Q2 2020 Dollar General Corp Earnings Call
Welcome everyone to the dollar General second quarter 2020, <unk> earnings Conference call.
Today's Thursday August 27 2020.
Lines have been placed on mute to prevent any background noise.
This call is being recorded instructions for listening to the replay of this call 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 Investor Relations and corporate strategy. Mr. Allow you may begin your conference.
Thank you Robert Good morning, everyone on the call with me today or today, so our CEO, Jeff all win or C O and John Garrett or CFO. Our earnings release issued today can be found on our website at Investor Day dollar General Dot Com under news and events. Let me caution you that today's comments include Ford.
These statements as defined in the private Securities Litigation Reform Act 1995.
Such statements about our strategy plan initiatives goals guidance or beliefs about future matters, including but not limited to beliefs about covert 19 future impact on the economy or business and our customer.
Forward looking statements can be identified because they're not limited to statements of historical fact, where use words such as May will should could would can believe anticipate expect assume intend outlook estimate guidance plan opera.
<unk> any focus confident long term look to committed to continue ahead C or go and similar expressions.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
Factors include but are not limited to those identified in our earnings release issued this morning under risk factors and our 2019 form 10-K filed on March 19th 2020.
Form 10-Q filed this morning, and then the comments that are made on this call you should not unduly rely on forward looking statements speak only as of today's date dollar general disclaims any obligation to update or revise any information discussed in this call unless required by law.
We also reference certain financial measures that have not been derived in accordance with gap.
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 a news and events 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 is.
Pleasure to turn the call over the Todd.
Thank you Johnny and welcome to everyone joining our call.
I want to start by thanking our associates for their exceptional work over the past several months as we continue to navigate this challenging and dynamic operating environment.
Throughout this period our team has remained steadfast it's focused on employee and customer safety, while providing affordable convenient and close to home access to everyday essentials.
I could not be more proud of our team's efforts to serve our customers our communities and each other.
For over 80 years dollar General is served our customers through unique combination of value in convenience, but is never been more evident just how essential our role is as our customers depends on us now more than ever for their everyday household needs.
We remain committed to being part of the solution. During these difficult times and believe we are uniquely position.
To continue supporting our customers through our expansive network of nearly 17000.
Within five miles or more than 75% of the U.S. population, our convenience small box format, providing for a quick in and out access our broad assortment of everyday household essentials central items are ongoing commitment to everyday low price our flexible supply chain are growing digital.
Capabilities and most importantly, our talented and committed associates.
Let me know highlight some of the actions we've taken to further protect our employees and customers, while keeping our operations running with minimal disruption.
As we discussed on last quarter's call what the onset of <unk> Cobot 19, we quickly and proactively implemented numerous safety protocols across the company based on recommendations by federal state and local government agencies.
We continue to monitor C.D.C. and other government guidelines regarding cobot 19, and are adopting our protocols and policies as that guideline evolves.
As announced in today's release, we invested approximately $13 million an employee appreciation bonuses during the quarter, bringing our total incremental investment in appreciation bonuses to about $73 million through the end of Q2.
Additionally, we expect to invest up to $50 million in additional financial incentives in the second half of the year.
Overall these actions have helped to further ensure the continuity of our business at a time when our customers need us most while recognizing our employees for their extraordinary efforts.
Well navigating the challenging times of Cobot 19, our country has simultaneously entered a period of deep reflection on its.
So seidl values, including racial equality and other matters of social Justice.
Our mission at dollar General was serving others in our core values include respecting the dignity and differences of others. We're committed to ensuring these values are evident and all we do including working to promote racial quality and social justice across our communities.
To further advance these efforts, we recently expanded our diversity and inclusion team and announced the combined 5 million dollar pledge with a dollar General literacy foundation to support racial and social Justice and education.
Additionally, during the quarter, we published our most recent serving others report.
Which highlights many of our efforts on the E.S.G. front. We first published this report in 2019 and expect that it will evolve and expand as we move into the future.
Beyond these efforts we remain focused on advancing our operating parties and strategic initiatives as we continue to meet the evolving needs of our customers and better position dollar general for continued long term growth.
To that end and from a position of strength. We are pleased to announce the acceleration of several value, creating initiatives, including DG pick up DG fresh and our non consumable initiatives.
We're also increasing our expectation for Remodels and relocations in 2020.
We will discuss each of these updates in more detail later in the call.
Turning now to our second quarter performance.
The quarter was once again highlighted by extraordinary growth on both the top and bottom lines as some of the consumer trends, we experienced in Q1 related to the pandemic continued in Q2.
More specifically and as we discussed on our Q1 earnings call, we experienced significant growth in our non consumable business in the month of April and through May 26.
These trends continued through the end of Q2, and we're pleased to note that for the second quarter. Our three non consumable product categories. In total delivered a combined comp sales percentage increase well in excess of our consumable businesses.
In terms of our monthly comp cadence sales increased 21.5% may 17.9% in June and 17.2% in July.
We do not typically disclose monthly comp sales we believe it's helpful. In this environment.
Overall second quarter net sales increased 24.4% to $8.7 billion driven by comp sales growth of 18.8%.
These results include significant growth in average basket size, particularly partially excuse me offset by a decline in customer traffic as we believe customers consolidated trips in an effort to limit social contact.
