Q1 2020 Earnings Call
[music].
Good morning, My name is Robert and I will be your conference operator today at this time I'd like to welcome everyone to <unk> dollar General the first quarter Twentytwenty earnings Conference call. Today is Thursday May 28, 2020, well lines have been placed on mute to prevent any background noise.
This call is being recorded instructions for listening to the replay of the call are available in the Companys earnings press release issued this morning.
Now I'd turn the conference over to Mr., Donnie loud, Vice President of Investor Relations and corporate strategy. Just allow you may begin.
Thank you Robert Good morning, everyone on the call with me today or today, so our CEO, Jeff all when our COO and John Garrett or CFO. Our earnings release issued today can be found on our web site at Investor Day dollar General Dot Com under news and events.
Let me caution you that today's comments include forward looking statements as defined in the private Securities Litigation Reform Act, a 1995, such as statements about our strategy plans initiatives goals financial guidance for beliefs about future matters, including but not limited to beliefs about cobra 19th future impact on the.
The economy, our business and our customer.
Forward looking statements can be identified because they are not limited to statements of historical fact or use words, such as May will should could would can believe anticipate expect assume in 10 outlook estimate guidance plan opportunity long term.
Look to committed to continue ahead seek likely potential or go and similar expressions.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations. In projections. These factors include but are not limited to those identified in our earnings release issued this morning under risk factors in our 2019 form 10-K filed on March 19th 2020, our form 10-Q filed this morning.
And in the comments that are made on this call you should 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 at the end of our prepared remarks, well open the call up for your questions. Please limit your questions to one and.
One follow up question if necessary now it is my pleasure to turn the call over the Todd.
Thank you Johnny and welcome to everyone joining our call.
These are certainly unprecedented times for us all and our Hearts go out to the communities and individuals affected by the cold at 19 crisis.
On behalf the dollar general I want to express our deepest gratitude to those serving on the front lines and especially to our teammates for their dedicated and efforts in fulfilling our mission of serving others by providing affordable convenient and close to home access to a central items at a time when our.
Customers need them most.
I'm inspired by the phenomenal work our associates are doing.
And could not be more proud of how they've responded to the needs of our communities.
In recognition of the essential work performed by our employees in April in New York Stock Exchange recognize one of our store managers Crystal burrows during the gratitude campaign, where the exchange join millions of others in honoring the way people on the front lines have responded to the cobot 19 crime.
Yes.
As one of America's essential retailers, we are committed to being part of the solution. During these difficult times and are continuing to support these efforts through our expansive network of more than 16000 store locations currently located within five miles of more than 75% or the U.S. population.
Our convenience small box format, providing for a quick in and out access and limited crowds both of which are conducive to social distancing our broad assortment of everyday household essential items are ongoing commitment to everyday low prices.
Our flexible supply chain.
Our growing digital capabilities and recent measures taken to further safeguard the wellbeing of both our team members and customers.
And of course, our talented and committed associates.
For more than 80 years dollar general and to serve customers through a unique combination of value in convenience and we will continue to be there for them in both good and challenging times.
Let me now highlight some of the key actions we've taken in response to covert 19 with two key priorities in mind.
First is the health and safety of our employees customers and communities we serve.
Second is maintaining the continuity of our business and operations.
For our employees and customers, we took swift and proactive action to keep them safe well keep you stores opened in running with minimal disruption.
We closed an hour early to allow greater time for stocking and enhance cleaning protocols distributor Max masks and gloves to all employees implemented a social distancing measures in our stores distribution centers and at the store support center and completed the installation of nearly 40000 plexiglas barriers.
At checkout across the entire chain.
To further support heightened demand we have hired over 50000 people since mid March nearly double our normal hiring rate.
We're happy to welcome these new employees to our team and our hiring efforts are continuing.
We also invested approximately $60 million in employee appreciation bonuses and provided enhance benefits and resources, including expanded paid leave and greater access to Tele health services.
And we contributed to our employee assistant foundation to US it's assist our co workers during times of need.
All these actions have helped ensure the continuity of our business at a time when customers need us most.
To support our communities, we dedicated the first our of each day to seniors and provided a discount for first responders medical personnel and National Guard members.
And through the dollar General literacy foundation save the children in organization working to ensure children in Rural America continue to learn and have access to nutritious food daring nationwide school closures will receive a $2 million donation.
[noise] beyond these actions we remain focused on advancing our operating priorities and strategic initiatives as we look to further meet the evolving needs of our customers and better position dollar general to emerge from this crisis, even stronger than before.
Turning now to our first quarter performance.
Quarter was highlighted by extraordinary growth in both top and bottom lines. These results reflect significant changes in shopping patterns, which began in March as consumers reacted to the covert 19 pandemic.
For the month of February same store sales increased 5.5% driven by broad based performance across many fronts, which we believe speaks to the continued strength and sustained momentum of the underlying business.
Beginning in March we experienced a significant surge in demand and sales as consumers began to stock up.
And category mix shifted even more than usual to our consumable category.
For the month in total comp sales increased 34.5%.
April sales moderated in comparison to March but remained elevated as consumers continue to replenish household essentials at a rate greater than normal.
