they have noted this improvement through our survey results at checkout. Notably, as of the end of Q3, customer satisfaction levels have increased by more than 900 basis points since Q1 when we first had these surveys available in the majority of our stores. This coincides with improving in-stock levels, which increased approximately 180 basis points from Q3 of 2020 through to the end…

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] And our first question is from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Hey. Good morning, Todd and Kelly. My question is on the...

Good morning.

Good morning. The comp algorithm. How does it move now that you're mixing to a higher level of remodels versus store growth? It sounds like you could get almost a point of remodelled lift, assuming they continue to grow at the rate you expect over the next few years. Where does the comp algorithm land? And then consequently, if it's a little lower than what DG is used to, does -- how much does the cost structure need to evolve? It sounds like you're making progress in a lot of areas. Some of the supply chain may take a little bit longer, but can you match that cost structure so that you can deliver some of the former earnings growth prior to the last couple of years?

Thanks, Simeon, for the question. I think as we go forward, especially with the introduction of Project Elevate that we feel good that we can get back to the contribution that our real estate programs have given us on a comparable sales line. But with that, I'd also say you're absolutely right on the cost structure, and that's something we're focused on as we go forward into 2025 and beyond. Certainly, around shrink and damages, we've got a lot of focus on what that can do. Depreciation, that will play out over time and same will retail salaries as we move the year. So I would say we're going to focus on all those components, both top line and cost structure as we work to get back to our long-term double-digit EPS growth target.

Thank you. The next question is from the line of Michael Lasser with UBS. Please proceed with your question.

Good morning. Thank you so much for taking my question. Have you seen enough progress with improved execution as well as the mitigation in shrink for you to see line of sight to restoring double-digit EPS growth in 2025 despite having some incentive comp recurring next year?

Michael, this is Todd. Just real quickly, I do want to say that we're really pleased with the progress we have made on Back to Basics. Really excited about Project Elevate as well as other initiatives that we've either announced like home delivery or others that we're working on that we'll talk a little further about when we have our call in March. But in saying that, when you look in totality, we feel really good about being able to deliver on a lot of different aspects and lines. I'm very happy with the merch side as well as our operators and our DC pieces of the Back to Basics work, because it is laying that strong foundation for the future and getting back to where Kelly indicated, over the long term, those double-digit EPS algorithm growth models that we've traditionally have had. Now in saying that, we have still more work to do. We're never happy here at Dollar General, right. We want to capture as much growth as we possibly can. So we'll continue to work hard, not only on Back to Basics, but all the initiatives as we go forward.

Thank you. The next question is from the line of Matthew Boss with J.P. Morgan. Please proceed with your question.

Great. Thanks. So Todd, have you seen any notable change in consumer spending or behavior between consumables and discretionary from your low-income customer? Maybe could you talk to top-line trends that you've seen in November, maybe relative to same-store sales in the third quarter? And then, Kelly, just with the heightened promotional backdrop, I think you cited, now expected at least through year end. How best to think about gross margin puts and takes in the fourth quarter, maybe notably markdown?

Yes. I'll start, Matt. Thanks for the question, and I'll pass it over to Kelly. From a consumer perspective, I would tell you a very similar consumer behavior as we exited Q2, as we did now exiting Q3. So very similar. Buying very close to need, being very selective at the shelf. As a couple of examples of our discretionary side as well as our non-discretionary side of the business. If you think about the core consumer, what we saw in Q3, private brand continues to do very well. Also our Value Valley area, which is that $1 offering up to 24 to 36 feet of product, depending on the size store. As a matter of fact, value that $1 offering was our best-performing category for the quarter as much as 600 basis points above the nearest category. So it really goes to show that the consumer is seeking value, trying to make ends meet. And then in our prepared remarks, we did talk about being -- the last week of the month being some of our weakest, right? And again, that just really proves that, that consumer is trying to make ends meet. Now some glimmers of hope. We did talk about some in Q2 and a little bit now in Q3. She is buying the discretionary side. It's just -- she's been very selective when she does and she's buying it very close to need. As an example, we were pretty pleased with our Halloween offering as well as the takeaway from the consumer on the discretionary side of Halloween. So let -- not the candy side while that was good as well, but the other side of that equation. So there is a lot of hope there. Our offering is solid for holiday. And while there's a lot of selling left and, unfortunately, five less selling days between Thanksgiving and Christmas, we are optimistic on what that consumer will start to spend as we get a little closer in.