During the quarter are highly consumable market share trends as measured by syndicated data continue to exhibit strength, including strong double digit increases in both units and dollars over the 412 24, and 52 week periods ending July 25 2020.
Importantly, our data suggest another meaningful increase in new customers this quarter compared to Q2 2019, underscoring the broaden the appeal of our value added convenience proposition.
We are very focused on retaining these new customers and the incremental spend of current customers through the acceleration of several key initiatives, which I noted earlier.
We're particularly pleased that we once again delivered significant operating margin expansion, which contributes a second quarter diluted EPS of $3.12, an increase of 89% over the prior year.
Collectively we view these results as further validation that we are pursuing the REIT strategies to enable balance and sustainable growth, while creating meaningful long term shareholder value.
We continue to operate and one of the most attractive sectors in retail and what the plans and initiatives. We haven't place. We believe we are well positioned to serve an even broader set of consumers even in a challenging economic environment.
With that I'll now turn the call over John Thank you Todd and good morning, everyone.
Now that Todd is taking it to a few highlights of the corridor. Let me take you through some of its important financial details unless I, specifically note otherwise all comparisons are year over year, and all references to EPS refer to diluted earnings per share.
In addition, please note that Q2 2019 adjusted results exclude a 31 million dollar pre tax impact related to significant legal expenses recorded in the quarter as discussed in today's earnings release.
Todd already discussed sales that will start with gross profit, which was positively impacted in the quarter by a significant increase in sales, including the impact of Cobot 19 gross profit as a percentage of sales was 32.5% in the second quarter, an increase of 167 basis points. This increase was primarily attributable to higher initial markup.
Inventory purchases, a greater proportion of sales coming from non consumable categories and the reduction markdowns as a percentage of sales.
These factors were partially offset by increased distribution transportation costs, which were driven by increased volume and our decision to incur employee appreciation bonus expense.
<unk> as a percentage of sales was 20.4% a decrease of 205 basis points or 161 basis points compared to Q2 2019, adjusted EPS DNA, although we incurred incremental costs related to cover 19. These costs were more than offset by the significant increase in sales.
Expenses that were lower as a percentage of sales in the quarter include retail labor occupancy costs utilities employee benefits, depreciation and amortization and taxes and licenses.
These items were partially offset by increased incentive compensation and charitable giving expenses as I mentioned, we also recorded expenses of $31 million in Q2, 2019, reflecting our estimate for the settlement of certain legal matters moving down the income statement operating profit for the second quarter was $1 billion, an increase of 80.5%.
Were 71.3% compared to Q2 2019 adjusted operating profit.
As a percentage of sales operating profit was 12% an increase of 373 basis points or 329 basis points compared to Q2 2019 adjusted operating profit.
Operating profit in the second quarter was positively impacted by cobot 19, primarily to higher sales.
The benefit from higher sales was partially offset by approximately $38 million of incremental investments that we made in response to the pandemic, including additional measures taken to further protect our employees and customers and approximately $13 million an appreciation bonuses for eligible frontline employees, our effective tax rate for the quarter was 21 and a half price.
Sent and compares to 22.9% in the second quarter last year finally, as Todd noted earlier EPS for the second quarter was $3.12, which represents an increase at 89% or 79% compared to Q2 2019 adjusted EPS.
Turning now to our balance sheet and cash flow, which remain strong and provide us the financial flexibility to further support our customers employees. During these challenging times, while continuing to invest for the long term.
Merchandise inventories were $4.4 billion at the ended the second quarter, essentially flat overall and down 6% on a per store basis year to date through Q2, we generated significant cash flow from operations totaling $2.9 billion, an increase of $1.8 billion or 157%.
This increase was primarily driven by strong operating performance combined with lower levels of inventory as our supply chain teams continue to work closely with our vendor partners to improve in stock levels for high demand products total capital expenditures through the first half were $424 million and included our planned investments in new stores remodeled.
Once and spending related to our strategic initiatives.
Moving onto liquidity and capital structure, we continued to have ample liquidity as a result of the measures. We took earlier in the year to further bolster our liquidity position coupled with our extremely strong cash flow in the quarter.
As a result, we finished the quarter with $3 billion of cash and cash equivalents and $1.1 billion of availability under our undrawn revolving credit facility.
As one of the measures to preserve liquidity at the onset of covered 19, we temporarily suspended share repurchases. During Q1, we continue to evaluate business conditions in our liquidity as a result of this evaluation, we resume share repurchases in the second quarter during the quarter, we repurchased 3.2 million shares of our common stock for $602 million.
And paid a quarterly dividend of 36 cents per common share outstanding at a total cost of $90 million with today's announcement of an incremental share repurchase authorization. We have remaining authorization of approximately $2.5 billion under the repurchase program.
Our capital allocation priorities continue to service well and remain unchanged. Our first priority is investing in high return growth opportunities, including new store expansion and our strategic initiatives. We also remain committed to returning significant cash to shareholders to anticipated share repurchases in quarterly dividend payments, all while maintaining our current.
Investment grade credit rating and managing to a leverage ratio of Approx approximately three times adjusted debt to EBITDA.
Moving to an update on our financial outlook for fiscal 2020, we continue to operate in a time of significant uncertainty regarding the severity and duration of the cobot 19 pandemic, including its impact on the economy consumer behavior and our business as a result, we're not providing guidance for fiscal 2020 sales or EPS at this time.