During April we also experienced significant growth in our non consumable businesses and our three non consumable categories delivered a combined comp sales increase in excess of our consumable business.
For the month in total same store sales increased 21.5%.
Overall first quarter net sales increased 27.6% to $8.4 billion driven by comp sales growth of 21.7%, including significant growth in average basket size and a meaningful increase in customer traffic.
Once again this quarter, we increased our market share at Holly consumable product sales as measured by syndicated data.
Importantly, our data suggests a meaningful increase in new customers underscoring the broadening the appeal of our value and convenience proposition.
We're particularly pleased that we delivered a significant operating margin expansion this quarter.
Which contributed to diluted EPS of $2.56, an increase of 73% over prior year.
Collectively these results reflect our commitment to doing everything we can to support our employees customers and communities. During this time and further validates our belief that we are pursuing the REIT strategies to create meaningful long term shareholder value.
We continue to believe we operate in one of the most attractive sectors in retail.
And having established an even stronger bond with existing customers. During these unprecedented times.
Combined with the actions we've taken to forge new customer relationships. We believe we are well positioned to drive continued growth even in what's expected to be a challenging economic environment.
With that I'll now turn the call over to John Thank you Todd and good morning, everyone before I begin I'd like to Echo Todd gratitude to our employees and note that my thoughts are with those who have been impacted by this crisis.
Now that Todd is taking through a few highlights of the first quarter. Let me take you through some of the 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 will start with gross profit, which was positively impacted in the quarter by significant increase in sales, including the impact of coded 19.
As a percentage of net sales and gross profit was 30.7% in the first quarter, an increase of 49 basis points. The gross profit rate increase was primarily attributable to a reduction markdowns as a percentage of net sales and higher initial markups on inventory purchases. These factors were partially offset by increased distribution costs, which were driven by increased.
Volume and our decision to incur discretionary bonus expense.
As today as a percentage of net sales was 20.5% a decrease of 204 basis points, although we incurred certain incremental costs related to covered 19. These costs were more than offset by the significant increase in sales expenses that were lower as a percentage of net sales. This quarter include occupancy costs detailed layer.
Her utilities, depreciation amortization and taxes and licenses. These items were partially offset by increased incentive compensation expense.
Moving down the income statement operating profit for the first quarter increased 69.2% to $867 million compared to $512 million in the first quarter 2019.
As a percentage of net sales operating profit was 10.3% and increase of 253 basis points.
We believe the impact of covered 19 significantly benefited operating profit in Q1, primarily through higher sales, partially offset by approximately $80 million of incremental investments that we made in response to the pandemic, including approximately $60 million and appreciation bonuses and nearly $20 million in measures taken to further protect the health.
And safety of our employees and customers as well as enhanced benefits programs to support our store associates distribution center employees and private fleet drivers.
Our effective tax rate for the quarter was 22.2% and compares to 20.8% in the first quarter last year.
Finally, as Todd noted earlier EPS for the first quarter increased to 73% to $2.56.
Turning now to our cash flow and balance sheet, which remains strong and provide us the financial flexibility to better support our customers employees during these difficult times.
The business generated significant cash flow from operations during the quarter totaling $1.7 billion, an increase of $1.2 billion or 202%.
This increase was primarily driven by strong operating performance combined with lower levels of inventory as we continue to work closely with suppliers to improve in stocks for high demand products merchandise inventories were $4.1 billion at the end of the first quarter essentially flat to prior year and a decrease of 5.5% on a per store basis.
Total capital expenditures in the first quarter were $195 million and included our planned investments in new stores, Remodels and relocations and spending related to our strategic initiatives.
During the quarter, we repurchased half a million shares of our common stock for $63 million and paid a quarterly dividend of 36 cents per common share outstanding at a total cost of $91 million.
At the end of Q1, the remaining share repurchase authorization was $1.1 billion in light of the covered 19 uncertainty in out of an abundance of caution we proactively took steps during the quarter to further bolster our already strong liquidity position, including the temporary suspension of share repurchases and the issuance of $1.5 billion of senior notes on.
April Threerd.
These measures along with our strong cash flow put us in an even stronger liquidity position with $2.7 billion of cash and cash equivalents and $1.1 billion of availability under our undrawn revolving credit facility at the end of Q1.
Importantly, our capital allocation priorities remain unchanged. 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. When it is prudent to do so and quarterly dividends all while maintaining our current investment grade credit rating and managing to a leverage ratio approximately three times adjusted debt to EBITDA our.
Moving to an update on our financial outlook for fiscal 2020, let me start by acknowledging the inherent and significant uncertainty that continues to exist around the severity and duration of the covered 19 pandemic, including its impact on the economy consumer behavior in our business. In addition, the timing scoping impact both current and anticipated stimulus slide.
Dislocation and other governmental responses to the pandemic remains to be seeing as a result, it is difficult to predict specific outcomes and while we expect to exceed our prior guidance for fiscal 2020 net sales same store sales and S.. We are unable to estimate the extent of such upside with reasonable accuracy.
Accordingly, we are withdrawing our sales earnings and share repurchase guidance for fiscal 2020 that was issued on March 12, 2020 in conjunction with our Q4 earnings call with regards to share repurchases, we're constantly evaluating our position and intend to resume our share buyback activity. When it is prudent and advisable to do so which may be as early.
