Q4 2019 Earnings Call
Good morning, My name is Robert and I will be your conference operator today.
Time I'd like to welcome everyone to dollar General fourth quarter 2019 earnings call today is Thursday March 12 2020.
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 coal are available in the Companys earnings press release issued this morning.
Now I'd like to turn the conference over to Mr. Daniello, Vice President of Investor Relations and corporate strategy. Mr. Allow you may begin.
Thank you Robert Good morning, everyone on the call with me today are taught days off or CEO, Jeff Oh, one or C O and John Garrett or CFO.
Earnings release issued today can be found on our web site at Investor <unk> dollar General Dot Com under news and events.
We caution you that today's comments include forward looking statements as defined in the private Securities Litigation Reform Act 1995, such as statements about our strategy claims initiatives goals financial guidance for belief 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 and our 2018 form 10-K filed on March 22nd 2019 and into.
Instead are made on this call.
Sure not unduly rely on forward looking statements, which speak only as of todays call.
Dollar general disclaims any obligation to update or revise any information discussed in this call unless required by law.
We also will reference certain non-GAAP financial measures reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which as I mentioned is posted on Investor Dot 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.
She wants to one and one follow up question if necessary.
It's my pleasure to turn the call over to talk.
Thank you Tony and welcome to everyone joining our call.
We are very pleased with our fourth quarter results capping off a strong year or performance across the company.
Notably our full year results include our best sales comp increase in seven years and double digit deluded EPS growth.
The quarter was highlighted by same store sales growth of 3.2%.
Despite the lab with an estimated 70 basis points sales comp benefit from the pull forward of snap payments into Q4 of last year.
And double digit growth in both operating profit and diluted D. P. S.
Of course, the said, we're especially pleased that we delivered strong operating margin performance. This quarter, even as we continue to invest in key areas, including our strategic initiatives to strengthen our competitive position and support long term sustainable growth.
Overall, we are executing well against both our operating and strategic priorities and believe we are well positioned to drive continued growth as we move forward.
During today's call Oh first recap some of the topline results for the fourth quarter and full year. John will then review our financial results in more detail as well as discussed our financial guidance for fiscal Twentytwenty.
Sure, Jeff and I will provide an update on our operating priorities and strategic initiatives.
Including some key actions, we've taken that not only contribute contributed to our strong results in 2019, but have also laid the groundwork for what we expect to be another solid year performance in 2020.
During the fourth quarter net sales increased 7.6% to $7.2 billion compared to net sales of $6.6 billion in the fourth quarter of 2019.
We're particularly pleased with the balance nature of our sales performance once again, driven by meaningful contributions across many fronts, including sustained positive sales momentum across new stores and mature store base.
Strong same store sales growth in both our consumable and non consumable product categories and another quarter of strong growth in customer traffic and average basket size.
Once again this quarter, we increased our market share in highly consumable products sales as measured by syndicated data with mid to high single digit growth in both units. Some dollars over the 412 24, and 52 week periods ending January 25th Twentytwenty.
Importantly, our market share gains continue to increase at an accelerated rate throughout these periods, which we believe speaks to the underlying momentum of the business.
For the full year net sales increased 8.3% to $27.8 billion compared to net sales of $25.6 billion in 2018.
Same store sales for the year increased 3.9%, which as I mentioned earlier represents our best for your comp sales performance in seven years and includes our highest increase in customer traffic since 2015.
Notably 2019 marked our 30th consecutive year or same store sales growth. This underscores our belief that dollar generals unique value and convenient proposition continues to resonate with our customers and all economic cycles and speaks to the resiliency of our business model.
Collectively we view. These results has further validation that we are pursuing the REIT strategies to enable more balanced and sustainable growth, while creating meaningful long term shareholder value.
We continue to believe we operate in one of the most attractive sectors in retail and are well positioned to advance our goal of further differentiating and distancing dollar general from the rest of the discount retail landscape.
Before I turn the call over to John I want to note that we are following the krona virus outbreak closely and our thoughts are with every one effective.
As compared to some retailers our direct import sourcing exposure is relatively limited although many of our domestic vendors also source from other countries.
We have limited insight into the extent to to which our business may be impacted by this outbreak and there are many unknowns, but we currently do not anticipate immaterial impact on fiscal 2020 results from anything that we have experienced to date.
Of course, we're continuing to monitor the events closely.
We're also mindful of those who were impacted by the devastating tornadoes that struck Nashville and surrounding areas last week and we are actively working to support our people and this community.
<unk> as I've said before our business is built on people and their health and safety will always be top priority.
With that I'll now turn the call over to John.
Thank you Todd good morning, everyone.
Got it is taking you through a few highlights of the fourth quarter and full year, let me take it to some of the important financial details.
Unless I, specifically node otherwise all comparisons are year over year, and all references to EPS refer to diluted earnings per share.
As Todd already discussed sales I'll start with gross profit.
Gross profit as a percentage of sales were 31.8% in the fourth quarter, an increase of 60 basis point.
This increase was primarily attributable to higher initial markups on inventory purchases and the lower LIFO provision. These factors were partially offset by increased markdowns as a percentage of sales a greater proportion of sales coming from the consumables category sales at lower margin products, comprising a higher proportion of sales within the consumables cat.
Great and increased distribution costs.
S DNA as a percentage of sales is 21.7% an increase of 13 basis points. These results were driven by increases in store occupancy costs repairs and maintenance expenses in advertising costs.
I didn't were partially offset by decrease approximately $11.6 million in hurricane and other disaster related expenses compared to the 2018 fourth quarter.