With regards to share repurchases, we now expect to repurchase approximately $2.5 billion of our common stock this year, reflecting our strong liquidity position and confidence about the long term growth opportunity for our business.
As Tom noted earlier, we are increasing our expectations for Remodels and relocations in 2020 overall, we now expect opened 1000, new stores remodeled 1670 stores and relocate 110 stores, representing 2780 real estate projects in total finally, we are increasing our expectations for capital spending.
In 2022 range of $1 billion to $1.1 billion as we accelerate key initiatives and continue to invest in our core business to support and drive future growth.
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 August since the end of Q2 and through August 25th we've continued to experience elevated same store sales, which have increased by approximately 15% during this timeframe.
That said, we remain cautious cautious and our sales outlook and recognize the significant uncertainty that still exist concerning the duration of the positive operating environment in particular, we can't speculate as to whether there'll be additional government stimulus or if so to what degree our business would benefit.
Ultimately, we expect to see our comp sales trends moderate as we move through the back half, but believe we are very well positioned to deliver positive sales growth for the balance of the year, even if broader economic conditions deteriorate.
In regards to our strategic initiatives, we continue to anticipate they will improve operating margin overtime, particularly as benefits to gross margin continue to scale and outpaced the associated expense with both end CIA and DG fresh expected to be accretive to operating margin in 2020.
However, our investment in these initiatives will pressure SJ rates in the back half, particularly as we further accelerate their rollouts. Finally, we expect to make additional investments in the second half as a result of covered 19, including up to $50 million, an employee appreciation bonuses, which Todd mentioned as well as investments in additional safety measures in closing.
We're very proud of the team's execution and service, which resulted in another quarter of exceptional results as always we continue to be disciplined and how we manage expenses in capital, but the goal of delivering consistent strong financial performance, while strategically investing for the long term, we remain confident in our business model and our ongoing financial priorities.
To drive profitable same store sales growth 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 Let me 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, while keeping the customer at the center of all we do.
Let me highlight a few of our recent efforts starting with our cooler door expansion program, which continues to be our most impactful merchandising initiatives.
During the first half we added more than 30000 cooler doors across our store base in total we now expect to install more than 60000 cooler doors this year compared to our previous target of 55000 cooler doors in 2020.
Notably the majority of these doors will be in high capacity coolers, creating additional opportunities to drive higher on shelf availability and delivering even wider product selection.
Turning now to private brands.
Which remains a priority as we pursue opportunities to further enhance our value proposition.
During the quarter, we made great progress with our rebranding and repositioning efforts, including the recent relaunch of our office products brand.
Looking ahead. Our plans include the continued expansion of existing brands as well as the rebranding of several additional product lines as we seek to drive greater category awareness and even higher customer adoption.
Moving to our better for you offering which is especially important for our customers as more food continues to be consumed at home.
This offering is now available and approximately 6400 stores with plans to expand to more than 7000 stores by year end.
Finally, a quick update on our Fedex relationship.
This convenient package pick up and drop off service is now available and over 8000 locations.
We now expect to complete our initial rollout to more than 8500 stores by the end of Q3.
Further advancing our long track record of serving rural communities.
Beyond these sales driving initiatives enhancing gross margin remains a key focus area for us.
In addition to the gross margin benefits associated with our NCR DG fresh and private brand efforts foreign sourcing remains an important gross margin opportunity for us.
During the quarter the team once again did a phenomenal job working with our global supply partners to ensure product availability.
Looking ahead, we continue to see opportunities to increase our foreign sourcing penetration, while further diversifying our countries of origin.
We also continue to pursue supply chain efficiencies through the further reduction of stem miles and accelerate expansion of our private fleet.
To this end, we recently announced the purchase of our 18th traditional distribution Center and Walton Kentucky.
We anticipate this facility will begin shipping early next year, enabling us to drive additional efficiencies as we move ahead.
Finally, shrink remains an opportunity as we continue to build on our success with electronic article surveillance over the past year, we've increased the number of items tagged by more than 40% and we continue to focus on leveraging technology to drive even higher levels of in store execution.
Our second priority is capturing growth opportunities are proven high return low risk real estate model continues to be a core strength of our business.
During the first half we opened 500, new stores remodeled 973 stores, including 704 in the higher cooler count DGP or DGP formats and relocated 43 stores.
We also added produce and more than 120 stores, bringing the total number of stores, which carry produce to more than 870.
As John noted, we now expect 2780 real estate projects in total this year as we continue to deploy capital. These high return investments, while delivering an expanded assortment offering to an additional 200 communities in 2020.
Overall, our real estate pipeline remains robust and I'm very proud the team's ability to execute such high volumes of real estate product projects. Despite the added complexities as a result of cobot 19.
Our third operating priority is to leverage and reinforce our position as a low cost operator.
We have 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.
Our operational initiatives consist of building on our success with fast track, which Todd will discuss in more detail.
As a result of our efforts to date, our store associates are able to better serve our customers. During this period of heightened demand.
As evidenced by recent customer survey results, which we are seeing overall satisfaction at all time highs.
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 there are a competitive advantage.
In total for fiscal 2020, we now expect to invest up to a $123 million and appreciation bonuses for eligible frontline employees to provide them with further support and demonstrate our continued appreciation for their exceptional efforts during these difficult times.