As the 2022nd quarter.
Finally, our 2020 outlook for capital spending and real estate projects remain unchanged from what we issued in our Q4 earnings release on March 12 2020.
Let me now provide some additional context as it relates to our full year outlook given the unusual situation I will elaborate on our comp sales trends thus far in may.
Since the end of Q1 and through May 26, we have continued to experience elevated consumer demand in our stores.
Albeit with some intermittent moderation and in particular over some of the more recent days overall same store sales have increased by approximately 22% during this timeframe.
That said it is important to note that they're a number of factors, which suggests that sales will moderate to more normalized levels beginning during the latter part of Q2, including the duration and impact of shelter in place restrictions and social distancing measures. The gradual reopening of other retailers. The tapering of benefits included in recent stimulus legend.
Relation and managing through it is likely to be a more challenging economic environment for our consumers with regards to our strategic initiatives. We continue to anticipate they will positively contribute to gross profit rate. This year, specifically, our non consumables initiative Orencia Guy and DC fresh DG fresh. In addition, we also expect continued in.
Meaningful investment in our 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 with both anti and DG fresh expected to be accretive to operating margin in 2020.
However, these investments will continue to pressure SJ rate this year as we accelerate their rollouts in closing I want to reiterate that we're very proud of the team's execution and service during the quarter. We remain confident in our business model and our ongoing financial priorities to drive profitable same store sales growth healthy new store returns strong.
Free cash flow in long term shareholder value as always we continued 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 with that I will turn the call over to Jeff. Thank you John I'd like to start by also thanking our employees for their hard work.
Second dedication as we navigate this difficult time.
I want to take the next few minutes to update you on our four operating priorities.
Our first operating priority is driving profitable sales growth.
The team did an outstanding job this quarter executing against a portfolio of growth initiatives. Despite the challenges surrounding 19.
Let me highlight some of our recent efforts.
Starting with our cooler door expansion.
Which continues to be our most impactful merchandising initiatives.
During the quarter, we installed more than 15000 cooler doors across our store base in total we expect to install approximately 55000 cooler doors in 2020, the majority of which will be in our higher capacity coolers as we continue to build on our multi year track record of growth and cooler doors and associated.
Sales.
Turning now to private brands, which continues to be a priority as we pursue opportunities to deliver even greater value for our customers, while also driving profitable sales growth.
During the quarter, we made great progress with our rebranding and repositioning efforts, including the relaunch of our laundry brand under the true living label.
In addition, our Clover Valley redesign has begun rolling out with over 250 items now available and more to come as we seek to drive greater category awareness and even higher customer adoption.
Moving to our better for you offering which is especially important during a time when more food as being consumed at home.
This offering is now available and approximately 6000 stores with plans to expand to nearly 7000 stores by year end.
Finally, a quick update on our Fedex relationship.
This service is currently available and approximately 4800 locations with plans to expand to over 8500 stores by year end.
Further advancing our strategy of leveraging our unique real estate footprint to increased customer access to services inconvenient and nearby locations.
Beyond these sales driving initiatives enhancing gross margin remains a critical area of focus for us.
In addition to some of our strategic initiatives, which Tom will discuss later as well as our private brand efforts foreign sourcing remains an important gross margin opportunity for us.
Our efforts this quarter were focused on supporting the business in a rapidly changing global environment.
The team did a tremendous job of working closely with each of our supply partners to ensure product availability, including pursuing product substitutions and shifting production to other countries when warranted.
Looking ahead, we continue to see significant opportunity to increase our foreign sourcing penetration. While also further diversifying our countries of origin as we seek to provide even greater value and an enhanced assortment offering for our customers.
We also continue to pursue supply chain efficiencies through the further reduction of stem miles and continued expansion of our private fleet.
We're especially proud of the team's efforts during the quarter as we delivered against record volumes, while constantly working with our vendor partners to minimize disruptions to supply.
We're also executing against additional opportunities to enhance gross margin, including further improvements in shrink and to our category management process.
Our second priority is capturing growth opportunities.
Our proven high return low risk real estate model continues to be a core strength of the business and enhances our ability to bring value inconvenience to even more customers across the country.
As one of America's essential retailers, we're committed to providing customers with even greater access to essential goods, especially during these unprecedented times.
To that end in the first quarter, we opened 250, new stores remodeled 481 stores, including 332, and the higher cooler count DG, GP or DGP formats and relocated 17 stores.
We also expanded the number of stores offering fresh produce bringing the total.
Produce to approximately 750.
And despite the added complexities as a result of Cobot 19 are best in class Real estate team has worked diligently with our communities and business partners to keep our real estate plans on track for 2020.
As a result, we're maintaining our real estate outlook for the year as we plan to open 1000, new stores remodeled 1500, new store excuse me run 1500 stores and relocate 80 stores, representing nearly 2600 real estate projects in total.
Overall I'm extremely proud of the team's continued ability to execute such high volumes of real estate projects, which is a testament to their dedication to serving new and existing customers.
Our third operating priority is to leverage and reinforce our position as a low cost operator.
Over the years, we've established a clear and define process to control spending which governs our disciplined approach to spending decisions.
