Q3 2019 Earnings Call
Good morning, My name is fear that there will be the conference operator today at this time I would like to welcome everyone to the dollar General third quarter 2019 earnings Conference call Todays Thursday December 15, 2019, 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 calls are available in the Companys earnings press release issued this morning, no I would like to turn the conference over to Mr., Donnie Lal Vice President of Investor Relations and corporate strategy strategy. Mr. Allow you may begin your conference or.
Yeah. Good morning, everyone on the call with me today, we're talking diesel or CEO and John Gilbert CFO earnings release issued today can be found on our web site at Investor don't dollar General Dot Com under news and events I.
Let me caution you that today's comments include forward looking statements as defined in the private Securities Litigation Reform Act 1995, such as statements about or strategy plan initiatives go financial guidance or beliefs about future matters.
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 2018 Form 10-K filed on March 22nd 2019 and into common stock.
Her made on the school.
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.
We also were reference certain non-GAAP financial measures reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which as I've mentioned is posted on Investor don't dollar General Dot Com under news and events.
At the end of our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one follow up question if necessary now it's my pleasure to turn the call over to dawn.
Thank you Johnny and welcome everyone joining our call.
We are pleased with a third quarter results, including same store sales growth of 4.6% and strong performance across the business. The quarter was highlighted by our best customer traffic and same store sales increases in nearly five years as well as double digit growth in both the operating profit.
And diluted EPS.
As a result of our performance through Q3 and outlook for Q4, we're raising our full year guidance for 2019, John will provide these details during his remarks.
In short, we are executing well against both our operating and strategic priorities.
And we're confident in our plans to drive continued growth.
On that note I'm excited to share an update on some of these plans, which we believe will further differentiate dollar general from the rest of the discount retail landscape.
First as.
As you saw in our release, we plan to accelerate our pace of new store openings are remodels and 2020 in total we expect to execute nearly 2600 real estate projects next year, which represents an increase of more than 20% over 2019, as we continue to strengthen the foundation for future growth.
In addition, given the sustained and positive performance of our non consumable initiative or NCR high we plan to.
To expand the offering to an additional 2600 stores next year, bringing the total number of MCR stores to approximately 5000 by the end of 2020 more than double the current store count.
Finally, we now plan to begin shipping out of our fifth DG fresh facility by as early as fiscal year end 2019.
I will discuss each of these updates in more detail later in the call.
But first let's recap some of the topline results for the quarter net sales increased 8.9% to $7 billion compared to net sales of $6.4 billion in the third quarter of 2018.
We're particularly pleased with the balance nature of our sales performance. This quarter once again, driven by meaningful contributions across many fronts, including sustained positive sales momentum across our new stores and mature store base strong same store sales growth in both our consumable and non consumable product categories.
And another quarter of solid growth in average basket size and customer traffic.
Once again this quarter, we increased our market share and highly consumable product sales as measured by syndicated data with mid to high single digit growth in both units in dollars over the 412 24, and 52 week periods ending November 2nd 2019.
Notably our market share gains increased at an accelerated rate throughout these periods, which we believe speaks to the underlying strength and continue momentum of the business.
Our third quarter results further validates our belief that the actions we've taken and investments we've made our further enabling sustainable long term growth, while continuing to deliver value and convenience for our customers.
We continue to believe we operate in one of the most attractive sectors in retail and what the plans on initiatives. We have in place we are well positioned to drive continued growth in the years ahead.
With that I'll now turn the call over to John .
Thank you Todd Good morning, everyone now that Todd is taking you through a few highlights of the third quarter.
Let me take you through some of its important financial details unless I, specifically node otherwise all comparisons are year over year and all references to EPS referred to diluted earnings per share.
As Todd already discussed sales that will start with gross profit gross profit as a percentage of sales was 29.5% in the third quarter and increased one basis point.
This increase was primarily attributable to higher initial markups on inventory purchases reduction markdowns as a percentage of sales and a lower LIFO provision.
Actually offsetting these items were.
Increased transportation distribution cost higher shrink a greater proportion of sales coming from the consumables category and sales of lower margin products, comprising a higher proportion sales within the consumables category.
As today as a percent of sales was 22.5% decrease of 13 basis points.
Decrease was driven by a year over year reduction and hurricane related expenses, a reduction expenses for store supplies and lower retail labor costs as a percentage of sales. These items were partially offset by an increase in utilities costs.
As previously discussed we are investing in our four strategic initiatives. This year. We're pleased with the continued progress on each and remain excited about the long term transformative potential of these initiatives year to date to the third quarter, we've invested $33 million in SGN expense attributable to our strategic initiatives, we continue to believe.
These investments position us well to deliver meaningful benefits to the business over both the intermediate and longer term.
Moving down the income statement operating profit for the third quarter increased 11.1% to $491 million compared to $442 million in the third quarter of 2018.
As a percentage of sales operating profit was 7% an increase of 14 basis points, which represents operating margin expansion, even as we continue to invest for the long term.
Our effective tax rate for the quarter was 21.7% and compares to rate of 20% in the third quarter last year finally, EPS for the third quarter increased 12.7% to $1.42.
Overall, we're pleased with the balance performance the team delivered during the quarter once again, resulting in strong sales and profit growth.