During the quarter, we invested approximately $20 million in S. DNA expense attributable to our strategic initiatives. We're very pleased with the progress on each and continue to believe these investments position us well to deliver meaningful benefit to the business over both the intermediate and longer term.
Moving down the income statement operating profit for the fourth quarter increased 12.9% to $721 million compared to $639 million in the fourth quarter of 2018 as a percentage of sales operating profit was 10.1% an increase of 47 basis points, which reflects another quarter of operating margin expansion.
Despite continued investment in our strategic initiatives.
Our effective tax rate for the quarter was 23% and compares to a rate of 21.2% in the fourth quarter last year finally, EPS for the fourth quarter increased 14.1% to $2 intensive.
Overall, we're very pleased with the strong and balanced performance the team delivered during the quarter, which contributed to solid who your GAAP and adjusted EPS growth of 11.2% and 12.7% respectively.
Turning now to our balance sheet, which remains strong.
Nice inventories were $4.7 billion at the end of the fiscal year, an increase of 14.2% overall and up 7.8% on a per store basis. We continue to believe the quality of our inventories in great shape and remain focused overtime and driving inventory growth that is in line with or below our total sales growth for.
For 2019, we once again generated significant cash flow from operations totaling $2.2 billion, an increase of $94 million or 4.4% as a percentage of sales operating cash flow was 8.1%.
Total capital expenditures for the year were $785 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 our strategic initiatives during the quarter, we repurchased 2.7 million shares of our common stock for 415 million.
In dollars and paid a quarterly dividend of 32 cents per common share outstanding at a total cost of $81 million for the full year. We returned a total of $1.5 billion of capital to shareholders to combination of share repurchases in quarterly dividend payment at the ended the fourth quarter remaining share repurchase authorization was $1.1 billion.
Our capital allocation priorities continue service well, our first priority is investing in high return growth opportunities, including new store expansion in our strategic initiatives. We also remain committed to returning significant cash to shareholders through anticipated share repurchases in quarterly dividend payment all while maintaining our current investment grade.
Rating and managing to a leverage ratio approximately three times adjusted debt to EBITDA are moving to our financial guidance for fiscal 2020, we expect another year of solid performance from our core business, you'll by healthy balance of comparable sales growth and new store development. In addition, we anticipate positive gross profit contribution.
From our strategic initiatives, specifically, our non consumables initiative or anti MDG fresh that said, we also expect continued investment in our strategic initiatives. In addition to the ongoing expenses associated with each as we continue to lay the foundation for long term sustainable growth.
It's all that and might we expect the filing for fiscal 2020 net sales growth of 7.5% to 8% same store sales growth of 2.5% to 3% EPS growth of approximately 11.5% or approximately 10% compared to 2019, adjusted EPS and inline with our long term goal of delivering double digit.
EPS growth on adjusted basis, while also continuing to invest that long term.
As a reminder, 2019 adjusted EPS excludes a $31 million pre tax impact related to significant legal expenses recorded in the second quarter 2019 as discussed in today's earnings release.
Our EPS guidance assumes a fiscal 2020 effective tax rate in the range of 22% to 22.5%.
Capital spending is expected to be in the range of $925 million to $975 million as we continue to invest in our strategic initiatives and core business to support and drive future growth.
In regards to shareholder returns as we outlined in today's press release, our board of Directors recently approved a quarterly dividend payment of 36 cents per share, which represents an increase of 12.5%.
We also plan to repurchase approximately $1.15 billion of our common stock. This year finally, our 2020 outlook for real estate projects remains unchanged from what we discussed with you at our Q3 2019 earnings call. Let me now provide some additional contacts through our current expectations as I noted earlier, we anticipate continued and meaning.
Full investment in our strategic initiatives this year, including ongoing expenses associated with each we continue to believe these investments will improve operating margin over time, particularly as the benefits to gross margin continue to scale and ultimately outpaced the associated expense.
The idea refresh our near term examples of this dynamic as we expect both will be accretive to operating margin in 2020.
That these investments will continue to pressure SJ rate this year as we accelerate their rollouts with regard to tear ups. Our guidance does not contemplate additional changes to tariff rate or product subject to tariffs beyond those which are currently in effect. Finally, as Todd mentioned, we're closely monitoring events related to the corona virus, including potential impacts on our business.
At present, although we anticipate delays on certain goods originating in China, we do not anticipate a material impact on our business or fiscal 2020 financial results and have not taken any such impact into account in our guidance.
In summary, we're very pleased with our 2019 result, and excited about our plans for 2020 as always we continued to be disciplined and how we manage expenses and capital with the goal delivering consistent strong financial performance, while strategically investing for the long term, we remain confident in our business model and our ongoing financial priority.
These to drive profitable same store sales rep healthy new store returns strong free cash flow and long term shareholder value with that I will turn the call over to Jeff. Thank you John.
Want to take the next few minutes to update you on our for operating priorities, including our plan for 2020.
Our first operating priority is driving profitable sales growth do that in the team is executing against a portfolio of initiatives designed to drive continued growth while keeping the customer at the center of all we do.
Let me highlight just a few.
Our cooler door expansion program continues to be our most impactful merchandising initiatives importantly, in addition to being a great sales and traffic driver the expansion of our cooler door footprint over the years has provided the scale necessary to enable DG fresh.
In turn given our DG fresh learnings and successes to date, we recently began incorporating higher capacity coolers into our stores, creating additional opportunities to drive higher on shelf availability and deliver a wider product selection.
We expect to further capitalize on these opportunities with plans to accelerate our growth cooler doors in 2020.
