Q3 2020 Dollar General Corp Earnings Call
[music].
Good morning, My name is Rob and I'll be your conference operator today.
This time I'd like to welcome everyone to the dollar General third quarter 2020 earnings call.
Today's Thursday December Threerd 2020.
I wanted to just 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 company's earnings press release issued this morning.
Now I'd like to turn the conference over to Mr., Donnie low Vice President Investor Relations and corporate strategy mission.
For Schneider you may now begin.
Thank you Rob good morning, everyone on the call with me today are taught day sales or CEO, Jeff <unk>, our COO and John Garratt, Our 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 forward looking statements as defined in the private Securities Litigation Reform Act of 1995, such statements about our strategies plans, including but not limited to our 2021 real estate outlook or initiatives goals priorities opportunities investment guidance expectations.
Or beliefs about future matters, including but not limited to beliefs about cobot, 19th future impact on the economy, our business and our customer and other statements that are not limited to historical facts.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections, including but not limited to those identified in our earnings release issued this morning under risk factors in our 20 night <unk> form 10-K filed on March 19th 2020, and in our form 10-Q filed this morning.
Given the comments that are made on this call.
You should not unduly rely on forward looking statements, which speak only as today's date dollar general disclaims any obligation to update or revise any information discussed in this call unless required by law. We also may reference certain financial measures that have not been derived in accordance with GAAP reconciliations to the most comparable GAAP measures are included.
This morning's earnings release, which as I mentioned is posted on Investor day at dollar General Dot Com under news and events at the end of our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one follow up question if necessary and now it's my pleasure to turn the call over to Todd.
Thank you Tony and welcome to everyone joining our call I'd.
I'd like to start by thanking our associates for their tireless work over the past several months in helping our customers and communities impacted by the COVID-19 pandemic.
Despite continuing continued significant uncertainty in the operating environment.
Our team members have been unwavering in their commitment to fulfilling our mission of serving others by providing affordable convenient and close to home access to everyday essentials at a time when our customers need them most.
I could not be more proud of their efforts.
As always the health and safety of our employees on customer continues to be our top priority.
We continue to closely monitor C D C and other governmental guidelines regarding COVID-19.
And are evaluating and adapting our safety protocols as that guidance evolves.
As one of America's essential retailers, we remain committed to being part of the solution. During these difficult times.
And we believe we are well positioned to continue supporting our customers through our unique combination of value and convenience, including our expansive network of more than 17000 stores located within five miles of approximately 75 per cent of the U.S. population.
At the same time, we remain focused on advancing our operating priorities and strategic initiatives as we continue to meet the evolving needs of our customers and further position dollar general for long term sustainable growth.
To that end and from a position of strength I'm excited to share an update on some of our more recent plans from.
First as you saw in our release, we plan to further accelerate our pace of new store openings and Remodels and 2021.
In total we expect to execute 2900, <unk> real estate projects next year as we continue to delay and strengthen the foundation for future growth.
As previously announced we recently introduced our newest store concept pop shelf.
Further building on our proven track record of store format innovation.
We opened our first two locations during the quarter and while still early we are encouraged by their initial results.
Finally, one of our core values is representing the respecting the dignity and differences of others building on this core value along with our commitment to diversity and inclusion we recently updated our fourth operating priority to better capture and express our intent.
We will discuss each of these updates in more detail later in the call.
But first let's recap some of the results for the third quarter.
The quarter was once again highlighted by exceptional growth on both the top and bottom lines.
We're particularly pleased that for the quarter, our three non consumable categories. Once again delivered a combined sales increase well in excess of our consumable business.
Of note.
This represents our 10th consecutive quarter of year over year comp sales growth in our non consumable business, which speaks to the strong and sustained momentum in these product categories.
From a multi cadence perspective comp sales for Q3 periods ranged from the low double digits to mid teens, what the best performance in August followed by modest moderation as we move through the quarter.
Overall third quarter net sales increased 17.3% to $8.2 billion driven by comp sales growth of 12.2%.
These results include significant growth in average basket size parts <unk>, partially offset by a decline in customer traffic as we believe customers continue to consolidate shopping trips in an effort to limit social contact.
Once again this quarter, we increased our market share in Holly consumable product sales as measured by syndicated data driven by double digit increases in both units and dollars.
Importantly, our day to suggest an increase from new customers this quarter as compared to Q3 of 2019.
These new customer skew younger higher income and more ethnically diverse further underscoring the broad appeal of our value and convenience proposition.
We're also encouraged by the repurchase rates of new customers and are working hard to retain them with more targeted marketing and continued execution of our key initiatives.
We're particularly pleased with the and how we delivered significant operating margin expansion, which contributed to third quarter diluted EPS of $2.31, an increase of 63% over the prior year.
Collectively our Q3 results reflect strong and disciplined execution across many fronts and further validate our belief that we are pursuing the right strategies to create meaningful long term shareholder value.