Turning now to our balance sheet, which remains strong merchandise inventories were $4.5 billion at the end of the third quarter, an increase of 13% overall and up 6.9% on a per store basis. We continue to believe the quality of our inventories in great shape and remain focused overtime on driving inventory growth that is in line with or below.
Total sales growth.
Year to date to the third quarter, we generated significant cash flow from operations totaling $1.7 billion, an increase of 9.7%.
Total capital expenditures through the first three quarters of 2019 were five under 18 million and included our planned investments in new stores Remodels and relocations continued investments in construction of our Amsterdam, New York distribution center and spending related to the strategic initiatives during the quarter, we repurchased 2.5 million shares of our CFO .
Common stock for $400 million and paid a quarterly dividend of 32 cents per common share outstanding at a total cost of $82 million with today's announcement of incremental share repurchase authorization, we have remaining authorization of $1.6 billion under the repurchase program.
Capital allocation priorities continue to serve as well and remain unchanged.
First priority is investing in high return growth opportunities.
Including new store expansion infrastructure to support future growth.
We also remain committed to returning significant cash to shareholders to anticipated share repurchases in quarterly dividend payments, all while maintaining our current investment grade credit rating and managing to a leverage ratio of approximately three times adjusted debt to EBITDA.
Moving to an update on our annual guidance for fiscal 2019, as Todd mentioned, we're raising our full year guidance, primarily due to our strong operating performance through the first three quarters and expectations for the remainder of the year for fiscal 2019, we now expect net sales growth in low 8% range and same store sales growth in the mid to high three.
The percent range, we're increasing our expectations for operating profit growth to approximately 6% to 8% and expect adjusted operating profit growth of approximately 7% to 9%.
And we're raising our outlook for EPS to the range of $6.46 to $6.56 or adjusted EPS of $6.55 to $6.65, which translates to a range of approximately 10% to 11% growth on an adjusted basis.
Our adjusted operating profit growth and adjusted EPS guidance exclude the $31 million pre tax impact related to significant legal expenses that were recorded in the second quarter, both our GAAP and adjusted EPS guidance assume an estimated effective tax rate within the range of approximately 20% to 22.5%.
In terms of share repurchases, we now plan to repurchase approximately $1.2 billion of our common stock this year, which represents an increase of about $200 million relative to our previous expectation.
Finally, our 2019 outlook for real estate projects and capital spending remains unchanged.
We now provide some additional context on our current expectations first our guidance does not contemplate additional increases in tariff rates, where the expansion of products subject to tariffs beyond those which are currently in effect or included in the list for be China, Tara Poseley. As a reminder, we have some sales related headwinds associated with the short.
Holiday selling season, and the lapping of an estimated 70 basis points sales comp benefit from the pull forward of snap payments into last year's fourth quarter.
With regards to gross margin, we continue to expect our rate improvement in the second half to be roughly in line with Q2, when compared on a year over year basis. As a reminder, we strategically invested in targeted promotional markdown activity in Q4 2018, which at this time, we do not plan to repeat.
Finally in terms of SG Nay, we continue to expect to invest approximately $55 million and our strategic initiatives in 2019.
In summary, we are very pleased with our results through the first three quarters of the year and are excited about our outlook for Q4 as always we continue to be disciplined and how we manage expenses and capital with the goal of delivering consistent strong financial performance, while strategically investing for the long term, we remain confident in our business model and our ongoing.
Operating priorities to drive profitable same store sales growth healthy new store returns strong operating cash flow and long term shareholder value with that I will turn the call back over time.
Thank you John I'm very proud of the progress the team has made in advancing our key strategic initiatives, which we believe better position us for the long term sustainable growth, let us take you through some of the most recent highlights.
Starting with our non consumable initiative or MCR as a reminder, sci consist of a new and expanded assortment in key non consumable categories, including home Domestics Housewares Party indication.
The NC I offering was available in more than 2100 stores at the end of the third quarter and we remain on track to expand the offering to a total of approximately 2400 stores by the end of 2019.
We recently completed our six replenishment cycle and I'm very pleased with the sustained positive sales and margin performance. We are seeing across our enhanced product categories. We also continue to see a positive halo effect and consumable sales.
Overall this performance is contributing to improvements in both total sales and gross margin rate in these stores.
These results reinforce our belief that NC I can be a meaningful sales and margin driver as we move forward.
In fact, as I mentioned earlier, our plans include accelerating the rollout of anti to a total of about 5000 stores by the end of 2020.
As we look to further complement our strong and growing consumable business.
Turning now to DG fresh.
Which is a strategic multi phase phased shift to self distribution of our frozen and refrigerated goods, such as dairy deli and frozen products. These goods currently represent approximately 8% of our total sales.
The primary objective of DG fresh is to reduce product costs on our frozen and refrigerated items, thereby enhancing gross margin.
And while still early we're very pleased with the progress and product cost savings we are seeing.
Three other important goals of DG fresh are to drive on time deliveries higher increase in stock levels and eventually expand our assortment offering in these categories.
This could include a water sluggish and the both national and private brands as well as an enhance offering a better for you items.
In total we were self distributing to approximately 4900 stores from four DG freshpets facilities at the end of fiscal Q3, and now expect to capture benefits from this initiative and more than 5500 stores by the end of this year.
This compares to our previous expectation of approximately 5000 stores being serviced by DG fresh at year end.