In fact, we expect to install approximately 55000 additional cooler doors. This year, which is about 10000 more than we did in 2019, the majority of which will be in higher capacity coolers. As we continued to build on our multi year track record of growth in cooler doors and associated sales.
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Turning now to private brands, which continues to be a priority as we pursue opportunities to further enhance our value proposition while also benefiting gross margin.
We're especially pleased with our ongoing rebranding and repositioning efforts, which contributed to our strong results in 2019, including our highest private brand sales increased six years.
Standouts in 2019 included both our studio selection and gentle steps product lines and we explained we plan to expand each of these brands in 2020.
We also believe there's significant opportunity with other brands as well in fact, our plans. This year include the rebranding of several additional product lines, including stationary laundry.
Hardware automotive pet food and party.
Also in 2020, we plan to execute a redesign of Clover Valley, our largest and most successful private brand, which generated over $1 billion in sales in 2019, as we seek to drive overall category awareness and even greater customer adoption.
In short we're pleased with the continued momentum we are seeing across our portfolio a private brands and believe we're on the right track to deliver even greater value for our customers, while continuing to drive profitable sales growth.
I also want to highlight our better for you offering which continues to resonate with our core customers.
As a reminder, this product line consists of a variety of better for you options at low prices and is now available and approximately 5600 stores with plans to expand to more than 8000 stores by the end of the year.
Next.
Quick update on our Fedex relationship, which provides customers with convenient access to Fedex package pickup and drop off services.
This service is currently available in more than 2500 locations with plans to expand to over 8500 stores by year end further advancing our long track record of serving rural community.
Importantly, we continue to explore innovative opportunities to serve our customers and are excited to be able to leverage our unique real estate footprint to provide solutions for them and convenient locations across the country.
Beyond these sales driving initiatives, we continue to focus on enhancing gross margin.
In addition to the gross margin benefits associated with our NC Guy DG fresh and private brand efforts foreign sourcing continues to represent a significant opportunity for us.
Our goals include increasing penetration and diversifying countries from which we source and we're pleased with our progress on this front.
In fact, we successfully reduced our direct sourcing exposure to China by approximately 7% in 2019.
And are targeting a further reduction of an additional 7% in 2020.
We are currently sourcing product from over 35 countries up from nine countries at the end of 2018 and expect to further increase our countries of origin. This year as we continue to lay the foundation for ongoing success in this area.
Additionally, while the team has made great progress in recent years shrink reduction remains an important area of focus an opportunity.
During 2019, we added more than 6000 additional electronic article surveillance units completing our rollout to the entire chain.
Looking ahead, we plan to build on our success with success with Eas as we increase the number of products tagged, while further leveraging technology to drive even higher levels of in store execution.
We also continued pursuit distribution and transportation efficiencies.
Reducing stem miles is an important contributor to these efforts and the successful opening of our Longview, Texas and Amsterdam, New York distribution centers in 2019 is expected to drive additional efficiencies as we move ahead.
Our plans also consist of the continued expansion of our private fleet in 2020, as we look to further reduce our dependency on third party transportation carriers.
Overall, we're pleased with the great work that team is doing across the business to further drive profitable sales growth and are excited about our plans for 2020.
Our second priority is capturing growth opportunities are proven high return low risk model for real estate growth continues to be a core strength of our business and enhances our ability to bring value and convenience to customers across the country.
As a reminder, our real estate model continues to focus on five metrics that have served us well for many years in evaluating new real estate opportunities, including new store productivity actual sales performance average returns cannibalization and the payback period.
Of note, we continued to see very consistent performance across these metrics and with average returns of 20% to 22%. We continue to believe new store growth is the best use of our capital.
In 2019, we celebrated the Grand opening of our 16000 store and completed a total of 2099 real estate projects slightly more than we had initially anticipated.
For 2020, we expect to open 1000, new stores remodeled 1500 stores and relocate 80 stores, representing nearly 2600 real estate projects in total or an average of seven projects per day as we continue to deploy capital and these high return investor.
Yes.
Importantly, we expect more than 1100 of our remodels to be in the higher cooler count DG TP or DGP format, bringing our total number of stores in these format to approximately 3500 by year end.
The remainder of our Remodels will primarily be in the traditional format. Many of which will include the higher capacity coolers I mentioned earlier.
We're also accelerating the expansion of our produce offering which provides the top 20 items typically sold in traditional grocery stores and covers approximately 80% of the overall categories. They carry.
Our plans now consist of adding produce in approximately 400 stores. This year up from our previous goal of about 250 stores, bringing the total number of stores with produce to more than 1000 by year end.
Hi, 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.
Over the years, we have established a clear and defined process to control spending which governs our disciplined approach to spending decisions.
This is zero based budgeting approach internally branded as saved to serve keeps the customer at the center of all we do while reinforcing our cost control mindset.
At the store level, our operational initiatives for 2020 consist of building on our recent success with fast track, which Todd will discuss in more detail as well as ongoing efforts to simplify our operations by reducing unproductive inventory and operating complexity.
As I highlighted earlier, we're also focused on improving distribution and transportation efficiencies while at the store support center work simplification and process improvement our ongoing initiatives to take cost out of the business.
In addition to generating significant savings to date. This process. That's also produced other meaningful initiatives such as our 2019 partnerships with Western Union and Fedex and the income associated with these service offerings.
Our underlying principles are to keep the business simple, but moved quickly to capture growth opportunities, while controlling expenses and always seeking to be a low cost operator.