We operate in one of the most attractive sectors of retail and with our unique combination of value and convenience further enhanced through our initiatives. We believe we are well positioned to successfully navigate the current environment and emerge even stronger than before.
With that I'll now turn the call over to John Thank you Todd and good morning, everyone. Now that Todd has taken you through a few highlights for the quarter.
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.
As Todd already discussed sales I will start with gross profit, which was positively impacted in the quarter by meaningful increase in sales, including the impact of covered 19th.
Gross profit as a percentage of sales was 31.3% in the third quarter, an increase of 178 basis points and represents our sixth consecutive quarter of year over year gross margin rate expansion.
This increase was primarily attributable to a reduction in markdowns as a percentage of sales higher initial markups on inventory purchases, a greater proportion of sales coming from non consumables categories and a reduction in shrink as a percentage of sales.
These factors were partially offset by increased distribution and transportation costs, which were driven by increased volume and our decision to incur employee appreciation bonus expense.
<unk> as a percentage of sales was 21.9% a decrease of 62 basis points, although we incurred incremental costs related to COVID-19. These cost for more than offset by the significant increase in sales.
Expenses that were lower as a percentage of sales. This quarter include occupancy costs utilities retail labor depreciation and amortization repairs and maintenance and employee benefits. These items were partially offset by increases in incentive compensation expense and hurricane related expenses.
Moving down the income statement operating profit for the third quarter increased 57.3% to $773 million compared to $491 million from the third quarter of 2019.
As a percentage of sales operating profit was 9.4% an increase of 240 basis points.
Operating profit in the third quarter was positively impacted by COVID-19, primarily through 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 $25 million and appreciation bonuses for eligible frontline employees.
Year to date for the third quarter, we have invested approximately $153 million income at 19 related expenses, including about $99 million and appreciation bonuses for our frontline employees.
Our effective tax rate for the quarter was 21.6% and compares to 21.7% in the third quarter last year. Finally, as Todd noted earlier EPS for the third quarter increased 62.7% to $2.31.
Turning now to our balance sheet and cash flow, which remain strong and provide us the financial flexibility to further support our customers and employees. During these unprecedented times, while continuing to invest for the long term.
We finished the quarter with $2.2 billion of cash and cash equivalents, a decrease of $760 million compared to Q2, and an increase of $1.9 billion over the prior year merchandise inventories were $5 billion at the end of the third quarter, an increase of 11.8% overall and 5.9% on a per store basis, but.
Out of stocks remain higher than normal for certain high demand products. We continue to make good progress with improving our in stock position and are pleased with our overall inventory levels year.
Year to date to Q3, we generated significant cash flow from operations totaling $3.4 billion, an increase of 103.7%.
Total capital expenditures through the first three quarters were $698 million and included our planned investments and Remodels and relocations, new stores and spending related to our strategic initiatives during the quarter, we repurchased 4.4 million shares of our common stock for $902 million and paid a quarterly dividend of 36 cents per common share.
Outstanding at a total cost of $88 million at the end of Q3, the remaining share repurchase authorization was $1.6 billion, our capital allocation priorities continue to serve us 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 coming.
Fitted to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment grade credit rating and managing to a leverage ratio of approximately three times adjusted debt to EBITDA are moving.
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 COVID-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 repeat EPS at this time and are unlikely to resume issuing guidance to the.
Extent, such uncertainties persist with regards to share repurchases capital spending and real estate projects our outlook for the year remains unchanged from what we stated in our Q2 earnings release on August 27, 2000 2020.
Let me now provide some context as to what we expect in the fourth quarter given the unusual situation I will elaborate on our comp sales trends thus far in Q4.
From the end of Q3 through December 1st comp sales accelerated increasing approximately 14% during this timeframe, reflecting increased demand in our consumables business and while we remain cautious in our sales outlook. We are encouraged with our sales trends, particularly as we move farther passed government stimulus payments and the expiration of enhanced unemployment benefits.
Under the cares act that said significant uncertainty still exists concerning the duration of the positive sales environment, including external factors related to the ongoing health crisis and their potential impact on our business.
Beyond these macro factors there are a number of more specific considerations as it relates to the fourth quarter first we anticipate higher transportation and distribution costs in Q for like other retailers. Our business is seeing the effect of higher transportation costs due to a tight carrier market as a result of driver shortages and a greater demand for services that third party carriers.
In addition, we are in the process of building expanding our opening a number of distribution centers across our dry and DG fresh networks and while we expect these investments will enable us to drive even greater efficiencies going forward and further support future growth. These investments will pressure gross margin rates. In Q4 also please keep in mind that the fourth quarter represent.
Our most challenging lap for the year from a gross margin perspective filing 60 basis points of rate improvement in Q4 2019 with regards to our strategic initiatives. We continue to anticipate they will positively contribute to operating margin over time as the benefit to gross margin continues to scale and outpaced the associated expense without any.