This saved to serve approach has served us well and navigating the current environment, while keeping the customer at the center of everything we do.
Our ongoing efforts to further supplier up to simplify our operations have been an important factor and eliminating unnecessary tasks. In turn this has allowed for our store associates to better serve our customers. During this period of heightened demand.
Beyond enhancing our ability to serve this process has also generated significant savings across the business.
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.
The strength and dedication of our people was on full display during the quarter as we heard countless stories of our front line employees going above and beyond the call of duty to serve our customers and communities.
As Todd noted earlier, we made a significant investment of approximately $60 million in employee bonuses to demonstrate continued appreciation for their exceptional efforts to serve our customers and fulfill the company's mission of serving others.
We believe these bonuses as well as our other investments and benefits such as additional paid leave were well received.
In fact, we continue to see record low turnover at the store manager level as well as lower turnover across our associate base.
Additionally, we continue to be pleased with our strong applicant flows as evidenced by the hiring of more than 50000 people since mid March.
We also continue to embrace innovative approaches to training and development and have recently transitioned to a virtual training environment, resulting in the continued development of our people despite the inability to travel.
We believe the opportunity to start and develop a career with an innovative and growing retailer has a unique competitive advantage and remains our greatest currency and attracting and retaining talent.
In summary, we are executing well from a position of strength and these are.
It's continued to provide the foundation from which we can drive continued growth in the years ahead.
With that I will turn the call back over to Todd.
Thank you, Jeff as I shared with you over the past several quarters, we're investing in building momentum behind certain strategic initiatives to strengthen our competitive position and further support long term sustainable growth.
Importantly, as a result of our efforts and investments to date. We believe we are even better positioned to move quickly alongside our customers as we continue to meet their rapidly evolving needs further accelerated by cobot 19.
Let me take you through some of the most recent highlights starting with our non consumable initiative or NCR.
As a reminder, NCR consist of a new and expanded product offering in key non consumable categories CMC I offering was available in more than 3200 stores at the end of the quarter and we plan to expand the offering to a total of approximately 5000 stores by the end of 2020.
We are expected to be pleased with the strong sales and margin performance RMC ice stores delivered in the quarter. We also continue to realize meaningful benefits from incorporating select NCR products and planograms throughout the broader store base, resulting in positive sales and margin contributions to all of our overall.
First just give me first quarter results. These results reinforce our belief that MC I will continue to be a meaningful sales and margin driver as we move forward and gives us confidence in our rollout plans for 2020.
Turning now to DG fresh, which is a strategic multi phased shift to self distribution of frozen and refrigerated goods.
As a reminder, the preliminary 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 we continue to be very pleased with the product cost savings we are seeing.
Another important goal of DG fresh is to increase sales in these categories by enabling the accelerated rollout of our high capacity coolers, increasing in stock levels and eventually expanding our overall assortment offering.
Importantly, we are already seen evidence of success against these goals, including meaningful increase imperishable sales and higher overall in stock levels in stores being serviced by DG fresh.
In total we are now self distributing to more than 9000 stores from six DG fresh facilities.
Our goal for 2020 is to capture benefits from DG fresh in approximately 12000 stores.
From up to 10 facilities, including our first combination facility co located with our existing dry goods distribution center and Zanesville, Ohio.
We continue to believe this initiative will be accretive to operating margin in 2020.
As the benefits begin to exceed associated expenses and growing in the years ahead as we continue to scale this transformational initiatives.
Turning to our digital initiative, where 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.
We believe essential brick and mortar retailers continue to serve a critical role and that has never been more evident than in the past few months.
We believe our unique store footprint combined with our digital efforts have positioned us well in a challenging and changing retail landscape, particularly as we consider the possibilities in a post cobot 19 environment.
More specifically DG pickup, which is our buy online and pick up in the store offering provides an important access point for those seeking a more contact list customer experience. We launched a pilot of this solution at the end of Q4 and are very pleased with the initial results, including positive feedback from both customers and employees.
Yes.
Importantly, we are well positioned to scale quickly with plans for rapid expansion as we move ahead.
Beyond DG pickup DG go mobile checkout is currently available in approximately 750 stores with plans to further expand as we look to combine this feature was self checkout, providing an even more convenient and contact list checkout solution.
Moving now to fast track, where our goals include increasing labor productivity in our stores enhancing customer convenience and further improving on shelf availability.
We're pleased with the store labor productivity improvements, we are seeing as a results of our efforts around roll tailored rotator optimization and even more shelf ready packaging. These improvements are particularly notable in the quarter as our teams work diligently and efficiently to key products on the shelf.
The second component to fast track to self checkout, which represents added flexibility for consumers, who may seek to limit face to face interaction, while also driving greater efficiencies in the store for our associates self checkout is currently available in more than 30 stores and our plans consist of a broader rollout later this.
Sure as we look to further enhance our convenience proposition.
Overall, we continue to made great progress with our strategic initiatives, while advancing our goal of further differentiating and distancing dollar general from the rest of the discount retail landscape.
As a mature retailer in growth mode. We are also laying the groundwork for future initiatives as we are constantly evaluating what lies ahead for our customers and our business. We continue to believe we are pursuing the REIT strategies to capture additional growth opportunities in a rapidly evolving retail landscape.