Given the success, we are seeing and great progress by the team. We now plan to begin shipping out of our fifth DG fresh facility by as early as fiscal year end 2019.
We believe this positions us well to capture additional benefits as we move into next year and as we expect EG fresh will be accretive to both gross margin and operating profit rate in 2020.
In short we're very excited about the results. We are seeing from this initiative as well as the long term potential benefit it can deliver for our customers and our business.
With respect to our digital initiative, our efforts remain focused on deploying technology to further enhance the customer in store experience in total we believe digital can drive additional traffic as well as an increase in basket size and turn our digital engage customers checkout with an average.
Basket twice as large as the company efforts.
One important element of our digital strategy is pursuing opportunities to expand our customer relationships, including innovating to meet their increasing desire for convenience.
So that in some of the more recent highlights include the consolidation of our DG go way up into our primary dollar general App, bringing all our customer facing digital tools together in one easy to use application and furthering our efforts to deliver and even more frictionless shopping experience to our cut.
Customers.
The further rollout DG go checkout now available in more than 700 stores, which allows customers to use their phones to scan items as they shop and then skip the line by using a DG go checkout.
Expansion of our car calculator, INAP shopping and budgeting tool to approximately 15000 stores up from about 12000 stores at the end of the second quarter.
And finally, we remain on track to pilot DG pickup, which is our buy online pick up in store offering during the fourth quarter.
Our digital efforts are focused on making things easier for our customers by providing them, even more convenient frictionless and personalized shopping experience.
Importantly, these efforts will continue to be tailored specifically to the dollar general customer and remain an important component of our long term growth strategy.
Moving now the fast track, where our goal includes increasing labor productivity in our stores enhancing the customer convenience and further improving on shelf availability.
There are two key components to fast track first streamlining the stocking process in our stores through rotator optimization and with even more shelf ready packaging.
These efforts are designed to reduce the amount of time spent stocking shelves during the truck unloading and restocking process and we're pleased with the labor productivity improvements we are already seen.
We remain on track to complete our rotator optimization efforts by year's end, which is well ahead of schedule and positions us well to drive even greater efficiencies as we move forward.
The second key component to fast track cells is self checkout, which we believe can further improve speed of checkout, while also reducing the amount of labor hours devoted to this activity.
We recently launched a pilot and select stores and are pleased with the early results.
Overall, we are making great progress with our key strategic initiatives enabled through focused and disciplined execution.
We believe we are the innovative leader in our channel and remain well position to capture market share in a changing retail landscape.
Along with our strategic initiatives, we remain committed to our four operating priorities. Let me take our last few minutes to update you on some of our recent efforts.
Our first operating 40 is driving profitable sales growth.
The team has executed against a comprehensive plan to drive continued sales and profit growth with several ongoing initiatives. Let me quickly highlight just a few.
Starting with our cooler door expansion program, which continues to be the most impactful merchandising initiatives.
During the first three quarters, we added nearly 35000 cooler doors across our store base in total we expect to install more than 40000 cooler doors. This year as we continue to build on our multi year track record of growth in cooler doors and associated sales.
As a reminder, last quarter, we began incorporating higher capacity coolers into the majority of our new remodeled and relocated stores.
These coolers provide 45% more holding capacity than traditional coolers, which will allow us to expand our assortment offering by approximately 25%, creating additional opportunities to drive higher on shelf availability and deliver a wider product selection.
We believe these efforts not only extend our runway for growth in cooler doors, but also better positions us to capture additional sales opportunities, including those associated with DG fresh.
Turning now the private brands, which continues to be an important area of focus for us.
We know that private brands represents an opportunity to further enhance our value proposition for customers. While also benefiting gross margin.
We are executing a variety of tactics to drive additional growth of these brands, including enhancing our current offerings as well as introducing new product lines.
One key area of focus is accelerating growth within our existing private brand portfolio, where our plans consist of rebranding and repositioning these products to drive greater customer penetration.
We have seen great success with our efforts to date, including studio selection and general steps and believe there is significant opportunity with other existing brands as well.
In addition to our rebranding efforts, we have introduced new brands in certain categories, where we see sizable opportunities for growth.
Recent examples include the introduction of our popular believe cosmetic line as well as are good and smart brand, which remains an important part of our better for you offering.
In fact, as a result of vis a vis success better for you offering is now available in approximately 55 5400 stores with plans for further expansion as we move forward.
We are constantly evaluating our private brand portfolio and we'll look to further enhance our offering when and where we see opportunities.
Importantly, we are seeing some of our best private brand sales performance in several years, which reinforces our belief that we're on the right track to delivering even greater value to our customers, while continuing to drive profitable sales growth.
Finally, a quick update on our Fedex relationship.
During the quarter, we rolled out this convenient package pickup and drop off service to more than 1800 stores and expect to be in over 8000 stores by the end of 2020.
And while still early we're pleased with the reception. This services offering is receiving from our customers and continue to believe it will become a traffic driver over time.
We continue to explore innovative opportunities to serve our customers and we are excited about and able to deliver the leverage our unique real estate footprint allows us.
And also the convenient locations across the country.
Beyond these sales driving initiatives, we're also focusing efforts on enhancing gross margin.
In addition to the gross margin benefits associated with NCR high DG fresh and private brand efforts shrink reduction remains an important area of focus for us.