See I in DG fresh on pace to be accretive to operating margin in 2020.
However, our investment in these initiatives will pressure asked you day rates in the fourth quarter as we further accelerate their rollouts. Finally, we expect to make additional investments in the fourth quarter. As a result of COVID-19, including up to $75 million in employee appreciation bonuses, which includes our recent announcement toward approximately $50 million an adult.
Funnel bonuses, bringing our full year investment in appreciation bonuses to approximately a $173 million as well as continued investments in health and safety measures in closing we are very proud of the team's execution service, resulting in another quarter of exceptional results as always we continue to be disciplined in how we manage expenses and capital with the goal of did.
Living 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 for operating priorities.
Our first operating priority is driving profitable sales growth.
The team once again did a fantastic job in Q3 executing against a portfolio of growth initiatives. Let me highlight some of our recent efforts.
Starting with our cooler door expansion program, which continues to be our most impactful merchandising initiative.
During the first three quarters, we added approximately 49000 cooler doors across our store base in total we expect to install more than 60000 cooler doors. This year, the majority of which will be in our higher capacity coolers, creating additional opportunities to drive higher on shelf availability and deliver.
An even wider product selection.
Turning now to private brands, which remain a priority as we look to drive overall category awareness and even greater customer adoption through rebranding repositioning and expansion of select brands as well as the introduction of new product lines.
We're very pleased with the continued progress across these fronts, including the successful rebranding of six product lines and the introduction of two new brands. So far this year and we're excited about the continued momentum were seeing across the from the across the portfolio.
Finally, a quick update on our Fedex relationship day.
During the quarter, we completed our initial rollout of this convenient customer package pickup and drop off service, which is now available in more than 8500 stores.
We're very pleased with the reception this offering is receiving from our customers and we continue to explore innovative opportunities to further leverage our unique real estate footprint to provide even more solutions for our customers and convenient and nearby locations.
Beyond these sales driving initiatives enhancing gross margin remains a key area of focus for us.
In addition to the gross margin benefits associated with our NCR DG fresh and private brand efforts for in sourcing remains an important gross margin opportunity for us.
The team once a day once again did a great job during the quarter working with our supply partners to ensure product availability. Looking ahead, we continue to pursue opportunities to increase our foreign sourcing penetration, while further diversifying our countries of origin.
We also continue to pursue supply chain efficiencies, including the continued expansion of our private fleet. The opening of additional DG fresh facilities and the recent purchase of our future Walton, Kentucky dried distribution center, which should contribute to a further reduction in stem miles beginning early.
Next year.
In addition, we recently began construction on our first ever ground up combination DG fresh and dried distribution center and Blair Nebraska.
We anticipate this facility will be completed in early 2022, enabling us to drive even greater efficiencies as we move ahead.
The team is also executing against additional for additional opportunities to enhance gross margin, including further improvements in shrink as we continue to build on our success with electronic article surveillance.
Our second priority is capturing growth opportunities our proven high return low risk real estate model continues to be a core strength of our business.
As previously announced we recently celebrated a significant milestone with the opening of our 17000 store.
This is a testament to the fantastic work of our best in class real estate team as we continue to expand our footprint and enhance our ability to serve even more customers.
As a reminder, our real estate model continues to focus on five metrics that have served us well for many years and evaluating new real estate opportunities.
These metrics include new store productivity actual sales performance average returns cannibalization and the payback period.
Of note, we continue to see strong performance across these metrics.
For 2020, we remain on track to open 1000, new stores remodeled 1670 stores and relocate 110 stores.
Through the first three quarters, we opened 780, new stores remodeled 1425 stores, including more than 1000 in the higher cooler count DGP, our DGP formats, and we relocated 76 stores.
We also added produce and more than 140 stores, bringing the total number of stores, which carry produce to more than 1000.
As Todd noted for fiscal 2021, we plan to execute 2900 real estate projects in total, including a thousand 50, new stores 1750, Remodels and 100 store relocations.
Additionally, we plan to add produce in approximately 600 stores.
Notably, we expect approximately 50% of our new unit openings and about 75% of our remodels to be in the DG TP, our GGP formats.
The remainder of our new store openings, and Remodels will primarily be and the traditional format with higher capacity coolers.
Our plans also include happen having.
Having approximately 30 stores and our new pop shelf concepts, which Todd will discuss in more detail by the end of fiscal 2021 up from two locations today.
Overall, our real estate pipeline remains extremely robust and we are excited about the significant growth opportunities ahead.
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 defined process to control spending, which governs our disciplined approach to spending decisions.
The 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.
We continue to build on our success with fast track, which Todd will discuss in more detail later.
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 our recent customer survey results, where we continue to see overall satisfaction scores at all time highs.
Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities, while controlling expenses and always seeking to be a low cost operator.
We have three business operating rating, we have three business operating priorities, but at the heart of them is is our foundational for operating priority.