Yes. And just to give you a little bit more color on Q4. So what we're seeing as we move into November, obviously, the calendar shifts are pretty significant. And that makes 2019 the best comparison. And we did talk about that a little bit on the last call that it's probably if you take sales on a 2019 CAGR basis, that may be the best way to look at it. On a little color for November, we did come in slightly above the midpoint of our sales expectations for November. So certainly contemplated in our guidance, and there is a lot of selling season left, which is why we slightly narrowed our expectations of our previous sales guidance to make sure that we are capturing that. I'll tell you on the high end, what we're expecting is just kind of a macro neutral environment. And then on the lower end, it does provide for some softening of that. The other primary driver really of the guidance is around the hurricane-related expenses. And so you heard us talk about $33 million of pressure in the third quarter. And then we're expecting another $10 million of pressure from the same hurricanes in Q4, and that's really as we work to finish all of the repairs that we need to do on the stores that were impacted. To your question on the margin piece of that, the promo backdrop, it is a little bit elevated, but it's not anything outside of our expectations. So that didn't really change much. And neither did the other expectations around shrink or damages. So shrink is still considered to be a tailwind in Q4.

Thank you. Our next question is from the line of Kelly Bania with BMO Capital Markets. Please proceed with your question.

Hi. Good morning. Thanks for taking our question. Todd and Kelly, I was wondering if you could talk a little bit more about the same-day delivery pilot. What have you learned so far from there? How much of that cost your consumer, if they would like the added convenience of that program? And how are you thinking about the margin implications, either passing on the cost of that to the consumer or absorbing those? And just kind of big picture thoughts about what that could add to the DG kind of growth profile going forward?

Yes. Thank you for the question. We are excited about the pilot. We soft launched it very tail end of Q2. And now through Q3, we've got up to 75 stores up and running. I would tell you that we're testing, we're learning, we're refining both the native app and, of course, our website to make sure the experience is just right. But so far, the customer is gravitating towards it. It is something -- we do everything through the eyes of the customer here, Kelly. And I would tell you that as we launch this, the customer is saying to us, one, we want convenience. Two, we want an opportunity to always save money. And then third, believe it or not, they want that personalized experience. They don't want to stay anonymous. They want that. And because they know with that comes specialized offering. So we're able to also offer that through this through this delivery means. The great thing about the delivery piece, a few anecdotes as we just start here, is that it is something that's a little bit different than what you see in other offerings in that we are using a third party, so no labor expanded or expelled by our own folks. It's being done through a third party. Eventually, I believe it could -- it will be thousands of stores. It could marry very, very closely due to this third party, our DoorDash kind of offering that we have today, which we've been very happy with so far. So there's a lot of good news there and not a lot of burden on our stores. And as it relates to cost, again, we'll continue to refine that as well. But we've always said here, we're going to do delivery our way when it's…

Our next question is from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question.

Good morning and thanks for taking my question. So I just wanted to go towards FY 2025. Any initial puts and takes you can provide? I know your incentive comp could normalize. There could be some hurricane expense benefit. And including that, any initial thoughts on CapEx spend just given the significant increase in real estate products anticipated next year? Thank you.

Yes, Rupesh, thanks for the question. I think, obviously, we're not ready to give 2025 guidance yet, but I can absolutely give you a few of the puts and takes that we are taking a look at. So one of those pressures that's going to be going into 2025 is going to be incentive compensation. We'll give you a better idea of what that looks like when we have our conversations in March, but that will pressure on 2025. The other two pieces are pieces that you've seen put pressure on this year as well, which would be around retail salaries. So we are seeing, and we talked about this a little bit last quarter, some wage rate pressure. And so that continued into Q3 and will continue into Q4. We expect it could continue into 2025 or at least it would -- our exit rate would continue into 2025. And then, of course, depreciation and amortization, which has put pressure for the last couple of years. On the CapEx, I think we've done a really nice job of considering our capital allocation. I'm really excited about what we're doing around our remodels and being able to invest in our mature store base and the capital allocation that's associated with that. So with that in the new stores, what we are expecting right now is a CapEx that would be similar to this year's CapEx as a percentage of sales and making sure that we're investing in those high-return projects.

Our next question is from the line of Zhihan Ma with Bernstein. Please proceed with your question.

Hi, Todd and Kelly. Thank you for taking my question. I wanted to circle back on the remodeling side of things. Maybe a two-part question. One, I believe you historically mentioned that the DGTP remodels had an 8% to 11% comp sales lift that compares to the 6% to 8% you were mentioning today. So has there been any update on that front? And secondly, in terms of the mix of remodels versus new stores going forward, is 2025 a good model for the next couple of years as we think about the medium to longer term? Thank you.