We added approximately 1000 additional electronic article surveillance units in the third quarter, bringing the total number of stores with Eas to approximately 13600, and we remain on track to incorporate these units in all stores by the end of the year.
We also continued to make progress in pursuit of further distribution and transportation efficiencies as we recently began shipping from our 17th traditional distribution center in Amsterdam, New York.
Additionally, we remain on track to reach our goal of approximately 300 private fleet tractors by the end of the year.
Finally, while the team has made significant progress with our tariff mitigation efforts, we continue to see opportunities to expand our foreign sourcing penetration, while diversifying our countries of origin.
Overall, we're pleased with the great.
Work the team is doing across the business to further drive profitable sales growth.
Our second operating priority is capturing growth opportunities.
We celebrated a significant milestone in the third quarter as we opened our 16000 store.
This is a testament to the fantastic work of our best in class real estate team, our proven high return low risk model for real estate.
Continued.
To be a core strength of the business.
As a reminder, our real estate model continues to focus on five metrics that have served us well for many years and evaluating new real estate opportunities.
These metrics include new store productivity actual sales performance average returns cannibalization and the payback period.
Of note our portfolio of new store openings in 2019 continues to perform very well.
Consistently beating pro forma expectations.
For 2019, we remain on track to opened 975, new stores remodeled 1000 stores and relocate 100 stores.
Through the first three quarters of the year, we opened 769, new stores remodeled 928 stores, including 480 in the Hyler higher cooler count DG, TP or DGP formats and relocated a 75 stores.
We also added produce to 65 stores during the quarter, bringing the total number of stores, which carry produce to more than 600.
As I noted earlier for fiscal year 2020, we plan to open 1000, new stores remodeled 1500 stores and relocate 80 stores, representing nearly 2600 real estate projects in total.
Additionally, we plan to add produce and approximately 250 stores in 2020.
Notably, we expect more than 1100 of our remodels to be in the DG TP or DGP format.
The remainder of the Remodels will primarily be in the traditional format.
As a reminder, our traditional remodel stores.
Which has an average of 22 cooler doors delivers a 4% to 5% comp lift on average.
This compares to an average comp lift of 10% to 15% for a de GTP or DGP remodel, which has an average at 34 higher capacity cooler doors.
Given the strong results, we continue to see from our remodel program. We are excited about the 50% increase in Remodels, we are targeting for next year.
Investing numbers are mature store base to incorporate our best and most impactful initiatives is an important component of our real estate strategy as we continue to leverage recent learnings and format innovation to capture additional market share.
With regards to new stores, we plan to accelerate the rollout of our DGX format next year targeting about 20 additional stores, bringing the total number of DGX doors to approximately 30 by the year end 2020.
The remainder of new store openings will primarily be in the traditional format. The majority of which will include higher capacity coolers.
I'm very proud of the team's ability to execute such high volumes of successful real estate projects and we are excited about the continued growth opportunities ahead.
Our third operating priority is to leverage and reinforce our position as a low cost operator.
With the customer always at the center of everything we do we remain committed to our low cost approach throughout the organization.
We have a clear in defined process to control spending and are constantly seeking opportunities to reduce cost where possible through a zero based budgeting mindset.
This process has produced significant cost savings to date in addition to fee generating initiatives such as our Fedex relationship.
We believe LOE costs always drives out high cost and we are steadfast in our pursuit of these opportunities.
Our fourth operating for already is to invest in our people as we believe they are a competitive advantage.
These efforts continue to yield positive results across the business as evidenced by continued record low store manager turnover strong applicant flow and a robust internal promotion promotional al excuse me promotion pipeline.
We continue to engage directly with our employees and are pleased with the participation rate and valuable feedback received in our most recent employee engagement surveys.
We value these conversations and look forward to continue nor work together to further enhance our position as an employer of choice.
We believe the opportunity to start and develop a career with a growing company is a unique competitive advantage and remains our greatest currency and attracting and retaining talent.
To that end in 2020, we plan to create more than 8000 net new jobs.
Importantly, our growth continues to foster an environment, where employees have opportunities to advance to roles with increasing levels of responsibility in a relatively short timeframe.
In fact more than 12000 of our current store manager toward managers are internal promotes and we continue to seek innovative opportunities to develop our teams.
In October we celebrated our 80th anniversary.
A lot of changes occurred and 80 years, but the one constant has been our unique culture, which is deeply rooted in our company mission of serving others.
On that note, we recently completed our annual community, giving campaign, where employees across the organization come together to raise funds for a variety of important causes.
I'm impressed every year by the generosity and compassion demonstrated by our team members, which reinforces our culture is alive and well and is a competitive advantage for dollar general.
In closing we are pleased with another strong quarter and the continued momentum we saw in the business as a mature retailer in growth mode. We believe we are uniquely positioned to continue delivering value and convenience for our customers and long term value for our shareholders.
As we are working through the busiest months in retail I want to offer my sincere. Thanks to each of our approximately 140000 employees across the company for their tireless dedication to serving our customers every day.
Our people truly make the differences dollar general and as I mentioned their dedication to fulfilling our mission of serving others is the bedrock of our culture.
We are excited about our results through the first three quarters and are working hard to finished the year on a strong note.
With that operator, we would like to open the lines for questions.
At this time, if he would like to ask your question. Please press star one on your telephone keypad now again that star one for any questions. As a reminder, ladies and gentlemen, please limit yourselves to one question and one follow up we'll pause for just a moment.