His priorities anchored and our people and is truly foundational to everything we do at dollar general.
Our fourth operating priority is investing in our diverse teams through development empowerment and inclusion.
As Todd noted this updated language more fully expresses our values and core beliefs and more closely aligns with the investments we continue to make in the development of our people.
Importantly, we believe these investments continue to yield positive results across our store base as evidenced by continued record low store manager turnover record staffing levels.
Healthy applicant flows and a robust internal promotion pipeline.
As a growing retailer, we also continue to create new jobs and opportunities for career advancement.
In fact more than 12000 of our current store managers are internal promotes and we continue to innovate on the development opportunities we can offer our teams.
We believe the opportunity to start and developed for career with a growing and purpose driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent.
We also recently completed our annual community, giving campaign, where <unk> where employees across the organization come together to raise funds for a variety of important causes.
I was once again humbled by the generosity and compassion of our people.
This event truly embodies the serving others culture that is so deeply embedded at dollar general.
And so from.
We are executing well from a position of strength and our operating priorities continue to <unk> to provide a strong 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 I'm proud of the great progress for team has made in advancing our strategic initiatives. Let me take you through some of the most recent highlights.
Starting with our non consumable initiative or NC high as a reminder, and see I consist of a new and expanded product offering in key non consumable categories.
The M.C.I. offering was available in 5200 stores at the end of Q3 and given our strong execution to date, we now expect to expand the offering to more than 5600 stores by the end of 2020, including approximately 400 stores in our anti light version. This compares to our prior XP.
Dictation of more than 5400 stores at year end.
We're especially pleased with the strong sales and margin performance, our NC I stores once again delivered in the quarter.
We also continue to benefit from incorporating select MCR products and planet grams throughout the broader store base.
And we are pleased with the performance of our lights stores, which incorporates a vast majority of the anti assortment, but through a more streamlined approach.
As noted earlier, we are also excited about the recent introduction of pop shelf.
And the opening of our first two locations, which further builds on our success and learnings with NCR.
Pop shelf aims to engage customers by offering a fun affordable and differentiated treasure hunt experience.
Delivered through first continually refreshed merchandise primarily in targeted non consumable product categories second a differentiated in store experience, including impactful displays of our offering designed to create a highly visual fun and easy shopping experience and third access.
Optional value with approximately 95% of our items price to $5 or less.
Importantly, while share while pop shelf delivers many of dollar generals core strengths, including customer insights merchandise innovation operational excellence digital capabilities and real estate expertise. It is specifically tailored to a different shopping occasion.
Well, primarily located in suburban communities and initially targets, a higher income customer potentially unlocking additional and incremental growth opportunities going forward.
We're proud of all of the incredible work the team has done in standing up this concept and with the initial work now behind US we look forward to welcoming additional customers to pop shelf as we move forward our goal of approximately 30 stores by the end of 2021.
Turning now to DG fresh, which is a strategic multi phase shift to self distribution of frozen and refrigerated goods.
As a reminder, the primary objective of DG fresh is to reduce product costs 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 seen.
In fact, DG fresh continues to be the largest contributor to gross margin benefit we are realizing from higher initial markups on inventory purchases.
Importantly, 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're pleased with the success, we are already seeing on this front driven by higher overall in stock levels and the introduction of more than 55 additional items, including both national and private brands in select stores being serviced by DG fresh.
And while produce is not included in our initial rollout plans. We plan, we plan and continue to believe DG fresh could provide a potential path forward to expanding our produce offering to even more stores in the future.
In total we were self distributing to more than 13000 stores from eight DG fresh facilities at the end of Q3.
We expect to capture benefits from this initiative in more than 14000 stores from 10 facilities by the end of this year and are well on track to complete our initial rollout across the chain in 2021.
Next 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.
In an environment, where customers continue to seek.
Safe familiar and convenient experiences we believe our unique footprint combined with our digital assets provides a distinct competitive advantage.
More specifically I'm pleased to note that during the quarter, we expanded DG pick up our buy online pick up in the store offering to nearly 17000 stores compared to more than 2500 stores at the end of Q2, providing another convenient access point for those seeking a more contact list customer experience.
In addition to DG pick up our plans include further expansion of DG go check out as we look to make this feature available in select stores that includes self checkout further enhancing our convenience proposition.
By leading our channel in digital tools and experiences. We believe we are well positioned to drive more in store traffic growth basket size and offer even greater convenience to new and existing customers.
Moving now to fast track, where our goals, including increasing labor productivity in our stores enhancing customer convenience and further improving on shelf availability.
We continue to be pleased with the labor productivity improvements we are seen as a result of our efforts around rotel rotator optimization, and even more shelf ready packaging.
The second component of fast track is self checkout, which provides customers with another flexible and convenient checkout solution, while also driving greater efficiencies for our store associates.
During the quarter, we accelerated the rollout of self checkout to more than 900 stores compared to approximately 400 stores at the end of Q2 with plans for further expansion as we move forward.