Our fourth operating priority is to invest in our people as we believe they are a competitive advantage.
2019 was a banner year in many ways underscored by another record low and store manager turnover.
Following a record low the previous year.
In addition, we continued to be pleased with our strong applicant flows in the length of time. It takes to fill open positions, which we believe further demonstrates that our commitment to investing in our people is resonating in the communities we call home.
I'm also pleased to announce for the ninth consecutive year dollar General was included in training magazine's top 125 list, placing number one overall for the second year in a row.
And while we're excited about these accomplishments the team has already focused on additional opportunities to further develop our people in 2020, including enhancing our store manager training program to include even more hands on learning.
Increasing the size of our assistant store manager development program and continuing to grow our private for fleet driver training program, including the funding and facilitation of training for employees to obtain their commercial driver's license.
In addition, we continually strive to create opportunities for people to grow and develop at dollar general.
As a result more than 12000 of our current store managers were promoted from within and internal placement rates remained strong across the organization.
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.
In summary, we are executing well and making great progress against each of our operating priorities. We have a robust set of initiatives in place for 2020 and are confident and our plans to drive continued growth in the years ahead.
With that I'll turn the call back over to Todd.
Thank you, Jeff I'm very proud of the progress team has made advancing our key strategic initiatives. Let me take you through some of the most recent highlights as well as our plans for 2020.
Starting with our non consumable initiative or NCR <unk> as a reminder, NCR consist of an enhanced and expanded product offering in key non consumable categories.
NC I offering was available in approximately 2400 stores at the end of 2019 and our plans include accelerating the rollout to a total of about 5000 stores by year's end.
We're especially pleased with the sustained positive sales and margin performance, we are seeing across our enhanced non consumable product categories. We also continue to see a positive halo effect in consumable sales.
Overall this performance is contributing an additional 1% to 2% increase in total sales comp compared to a typical remodel as well as a meaningful improvement in gross margin rate in these stores.
And while the N C store count is still relatively small compared to our overall store base. We are realizing additional benefits by leveraging learnings from these stores.
Specifically, we are incorporating select NCR products and full planograms throughout the broader store base, resulting in positive sales and margin contributions across the entire chain.
Turning now to DG fresh, which is a strategic multi phased shift to self distribution of our frozen and refrigerated goods. These goods currently represent approximately 8% of our total sales.
The primary objective of DG fresh is to reduce product cost on our frozen and refrigerated items by removing the markup paid to third party distributors, thereby enhancing gross margin.
And while as expected this cost of goods benefit was more than offset by initial startup costs and associated operating expenses. In 2019, we continued to be very pleased with the product cost savings we are seeing.
In fact, as John mentioned, we expect DG fresh will be accretive to operating margin in 2020.
As the benefits begin to exceed associated expenses and grow in the years ahead as we continue to scale this transformational initiatives.
Another important goal of DG fresh is to increase sales in these categories by enabling the accelerator rollout of our higher capacity coolers, increasing in stock levels and eventually expanding our overall assortment offering.
This could include a wider selection of both national and private brands as well as an enhance offering a better for you items.
And well produce is not included in our initial rollout plans, we believe DG fresh could eventually provide the potential path forward to expanding our produce offering to more stores in the future.
In total we are currently self distributing product to more than 6000 stores from five DG fresh facilities. Our goal for 20 tone 20 us to capture benefits from DG fresh and approximately 12000 stores or about double the current store count.
From up to 10 facilities by year's end.
In short we're very pleased with the results. We are seeing from this initiative and excited about the potential long term benefits it can deliver for our customers and our business.
Next our digital initiative, where our efforts remain focused on deploying and leveraging technology to further enhance the customer in store experience.
Our strategy consists of building a digital ecosystem that is specifically tailored to providing our core customer with even more convenient frictionless and personalized shopping experience.
To date many of our efforts have centered on further enhancements to the dollar general mobile App, which now includes digital coupons.
A shopping list feature.
Our car calculator in App shopping and budgeting tool.
And did you go mobile checkout now available at approximately 750 stores what plans for further expansion as we look to combine this feature was self checkout in select stores as we move ahead.
Providing for even more convenient checkout solutions.
Our our digital offering is clearly resonating as we added 1.5 million users to our monthly active user base on our mobile app ending the year with three dozen I'm, sorry, 3.3 million monthly active users.
In 83% increase over prior year.
Importantly, we know digitally engaged customers checkout wood baskets twice as large as the company average.
We are also recently launched a pilot a BG pickup which is our buy online pick up in the store offering.
Did you pick up is currently available and approximately 30 stores and we are well positioned to scale quickly pending the outcome of our pilot results.
By leading our channel and digital experiences. We believe we can continue to drive in store traffic grow basket size and offer even greater convenience to both new and existing customers within our channel.
Moving now to fast track, where our goal.
We'll include increasing labor productivity in our stores enhancing customer convenience and further improving on shelf availability.
First component the fast track is streamlining the stocking process in our stores through rotator optimization, which we have now completed at each of our distribution centers 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 very pleased with the labor labor productivity improvements we are already seen.
Importantly.
We're also seeing increased sales higher in stock levels and lower store manager turnover in the initial stores that received optimize roll tenders, which positions us well to drive additional benefits as we move forward.
The second component to fast track is self checkout, which we believe can further improve speed of checkout, while also reducing the amount of labor hours devoted to the checkout activity.
We are currently in self checkout in a small sample of stores and are pleased with the early results, including positive feedback from both customers and employees. We believe this offering will not only further enhance our convenience proposition for customers, but also drive even greater efficiency in the stock.