As a reminder, these bonuses follow our 2017 investment of nearly $70 million and store manager compensation and training as well as prior and continued investments in employee training benefits and wages.
Importantly, these then these investments continue to yield positive results across our store base, including continued record low store manager turnover strong applicant flows and a robust internal promotion pipeline as well as record staffing levels over the first half of the year.
We believe the opportunity to start and develop a career with a growing and purpose driven company as a unique competitive advantage and remains our greatest currency in attracting and retaining talent.
We also held our annual leadership meeting earlier this month and I was amazed by the team's ability to seamlessly transition to a virtual event, resulting in continued development for more than 1500 leaders of our company.
This meeting was once again, a testament to how our people truly embraced the serving others culture.
In summary, we are executing well from a position of strength and our operating priorities continue to provide a strong foundation from which we can drive up we can continue to provide continued growth in years ahead and with that I'll turn the call back over to Todd.
Thank you, Jeff I'm very proud of the progress the team has made and advancing our key strategic initiatives, which we believe better positions us for long term sustainable growth. Let me take you through some of the most recent highlights.
Starting with our non consumable initiative or NCR High as reminder, NC I consist of a new and expanded product offering in key non consumable categories. The NC I offering was available in approximately 4300 stores at the end of Q2, and we continue to be very pleased with the strong sales and margin performance.
We are seeing across our NCR product categories.
In fact, this performance is contributing to an incremental 8% comp sales increase in total non consumable sales compared to stores without the anti offering as well as a meaningful improvement in gross margin rate in the stores.
We also continue to realize meaningful benefits from incorporating select NC I products and plan to grams throughout the broader store base, resulting in positive sales and margin contributions across the chain.
As a result of our strong performance and learnings to date. Our plans now include accelerating the rollout of our NC I offering to more than 5400 stores by the end of 2020 by incorporating the light version of this initiative into approximately 400 stores.
The light version provides for a more streamlined approach as the full NCR assortment is incorporated into space already dedicated to non consumable products, resulting in less disruption to the stores and the ability to more aggressively scale. This initiative as we move ahead.
We believe and see I will continue to be a meaningful sales and margin driver as we move forward in a very and I'm very excited about the additional opportunities to further leverage our success in learnings with this important initiative.
Turning now to DG fresh, which is a strategic multi phased shift to self distribution of frozen and refrigerated goods.
As a reminder, 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 we continue to be very pleased with the product cost savings we are seeing.
In fact, EG fresh continues to be the largest contributor to the gross margin benefit we are seeing from higher initial markups on inventory purchases, which John noted earlier and we expect this benefit to grow as we continue to scale. This transformational initiative.
Another important goal of DG fresh is to increase sales in these categories. We are pleased with the success. We are seeing on this front driven by higher overall in stock levels and the introduction of more than 55, additional new items, including both national and private brands and select stores being serviced.
By DG fresh.
In total we were self distributing to more than 12000 stores from eight diesel.
Skews excuse me from eight DG fresh facilities at the end of Q2.
Given our success and strong execution to date, we now expect to capture benefits from DG fresh and approximately 14000 stores from at least 10 facilities by the end of this year. This compares to our previous expectation of approximately 12000 stores by year's end.
Turning to our digital initiative, where our strategy consist of building a digital ecosystem, specifically tailored to provide our customers with an even more convenient frictionless and personalized shopping experience all of which have become even more important as a result of cobot 19.
Today customers are seeking safe familiar and convenient experiences in many aspects of their lives.
And in that regard, we believe our unique store footprint combined with our digital assets are a distinct competitive advantage.
During the quarter, we accelerated the rollout of DG pick up our buy online pickup in the store offering to more than 2500 stores compared to about 40 stores at the end of Q1 with plans for even more aggressive expansion as we move ahead. In fact, we now expect to introduce this offering into a sense.
Actually all of our stores by the end of Q3.
In addition to DG pick up our plans include the further expansion of DG go mobile checkout as we look to combine this feature with self checkout, providing an even more convenient and contact list shopping experience.
Moving now the fast track, where our goals include increasing labor productivity in our stores enhancing customer convenience and further improving on shelf availability.
We continue to be pleased with the later labor productivity investments. We are seen as a result of our efforts around rolled painter optimization and even more shelf ready packaging.
The second component to fast track is self checkout, which represents added flexibility for customers, who may see to limit face to face interactions, while also driving greater efficiencies in the store for our associates.
Self checkout is currently available in approximately 400 stores compared to more than 30 stores at the end of Q1 and our plans consist of a broader rollout later this year as we look to further enhance our convenience proposition.
Overall, we are focused on controlling what we can control, while taking action, including the acceleration of our strategic initiatives to further differentiate and distance dollar general for 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're pursuing the right strategy is to drive long term sustainable growth, while creating value for our shareholders.
In closing we are excited about our position midway through the year, our extra ordinary first half results are a testament to the strong execution and disciplined approach of our team.
We're very proud of our people, especially those serving on the front lines and I want to offer my sincere. Thanks to each of our approximately 157000 employees across the company for their tireless dedication and fulfilling our mission of serving others.
With that operator, we would now like open the lines for questions.
Thank you.
At this time will be conducting a question and answer session.
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Our first question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question.
Thanks. Good morning. My first question is anyway, you can parse through thinking about the trade down effect, and which is bringing more customers to your store, which you mentioned.
So the timing of stimulus.