And while still early we are pleased with the initial results, including our customer adoption rates as well as positive feedback from both customers and employees.
Overall, we remain focused on controlling what we can control, while taking actions, including the continued execution of our key initiatives to further differentiate and distance dollar general from the rest of the discount retail landscape.
As a mature retailer in growth mode. We're also laying the groundwork for future initiatives and continue to believe we are pursuing the right strategies to capture additional growth opportunities in a rapidly changing retail landscape.
In closing we are very proud of the team's performance and our results through the first three quarters of 2020.
Which further demonstrate that our unique combination of value and convenience continues to resonate with our customers and positions us well going forward.
As we are in the midst of a busy and extended holiday season, I want to offer my sincere thanks to each of our more than 157000 employees across the company for their hard work and dedication to fulfilling our mission of serving others.
With that operator, we'd now like to open the lines for questions.
Thank you.
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Thank you and our first question comes from the line of Matthew Boss with JP Morgan.
Great and congrats on another nice quarter.
Hey, Matt.
Todd So clearly the company is hitting on all cylinders today, what do you think DG takes from this pandemic following a vaccine in any categories that you are.
I believe the company is taking multiyear market share what do you. What are you seeing from new customer acquisition, just kind of thinking about the after versus obviously the clear momentum that you're seeing today.
Thank you Matt that's a great question because you know here at dollar General we're always focused on that long term right and.
We believe that.
Through the initiatives that we have in place.
Including DG fresh, including our digital assets and fast track, including our cooler initiatives that we continue to.
To benefit from and feel that we're still in the early innings of the ballgame on we feel that those will serve us very well post pandemic and let's hope that post pandemic come sooner than later.
But as we continue to look forward. We also are encouraged on some of the early initiatives, we have around pop shelf and that concept.
Because we believe that Theres, a fair amount of white space out there for a discretionary.
Format like pop shelf and and again I think we're encouraged as we look at the first two stores on what that customer response.
It has been.
On the customer acquisition side of the of the equation. We're very pleased with the amount of new customers that we've seen and what really encourages US is is that's a little different customer one that is very adjacent to our core customer, but as I said skews a little younger more digital savvy.
And a little bit more ethically ethnically diverse and that really gives us the opportunity to speak to her a little differently and I'm happy to say that toward the end of Q3, we actually launched our our new customer acquisition platform through social media and a and a few other means.
So that we won't talk about exactly how I want to give away too much but.
But suffice it to say, we're happy with some of the early response that weve, even seen from that so more to come we are doing everything that we believe is appropriate right now while we're in the midst of the pandemic to retain and keep those customers as we move into 2021.
Great and then a follow up maybe for for John on gross margin. If I look at expansion. The last few quarters, you've shown a 150 basis points plus relative to multi year second and third quarter historical levels. So maybe could you just elaborate elaborate on the fourth quarter.
There are factors that you've mentioned and is the point that we should expect moderation in gross margin expansion or do you actually see these headwinds outpacing a tailwind.
Great question Matt.
First I'll start by saying were very pleased with the gross margin expansion, we've seen with six consecutive quarters of year over year expansion. As you mentioned 178 this quarter, maybe start by talking about the drivers this quarter and that can help inform as we look ahead.
I think it's important to note that the initiatives like DG fresh in NCR really contributing and impactful to the three biggest drivers we saw this quarter.
First a lower markdowns with the strong sell through on non consumables, we didnt have to take as much clearance markdowns as well as we've been talking about for a number of quarters. Now. We're just continue to be more and more targeted on promotional activity and have less promotional activity necessary. Secondly, when you look at higher initial markups.
That was primarily driven by DG fresh we continue to see that same substantial cost takeout and that only gross as we scale.
And then third the.
The mix benefit again, the key driver there was non consumables. Obviously, there has been a shift in wallet, but I would say that we've really positioned ourselves very well with what we've done to that part of the box with the impact of NCR and spreading the learnings from that as evidenced by the 10 consecutive quarters of non con comps.
In addition to that we did have a lower shrink, which we were pleased to see as a percentage sales now partly offsetting that was higher distribution and transportation costs. So as we look ahead as you alluded to in Q4, you know, we're not providing specific guidance given the uncertainty of the environment, but I think factors to consider as you look ahead.
Wed consider first that we expect anticipate higher transportation and distribution costs in Q4 to continue with the tight carrier market and the DC startups also Q2 and Q3. It certainly was enhanced by the mix shift into non consumables, which it's hard to say, but.
When but it's likely to moderate somewhat overtime from those those heightened levels and then I think in Q4. It's also important to note that it is the most challenging lap of the year as we mentioned as were lapping 60 basis points of gross margin expansion in Q4, so while there are some uncertainties and some.
Near term headwinds, we continue to believe there's opportunities to increase our gross margin net operating margin overtime. We continue to see a growing benefit from initiatives like DG fresh and hence the I as I mentioned and those will only grow as they scale, we continue to see opportunities in the levers that we talk about category management.