Sure.
To summarize 2019 was a noteworthy year for dollar general as we delivered strong results and made significant progress with our strategic initiatives, while further laying the groundwork for further initiatives and long term sustainable growth.
As a mature retailer in growth mode. We're constantly evaluating what lies ahead for our customers and our business and continue to believe we are pursuing the REIT strategies to capture additional growth opportunities in an evolving retail landscape.
In closing I am proud of the team's performance and our 2019 results, which demonstrates strong and disciplined execution across many fronts, including a multitude of complex projects.
And with the plans we have in place, including continued investment we are excited about our ability to sustain this growth in 2020 and over the long term.
I want to offer my sincere thanks to each of our approximately 143000 employees across the company for their hard work and dedication to fulfilling our mission of serving others as a team. We look forward to 2020 as we look to build on our strong performance from 2019 with that operator, we'd now like to open the line.
As for questions.
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Our first question comes from Rupesh Parikh with Oppenheimer. Please proceed with your question.
Good morning, Thanks for taking my question and congrats on another strong quarter. Thank you profession. So just just what the Corona virus I'd. Just curious where are you guys are seeing related to it in recent days and what type of changes in consumer behavior or anything in store currently.
Nevertheless, we are like probably other retailers I'm seeing a a a stock up phenomenon happening up over the last week and a half to two weeks.
Accelerated into this week I'm, a little bit more so we're continuing to watch that closely I'm really proud of our store teams.
With the additional volume, how they've taking care of our customers and our supply chain teams, making sure that we have stuck in the store for those for those customers that come in it as our hope as we as we move through this we're able to satisfy the customer need as they they continue to shop with us.
We're watching that closely as well because you know like most stock ups Theres always a backside to this ah. So we're watching that as as we continue to move through the next.
A few weeks.
With the hope that this virus will diminish over time, and obviously, we will see the backend, but we'll keep everybody posted as we move forward. Our goal internally here again is to ensure we we deliver for our core consumer.
Great and then one follow up question. So you guys again very positive commentary and some of the market share gains you're seeing.
Just given some of your initially but do you do fresh and the non consumable initiatives any shift in where you're seeing their shares games coming from versus recent quarters.
As you take a look at what we've been able to suppose in 2019, and let's be honest even in years. Prior I'm. You know we were really taking share from across the board and in many respects, obviously DG pressure has accelerated.
Some of that those share gains coming from different different disciplines as well that are out there, but the great thing is that DG precious scaling exactly where we thought it would.
Our teams have done a fabulous job as you can imagine this is a very complex project to rollout.
But in truth, DG fashion, where we're rolling that out.
At a very very high level of execution.
So we were looking forward to additional.
Gains in traffic and customer count as we continue to scale that and then the M.C.I. pieces. Another one that we're seeing some very good traction from.
Our non consumable side, you know we posted our best non consumable sales last year that we've seen in the last four to five years and a lot of it has to do with him a lot of the work that the team is put in a within our non consumable initiative and the important thing here is scaling it varies.
Quickly up to 2400 stores and soon to be 5000 by year's end, but the most important thing is we've been able to take the learnings from that and move it back to the entire chain. So that we saw a great benefit as we move through 2019, we expect the same in 2020.
Great. Thank you for all the color true.
Our next question comes from Matthew Boss with Jpmorgan. Please proceed with your question.
Great. Thanks, and congrats on a really nice quarter. Thank you Matt.
Todd maybe to take a step back can you talk to the current health of the low income consumer maybe what you're seeing in the competitive environment I'm just anything to consider in terms of the anticipated quarterly cadence of comps as we think about the progression of the year.
Sure Yes.
As we see the core customer as you know, we talk to each and every quarter.
Leading into.
Q1, so coming out of Q4, our core customer was was in really good shape and continues to be in good shape.
Probably not much I'm not very different than what we saw are coming out of Q2 and into Q3.
Now obviously with the krona virus studied in we're watching that very carefully we'll be talking to our our core consumers here in the next couple of weeks two to understand exactly how she's feeling as she now moves through Q our Q1.
And dealing with the Corona virus, but I would tell you.
That.
Everything was all systems go as far as we were concerned leading into this on a this virus. So we anticipate that our core consumer will be in pretty good shape and I think it really goes to show you the stuff some of the stock up sales that we've seen early on here as I mentioned earlier.
Core consumer is doing a lot of that and she has the means the do it and I think thats an important noted to take away is that in years past she might not have had that that luxury or that opportunity from a environment standpoint, I would tell you that the promotional environment is a is very very stable.
Again very much like we saw it all the way through 2019, and we feel fabulous about where our everyday pricing is on the shelf. We're in we're in very very good shape and again, probably some of the best that we've seen in a really since I've been here for over 11 years. So we're in very.
Very good shape there so right now we feel good about that customer we're watching that closely and John you may want to talk about the cadence yeah in terms of sales I'll start by saying that we feel good about this business is I've ever felt I think Todd would agree the initiatives are a firing on all cylinders.
So we expect strength throughout the year now obviously, there's some lapping differences as you move through the Atlantic its little tougher Q3 in particular as Todd mentioned.
Q U Q1, obviously over the last two weeks, we've seen the stock up he mentioned, but as the also mentioned.
It remains to be seen whether that is just timing or whether that is permanent because we tend to see that average out overtime. So more to come on that but overall anticipate a really strong year for sales and feel very good about the guidance provided.
Great and then just a follow up John maybe on the gross margin how best to think about some of the puts and takes to consider in 2020 in any material difference between your first and second half of the year embedded gross margin assumptions.