In closing we are proud of our strong start to 2020. Our results are a testament to the strong execution and disciplined approach of our team.
And with our unique combination of value in convenience further enhance through our initiatives. We believe we are well positioned to navigate the current environment and come out the other side stronger together with the communities we serve.
Importantly, we are very proud of our people specifically those serving on the front lines, including our store Associates distribution center employees and those in our private fleet.
I want to offer my sincere thanks to each of our more than 155000 employees across the company for their tireless commitment and dedication to fulfilling our mission of serving others.
With that operator, I'd now like to open the lines for questions.
Thank you.
This time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
As a reminder, we ask that you please limit to one question and one follow up.
A confirmation tell indicate line is in the question Q you May press star too if you like to remove your question from the Q.
Participants uses speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Michael Lasser with you'll be S. Please proceed with your question.
Good morning, Big block of taking my question you mentioned that you were confident that moderated a bit.
What has been the magnitude of the moderation and we've been more still do others, who will review the being and sheltering plates restrictions being lifted or because you are seeing abating benefit of them then will follow.
Thanks, Mike.
Thank you Michael this is John and provide a little more context here, we alluded to in the prepared comments that through Q1 through May 26, our same for sales increased by 22%. During this timeframe and had mentioned some intermittent moderation over recent days.
Given the unprecedented environment and the spirit transparency I do think it's fair to give more color on the.
Recent trends what we've seen in some recent days is some days in the mid teens, but we've seen it bounce back in recent days into the mid Twentys. So things have been fluid, but stay up sales are still very healthy and we believe we're very well positioned we're seeing strength in both sides of the box on the consumable side and the non consumables and I think an interesting stat.
We've seen floating around.
Is just how much people have their stimulus money still to positive in the bags, which lead you believe there's some tail to that but we're still seeing strength in both sides of the business and believe with our can unique combination of value and convenience, we're very well positioned.
That's really helpful. Thanks.
My follow up question inevitably mentioned that quarter than very healthy comp trend.
Perion growth from new customers.
How can die.
That contribution is it.
Third quarter, maybe half of the overall growth in call.
Upward leading customers Vicki.
We enjoyed in the car.
Yeah, Michael as Todd. Thank you, yes, we have seen an increase in the end customers and it's no surprise right. When the going gets top we know that our customers need us more I mean, we're therefore, but we also know from past recessionary times that.
And in times of some of these that we have a customer that also starts to trade into dollar general we saw that in a in a very big way in Q1.
We can validate that pretty easily through credit card data that we've seen but also through as you know we do extensive quarterly customer interactions and reach out send them and we know exactly where our customer stand as well as new customers and I would tell you those those.
Reach out to our customers have told us this quarter that not only.
Did we trade in we loved what we saw and we plan to repeat shop, if they haven't already so we're very very very bullish on that and I think it's a real testament to the the work. The team has done on this a box to make it. The most relevant is it's been in many many years and I would tell you that.
Just like we probably saw in auto nine with new customers coming in they are delighted to see.
All the changes that we've made and just like then I'm I'm very bullish that we'll continue to hold onto those customers for long term.
Okay. Thank you for months with good luck.
Thank you.
Our next question is from Matthew Boss with JP Morgan. Please proceed with your question.
Great Thanks, and congrats on a nice quarter guys.
Thank you.
Todd maybe could you speak to the overall health of your core consumer today, the push and pull between rising unemployment and your ability to deliver value as we think about the 2008 2009 playbook I guess, maybe larger what's the economics sweet spot you. Thank for your model and if you had to rank initiatives to take additional mark.
Its share out of this crisis, what would they be.
Yes, Michael Thank you leave the customer was feeling very good I think it was a real Testament. She was back to work leading into this crisis. So when you look at our our strong.
Comp in in the month of February, which really had virtually no covert related retail in it.
Very very.
Very good shape, probably the best we've seen in many many years.
What that was eight what that enable her to be able to do was to stock up with confidence and we saw that early on she came in and really stocked up on first starting like with paper goods and moving into to food and then obviously when stimulus started to a rollout we saw obviously like.
Other retailers a surge in our discretionary type categories.
Right now I would tell you because we do we do talk to a very very frequently as I mentioned earlier.
She she has a lot more trepidation, obviously, just because of what's going on.
But I would tell you that.
She's still has money in their pocket as evidenced by what she is doing but I think a lot of that extra money right now is driven through stimulus.
Both the the basic stimulus that was sent out.
Starting middle of April.
But also for perhaps any unemployment that may be needed for our core customer, which by the way there's evidence to show maybe our core customer is is not having to.
To to capitalize yet on that because they're they're mostly most likely front line workers like many of them Americas customers today out there and and so she's she's got a lot of money still in our pockets, but we're watching it very very closely because that can turn and we understand that we're watching it but we also.
Watching one stimulus starts to taper off and of course.
With additional snap benefits that are out there that's helping as well so when you put it all together, we feel that we're very well positioned the sweet spot I would tell you. We do very good in good times than we do Fabulous in bad times.
But I would rather see our core consumer.