Yes, absolutely. Thanks for the question. And so yes, we are expecting a comp lift of around 6% to 8%. You're right. We had quoted 8% to 11% last year. What it is, is really a function of what is occurring in the remodels. So as the base has a higher cooler count, when we go to remodel those stores, we are not including as many cooler accounts, and so that impacts top line. What I will say, though, is that the IRRs are still better than the new store returns. So we're really pleased with where those are landing. And then now that we've got Project Elevate, we're looking to add an additional comp lift of 3% to 5%, again, with a great IRR on those projects as well, higher than our new store returns. So anytime you can touch that many stores, you always get a big positive, and so we're pleased to do both with those lifts.

Yes. And I think I would also add on that, Kelly, that while we're not here to talk about the years ahead, but as you think about Project Elevate and our mature store base, and making sure that we're offering the customer exactly what she needs in the mature store base. We are excited about the opportunity that additional remodels every year could offer. If you think about it and you move in the next three to five years, you could essentially touch 80% to 90% of your store base, right, over time, on a much quicker basis, less than half the time, quite frankly, that we were -- we would have done so in the past. So more to come. We are just starting the journey. But the great thing about the Project Elevate, is -- and I just want to get you in the ballgame is the -- from a customer perspective, they see everything in Project Elevate that they would see in a normal remodel, less the additional coolers and produce. Everything else, the experience they see in a remodel, which they love today, they'll see in this project elevate. So excited about it. We'll talk, I'm sure, a lot more about it as we move through 2025.

Our next question is from the line of Kate McShane with Goldman Sachs. Please proceed with your question.

Hi. Good morning. Thanks for taking our question. Todd, you had mentioned last quarter that of the share gain that was up for grabs at the time that you didn't quite get your fair share, I know there's still been quite a few door closures in Q3 and we were wondering if you've seen any change with what you've seen with those opportunities this quarter?

Yes. Interestingly, we -- what we've seen is a little bit of a rebound of that. Matter of fact, our mid- to high-end consumer, we gained share once again in Q3. So happy to see that start to bounce back. So it's interesting how the consumer is reacting. She's being a little finicky. But at the end of the day, value always wins. It appears. And so she's starting to seek more and more value. So good to see that customer that's available out there in the marketplace that we were able to capture more of our fair share this quarter than we did last. And we've got our sights set on that. Very same type of dynamic as we move through Q4 here and into early 2025.

Thank you. The next question is from the line of Karen Short with Melius Research. Please proceed with your question.

Hey. Thanks very much. Good to talk to you. Wondering if you could just give a little bit more color on the actual dollars going into the standard remodels versus Project Elevate, and also what the return profile -- actual return is, as you calculate it? I know it's probably a little early on Project Elevate, but curious if you could give color on both of those.

Yes. So for our traditional remodels, we're expecting a similar investment on the capital expenditure side. And I would tell you on Project Elevated is significantly less than that. So that's why it fits really nicely into our capital allocation structure. On the returns, we will -- you're right on Project Elevate a little early, but I will tell you that what we are contemplating are IRRs that are significantly higher than our new store IRRs and are relatively in line with the traditional remodels.

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

Hey. Good morning, everyone. I wanted to focus on the gross margin. The trend is improving, down less this quarter than prior quarters. As you think about some of the tailwinds such as shrink on paper that should build into the fourth quarter and into next year, can you speak about that? And how you're thinking about gross margin expansion year over year, starting in the fourth quarter? And maybe just in general, how you think about the recoverability of the gross margin from here? Thanks so much.

Yes. I think shrink is probably our biggest opportunity. And so as we think about what the Q4 looks like, it should certainly add some benefit to the gross margin line. We have a -- we still have a lot of work to do, I would say, on shrink while we have made a ton of progress, and we think it will be a tailwind as we move into 2025 as well. So certainly pleased with the progress that we're making, but just want to call out that the shrink is really a continuous improvement journey. And just as a reminder, because of the long tail, it does take year for us to get the full impact of any actions that we take to show up in the financial statements just because as we take inventory through the year, that's when we'll get the benefit of that. And so that could be a little bit longer journey, but certainly should be a tailwind to 2025. Our goal is still to hit those pre-pandemic shrink levels, and we feel like we have a path to get there.

The next question is from the line of Scot Ciccarelli with Truist Securities. Please proceed with your question.

Hey, guys. So historically, when your core customers been pressured, it's usually resulted in higher traffic, but lower ticket as folks buy less become in more frequently. Today, we're seeing the opposite happen with traffic dropping in the last few quarters. Todd, why do you think that is playing out that way? And would you expect that to change at some point?