The first question will come from Matthew Boss with Jpmorgan. Please go ahead.
Great Congrats on a on a really nice quarter guys. Thank you Matt.
Todd maybe to start off can you speak to the health of the low income consumer and maybe how you'd handicap your topline strength that you're seeing today as we think about the industry backdrop versus your own offensive initiatives, meaning I guess, how confident are you that you can sustain the drivers of todays topline strength as we look ahead to next year and beyond.
Our first Matt I would tell you that our core consumer we see her about where we have the last couple of quarters.
He still has a little bit extra money in her pocket continues to.
Be employed at a pretty high rate, but always remember our core customer is always a little stretched.
And and she looks to us to provide that value and convenience that she has come to known from dollar general and.
As I look into the future.
Whether it be this quarter into next year I would tell you that.
The continued strength, we see in the topline sales results are really a combination of.
Good consumer, but I would tell you that.
That our initiatives are really starting to work for us.
Across all across the entire portfolio of businesses, we have both consumables and non consumables. So both are shorter term initiatives around coolers health and beauty Q lines et cetera, but also you probably noticed we've had some of our best non consumable results that we've had many years.
And a lot of that is coming from our longer term strategic initiatives, mainly NCR high where we've taken a lot of our RMC learnings.
And not only have got him in the 2100 stores that we've already launched it in but we've also flushed it back into the entire chain many of those.
Very successful Planograms that we've set we've actually put them inside of our 16000 stores, which is really starting to help drive that top line. So we feel very very good about sustainability of our of our comps as we as we go forward.
Great and then maybe just a follow up for for John on the gross margin I guess any difference between your gross margin performance versus internal plan. This quarter in the third quarter and then with the acceleration of DG fresh and then into next year is there any reason why your gross margin expansion opportunity as we think about next year.
Not potentially be larger than the performance that we're seeing this year.
Thanks, Matt ill start by saying, we feel very good about the balanced Q3 performance as we drove a strong topline as Todd mentioned, while increasing our margin rate slightly I will tell you that we still see the second half gross margin. The same as we did on our last call. We continue expect rate improvement as we mentioned in the second half to be roughly in line with Q2.
Compared on a year over year basis, and we see the same basic drivers there in play.
As we said we would we continue to be more targeted and promotional activity and as you can see we continue to drive very strong transaction growth great balance in our sales and have been growing our share. It at an accelerating rate. We also expect to see in are seeing continued growth in benefits from initiatives like DG fresh and NC I.
As Todd mentioned and as you look forward I'm not going to comment specifically on 2020, we'll be talking about that in our next call but.
Just more broadly as you look over the long term theres always headwinds there, but we see ourselves in a position to expand our gross margin over the long term, we see growing impact continuing from initiatives like DG fresh and NC I, we're really focused in our initiatives on the topline and the bottom line, we continued to see opportunity with category management is.
We mentioned in her prepared comments see lot opportunity around foreign sourcing penetration lot of great things going on with private label to drive that penetration on the shrink side. We're incorporating he asks in the remainder of the stores this year as well as operational focus on that.
The opportunity there over the long term and the teams done a great job on the supply chain side driving efficiencies. So we believe we're making the right investments and we believe we have a lot of levers to improve operating margin over the long term, while reserving the right when needed to invest in the customer.
Great Congrats again.
Thank you.
The next question will come from Rupesh per week with Oppenheimer. Please go ahead.
Good morning, Thanks for taking my question also congrats on a great quarter. Thank you. So I also wanted touched a little bit more about your acceleration in your real estate plans for next year or so if you could maybe talk a little more about your thinking beyond the decision accelerate your real estate projects and how you feel about the organizational capacity handle both the acceleration on the real estate front end really all the initiatives that you continue.
Under way.
Rupesh. Thanks for the question I would tell you.
We have really over the years base building built the capability.
To execute against a.
Very robust pipeline of real estate projects.
Even beyond that.
We have built the disciplines here and have proven over time that we can handle a lot of complex projects at one time, we have a great group of individuals at work for this company that work hard everyday to make sure that we executed a very very high level.
And that's what really gave us the.
The the notion to move a little faster here knowing the success that we have have have seen.
In the recent past, but even more so than that we want to make sure as we continue to take care of the mature store base of this company.
Touch every store every seven to 10 years to make sure. It's refreshed and has the best and brightest that we have available we really need to start to accelerate our our remodel programs to help facilitate that every seven to 10 year touch.
But again, we wouldn't be able to do that without all the great work that this team is able to produce in any given year.
Great and then one quick follow up question. So any initial thoughts in terms of their snap roles snapper, what changes are going to go into effect next year.
Yes, there is one that was in the news yesterday around able bodied work requirements, which would take effect April 1st 2020 based on what we know about this proposal we don't see this as a material impact next year as we see it. This is something we continue to monitor closely.
We've continued to see a long term trend of reduced benefits over time gradually but over that time, our share has grown as well. So we're still a little under 5% in terms of tender mix, but it really focused on what we can control and thats, making sure we're prepared to serve those customers as they need us.
Great. Thank you.
The next.
Next question is from Karen short with Barclays. Please go ahead.
Hi, Thanks for taking my question.
Just a follow up a little bit on the gross margin in general so.