<unk> brand penetration for in sourcing penetration supply chain efficiencies and shrink and while we always reserve the right to invest in price where needed where appropriate. We're currently in a great spot on pricing.
Don't see the need to make any investments there right now so I believe we're making the right investments and have the levers to continue to improve gross margins and operating margins over the long term.
Great color congrats again on their performance.
Thank you.
The next question is from the line of Karen short with Barclays. Please proceed with your question.
Hi, Thanks, very much and congrats.
From.
Thank you.
Folks from 2021, but I think that's what everyone is concerned about as it relates to.
Tough compares.
So I wanted to ask a couple of questions.
Appreciate there's a lot of unknowns.
Is there any way to kind of provide a framework.
With respect to price.
And I would ask that in the context, and while I understand you definitely can't predict sales.
How are you thinking about freight into 2021.
Uh huh.
Thank you for about wages, specifically because.
You outlined I guess $173 million.
Bonuses for probably will have around $53 million.
<unk> expenses.
One offered these bonuses how do you think about taking them away, maybe a little color.
Right.
Okay, Let me start non I'll I'll have John chime in as well here.
As we look out to 2021.
Well again, we're we're really squarely focused on is controlling what we can control and that is really.
In our key initiatives, ensuring that we execute at a high level.
Retain as many of these new customers as we possibly can.
Through the means that we have talked about.
And also again with our with our key initiatives.
Being a a nice backdrop to the new consumer she can do a much fuller shop inside of our store than she ever has been able to do in the past.
As you start to think about.
2021, and and the labor side to your point wages.
Again, we don't have a crystal ball, so we don't know exactly.
What the pandemic is going to look like in in the first part of the year or you know how fast this vaccine will be will be given we've got some hints obviously from the.
From the CDC and through the government, but.
The one thing I think just to take away is that we are going to do what's right by our employees first right and so we'll continue to watch that we'll continue to keep them safe through this pandemic until a vaccine is widely available.
And if if we do need to pay additional bonuses to reward our frontline workers for taking care of the customers and we'll do that but again I think was too early to tell in Q1 exactly what's going to happen at this point.
Yes, I think the only thing I'll add to that as you mentioned, it's challenging in this uncertain environment given the fluid nature of the pandemic and the impact that can have on the economy and the consumer to say what sales look like but to Todd point, what we're focused on controlling what we can control and that's accelerating virtually all our strategic.
It is which we feel great about and are really pleased with what we're seeing them contribute to the top line and the bottom line and again those will continue to have an increased impact as we scale those and so we're focused on that as well as as Todd alluded to doing.
Doing whatever we can to take care of those customers those new customers trading in it.
To keep them coming back as they have indicated they intend to and also keeping those baskets bigger and I think what we've done to make the box more relevant than ever providing that fuller fill in trip positions us well so focused on controlling what we can control you know in terms of puts and takes we feel great about I'll tell you the fundamentals.
The business the strength of the business model the initiatives and having a model that performs well in all cycles of the economy in terms of a couple of specific things. You mentioned, you mentioned freight and it remains to be seen I think a big part of freight is the capacity constraint right now.
In the end the heightened volume so it remains to be seen that's something that.
Time here with the holiday season, Thats, usually at its peak and certainly all the volume is straying that now hopefully that is something that would normalize over time and certainly we have a lot of mitigating efforts to go after that in terms of.
Further scaling our private fleet continue to expand and diversify our carrier base and then ongoing efforts around stem mile reduction load optimization in DC productivity efforts and then the other thing I.
I pointed to in Q4 around gross margin as you know we have over the last two quarters gotten additional benefit from that mix shift into non consumables, we feel fantastic about the non consumables business as we continue to scale and size. We continue to import the best ideas from that to the rest of the chain. So we feel great about that piece of it.
Business, but it remains to be seen if you can continue to get that kind of mix shift in what I imagine that that would.
Over time.
Moderate somewhat and so I think that to some of the considerations for next year, but.
Feel fantastic about the fundamentals of the business.
Okay. If I could just ask one more is there any pattern or anything you could point to.
Rural versus urban stores and then.
In the quarter, but then also with the acceleration that you saw.
For the quarter to date any any per.
Consumables accelerating.
For Q.
Hi, Karen this is Jeff.
In terms of the rural versus urban.
The nice thing about our model is consistency really across the store base, but specifically to rural we did see our rural stores performed well and and outperformed our urban store. So we're pleased with that performance.
And and continue to.
To be real pleased with our.
Our remodel program, our new store development program and the fact that we're within 75 or 75%. The U.S. population is within five miles of our store network. So that unique footprint continues to to serve us well.
You mentioned about the trends.
In terms of the sales piece, we we did mentioned as John said earlier in our prepared remarks around the sales and.