So I don't know how do you sort through both of those those factors.
Sure. Yes, you know, we obviously talk to our customers each and every quarter. So we've got in real good data from that but also through our credit card data, we can see that.
We're getting a a trade down at a at a pretty good clip.
And we saw that in Q1 and that continues into Q2.
And of course, as we just talked about the first period.
Up to.
Just here in Q3, so as we continue to to watch this evolve what we see is very reminiscent of what we saw.
During the great recession, even though it was more of a financial recession versus where we are today. This one is starting to turn more into an look a little bit like that recession and and during that time, obviously, we saw a pretty good trade down and we've got a nice track record and the playbook.
Hopefully be able to retain those customers as we continue to move through cobot, and hopefully post coal that but we're squarely focused on servicing those customers right. Now that are that are coming in I would tell you that the information we're getting back to our customer work our proprietary custom work.
Really speaks to the.
The additional.
Stuff that we've done inside of our store over the last 18 months to two years.
Refresh being the big one our cooler expansions and obviously, our NCR and our non consumable initiatives over the last 18 months two years had been very very fruitful for for this customer. So we're very optimistic that we'll continue to see that trade down and we're I'm as optimistic that we'll be able to keep a great.
Deal of them as we continue to move forward.
And related to it can you talk about how you saw the discretionary mix of product evolved during the quarter and then if you can into the third quarter.
Okay.
Sure, Yes, as we mentioned in the previous call. It started with that consumables stock up at the beginning at the pandemic then in April as we saw the stimulus money in play and people sheltered in place, we saw pretty significant shift into discretionary categories like home doing phenomena.
Only toys seasonal and that continue to all the way through.
Q2, and it's continued to remain very strong I think it's important to note our discretionary business was doing very well coming into this we've had nine straight quarters of non consumable growth and I think it really is a testament to what we've done within Cie stimulus certainly helped as well as the changing in shopping patterns, where people were sheltered in place.
I think what we've done to make this part of the store more relevant than ever with the rotation of goods.
The greater variety an aspirational products has really made it relevant and really helped us capture this additional business.
Thanks.
Our next question is from Matthew Boss with JP Morgan. Please proceed with your question.
Great. Thanks, and congrats on a nice quarter. Thank you.
Maybe first on on the margin side, how best to think about the drivers of gross margin as we think about a third corridor, where the back half of the year.
As we think about IMU, and non consumable and Mark Downs, which drove outsized expansion in the second quarter.
Thanks, Matt Good question, maybe start by talking about the drivers of Q2 and that May help inform the balance of the year, we're not giving specific guidance and Q3, but I think it gives you an idea.
Let me say how pleased we are with the performance 167 basis points of gross margin expansion in Q2 is phenomenal and that marks our fifth consecutive quarter of year over year gross margin expansion the initiatives like DG fresh and NCR in particular are really contributing if you look at the drivers to top three drivers in Q2.
Number one was higher initial markups and that was driven primarily by DG fresh and that's the benefit we expect to continue to grow as we scale.
The second one was mix we saw the benefit of course of stimulus and changes to shopping behavior I mentioned, but I also believe that as I said anti is playing a meaningful contributor to getting more that non consumable business and with that higher non consumable mix that was a big driver of the favorable.
Mix as well as we saw good mix within the mix with categories like health and beauty doing very well within our consumables.
And then the third one was higher initial markups.
I'm sorry, rather the third one was lower promotional activity, we've been talking about there for a few quarters now we've been more and more targeted with the tools, we put in place to get more bang for the Buck with our promotional activity in this environment. It wasnt as necessary. So that was a three key drivers you know as you look ahead.
Obviously, we got some extra benefit from a pretty very significant shift into non consumables. So I wouldn't expect that kind of shift every quarter that gave us some extra juice, but as you look at the initiatives. We have in place we expect to see a growing benefit from DG fresh and then see I and we have a lot of other opportunities.
To leverage seems a great job on category management, we have more opportunity with private brands and foreign sourcing penetration supply chain efficiencies. There is some near term pressure from distribution transportation costs, one keeping up with the volume to the additional bonuses that we've put in place and then three there is some carrier rate.
Pressure, but the team's doing a phenomenally job phenomenal job mitigating that with the actions they have in place.
So and then the last thing is we're always watch price, but we feel very good about where we're price now so you're not coming specifically on Q3, but just in general we feel very good about what we've done to drive this.
Continued growth in gross margin expansion and over the long term think we're very well positioned and making the right investments to drive gross margin expansion over the long term and have a lot of levers.
Great and then a follow up on unit growth from here, so with the consolidation of brick and mortar retailers laterally and then tying that to the acceleration of real estate projects that you guys cited for this year, maybe Todd what are you seeing from new store productivity or metrics out of your new stores and how best to think about the expansion.
Unity or long term saturation, just given the market share in the white space opportunity that that this current crisis seems to be opening up.
Yeah, that's a great question and I would tell you that we're very pleased with the continued.
Improvements that we continue to make each and every quarter.
Our store in the box, making it more relevant to a broad based amount of consumers and in many different type of settings. All the way from our rule, which is our bread and butter all the way into vertical living with our DGX box and I would tell you that we still believe we've got 12000 or so opportunities.
To place a dollar general out there across the the continental United States.