I know you've consistently said and you said it twice on this call that second half gross margin will be similar to Q. So that implies kind of almost 30 basis point improvement in gross margin in the fourth quarter. So wondering if you could just provide a little color on why you see that.
Treatment and then you did call out shrink.
As a pressure point this quarter as distribution transportation, but can you elaborate a little bit on what was causing that is that got anything to do with any acceleration into fresh initiative.
Sure I'll start by talking about gross margin you're correct in the way you're thinking about the second half that would imply and thats. What we expect is increased gross margin expansion in Q4. The reason, we see more gross margin expansion in Q4 versus Q3 the to both main drivers I would point to is one.
The acceleration of our strategic initiatives as fresh scale as NCS scales, we see that playing a bigger and bigger role. The other piece is the promotional activity we are lapping.
Heightened promotional activity last year. It was targeted at served its purpose created a lot of momentum in the business, but we don't see need to repeat that in the teams done a really great job being very targeted in the promotional activity really focused on what moves the needle and we see ability to do less as a percent of sales. This year. That's the two main things I would point to as well.
As just seeing other opportunities and the other levers.
That we mentioned there in terms of shrink.
We've reduced shrink quite a bit over the last three years, but as we've said it's never straight line to the top in Q3, we were lapping a very challenging lap at the time that was the lowest shrink rate we had in many years.
What we've been trying to do this year is balanced shrink within stock improvement levels, we really look to take our in stock improvement to the next level, which is great in terms of driving sales, but it does present, a little bit more shrink exposure.
But we continue to see opportunity over the long term to drive further shrink improvement and with the incorporation of Eas units and all the stores by the end of the year, that's been a big benefit to us and we would expect benefits from that as well as leveraging all the other tools and technology and process rigor to drive that.
Down further over the long term.
So my follow up would be then as we led to 2020, just generally speaking it would sound to me barring anything unforeseen with respect to the competitive environment or the consumer.
That tailwind said the greater than the headwinds overall for next year.
I'm not going to comment specifically on 2020, I'll just speak to the longer term and what I would say is we feel like we have a lot of catalysts in place to drive the topline as we've mentioned we feel like we have a lot of levers within gross margin and SGN a to flow that through we're very pleased with where we're at this year.
Delivering double digit operating profit growth and EPS growth this quarter, while reinvesting in the business and as we look forward. We'll continue to look at that we want to make sure that we're delivering strong performance at the same time reinvesting in the business to protect the long term health and growth of the business. So I would look at it that way.
Great. Thanks very much.
The next question is from Ed Kelly with Wells Fargo. Please go ahead.
Yes, Hey, guys. This is a anthony on Fred Thanks for taking your question congrats on the thought quarter. Thank you. So clearly you guys continue to accelerate share gains given the comp performance and your initial remarks can you just talk about what you're seeing right now and the competitive landscape and then is there any specific channel that you think this is coming from or would you say it's been more.
Broad based.
Let me start with the second piece first as I would say that it is it is more broad based when you look at the at the share gains.
That we've seen and our core consumer continues to be again, a little bit healthy in that she has a bit more money in their pocket.
But I would tell you that as as we look.
Out there a lot of our initiatives are really the key driver behind the share gains.
And out outsize share gains at that and accelerating.
And you can really see it in in many of the categories that we've really got the emphasis on health and beauty being one our food and perishable initiatives you can really see the the initiatives.
Really resonating with the consumer and she is voting with their wallet on where she shops and it's great to see now our goal is to continue to be.
Fill in and that is exactly how our consumers continue to look to us, but with expanding assortments and fabulous prices, we feel that we give the opportunity to be able to fill in with confidence.
Got it that's helpful. Thanks, so much guys. Thank you.
The next question is from Michael Lasser with you BS. Please go ahead.
Good morning, Thanks, a lot for taking my question.
My question to give me a little bit of a Devil's advocate on the fourth quarter implied gross margin.
Pretty easy compares as you mentioned you do you engage in some promotional activities in the year ago period that you're not going to repeat you've got all of these really good gross margin drivers like DG fresh the anti.
Initiative being yet you're only guiding for 30 basis points of gross margin expansion in Fourq you to to get to like a 31.5% gross margin, which would be below where you've been over the last few years excluding 2018.
I wouldn't it be better than that.
Yes, what I would say Michael as you look at the squeeze on Q4 that as Kevin pointed out that end points, a pretty healthy gross margin.
What I would tell you is that one there are some headwinds were overcoming tariffs the teams done a phenomenal job mitigating that such that it's not immaterial impact wasn't a surprise to us but.
Still is the pressure and theres other pressures as well as well as reinvesting in the business. That's the way. We look at is if we can deliver double digit EPS growth, which is what our guidance implies tend to 11% while reinvesting in the business to put more catalyst in place for long term growth, we think thats a healthy balance that.
During the two.
Okay and my follow up question is it's very not maybe much not apparent from the financial performance that you've reported but given all that you do have going on have there been any hiccups with the opening any in these new fresh de Cesar.
Gauging in spy or opening new stores that we should be mindful about as as you get further into.
Executing some of these strategies over the next few quarters.
Hi, Michael as Todd I would tell you that to the team has done a phenomenal job across the board on each of those initiatives you just talked about and I would tell you that we have seen.