And so we're pleased we're ready for the fourth quarter I can tell you that in terms of that the team's ability to set holiday.
We've made great improvements in our in stock position on the inventory side. So we're certainly ready to serve that customer and excited about the remaining parts for the fourth quarter.
Thank you.
The next question is from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.
Hi, everyone. Good morning, a little bit along the lines of Karen's question.
Maybe unanswerable around 2021, I want to ask through the lens of the topline and in the past you've been fairly deliberate around some of your sales drivers like bottoms up no new store remodel sales initiatives I think we've talked about a recession up low uplift and all of this is on top of I think normally some inflation are you still thinking about 20.
In this way can you share your thoughts on any of these items and then I don't know how you think about stimulus. If that's part of a sales plan or not for next year.
Yes, assuming any non as as we look at the <unk> of the sales number for 21 again way early we're not giving any guidance here yet to come.
By any means but I would tell you that a lot of the long term algorithms are still well intact for our new store algorithm is still very strong as you saw we were going to be opening more.
More stores next year at the same an accelerated pace.
And I think Thats just show you that we're very very pleased with our store performance for our new store performance and quite frankly, our remodel program accelerating next year.
It is also a great sign that we're seeing tremendous value and our consumers are seeing tremendous value coming out of those remodels. So.
So all of the fundamentals around the top line, including our initiative drivers are well intact.
Stimulus will have to wait and see we don't want to guess, what what may or may not come but.
But any stimulus that does come would be a tailwind.
For us and I'm sure many retailers, but we'll watch and see what happens there we're not betting on that right now until we see it.
What we are big on here and I'll keep saying is controlling what we can control and that is dry.
Driving that top line through our long term strategic initiatives and I think they have served us well over the many years.
And there are set up to service well for many years to come.
Thanks, Todd My follow up it's related to margin at the second call out in the release the initial higher markups I think we presume that's the DG fresh and.
And Todd I think in your prepared comments, you said building and that's my question I wanted to ask if you could talk about the rate of I guess sequential momentum there because I think it was initially called out in last year's fourth quarter, and so trying to think about how that ramps into 21 is it ratably or are there or is there some step change that we should expect from.
For that item alone next year.
Yes, I think the way to think about that is and you're exactly right that that is the primary driver of that initial markup benefit that we've been talking about for a number of quarters now.
It's already accretive to the business and to your point it will grow over time not only low.
Generally as you add more stores, but you have economies of scale as you serve more stores from existing Dcs as you get the efficiencies of operating that the team. It's been amazing how quickly we've gotten this up and running and and gotten quite efficient at this so you get both benefit so it continues to grow as it scales both.
In terms of the gross margin benefit that substantial cost takeout, but then the other thing we've talked about is the sales benefit.
We are already seeing in those stores served by our self distribution better in stocks better sales.
And Thats, we expect that to grow that benefit to grow and then the other thing is now we are free to.
Improved the assortment, we had agreements before which precluded us from carrying a certain competing brands and private label. This opened that up and as we mentioned, we're already adding new skews, there and then longer term.
Locked we see that the opportunity to unlock further expansion of produce two more stores and so we think it's the gift that keeps on giving both in terms of cost and margin, but also in terms of sales.
Okay. Thanks, John and have a good rest the fourth quarter.
Thank you. Thank you.
Our next question is from the line of Michael Lasser, Yes. Please proceed with your question.
Good morning, Thanks for my question, So dollar general.
Reported a 17% comp quarter year to date.
You had to guess or.
Lets analysis behind it how much of that 17.5.
Market share gain and then how much.
Other factors like the wallet share gains.
Yes, we're not going to probably Mike will get into too much of that due to competitive reasons, obviously, but I would tell you that we're really happy with the the share gains that we've seen.
Those share gains or are continue to come from a multitude of different disciplines that are out there drug continues to be the largest share donor that we've seen but some new emerging trends that we've seen.
And have some evidence of is that in the discretionary areas were taking some some share at a rapid rate as well and in many cases zone, that's probably from some of the consolidation that has happened on that side of the equation recently.
And so.
Couple that with our initiatives around NC I and now pop shelf I believe were well positioned as we move into 21 to capitalize and keep those customers that were seeing there in this in the share gains that we've already gotten in 2020.
Got it and then my follow up question, yes.
Around your expectations.
Initial thoughts on as Verizon over environment for consumables until.
Presumably the promotional environment is going to increase.
In.
Price and all that.
Margin expansion potential for you haven't seen investing in price picking a disproportionate amount of market share in this softer consumer or consumable environment overall.
Well you know, we always say, we we always reserve the right to low.
Lower price to ensure that we keep those footsteps coming in at dollar General and more importantly service that that consumer as we sit right now, though Michael we don't see any evidence and or need to pull the price lever.
The the the promotional activity the everyday price activity across retail right now seems to be pretty tame and about the same as it has been for many quarters now.
But you know as we continue to watch.