And obviously with some of the recent cobot activity in some of the displacement that we've seen that opportunity continues to to expand as far as I'm concerned and we continue to watch that very carefully and we we.
We have actually done a lot of work into we're not ready yet to talk about 21, but we've done a lot of work.
Into our 21 pipeline as well so we feel good about where we are we feel good about that that ability to continue to build stores and attract and retain those customers.
Great Best of luck.
Thank you.
Our next question is from Karen short with Barclays. Please proceed with your question.
Hi, Thanks for taking my question.
Couple things to elaborate on so first of all within.
Hi.
Person I just wanted to clarify.
Stores currently Comping, 27% is that how I'm interpreting that statement and then I guess, what I was wondering is could you talk a little bit about how that's trended over time.
And then also how those stories are looking into August.
Then I had another separate question.
Yes, so I'm, Karen I think that.
Your.
You are back to the envelope is pretty close because we're we're seeing an outsized benefit.
Our NC I stores and the great thing is not only that topline but of course that margin line.
And the lines will get more more blurred as we go and the reason being is that we're moving a lot of the great learnings from NCR into the bulk of the chains as well, which is great. Because then we're getting benefit in.
In the rest of the chain at the same time that we're growing the NC IP sense, we're taking the best of the best there so.
We really like what we see.
And we continued to be very bullish and that's the reason why we're expanding that extra 400 stores and doing it in that light version.
And that light version will give all the items that you see an NCR high without all the movement inside the store for that disruption and we believe that that may be the unlock as we move into next year to do more of these these remodels.
Okay, and then in terms of the buy online pickup in store.
Seems like obviously, a pretty being at all stores by year end.
Acceleration from.
The 40 that you're out at one Q. So I'm actually wondering if you could talk to what the impact is on the comp the stores that currently.
Line.
And then they maybe any color you could give in terms of the basket looks like.
Yes.
Sure sure well first of all that we have to say we're at the very started this journey right. So football feel we're on our own 10 yard line.
So we've got a a ways to go here, but but again because of the acceleration you can imagine we like what we've seen in the early data, but again, it's so early to draw any any large.
Or broad based conclusions, but I would tell you that.
What we've seen early on a couple of anecdotes is that.
The consumer is enjoying the the experience a rating rating the at very high.
What we're seeing we saw a little bit in the test stores and we're seeing that even in the expanded stores now that we're up to over a couple of thousand and soon to roll out to the chain is that we're seeing.
The customer comes into pick up her.
Her order she's actually buying additional items inside the store, which then is increasing that basket size.
[music] above where we normally would see our basket size. So we like what we see early on but we're just what we'd like to say running water through the pipes right now.
To make sure everything is working and make sure the customer experience is right and then will really start to market as heavy as we move to the back back side of this.
This quarter in into Q4, but also in the next year to really start to to drive some awareness into it. We are lastly, we believe this this will be a very big benefit for that trade down customer I talked about earlier, because that trade down customer that we've seen.
Is a little skewed a little younger more digitally savvy.
With families and we believe that this will be right up her alley as well as she continues to to learn about dollar general and grow what dollar general.
Great. Thanks very much.
Sure.
Our next question is from keep Peter Keith with Piper Sandler. Please proceed with your question.
Hi, Thanks, everyone.
Great quarter I.
I was wondering just if you could commentary comment on the geography.
The store base with the urban versus rural exposure, if you cited meaningful differences between the two.
Yeah. This this is Todd again actually what we what we experience which was great to see is is a pretty even performance across our rule store base and more of our city setting store base. So once again, we've done a lot of work around.
Around our city and or more urban settings.
With with much work being done around those type of stores, including our DGX stores, but in saying that we were very pleased with the overall sales and margin performance was very very similar in both sides of that so it was great to see.
Okay helpful and then might be.
Bronx had asked but I do want to cut a circle back on your your long time long term guidance and it's been a couple of years since you've put out that that 10% to 15% EPS growth range that you wanted to achieve annually.
How are you thinking about that today because it seems like you have a number initiatives that are all working in conjunction and perhaps if anything that that range at this point looks a bit conservative.
Great question, I'm, not going to comment specifically on 2021 or give you any specific predictions, but what I will tell you.
As we are extremely excited about the fundamentals of the business. We're extremely well positioned we continue to see ourselves is 10% plus EPS growers over the long term.
As you look at the unit growth opportunity, we have in a long runway there and the type of performance. We're seeing from these new units. Its best performance. We've seen in years. When you look at our sales with all the levers that we have all the initiatives really clicking to drive the topline and meaningfully the bottom line when you look at our strategic initiatives.
Momentum on the comps and when you look at gross margin.
All the levers that we have the initiatives going after that obviously with the cash we generate substantial cash flow we've been producing that allows us to reinvest in what we announced was accelerating these initiatives. So we really believe we're extremely well positioned with the initiatives, we really believe what we've been doing to the.
Boxes made it more relevant than ever and believe that we're now providing a fuller fill in trip for customers coming in so as we look to make these larger basket stick to the extent possible as we look to keep these new customers that we've attracted coming back we think we're very well positioned with the initiatives we've put in place in more red.
I haven't than ever and very excited about the future.
Okay. Thanks, very much Jon good luck.
Thank you.
Our next question is from Kelly Bania with BMO capital. Please proceed with your question.
Hi, good morning, Thanks for taking my questions.