They have money in her pocket and be able to spend equally on both our consumable and non consumable businesses, but we're very very bullish on what post cobot looks like because again I think we're very well position no matter. What this economy does to both our core customer and to the customer overall.
Great answer maybe John to follow up on the gross margin, what's the best way to think about markdowns markups and distribution in the second quarter in the back half as we think about the drivers behind your first quarter gross margin expansion and any other accelerating tailwinds to consider as fresh continues to ramp or opportunity.
Andy on the front or on the freight side.
Thanks, Matthew I'll walk you through the puts and takes I'll start by saying, we're very pleased with the Q1 gross margin expansion of 49 basis points.
One of things, we didnt call out as a driver was product mix not not a material impact on margin pressure that really speaks to the surge we saw a non consumables seo, particularly as the stimulus payments came out.
That coupled with the mix within the mix within consumables, we saw strength in categories like health and beauty, which has margin rates more akin to non consumables. So the combination of those helped the balance out the mix pressure from the initial surge in consumables and made it really not immaterial impact for Q1, what we did see drive.
Being benefit in Q1 is what we have been seeing in calling out in recent quarters, one was lower markdowns as a percentage a net sales was the topline.
The team remains very targeted on their promotional spending and then the second we called out was initial markups and inventory purchases and Thats really DG fresh we are seeing the substantial cost benefit we expected to see as we self distribute frozen and refrigerated goods and seeing a growing benefit from going benefit from NCR <unk> as well so.
While it's hard to get very specific around Q2 or the following quarters given the dynamics. The near term dynamics I would say is that we continue to see opportunities to continue increasing our margins overtime with the growing benefit of initiatives like DG fresh and NC I and the other levers we have the team continues to do a fabulous job with category management.
[noise] private brands, where we've seen elevated sales in recent quarters. There is a big opportunity in foreign sourcing supply chain you asked specifically around supply chain. Obviously, there is little bit geography, there as we take over self distribution of frozen refrigerate goods, we take on a little bit more cost there, but we save a lot more on the.
Product cost side, but when you strip that out it's been doing very well driving efficiencies as the team has been working on reducing transportation rates, where they have been successful as we've expanded and diversified our carrier base expanded our private fleet, we're seeing lower fuel costs and they continue doing an excellent job driving efficiencies to stem mile reduction.
The optimization and DC productivity efforts and then the other one that we didn't really caught this quarter because it wasn't material with shrink we continue to see an opportunity for shrink over the long term. We're looking forward. The latter part of the year as we see the benefit I hope to see the benefit of the Eas units. The 6000 units we installed comes.
Leading the chain at the end of last year looking to see the continued benefit we've seen in the past from those as well as increased tagging now that we've completed the system. So I think when you put all those together, we feel very well positioned now we always reserve the right to invest in price if needed.
But we believe we're in a great position right now with price and believe we're making the right investments to drive drive.
Margin expansion over the long term and believe we have the levers to do so.
Congrats again best of luck.
Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question.
Thanks, Good morning.
Little bit of a follow up to the last one I mean, there's a lot of dollars coming in right now to the business and I want to ask about reinvestment rate first on gross margin I know John you just mentioned.
Feel good about where pricing is can you talk about the price elasticity in general and if you can measure it in this environment and whether it makes sense to lean and then related to that any overhead costs or ongoing wage issue.
Wage costs that you're contemplating bonuses or wages.
As far as maybe soaking up some of the reinvestment dollars. Thanks.
I'm, assuming this is Todd I'm going to go to answer your first wondering kick it over John for the second piece, but.
The first your first question.
Our our pricing is as competitive as it's been in the time that I've been hearing 11 years and I've been here.
We are in very very good shape against all classes of trade.
And again, that's one of the cornerstones as you know of this model and what our consumers look for.
Very close second the convenient pillar, but I would tell you that some right now we don't really needed to we don't see a need to lean in a further on price because we're so well priced today again against they'll classes trade now we'll continue to watch that if something changes the other thing to keep in mind is that we've been very.
Very vigilant.
Around price, especially during this time.
Well, we don't want to do is to raise prices to our consumers in a time of of need, especially in a pandemic. So we've been very very cautious about that only raising prices on a few items.
As you look at milk eggs in a few that have just rapidly increased others that may have increase we've actually held prices down. Some so that we are able to.
Service the on the customer the way she needs to be right now and into your point, we're doing very well and making sure we're passing some of that onto our consumers as well.
And on the investment side.
First we continue to make meaningful investment to advance our strategic initiatives as well as Remodels, a new stores as we're seeing great returns is expected from those and that continues as planned and is on track.
In addition, as we go forward.
Health and safety of our employees and customers is our top priority and so we will continue to invest some there as needed making sure. There's plenty of masks clubs of hand, sanitizer thorough cleaning protocols and of course, we just recently.
Finished the installation of the Plexiglas shield. So we'll do what is necessary and prudent to ensure their safety beyond those things Theres nothing no material changes that I see right now.
Okay and then the follow up can you remind us the the percentage of store.
Stores that are in rural areas versus non rural and how the I guess the dispersion or range of performance is tracking I think it was pretty wide at first and if that's continuing or you're seeing normalization.
The state's begin to reopen.
Thank you for the question you know we're at right around 75%.
