Q1 2021 Dollar General Corp Earnings Call
Good morning, My name is Melissa and I will be your conference operator today.
At this time I would like to welcome everyone to the dollar General first quarter 2021 earnings call. Today is Thursday May 27, 2021, all lines have been placed on mute to prevent any background noise. This call is being recorded instructions for listening to the replay of the call are available in the company's earnings press release.
Issued this morning.
I'd now like to turn the conference over to Mr. Donny Lau, Vice President of Investor Relations and corporate strategy. Mr. Low please begin.
Thank you and good morning, everyone on the call with me today are Todd Batesville.
General and our C O O 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.
Caution you that today's comments include forward looking statements at the time.
On the private Securities Litigation Reform Act of 1995, such as statements about our strategy.
Planned initiatives, those priorities opportunities investments guidance expectations or beliefs about future matters and other statements that are not limited to historical fact.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections, including but are not limited to those identified on our earnings release issued this morning under risk factors of our 2020 form 10-K filed on March 19, 2021 end of it.
Comments that are made on this call.
You should not unduly rely on forward looking statements, which speak only as of today's day dollar general disclaims any obligation to update or revise any information discussed on this call unless required by law.
We also may reference certain financial measures that are not.
Been derived in accordance with GAAP reconciliation to the most comparable GAAP measures are included in 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.
The end of our prepared remarks, we will open the call up for your questions. Please limit your questions to 1 and 1 follow up question if necessary now it is my pleasure to turn the call over to Todd.
Thank you Donny and welcome to everyone joining our call.
We are pleased with our strong start to fiscal 2021, and I wanted to thank our associates for their unwavering commitment to supporting our customers communities and each other.
As a testament to their efforts our first quarter results exceeded our expectations, reflecting strong underlying performance across the business, which we believe was enhanced by the most recent round of government stimulus payments.
The quarter was highlighted by net sales growth of 16% and our combined non consumable categories of 2.
208 basis point increase in gross margin rate and double digit growth in diluted EPS.
Despite what continues to be a challenging operating environment, we are increasing our sales and diluted EPS guidance for fiscal 2021 to reflect our strong first quarter performance John will provide additional details on our outlook during his remarks.
As always the health and safety of our employees and customers continue to be at top priority while meeting the critical needs of the communities we serve.
And we believe we are uniquely positioned to continue supporting our customers through our unique combination of value and convenience, including our network of more than 17000 of stores located within 5 miles of approximately 75% of the U S population.
Overall, we are executing well against our operating priorities and strategic initiatives as we continue to meet the evolving needs of our customers and further position of dollar general for long term sustainable growth.
Now, let's recap some of the top line results for the first quarter.
As we lapped our most difficult quarterly comp sales comparison of the year net sales decreased 6% to $8.4 billion driven by a comp sales decline of 4.6%.
Notably comp sales on a 2 year stack basis increased a robust 17, 1%, which compares to the 15, 9% 2 year stack, we delivered last quarter.
Our first quarter sales results include a decline in customer traffic, which was partially offset by growth in average basket size and while customers continue to consolidate trips on average they continue to spend more with us compared to last year.
From a monthly cadence perspective comp sales increased 5.7% in February despite a headwind from inclement weather across the country.
For the month of March which represents our most difficult monthly sales comparison of the year comp sales declined 11, 2%.
Importantly, beginning in mid March and in line with the timing of stimulus payments, we saw a meaningful acceleration in sales relative to the first 2 weeks of the month, especially in our non consumable categories.
Comp sales declined 4.3% in April and while year over year growth of non consumable sales moderated in comparison to March they were positive overall, despite a more challenging lap.
Overall, each of our 3 non consumable categories delivered a comp sales increase for the quarter.
Of note comp sales growth of 11, 3% and our combined non consumable categories and 29, 8% on a comparable 2 year stacked basis significantly exceeded our expectation at.
And speaks to the continued strength and sustained momentum in these product categories enhanced by the benefit from stimulus.
Once again this quarter, we increased our market share in highly consumable product sales as measured by syndicated data.
Importantly, we continue to be encouraged by the retention rates of new customers acquired over the past several quarters and are working hard to drive even higher levels of engagement with more personalized marketing and continued execution of our key initiatives.
In addition, we recently published our third annual serving others report, which provides context related to our ongoing ESG efforts as well as new and updated performance metrics and we look forward to continued progress on our journey as we move ahead.
We operate in 1 of the most attractive sectors in retail and believe we are well positioned to continue advancing our goal of further differentiating and distancing dollar general from the rest of the discount retail landscape.
As a mature retailer on growth mode. We are also laying the groundwork for future initiatives, which we believe will unlock even more growth opportunities as we move forward.
In short I feel very good about the underlying business and we are excited about the opportunities that lie ahead.
With that I'll now turn the call over to John Thank you Todd and good morning, everyone.
The other Todd has taken you through a few highlights of the quarter. Let me take you through some of its important financial details unless we specifically note otherwise all comparisons are year over year, all references to EPS refer to diluted earnings per share and all yours noted referred to the corresponding fiscal year.