I was hoping you could maybe just help quantify you called out a little bit of SGN a pressures.
As you accelerate some of your initiatives in the back half I think that was separate from the 50 million and cobot related cost. So maybe you can just give us a little color. If you can just terms of dollars that you're thinking in the second half there.
We didnt mix Ics.
We didnt divulge the exact dollar amount what we did do as we gave new guidance around capital and so you can kind of extrapolate.
That's where a lot of that capital is going toward was these new initiatives accelerating the initiatives as well as accelerating real estate.
On the expense side I would look at it more as an acceleration of money, we were already going to spend as opposed to additional investments and so you could kind of think about the proportionality of what we're doing in terms of advancing the so Todd mentioned the 400 additional anti stores, we're doing we're going to be serving more.
Fresh stores as we carry be serving 14000 at the end the year instead of 12000 stores, we're going to be scaling.
DG pickup across the chain in Q3, and adding 200 more project. So I would really look at it more in terms of just proportionately.
Pulling those expenses forward not additional expenses and again all these things we do our aimed at high return projects.
Where we're really focused on pulling that benefit forward. So there is some front end pressure of cost with the started up in the initial.
Cost associated with that but the benefits far outpaced that and that's really what we're focused on is pulling more that benefit forward.
So.
Okay, that's very helpful.
And then just another quick one on margins, obviously DG fresh.
Going really well.
And in order of magnitude it sounds like the gross margin benefit from from that is larger than mix, which is which is quite incredible.
So just was curious if you could just talk about as you look at your supply chain today.
How much more opportunity is there to bring more in house.
Versus what you have third parties you gave some metrics on stores, but maybe just talk about it a little bit bigger picture.
You know as as we continue to I'm always look to be a low cost operator, we're always looking at opportunities while we're still.
Working DG fresh in our goal is still by the end of next year to be essentially.
Fully self distributed on our perishable side of the business, but there are some other areas in non consumables that we.
We'll be looking at but but also DG fresh unlocks even greater opportunity down the road of of ensuring that our dry network.
Is efficient.
As possible and that May look like some goods coming out of our our traditional.
Dcs and moving into fresh, leaving more room for other goods in our in our main DC. So think of things like candy and water. Some of the things that we can move into our fresh facilities.
That makes a lot of sense and those areas will loosen up a lot of other areas inside of our Dcs to make room for other type of goods. So we're looking at all that right now.
But as you can imagine we're squarely focused on ensuring we rollout fresh at at the highest level of execution, we can I can't be more prouder of the team, especially through a very.
Very dynamic first half I think would be the best way to put it, especially with Covance and everything going on they they have executed at a very high level to include our stores.
And our operators to ensure that we're servicing the customer at a very high level, so couldn't be more happy with DG fresh, but there's always more room for opportunity as we continue to move forward and distribution.
Thank you.
Yeah.
Our next question is from Michael Lasser with US. Please proceed with your question.
Good morning, Thanks, a lot for taking my question Todd.
When you make the analogy from the current environment. So we own I'd see in your differences and the reason why I asked the question is melito nine you saw a big spike as sales.
Initially after the recession that in and then you saw.
Really healthy comp for four years, even after that.
So to use that parallel wouldn't you expect similar growth in the years of had even after you've anniversary some of the really big growth that you will recently.
Now, it's a great question, Michael and I, just I want to frame it up the make sure. We all remember and I was the merchant at that time back. Another eight 910 and then they are we we did a lot of other work to the box right to start to really make it very relevant to the consumer. So at the same time, we were seeing a trade and we were also.
On growing the amount of skews, we doubled the amount of skews from 2009 to 2011 as an example, right going from 5700, So 10000 to 11000 skews pretty much where we sit today.
But.
I think it's important to also note we continue to refine that boxing that boxes, even more relevant today now we don't expect to see probably the same amount of 'em outside sales comps for that long of a time just because of the initiatives that we had then versus now but the important thing here.
As we've got some great initiatives that will my in my opinion maker much more stickier. Today. Then then it then she would have been even to know eight or nine because of DG fresh because of our digital initiatives because of NC I am really showing her a real treasure hunt opportunity on that non.
Consumable side of the business, so I'm very bullish on on build to keep that consumer.
Albeit at a higher rate what does have to see if we get as many of those consumers over long haul.
I'd say, we're probably what who knows how far we're going to Cook cobot. So.
We'll have to wait until we get to the backside. The cobot before we know exactly how many customers. We have we have received or or gotten into the brand and then we're going to do everything possible to continue to keep as many as we can.
Hopefully we'd get to the other side too.
I'm with you in my.
Hi, My follow up question is.
On.
These new customer as you look at your credit card data are you.
More of the growth in in the non consumable in a discretionary area coming from those new customers because the core DG cut where historically had has really lived in the tight budget it doesn't have.
This fall and necessarily to to buy those nondiscretionary good.
Very good faith and is that is that the the we should read it so more of the growth coming in the discretionary categories from those new customers.
I would tell you that we were very pleased with our core customers.
Ability to to buy non consumables I would tell you that's that's more the driver.
Now some of that was stimulus related but again I believe a lot of it had to do with our.
Our ability to attract new customers as well, but also showing her something different because of our non consumable initiatives that we've got moving.
Now as we all know some of the stimulus has started to Wayne.
But.
As you can tell by our numbers that we've posted through Q2 and into the just about the full force period of of Q3 that we continue to see a pretty robust customer.