Yeah as you look at gross margin I'll start by saying, we're very pleased with where at right now a ending the year with 60 basis points expansion 14 basis points expansion the year, coupled with strong comp in traffic growth.
As you look across the year here are the things that help Q4, we expect to continue the biggest driver in Q4, we called out with higher initial markups and DG fresh was the biggest driver of that and as Todd mentioned with DG fresh and anti we're very pleased with what we're seeing there and we continue to see those benefits grow.
As we move forward and NCR had that added benefit of helping the non consumables across the system as we take the best ideas and implement them elsewhere and again, having the best year this year and non consumables that we had in four or five years.
We see other opportunities to expand our gross margin. We're very pleased with what we saw in private brands this quarter with the actions we put in place.
Getting traction direct foreign sourcing and supply chain as the market has stabilized we've done a lot of great work there to take advantage of that in driven efficiencies there and shrink a with the investment we made in the Eas units in the latter part of the year, adding 6000 unit as we hit those inventories later in the year that should help it of course you.
Just a great relationships, we have their vendors and the scale, we have with low skew model count.
So when you put all these together we feel good about our ability to enhance our gross margin over the long term. There's a lot of levers here now we always reserve the right to invest in price when appropriate to drive share currently we're in a great spot on price and happy with result, so feel good about where we're at will make trade offs throughout the year as we mentioned we are investing some.
Yes, Jna to drive gross margin, but feel that positions us very well not only for this year, but to drive a that double digit EPS growth, we strive for over the long term.
That's great pellet best of luck.
Thank you.
Our next question comes from Michael Lasser with you B.S. Please proceed with your question.
Good morning. Thanks, a lot for me taking my question I know you don't have a ton of stores in the Pacific northwest, but if you look at areas that where that could grow to virus is spreading more rapidly or in areas, where you thought that initial stock up take place.
Are you starting to see a slowdown in sales in those areas either because consumers are engaging in social distancing or because that stockpiling just pulled forward some sales and as part of that usually unique customer base any any unique value proposition, where you're you're feeding.
Phil interests and you have a lot of rural locations. So do you think your customer given those characteristics might might just.
You'll be less exposed because your customer either need your store more often or will engage in less social distancing because we live in rural areas.
Yes, Michael Thanks for the question you know as we look at what's transpired over the last couple of weeks.
We've seen a pretty good balance of of shopping acceleration across the 44 45 states now that we operate in and and really not specific to the Pacific Northwest I'm now as you indicated, though where less exposed out there.
Just because of a really just growing that store count.
In California, Oregon, and and in Washington, Obviously, so we're.
We are less exposed out there, but seen the sales really across the board.
As far as the social distancing is concerned I I think it's it is key to point out and it's not lost on us obviously that.
You know, we're within five to seven miles of the majority of the United States over 75%. If you will we are in all these rural communities.
But I think the most important thing here is is that we're a small box shop close to your home and I think in times like this where people are probably less apt to travel you know we believe that.
We'll get our fair share of that consumer base, because they just don't want to travel to the big box or don't want to travel great distances. So we're watching that very closely.
And I think that that phenomenon if play out will be probably in the upcoming weeks as we see this virus continue to unfold.
Okay, then and Todd I know you have a lot in your played it is that wasn't enough one of your competitor.
Recently talked about being more promotional so do you expect to respond to this with increased promotional activity and what are the chances that there could be an extended period of heightened promotions within the small box a value discount retail sector.
Yeah Michael.
We watch.
All retailers, whether it's directly in our space or a in the other areas of drug.
Grocery or or mass retailing I would tell you and we track it closely as you can imagine a we don't see a great deal of promotional activity across the board. There's always a skirmish hear her there if you will in certainty amaze, but that's always there right and we're squarely focused on country.
Growing what we can control and we feel we're in a great spot on everyday price on our promote promotional cadence that we have out there and we continue the distance ourselves from our nearest competitors and that's really what we're focused on and I think we're delivering on that.
Thank you very much good luck in Stacy.
Thank you.
Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question.
Hi, Good morning, everyone. My first question is on implied EBIT margin, they look down a little bit 2020.
Is that fair and can you walk through some of the puts and takes.
Bigger picture.
Little surprised given that DD fresh is going to be accretive that the overall EBIT margins going to be down. So we can talk about so can we talk about some of the puts and takes place.
Yes, I think when you look at the guidance provided on the topline and bottomline guiding toward the approximately 10% EPS growth I think that suggest a pretty healthy operating profit or EBITDA EBIT growth on top of a very healthy one this year and I would say what we're focused on right now is striking healthy balance between the near term and the long term.
We are investing in SDMA investing a little bit sta to save more gross margin overtime and as we said fresh and NCR going to be accretive this year, but we continue to ER in depth and these initiatives as they scale, but again, we think that the right trade off for the long for the long term and if we can.
We ended the year beginning of the year. There are some uncertainties you have the uncertainty around corona virus election cycle, and what that May mean to the macros, but as Todd said, we believe we're very well positioned in that event of unfortunate event of a downturn.
Delivering 30 straight years of.
Consecutive same store sales growth I think it just shows the resiliency of the model and I think we're very well positioned to serve our customers as he mentioned so feel good about the guidance provided and feel we're striking a healthy balance between the near term in the long term with our eye on continuing to deliver sustainable double digit EPS growth over the long term.
And my follow up it's also on deepening Chris If you think about the gross margin drivers for 2020.