As Todd already discussed sales I will start with gross profit, which we believe was positively impacted in the quarter by a significant benefit to sales, particularly at our non consumables categories from the most recent round of government stimulus payments.
Gross profit as a percentage of sales was 32, 8% in the first quarter as Todd noted. This was an increase of 208 basis points and represents our eighth consecutive quarter of year over year gross margin rate expansion.
This increase was primarily attributable to higher initial markups on inventory purchases a reduction in markdowns as a percentage of sales a greater proportion of sales coming from our non consumables categories and a reduction in shrink as a percentage of sales piece.
These factors were partially offset by increased transportation costs, which were primarily driven by higher rates.
SG&A as a percentage of sales was 22% an increase of 152 basis points. This increase was driven by expenses net were greater as a percentage of net sales. The most significant of which were store occupancy costs disaster expenses related to winter storm, Yuri retail labor and depreciation and amortization.
Moving down the income statement operating profit for the first quarter increased 4.9% to $908.9 million as a percentage of sales operating profit was 10, 8% an increase of 56 basis points.
Our effective tax rate for the quarter was 22% and compares to 22, 2% in the first quarter last year.
Finally, EPS for the first quarter increased 10, 2% to $2.8 2 cents, which reflects a compound annual growth rate of 38% over 2 year period.
Turning now to our balance sheet and cash flow, which remains strong and provides us the financial flexibility to continue investing for the long term on delivering significant returns to shareholders.
Dice inventories were $5.1 billion at the end of the first quarter, an increase of 24.2% overall and a 17, 6% increase on a per store basis as we cycled a 5.5% decline in inventory on a per store basis, driven by extremely strong sales volumes in Q1.2020 and.
In anticipation of a more challenging supply environment, we strategically pulled forward certain inventory purchases during the quarter, particularly in select non consumable categories to better support the sales momentum we were seeing in the business.
And while out of stocks remain higher than we would like for certain high demand products. We continue to make good progress with improving our in stock position and are pleased with the overall quality of our inventory.
The business generated significant cash flow from operations during the quarter totaling $703 million, a decrease of 60%, but which reflects a compound annual growth rate of 11% over a 2 year period. This decrease was primarily driven by higher levels of inventory as a result of improving inventory positions, including the <unk>.
All forward of certain inventory purchases I mentioned earlier.
Total capital expenditures for the quarter were $278 million and included our planned investments in new stores, Remodels and relocations distribution transportation projects and spending related to our strategic initiatives.
During the quarter, we repurchased 5 million shares of our common stock for $1 billion and paid a quarterly cash dividend of at 42 cents per common share outstanding at a total cost of $100 million at the end of Q1, the remaining share repurchase authorization was $1.7 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 committed 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 3 times adjusted debt to EBITDA.
Moving to an update on our financial outlook for fiscal 2021.
We continued operating at time of uncertainty regarding the severity and duration of the COVID-19 pandemic, including its impact on the economy consumer behavior in our business. Despite.
Despite continued uncertainty as Todd mentioned, we are increasing our full year guidance for sales and EPS due to our strong Q1 outperformance, which we believe was aided by the latest round of stimulus.
For 'twenty 'twenty, 1 we now expect the filing of net sales in the range of a 1% decline to an increase of 1% a same store sales decline of 5% at 3%, but which reflects growth of approximately 11% to 13% on a 2 year stacked basis and EPS in the range of $9.50 to $10 on 'twenty.
Which reflects a compound annual growth rate in the range of approximately 20% to 24% or in the range of approximately 19% to 23% compared to the 2019 adjusted diluted EPS over a 2 year period, which is well above our long term goal of delivering at least 10% annual EPS growth on an adjusted basis.
Our EPS guidance continues to assume an effective tax rate in the range of 22% to 23%.
With regards to share repurchases, we now expect to repurchase approximately $2.2 billion of our common stock this year compared to our previous expectation of about $1.8 billion.
Finally, our 2021 outlook for capital spending and real estate projects remains unchanged from what we stated in our Q4.2020 earnings released on March 18th 2021.
Let me now provide some additional context as it relates to our full year outlook.
First there could be additional headwinds in tailwind this year, the timing degree and potential impacts on our business of which are currently unclear, including but not limited to the potential impacts from legislation and regulatory agency actions.
Given the unusual situation I will now elaborate on our comp sales trends thus far in may.
From the end of Q1 through May 23rd comp sales declined by approximately 7% as we continued to cycle extremely difficult prior year comparisons as a reminder, comp sales growth for the month of May of 2020 was 21, 5%.
And while we are nonetheless encouraged with our sales trends, we remain cautious in our 2021 sales outlook given the continued uncertainty that still exists it's unique comparisons against last year and the anticipation of fading tail winds from the most recent round of government stimulus that said as you think about the comp sales cadence of 2021, we continue.