On both sides of the equation so.
She is she's liking what she sees she has a little bit of money in her pocket I.
I think I think we're seeing a good trade down which is helping but our core customer is spending there as well and I think it really goes to again the amount of work, we've done but plus she's at home a little bit more she's has a little bit more probably disposable income because she is not doing other things and with that.
She she really likes what she sees and buying a lot of our products.
Thank you very much a good luck sure.
Our next question comes from Scot Ciccarelli with RBC capital markets. Please proceed with your question.
Good morning, guys. So obviously overall sales trends.
Core there remains strong right now, but really being driven by ticket rather than transaction. So how should we think about the concept of gaining market share and new customers that you referenced versus lower overall transaction levels. Thanks.
Yes. Thank you for the question Yeah, our traffic was down.
I'll give you a little a little anecdote. It was it was low single digit so.
Typically down, but but down and we'd like to see that up and we strive for that obviously all the time now in saying that the between our core customer having money to be able to do a fuller shop and the trade down that we got well offset any of any of that so.
We like what we see from the customer base, we have.
And.
She is just consolidated her trips.
Not not as much at dollar general as you may see and other places, but yet she is consolidating and and so we continue to offer her more and more so that when she's in she can do a fuller shop and she doesnt feel compelled to have to go elsewhere. So I think thats really what you're seeing from from our brand and we'll continue to.
To show her.
Products that she she wants and needs, but also products that may be a surprise and delight.
Detection, we think about the surge that you've seen in discretionary sales really a function of that Fuller shop then.
Again, I think a lot less or trying to get our arms around you've always got consumables not outpaced discretionary and first time and 10 plus years, you saw that kind of reverse this quarter. So I guess I'm just trying to figure out what drove that and maybe it's the floor shot maybe it's something else.
Now when you when you look at it and I don't want anybody to take the opinion that our consumable business wasn't very healthy. It was that it was very healthy. It was just outpaced by our our non consumable or discretionary side of the equation I would tell you I believe fully that its.
A couple of things one where we are seeing that trade down and she is she likes what she sees and we're seeing repeat in the trade down we can see it in the credit card data so not only she's shopping us once she is shopping as multiple times during.
This cobot outbreak and pandemic that we've seen so it tells us that she likes what she sees and she's coming back.
So she is helping drive and propel that non consumable business, but but also our core consumer likes what she sees and she was buying some of that product, possibly elsewhere and I think she now sees the benefit of shopping dollar general there from all the work that we've done so I'm very bullish on what that looks.
Like as we get to the back size of the pandemic because of all the work we've done, but but we are continuing to.
To ensure that we're working both sides of the equation, meaning the new customer as well as our existing customer.
Great. Thanks, a lot guys. Thank you.
Our last question come some rupees per week.
With Oppenheimer. Please proceed with your question.
Good morning, Thanks for taking my question. So it's I guess to start out.
So as you look out if you look at the cobot crisis out as you're thinking about some of that permit it benefits coming out of the strategic.
Well again, where.
We're taking it one day at a time as you can imagine just like just like most people, we're hoping that the pandemic winds down sooner than later, but in saying that.
We have seen.
That new customers. So we believe that is paramount is to key per and continue to work that but also we're seeing real opportunity.
On a few other fronts, one is to enable us to accelerate our our strategic initiatives, which you heard from both myself and John on as well as Jeff and we're very excited about that because first of all these initiatives were working well prior to covert now they are working very well and we.
No that the consumers looking both for the goods that we are offering through these initiatives, but also.
Because of a being on the forefront of there's not that we knew cobot was coming but but knew that the customer's always looking for more of a convenient and frictionless shopping experience and we were well out in front of this right 18, 12 18 months ago to create what we've created around our digital efforts and our NC products and many other thing.
So we see real opportunities there Karen talked to asked about real estate, we see opportunities there.
That there'll be some real estate opportunities opened up we believe because of this that we will take advantage of as well. So theres a lot of a lot of here's where we know we can take advantage of but where we're squarely focused on right. Now is servicing those customers that are coming in because she's still really needs us.
Because of this raging pandemic that we hope again winds down soon.
And one follow up question just on the supply chain. So when your competitors called out some challenges are out of stocks during their quarter. So just curious where do you guys are from a supply chain, especially in categories like color you decide really stellar growth during the quarter.
Hey, Rupesh. Thank you this is Jeff.
First of all we've said this before but our teams are out in front of this very early so I think it's a testament to the collaboration of our merchant team supply chain and the operators and also.
The great relationships, we have with our vendor partners.
So we're seeing steady progress and we still have obviously work to do but.
What I can tell you is is that the team has been very creative and finding solutions.
To get product on the shelf for the customer you've heard us say before we've stood up new skews. During this items, we never carried before we've looked at different pack sizes, and so I'm real pleased with the progress of the team and as we look forward.
And we're still suffering from some constraints, but as we look forward, we see that the supply chain that we have is incredibly nimble and and many of the initiatives. We haven't plays have allowed us to get the products in and out of the supply chain in the distribution center fast so we'll be ready for that customer when that when the inventory is ready for us to distribute to them.
So we're pleased with the progress.
Great. Thank you.
Yes.
This concludes dollar General Corporation's conference call you may disconnect. Your lines at this time and we thank you for your participation.
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