You're probably not going to quantify but does it make sense the D.V. French would be the top of the list in terms of initial markup like it wasn't before and then now that you have a little bit more learnings from the initial rollout can you help or comment on sizing the long term EBIT margin opportunity from it.
Yeah, I'll start by saying that you're correct in thinking that DG fresh is the biggest as I mentioned as a lot of drivers to help gross margin PDG fresh is the biggest one to point to this year.
In terms of sizing that I think a couple of data points. We've provided is that it's about 8% of our business and it's a growing piece of our business and as you mentioned it was the leading driver of the leading.
Item, we called out in our gross margin expansion for the quarter. So.
Well, good about where we're at and feel good about what it can contribute and not just on gross margin, but sales as well I think getting to point to is we see it as a sales driver as well.
As we remodeled stores at the coolers that provides a very sizable sales Bob and we think as we can improve the assortment improve the in stock as we've said before historically our in stock on the frozen refrigerated side of the businesses leg dry by 10 point.
There is very strong correlation as you know between in stock and sales and so we see that is a benefit as we close that gap as well as the ability to improve the assortment a in the store provide more better for you options along with that including projects. We think longer term. This is the unlock for produce so we think it pencils very well.
It is delivering exactly what we thought it would in terms of as we convert items and stores is delivering that sizeable cost takeout that we targeted but longer term, we see it as a big sales driver too.
Okay. Thank you good luck this year. Thank you.
Our next question comes from Christopher Mandeville with Jefferies. Please proceed with your question.
Hey, good morning, guys.
John just to kind of follow up on the overall guidance here if I look at your comp guide of two and a half the three I could simply holds the two year or three year stack for that matter and come out above that range. So thank you guys are talking about.
Being in a position of strength and receiving momentum you've got 75 additional stores entering the comp base versus last year additional cooler expansion fast track and fresh or are already seeing improvement <unk> on shelf availability and then you've got some near term benefit from from the krona virus that consumable category and less.
You know, maybe we're missing something in terms of.
Temporary uplift in 19 from maybe competitive closures can you just help us understand why we should only be looking for a two and half the 3% comp.
Well I'll start by saying that we feel great where at right now coming off a year with a a 3.9% full year sales comp as we've said before this model works very well with sales comps in the range of two to four we're at the high end of that now obviously as we come into the year, that's a tough lap, but I can tell you as I said before we feel as good as.
Ever about the strength of the business model the fundamentals and the initiatives, but we also mentioned there are some near term uncertainties with what the Corona virus election cycle may mean to macro impacts, but we're focused on controlling what we can't control and delivering profitable sales growth and feel like we have great initiatives in place and with the Guy.
[noise] provided we're comfortable with it and it implies a quite healthy two year stack.
Okay, and then I guess my follow up would be as it relates to just operating expenses with the strategic initiatives is there any way of framing up the startup costs that we should expect in 20 versus 19, and then just on distribution and freight be at that they're in different line items just.
Given the notable declining crude of late is there any way of also kind of sizing up that potential benefit on the margin. Thanks sure I'll start with your question around SDMA and I think it's a fair comment that as we shift into scaling base the cost shift from startup costs to ongoing operating costs and I think the perfect example.
That is DG fresh as we scale that we have to continue to invest a little bit of labor in the stores to save a lot of product costs. So with the virtual it's a virtuous cycle as it grows and its accretive we expect it to be accretive this year and net benefit grows as we get more and more efficient.
Do you still do have some startup costs in some inefficiencies as you start up new Dcs as you.
Remodel stores for ends the eye as we work on digital but increasingly it shifts more toward ongoing expenses, which I would really classify more as geography between gross margin savings and Sta with gross margin exciting gross margin savings continuing to pull away from the ask DNA.
Writing more and more of a benefit as we move forward. So I think thats the right way to think about that and it's a healthy tradeoffs in terms of distribution transportation costs. There too is a little bit of geography, if you look at.
Our distribution cost, we called that out as a drag this quarter not a significant one really the reason for that is as we incur additional costs as we take over the cost of distributing a fresh and frozen refrigerated good.
But again the.
Product cost savings that comes out of that far exceeds the.
The labor and the distribution costs. So if you strip out the impact of taking that additional cost on as a percent of sales year over year, our distribution transportation costs were lower and what I would point to why that is several things. The teams done a great job of expanding diversifying our carrier base and as the market improved.
I've been able to take advantage of that with better rate. We've also expanded our private fleet and we'll continue to do so this year, primarily around the new fresh Dcs.
We just opened two new Dcs, which helps the reduced the stem miles as well as other efforts to reduce stem miles load optimization and warehouse efficiency. So when you strip out a that extra cost that were picking up that net as favorable teams doing a great job to drive efficiencies on distribution and transportation.
Very helpful. Thanks again.
Our next question comes from Paul Trussell with Deutsche Bank. Please proceed with your question.
Good morning, Great results.
The data before.
So, let's just maybe start with your real estate projects.
A thousand new stores, obviously, you've continued to have really good results out of the new boxes.
Maybe just touch a bit more on that and ish from your vantage point, how many years.
Have.
Additional thousandth store openings to you kind of foresee and then on the remodel front.
Majority of your Remodels are going into that highly or a cooler count.
Format, how should we think about the opportunity there I think you mentioned about 3500 by year end.
What's the runway. Thank you that's sure Paul Yes, we feel very good about our real estate program. It is one of 'em dollar generals core strengths and we continue to execute at a very very high level. As you indicated we're very pleased with the results we saw in 2019.
And it was just another year of adding onto great results even from past years.
We still see an opportunity.
To end the continental United States to put a dollar general in about 12000 locations.