Yes. We are squarely focused as always on driving traffic. So that's, first and foremost, I think, is important. But as you start to think about the traffic number, this was the first quarter that we actually lapped a positive traffic number from LY. So we anticipated it softening as we move through this quarter from a year-over-year perspective, obviously. But we were happy with the traffic gains that we did see in the quarter, but we are never satisfied with where we are. We're always pushing more. Now the dynamic that you also indicated that the ticket being up is something to watch. The good thing is, is that a lot of that ticket that we saw was -- really came from some of the discretionary areas of the store. And so it is good to see that she's shopping that side as well. So more to come there. I believe, as I indicated earlier, that she has the money to spend, but she's been very, very frugal with that spend. And when she spends it. So we'll continue to watch that, but working hard to drive traffic through the back half of this year, which is -- or the back quarter of this year here in Q4, but also to start off the year on the right foot here in Q1.

Our next question is coming from the line of Paul Lejuez with Citi. Please proceed with your question.

Hey. Thanks, guys. Curious when you do a remodel, how much of that expected comp lift is traffic versus conversion versus ticket? And then second, on that shrink opportunity on the gross margin line, I'm curious if there's an offset on the SG&A line? And then, Kelly, maybe just high level, how you're thinking about SG&A leverage point for next year?

Yes, I'll start, Kelly, and I'll pass it over to you. Yeah, as we look at that remodel program, what we normally see in remodels is that normally, it -- your uptick happens from the offering itself. So more on the ticket side of the equation. And then as time goes, the traffic starts to pick up as well. So just like any remodel that we've done, we believe Project Elevate will probably fall into that same category because what will happen is word of mouth will get out that we've remodeled the store and then traffic normally builds. So it's usually ticket first and then traffic to come as we move through the months beyond those remodels.

And then on the shrink side, on 2025, I think it could be a big contributor to gross margin as we move into next year. On the SG&A leverage point, I think it still stays the same as where it's been historically. A 2% to 4% comp helps us get to that leverage point, and that's what we'd be looking for, and that's what we would want comps to build to over the longer term.

Thank you. Our final question is from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Thanks. Good morning. Good progress. Todd, just how are you thinking about the company's operating margin structure over time? It looks like if we back out the hurricane costs, you're going to exit this year a little bit around 5%. Can you improve on that over the next couple of years? Or do you feel like the business needs to see some investments both from labor and maybe price before you build from there?

Yes. Thanks for the question, Chuck. Let me start, and I want Kelly to jump in as well. I would tell you that we are pleased where we came out here in Q3. As you look at our business, there is expense headwind that's there. We've got a lot of levers to be able to pull though as well into the future. While we're not here yet to talk about 2025 and beyond, I would tell you that we are squarely focused on achieving a better rate than where we are today that you mentioned. But we've got some work to do. Now I would also tell you, we feel good about the labor line from the respect of how many hours the stores have. We don't believe a big investment is still needed at this point. I do feel good about the hours we have and the ability of the stores to be able to produce from that. So we don't believe a big uptick there. And we don't see any huge upticks in other expense lines other than obviously, incentive pay and some of the other things that Kelly already mentioned, that will come back at us in 2025. Kelly?

Yeah. No, absolutely. And as you can hear, we're really managing this business for the long term and focusing on double-digit EPS growth. And we do think we can get back to that over the time. We've got still a lot of underlying long-term drivers in place, and that includes a long runway for new store opportunities with high returns. And so that hasn't changed. We've got other long-term margin drivers. We think we've got a path to the shrink reduction. We have a path, we believe, to stabilizing the sales mix. And then we have DG Media Network, which we're really excited about and continue to be excited about and delivery could certainly play a big role in that. You've got private brands and global sourcing opportunities, our category management. I'm really excited about the potential of inventory optimization as we look in the future, both on the sales line and as well as what it gives us on working capital. Supply chain efficiencies with some of the automation that we talked about today, and then, of course, our save-to-serve approach of controlling costs and always being that low-cost operator. And then the other thing I would just point out is that we have been generating a significant amount of cash flow, which does allow us to invest in the business and you say that today with our real estate announcement and being able to invest even more in our existing stores at a rapid pace with Project to Elevate. So with all of those things in mind, we really do believe we've got a long-term opportunity to drive higher sales and margins that would support that double-digit EPS growth. So while we're not ready to commit to a time line or, of course, the guidance beyond 2024 at this time, we do think that, that double-digit EPS growth remains our long-term target, and we believe it's possible to achieve it.

Thank you. At this time, this will conclude our question-and-answer session and also conclude today's conference. We thank you for your participation. You may now disconnect your lines at this time, and have a wonderful day.