No Showstoppers, obviously, there is always going to be a bumper too, but they were very very manageable. We learn from those end and kept moving down the road and I think it's a real Testament.
So your question here is our notion that we're we're able to accelerate both our non consumable initiative into next year of course, accelerating our and growing the.
The fresh initiative into next year with up to five different new facilities as we as we go into 2020.
So I would tell you that.
Theres been some learnings, but more a whole lot more wins in any anything else that that we've seen and has given us great great confidence to move forward.
Sounds great have a good holiday I appreciate it sure. Thank you. Thank you.
The next question is from Simeon Gutman with Morgan Stanley . Please go ahead.
Hey, guys. This is the on few on for Simeon just wanted to dig in a little bit more on the topline momentum is there any kind of update on the basket size or the number of trips.
And then I guess within that you mentioned transactions are growing nicely. So are you gaining new customers or is that kind of the existing customer just coming more frequently. Thank you.
Thank you.
I would tell you that our topline was very balanced.
Very good mix of both traffic and ticket.
And I would tell you that the average basket size has upticked a little bit over the last.
Quarter or too.
As we continue to.
Refine our offering and give our customers more choices as we rollout DG fresh to more stores.
It also enables again an extra item in the basket if you will.
So we're very pleased with both traffic and ticket.
As as we see it as it relates to the consumer.
We continue to see that.
Our fastest growing.
Category, a consumer if you will is that consumer making 50000 or above.
And and we continue to believe that that she's shopping us more often because of all the work that we've done to refine that boxing given her an offering at a great compelling price.
And and she's I'm liking what she sees when she tries us actually sticking with us.
Even after the first few trial. So we're really excited about that gives us great confidence as we move into the into 2020 and beyond that we can drive that topline.
Got it makes sense and just as a follow up I guess, you're lapping this year in this quarter the hurricane related expenses you mentioned.
And so you see you had some leverage but maybe if you ex that out I mean, theres not as much leverage on the asset.
With comps came in so much stronger I guess why should we see more leverage on that.
What I would say is that we're proud of the Q3 and year to date cost control.
That we've put in place, while driving strong topline and investing in our strategic initiatives year to date, we've invested $33 million in our strategic initiatives, yet you know in Q3 and year to date leveraged.
Adjusted basis, we're laser focused on cost control make no mistake, but we're looking more broadly and operating profit and willing to make those tradeoffs that deliver the bottom line. So we're pleased with delivering double digit operating profit growth.
And delivering the double digit rate increase making those tradeoffs, but as you invest and things like DG fresh there is a trade off between gross margin SGN day, you have to spend a little bit more NSG and eight to save a lot more on gross margin and when you at the front end of these initiatives.
Theres more upfront cost, but as these grow over time and scale. We see these having great returns we mentioned in the call. We CDG fresh is being accretive from a rate.
And dollar standpoint next year. So we believe that we're making the right tradeoffs here and.
Believed that if we could deliver that kind of leverage while investing in the business. That's that's the right trade off for the long term and we believe these types of investments as well positions us well to be double digit EPS growers on adjusted basis over the long term.
Great. Thanks, guys.
The next question is from Scot Ciccarelli with RBC capital markets. Please go ahead.
Good morning, guys.
John I know youve bounce around this topic quite a bit today, but at this is also on margins.
I guess, just kind of taking a step back and we have seen a fairly consistent pattern.
Be making pretty sizable investments in the business over the last several years, whether it was price or training labor initiatives et cetera, and while there has been a nice payoff on the sales growth. These investments have weighed on profit growth and flow through so I guess, what I'm wondering as well are there any areas as you kind of sit here today that seem right for incremental investments.
Well.
As I as we look ahead I would tell you that theres nothing specific we see on the time horizon, which would be a substantial increase in investment I think we've got four really good investments before us now those are going to scale and as we grow those more money will be spent on those but as we've said we see those hitting a tipping point, we CDG fresh.
Hitting a tipping point, where it's accretive next year, we're already seeing accretion from anti we're investing in digital and we're investing in fast track.
Fast track on the labor side, we're seeing benefits there already with what we're doing with making it easier to stock the shelves, we're investing in self checkout, which we see is a great return over the long term, but we're just starting there. So we're pleased with what we're seeing with that test right now in terms of adoption and customer feedback and see that returning.
Over the long term. So these are various phases, but we see all of these providing.
Catalyst the topline, but also helping the bottom line, helping that margin rate.
I would tell you we're not giving specific guidance for next year, but don't see any major investments on the horizon beyond continuing down the path, we're on which is working very well for us.
Very helpful. And then just a quick follow up here.
Had seasonal goods that were up the same amount as consumables from a growth rate perspective, just curious if there was something specific that drove that this particular quarter or is a function of anti program any kind of guidance on that because obviously it helped you sell a richer mix good. Thanks.
Sure I would tell you that.
The the teams done a great job in our seasonal programs.
Not only seasonal but but many of our home.
Categories are doing very well and I would tell you that in C. I has.
Has given us a nice shot in the arm as it relates to the overall top line, it's even gotten us to look at our everyday 16000 stores a little differently as we continue to scale inside so I would tell you that.
That's really been the catalyst.
Behind it and we're very proud of the team's performance and our store teams performance in our non consumable categories.
The other note is apparel did very well even in a downsizing mode that we're in an apparel, we've made that even more productive.
As we expand out on other categories.