The the environment, we'll we'll do whatever we have to do to ensure that.
We're price right, but I think it's also important to note.
That in the 12 years that I've been here. This is the best competitive positioning we've ever been been in on price. The very best so from a position of strength, we've already lower price got it where it needs to be and is in and are in very good shape as we move into 2020.
Anyone.
Thank you very much and have a good holiday sure.
The next question is from the line of Paul Nice wave at Citi. Please proceed with your question.
Hey, Thanks, guys I'm curious if you could talk about some of the new customers that you've acquired earlier in the year and if there are any retention metrics that you might have is that you can share and then and then second just going back to your comments about lower markdowns just curious if that was true across both.
Consumables and non consumables and if you could talk about the gross margins within each of those businesses relative to themselves a year ago. Thanks.
Sure. This is Jeff first on the new customer retention metrics you asked about.
As Todd earlier stated, we're real pleased with the launch of our retention strategy that we did the tail end of Q3 so for.
First I got to tell you, it's a little early but one of the things here at dollar general that we do.
Very well is we measure everything and we're very focused on on monitoring our efforts. So that we can pivot if we need to or we can accelerate if we need to and so what I can tell you is is that initially we're pleased with what we're seeing from the new customer retention a strategy that we put in place.
We think it's the right time to do that when you think about that not only from when we started acquiring new customers.
Call it six months or so ago, and then also thinking about that as it relates to 2021 and and our desire to try to retain as many as we can so I'm very pleased with the surgical digital approach that we're taking out rest assured we are measuring that and then I think it at a future day, we'll be able to talk more about that but right now it's a little bit early.
Great and then I'll toss it to John on the margin question, Yeah on the markdowns. It really is both we've been talking about lower markdowns as a percentage sales for a number of quarters and the driver that has been lower promotional activity. The team has gotten very targeted and got very sophisticated tools, we put in place and the processes to re.
Really go after what gives us the biggest bang for the Buck what really moves the needle on true incrementality of traffic and profitability and so that's been throughout but with the strength growing strength of non consumables and the better sell through there. We have then more recently seen a reduction in the amount of clearance Act.
Activity required to clear those good so it really is both consumables and non consumables.
Thanks, guys best of luck.
Thank you.
Our next question comes from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question.
Good morning, Thanks for taking my question. So I wanted to go back to the launch of the pop shelf concept.
Just curious in terms of the decision to launch the new concept right now during the pandemic is that driven by moving more real estate opportunities or just anymore color you can provide there.
Sure as you can imagine.
Any concept of this magnitude.
The work had begun long before cove, it the pandemic or any of that probably as you as you really dial the clock back about 18 months or so ago really started that process and I would tell you that the the the plan all along was to launch about this time that we.
We launched it so we were very much right on track to our initial launch times.
Now, obviously, we didnt anticipate the pandemic.
But I would tell you that.
What we didn't anticipate either was the abundance of available real estate that would be out there and that's been a real positive for us.
With with some of the consolidation that we've seen from discretionary retailers that may no longer be in business. At this point, we've seen some real opportunity to grab some some very good real estate.
That we're able to open up this is this concept in and that's why we're pretty bullish on the US 30 by the end of 2021, both from a real estate perspective, but also the initial sales of this concept at least in the first two stores has been very very strong and exceeding our expectations.
So again hitting on all cylinders on the initiatives, so far but again, it's early but.
But but but rest assured we are we will do what we do best here at dollar general and Thats execute at a high level and continue to.
Refine this this new concept to make it the best it can be.
Great. Thank you for me maybe just one follow up question any thoughts you can share in terms of what you guys are seeing thus far in the holiday season in house for foreign versus expectations, and I know your quarter day trends accelerated interest to be driven by their consumables category. I was just curious if curious if you think that the November almost in November performances represent any pull for that demand.
From.
Sure.
I think it's a little early to talk about what Q.
Q4 is going to look like in totality lot of selling left the month of December for retail obviously is very big I don't have to mentioned that but I, but I will but but when you start to look at and our numbers. The great thing that we saw was our traffic numbers in November store.
Started to rebound pretty nicely really came back to where we saw some of those traffic numbers in Q2.
And so that was a great sign for us that the consumer was was out shopping.
Not only the consumables side of the business, but the non consumables for discretionary side of that equation as well.
Other thing and Jeff alluded to it in part of his comments earlier you know we really lean then on inventory for Q4 around holiday. We knew it was going to be a good holiday season for for dollar General we went and bought more inventory middle of the year.
From the close of market, mainly and we are.
We are in some of our best inventory positions in holiday than we've been in many years.
And are very encouraged by the early the early.
We sell through what we've seen in holiday so.
Encouraged but from a lot of selling left to go.
Great. Thank you for all the dollar.
Yeah.
Thank you.
Thank you everyone, who has joined to see this will conclude today's teleconference. You may now disconnect. Your lines at this time, we thank you for your participation.
Yeah.