And so there's a there's still a lot of runway there DG fresh honestly opens up some runway for us as well because of being able to scale, our cooler our cooler counts and associated product sales, including produce.
So it opens it up.
And we all the metrics that we follow on our new stores continue to run at a very very high rate among the top of what we we see.
As far as a return of 20% to 22%. So again very very strong and we see that 2020 should be the same and we've come out of the shoot very strong I'm in the early days here as it relates to the the higher cooler account.
This is again just a continuation of of how we see coolers and the associated sales with that.
As I've mentioned before and I still truly believe I'm you know, we're still you know somewhere in that fifth inning.
Have a nine any ballgame I'm on cooler on cooler counts and be able to to really leverage that and again DG fresh will be a big big unlock as we continue to roll that out these higher capacity coolers can contain and will contain 25% more items and.
It holds in totality, 44% more product so the holding powers greater and reduces out of stocks, which increases sales. So again, we're very very happy with our decisions to to move to that and I believe you will start to see a those benefits in 2020 m. beyond so.
Again, very very happy team has done a great job in executing and we see the same as we go into 20 here.
Thank you for that color my follow up is just on the.
Pick up test.
How is that working so far and I believe you mentioned 30 stores.
That is being tested in.
You know what are you looking for.
From a metric standpoint, and when you say can scale quickly.
What does that potentially equate to sure.
Again early days, Paul 30 stores up and running but the great thing here is our I team and our operating teams collectively stood this up in less than one year and the App is very very intuitive. It's it's great.
Use the the App myself and I've seen others other competitors that have.
Have the App and I would tell you that ours is as good if not better than than most of those.
Early on we're seeing above what we thought we would see we're seeing some.
Inversion from existing customers, but probably some a new customers as well.
The great thing is our are repeat customer base on this is at a very high level much higher than we thought.
So that's that's a very good sign that once you enjoy the the experience and to if it is this some of these newer customers were getting repeat newer customers as well. So we're going to continue to monitor that very closely we think thats. One of the key metrics are we are we actually attracting a new customer.
Overall, and so we'll watch that as we go a couple of a couple of.
Points just to think about here is the average items is running about seven to eight to nine items somewhere in there, which is not too dissimilar to what a full checkout experience averages for our core consumer.
And if the dollar amount is running well about three to $5 more dependent on the transaction than our normal. So again, we're a fill in as well as we've always mentioned and she's using this DG pick up at least so far early on in 30 stores as additional fill in.
Now as it relates to scaling we said this before we're going to take the slow, but if our consumers continue to resonate the way they have we're going to be able to turn the dial up as quickly as we believe.
We should scale this appropriately with the appropriate return against it.
But we're only going to go as fast as a consumer wants us to go and also only as fast as our execution levels will allow us a we're very disciplined along those lines and we'll continue to be but the great thing here is we believe this a real competitive advantage for us, especially in our channel.
Thank you my best.
Our final question will come from Karen short with Barclays Bank. Please proceed with your question.
Hi, Thanks, very much I, just one clarification I know this is kind of been asked in various different ways, but I.
I just want to be clear you do you believe that the gross margin benefit from all these initiatives will build throughout the year correct, but but the ideas we have to keep in mind as gene I will also be a little elevated leading to that slightly negative EBIT margins is that the right way to think about it.
And that is right way to think about that as we scale. These we see the benefit of DG fresh NC I continue to grow up but again that is partly that as you had the investment costs associated with that but it continues to be more and more accretive as you move forward every scale.
And then so switching to the virus I mean, obviously every days any day, but it does seem likely will be in a much weaker macro for potentially several quarters.
Let me discuss how I mean, obviously you are very resilient as a box and but can you maybe discuss how you might perform in and weaker macro today and how it might differ from a laid on nine I say in the context of comp, especially because I think there are many investors who are using eight or nine as a proxy for how you might be comping.
In a weaker macro and I think there's maybe a few.
Issues with that as it relates to the comparability. So anything you can talk to you on that.
Sure obviously, we're watching the virus as I mentioned earlier very closely and if it does lead to a weaker macro environment, we feel we're very well positioned.
Tend to capture those opportunities as they come as it relates to 2008 and nine compared to today well, we're a much different shop today than we were.
You know in eight nine we were we're fixing the railroad raising our gondola hides doubling our skew count a lot of different things.
That drove those comps probably to a little bit more of an outstretch comp than what you might see you know in a in a downturn in today's environment, but in saying that we still believe very strongly that we're well positioned in a downturn for the product offering that we have as well as the come.
Customer that we serve and also we know from Oh, eight or nine which we don't believe this will change is that trade down customer will come into the box as well and the great thing about that is maybe she visited us back in eight nine and some obviously may not have come back when she comes back she is going to see a completely different Bob.
Yes, that's even more enhanced Vince you saw before so we'll watch it carefully but we think we're well positioned as we move forward here.
Okay. Let me just my last question is can you just give an update on the comp waterfall from new units and Remodels as it's still kind of that 200 to 250 range or is it.
Maybe just an update there.
Yes, just to clarify what we've said it's actually a 150 to 200 now that is net of cannibalization, which has been very consistent as expected and so as you think about that 150 to 200 basis point range. We have been writing at the high end to that as we've seen not only a great results from the stepped up new unit, but just see continue see great results from the remote.
Models, particularly where we have the extra cooler count presence so.
Toward the high end of that went 52 hundreds the way to think about that.
Great. Thanks Simon.
This concludes todays conference you may disconnect your lines at this time and we thank you for your participation.
Yeah.
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