Apparel is still important to our customers in certain areas and we're capitalizing very well on that.
That's great. Thanks, guys.
The next question will come from John Heinbockel local with Guggenheim Securities. Please go ahead.
Hey, Todd let me start with.
Good for you assortment right, where does that stand now terms a number of items, where does where does that go do you think over the next year or two.
And is that the helping you broaden out your demographic appeal.
Yes, John I would tell you that.
Right now, we we see our better for you offering.
At about 5400 stores.
We see an opportunity to probably double that overtime.
And eventually into the majority of our stores, but everything we do here as you know it through the the the lens of the consumer and as the consumer continues to change and her preferences continue to change and also as we start to see a little bit more of a millennial customer showing up.
Which we have better for you continues to to grow with our customer base and we're going to grow with it.
The great thing is that we've got.
Upwards of of 20 feet worth the product today, the majority of that in our in our better better for you goodness Smart label, which is our private brand label, which makes that very very accretive for us, but I would tell you that as we continue to scale our fresh initiative.
That that more and more introductions into frozen dairy and Deli will also fall into some better for you type categories, and and sales opportunities and I agree with you fully and what we've seen in our data shows it is expanding the reach of consumers that we.
That we have today and we'll continue to get into the future.
Alright, and then secondly, I know the high capacity coolers, right, 45% more holding capacity.
When you think about the the productivity right would be the revenue where the volume that a big high capacity cooler can do versus a non.
Is it similarly.
You know 40, 50% of it can do that much more business or is really a flngs you got to keep it stop so maybe it's not going on.
Yes, I think thats the way to look at it is it does give us more more revenue I would tell you that for sure not not not not at a 40% rate, but this is really being done twofold reasons number one we are we are.
Ensuring that we're in stock as we rollout our new fresh initiative.
We would rather have it in the cooler on the sales floor than any back stock in the back room in that in a cooler waiting to be stock.
Thats number one, but it does give us 25%.
One more item capability, and that's where you're going to see the increase in sales come from.
In this initiative.
I'm happy to say that the majority of the stores.
That we put in the ground new next year as well as our remodel of Relos, we'll have those higher capacity coolers in them. So we feel real good John about where this is going to take us.
Thank you.
Thank you.
The next question will come from Chuck Grom with Gordon Haskett. Please go ahead, hey, good morning, guys good quarter.
Talking with dig a little bit into NCR, a little bit more maybe the number of skews, you're adding by store what the lift you're seeing.
Okay, and individual store and it seems like the gross margins are starting to nicely contribute maybe just sort of unpacked that for us a little bit more because obviously, it's it's pretty important you talk about the remodel of historically, but it sounds like it's something that we maybe could start to quantify.
I would tell you that.
Chuck that we plan to quantify this a little bit more as we move into next year, but let me, let me try to shape it up a little bit by saying that.
It is a complete redo of our of our non consumable categories in general and Andy and I would tell you that the mix is vastly different in those stores.
What you see in in our traditional stores on top of that it gets refreshed multiple times a year in many of the areas of events.
Where our Planograms our static if you will outside of seasonal in our in our traditional stores, so give something fresh and new to the consumer every time she comes in.
And.
Again, she has been been gravitating to resonate into that very very well.
Would tell you that it has been accretive to our our remodel sales again will quantify that probably a little deeper as we as we move forward, but both on the sales line and the gross margin rate line, we've seen benefits from this and as that continues to grow.
It will start to.
Benefit the entire company as we continue to grow that but the one point that I did want to again make is that we're taking some of those best of the best plan, a gram learnings and rolling them back into the 16000 store base and that's really what's giving us some of that.
The strength that you've seen over the last quarter to two in in our non non consumable categories. So we feel very good about where it's headed and we're only in the third inning here.
Bill to roll this out.
Okay. That's helpful and then just a follow up.
Along with the potential margin saving from eliminating the middle man and one of the benefits from bringing fresh distribution house was I believe the ability to get better access to brand. So just wondering if you could elaborate on progress on that front and anything we should expect over the next couple of years, maybe any specific brands that you've been able to bring in.
So thanks.
Chuck up as we continue to scale up fresh.
It is a goal of ours too to expand the brand offering in the areas.
That.
That our customers are looking for.
A lot of it in the in the Deli and frozen areas of the store and the one big area that we see opportunities to move forward as well is even in our own private brand offering, which we were excluded two really playing in any significant weigh in and that would include better for you as we continue to.
Move forward.
So that while that is a very important piece of the fresh initiative. The most important piece right now is getting the stores up and running.
Seamlessly, making sure we're in stock for the consumer driving that in stock rate, which will drive our sales higher and we've already seen that.
And then as we master that within the next upcoming a year or more will start to put in these new brands, which will also then help accelerate that top line in the fresh initiative. So we believe we got a multi year.
Pronged approach to this that should drive that top line.
And just a quick follow up I think you said 5500 stores, but then it or did you did you say how many you expect to be in by the end of 20 to 20.
Well I think what we've said Chuck is that the the pace of rollout is going to be very similar we'll probably expand that a little bit more but we plan to be in close to 12000 or more stores by the time, we leave 2020.
Okay, great. Thanks, Thank you.
And gentlemen, we have reached the top of the era. At this time. This does conclude today's conference call you may now disconnect.
Good.
Mm Hmm.