Rule very small town based.
So again, we pride ourselves on serving that that underserved customer out there.
I would tell you that.
That that footprint really serves us well, especially during this time and our customers well think about being close to home.
We're within five miles of 75% of America, you think about that small box that we offer that 72 to 7400 square foot box.
She can shop that.
With convenience and with confidence that there won't be crowds.
And then lastly, we want to make sure that as we make sure that new customers come in that we show her the best that we've got and and that's exactly what we've done through this she's seeing great products and we've seen great comments from our our current customers as well as our.
Our our new customer so we feel that we're well positioned.
Obviously.
We do very well both in our rural locations and are more metro settings, but.
But again a rule being the.
The major driver I would tell you ahead has seen a little larger increase in in sales overall, but again I'm very proud of both sides of the equation, our rule and our city type stores.
Thank you.
Our next question is from Michael Montana with Evercore ISI. Please proceed with your question.
Great. Good morning, Thanks for taking the question just wanted to ask if I could for a little bit of additional color on the traffic versus ticket trend in the quarter, sorry, if I had missed that and then also on the geographic side. If there's anything you could call out.
In terms of different regions of the country and how those trends may have gone.
Yes sure. This target I would tell you we're very proud that both traffic and ticket were positive.
In the quarter and I think Thats, a real Testament once again to the power of.
Of the box that we have out there and the ability for the consumer the shop, both sides of that so again very proud of seeing that obviously the ticket side was a was the larger driver, but I would tell you.
Very nice performance on the on the front side of that too on the traffic side.
As far as geographic some you know throughout the quarter. There were there was some puts and takes every.
We had changed depending on the severity of.
Of Covance outbreaks.
So think about areas like the northeast think about areas like the Midwest, Michigan law, Wisconsin those type of areas.
We saw.
Big early surges, obviously in the northeast things leveled out for a bit and then Resurged again and continues to be elevated.
So there was some give and take but I would tell you when all of the dust settled.
All of the operating regions, we're very well.
Very close together in their performance overall.
Yes for the follow up if I could was on multichannel just curious about the pickup efforts that you all have in place if theres any incremental color there maybe in terms of the pace that you might lean into it as well as the mobile app.
Yes, again, we're just getting going on on our byline pickup in the store efforts, but I would tell you.
I'll give you a couple of Nuggets that we have seen early on one is she she's been very pleased with the.
With the transaction and her ability to get what she needs.
The repeat was very very heavy meaning once you use it once the repeat was.
Was very good on the other side and again very high scores, even even on our repeat.
We know that the customer as we start to move post pandemic and we all hope we get there sooner than later that though retail is going to change a little bit and I would tell you those that have a strong brick and mortar presence as dollar general has but also has have a very.
Very good presence of.
Of the digital side to include buy online pickup in the store to include areas like self checkout, where where the customer can feel that if she doesn't want to interact or have contact with.
And or the actual payment terminals that she can feel very confident the check out in our stores.
I would tell you that.
I'm, so proud of the team and their efforts over the last couple of years, because they have set us up for success. During this time and and we will flourish as we go forward so more to come as we aggressively rollout by online pickup of the store in the upcoming months in quarters ahead, because we know that the customer is really looking for.
That option inside of a brick and mortar retailer.
Thank you.
Our next question is from Rupesh Parikh with Oppenheimer. Please proceed with your question.
Good morning, Thanks for taking my questions and also congrats on the nice quarter I'm, sorry, I guess I wanted to start with store traffic. So it's very notable notice of all your commentary just about the meaningful increase in store traffic, while many of your competitors actually had declining traffic during the quarter is there any more color you can provide in terms of what you think is driving that delta between you and some of your peers.
Yes, when you look at it again it was pretty evenly based in the regions as you as you look out and backward now in hindsight.
But I would tell you that our rural locations did did outperform a little bit.
In that area and I think Thats, a real Testament again to the role nature of our of our box and the ability for customers to stay close to home.
And and shop with confidence in a small box it doesn't have a lot of.
A lot of customers in any given time I'm also what would tell you that I think once they got in for the first time.
She repeated those purchases as she continued to to restock her pantries.
Throughout the the quarter. So once you got in I think she really like what you saw and I would tell you I think we did.
Some of the best if not the best in keeping in stock on many of the core items, we got a lot of customer complaints.
Then on on I'm not being in stock on some items, but they were paled in comparison to the complements that we've got.
Insane things like we found stuff that we haven't found another other places.
In weeks and or months and it was great to hear so I think just the combination of that strongbox and our rule location really helped propel those traffic numbers.
Okay, Great and then maybe just one follow up question just on the supply chain out of stocks are your inventory was down a bit more than 5% on a on the same store basis.
How long do you think or when do you think your supply chain, we'll be back to where it needs to be in terms of getting the stores fully stocked.
Well first of all this is Jeff.
I'm extremely proud of the way that team responded to the in stock challenges that all retailers faced and our merchant team was involved very very early with our suppliers and partnering with ways to get our fair share and product, but also thinking about creative ways to provide alternative pack size.
It is or substitute items for our stores.
And then also we were able to stand up even new skews during this.
During a time so merchant team did an outstanding job and then the supply chain. Obviously, you can't do that without the supply chain. So they are able to flex up to our demand and then also they're able to deliver the product to our stores on time and and then finally as Todd mentioned as well fast track earlier is a was one of our initiatives that really paid off during.
And that's because the stores were able to get the product on the shell is I think out and when it will end.
A lot of that depends on the customer and also depends on the way the economy in terms of the shelter in place. So as you know many of the nation as is opened up for business now so we'll have to wait and see what I can tell you. This our supply chain is ready to deliver the product to the stores when its available and our.
Store teams are ready to get it on the shelf. So we'll be in a great position for the customer wants the products are available.
Great. Thank you.
Our next question just from Karen short with Barclays. Please proceed with your question.
Hi, Thanks very much.
Wanted to actually go back to a couple of comments made in terms of Afras, you talked about a meaningful increase.
In fashion doors that you've rolled the frac sand. So wondering if you could elaborate a little bit on that my second question is just on that peaky pickup I don't know if there's any color you could provide on what the average ticket looks like and then I had one other follow.
Sure Karen.
On DG fresh I.
I would tell you that we saw a meaningful difference.
In our in stock levels, but also of course, our sales numbers in the stores that we self distributed that's exactly what we're going to see it for the long term here, but it was even more amplified obviously daring cobot 19, and a win customers were out and still out.
Looking to fill their pantries or refrigerators, and freezers with goods instead of going out to eat.
And so I believe that is reacting exactly what we how we thought it would.
But it was great to see it actually is.
In in person in an action as as we as our customers needed. The most so I.
I would say that it gives us even greater confidence that as we continue to move over the next upcoming quarters. In years ahead that is really going to pay a big dividends for us.
Yeah.
And then in terms that average ticket would pick up is there any meaningful belterra anything to point to that any I know, it's still early stage.
It is it is still early stage, but I would tell you that the average basket is not dissimilar to what we would normally see inside of a store, which we thought right. So five to six items could be seven or eight but let's call. It five to eight and totaled the closer to that that six range with the basket size being a little.
A larger from a dollar amount, but but not meaningful and again, it's doing exactly what we thought it would do.
I don't believe our core customer is going to change her shopping.
Behavior over the long term I feel a still fully believe that.
When she comes in she comes in often and buys five to eight items with a a ring of about 12 to $13 basket sizes, and and we believe that buy online pick up in the store will be no different.
Okay and then that's recently increased pretty meaningfully I think I've got a 40% increase in monthly snap benefits and I guess my question is how sustainable first I'll give you see that impact in terms of may on sales and how sustainable do you think that we'll be in terms of benefit to that comp because obviously.
Similar to an l. eight or nine increase in terms of percentage.
Karen This is John.
We have seen the benefit from that as you know recent legislation is let states make it easier for families to continue participating has provided emergency supplemental benefits I think it's up to two months as it stands now and then also in lieu of the National School lunch program is providing a $20 and 50 850 cents per week per day.
And then so the combination of those is helping our customer and we are seeing enhance purchasing power and increased.
CBT sales, so how long that persists it depends on how long these benefits persist, but what I would tell you is.
We have been growing our share with these customers overtime as we serve them well growing ABT share and we're focused on controlling what we can control and that's taking care of them and we'll see how it plays out in terms of the duration of the legislation, but we are seeing the benefit.
Great. Thanks.
Our last question comes from Sean The Lutheran with Goldman Sachs. Please proceed with your question.
Yes, hi, Thank you for taking my question up.
Great color just wondering you know as the go forward you see it became shifts a little more aggressive in certain initiatives like private label onion and Tiki fresh in this challenge in London.
Good opportunities to do more producing those stores you mentioned you know meaningful investments in your initiatives. Just just just want to clarify is this an acceleration in your investments, especially when you last spoke about then during fourq Q and instead, an opportunity to double down on some of these initiatives in this challenging backdrop. Thank you.
Thank you and then that's a great question the the numbers that John alluded to.
They they weren't a very big acceleration, but I would tell you. The one area that we're we have accelerated our thinking.
As well as our expenditure has been around buy online pickup in the store.
We we thought it would be a more gradual rollout.
But again seeing what we have seen now through cobot 19, and what our customers are telling us about wanting an option. If you if she wants to take advantage of it in that contact was world I would tell you that buy online pickup in the store.
Has accelerated and our spending against it as well as.
As the rollout into our stores will be.
We will be.
Fastly vastly different than what we have thought and.
Our hope would be we would roll out to the majority the chain by the end of this year as we roll forward.
As you look at the other area that we would anticipate maybe expanding a little bit faster will be our self checkout.
It would be our goal eventually to help so self checkout in virtually all of our stores.
It was going to be a few year rollout.
We believe we can accelerate that some as we continued to move forward.
In 2020, but also accelerated in 21 for sure as again the consumers looking for more of a contact list experience in them in some cases. So those are just a couple but we're taking a look at IGI fresh as well we have a very aggressive plan there as you already know.
But that produce side is a great question and we continue to evaluate our stores to put produce in and that very well could be an expansion as we move through later this year it into 21 as well.
Great. Thanks, so much.
Thank you.
This concludes todays conference you may disconnect your lines at this time and we thank you for your participation.
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