We expect our performance to be better in the second half given a more difficult comp sales comparison in the first half.
Turning to gross margin as a reminder, gross margin in 2020 benefited from a favorable sales mix and a reduction of markdowns, including the benefit of higher sell through rates and more clearance sensitive non consumables categories as.
As we move through 2021, we expect pressure in our gross margin rate as we anticipate a less favorable sales mix and increase in markdown rates as we cycle abnormally low levels, we saw in 2020 and of higher fuel and transportation costs.
Also please keep in mind, the second and third quarters represent our most challenging laps of the year from a gross margin rate perspective filing of improvements of 167 basis points in Q2, 2020, and 178 basis points in Q3.2020.
With regards to SG&A, while we continue to expect ongoing expenses related to the pandemic in 2021 overall, we currently anticipate a significant reduction in COVID-19 related costs compared to the prior year.
Additionally, we continue to expect about 60 million to $70 million incremental year over year investments in our strategic initiatives. This year as we further their rollouts. This amount includes approximately $23 million in incremental investments made during the first quarter.
However in aggregate, we continue to expect our strategic initiatives will positively contribute to operating profit and margin in 2021, driven by NCI and DG fresh as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense in.
In closing we are very proud of the team's execution and performance, which resulted in another quarter of exceptional results as always we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent strong financial performance, while strategically investing for the long term, we remain confident in our business model.
And our ongoing 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.
Thank you John.
Let me take the next few minutes to update you on our operating priorities and strategic initiatives.
Our first operating priority is driving profitable sales growth we.
We are off to a great start to the year as our team continues to drive strong execution across our portfolio of growth initiatives let.
Let me take you through some of the more recent highlights.
Starting with our non consumables initiative or NCI as a reminder, NCI consists of a new and expanded product offering in key non consumable categories.
The NCI offering was available in over 7300 stores at the end of Q1, and we remain on track to expand this offering to a total of more than 11000 stores by year end, including over 2100 stores in our light version, which incorporates a vast majority of the NCI assortment, but through them.
More streamlined approach.
We're especially pleased with the strong sales and margin performance, we continue to see across our NCI product categories.
Notably this performance is contributing to an incremental comp sales increase and non consumable sales of 8% and our NCI stores, and 3% and our NCI light stores as compared to stores without the NCI offering.
Given our strong performance to date, coupled with the added flexibility of of more streamline approach. Our plans now include completing the rollout of NCI across nearly all of the chain by year end 2022.
Moving to our newest concept pop shelf, which further builds on our success and learnings with NCI.
Pop shelf aimed to engage customers by offering of fun affordable and differentiated treasure hunt experience delivered through continually refreshed merchandise a differentiated in store experience and exceptional value with the vast majority of our items priced at $5 or less.
During the quarter, we opened 3 new pop shelf locations, bringing the total number of stores to 8.
And while still early we continue to be very pleased with the initial results, which have far exceeded our expectations for both sales and gross margin.
In fact year, 1 annualized sales volumes for our first 8 locations are trending between $1.7 million end $2 million per store with an average gross margin rate of about 40%, which we expect will climb as we continue to scale. This exciting initiative.
As a reminder, this compares to year, 1 sales volumes of about $1.4 million for traditional dollar general store.
And of gross margin rate of about 32% for the overall chain in 2020.
For 2021, we remain on track to have a total of up to 50 pop shelf locations by year end as well as up to an additional 25 store within a store concepts, which incorporates a smaller footprint pop shelf shop into 1 of our larger format at dollar general market stores.
Importantly, we currently estimate there are about 3000 pop shelf store opportunities potentially available in the continental United States.
And when combined with pop shelf compelling unit economics, we remain very excited about the significant and incremental growth opportunities. We see available for this unique and differentiated concept.
Yeah.
Turning now to DG fresh, which is of strategic multi phase shift to self distribution of frozen and refrigerated products.
The primary objective of DG fresh is to reduce product costs on these items and we continue to be very pleased with the savings we are seeing.
In fact, DG fresh continues to be the largest contributor to the gross margin benefit we are realizing from higher initial markups on inventory purchases.
And we expect this benefit to grow as we continue to optimize our network and further leverage our scale.
Another important goal of DG fresh is to increase sales in these categories and we are pleased with the success. We are seeing on this front drew.
Driven by higher overall in stock levels, and the continued rollout of additional products, including both national and private brands.
In total at the end of Q1, we were delivering to more than 17000 stores from 10 facilities at.
And now expect to complete our initial rollout across the chain by the end of Q2, which is ahead of our previous expectation of year end as communicated on our Q4 call.
Moving to our cooler expansion program, which continues to be our most impactful merchandising initiative.
During the quarter, we added nearly 18000 cooler doors across our store base and are on track to install approximately 65000 cooler doors this year.
Notably the majority of these doors will be in high capacity coolers, creating additional opportunities to drive higher on shelf availability and deliver on even wider product selection all enabled by DG fresh.
In addition to the gross margin benefits associated with NCI and DG fresh we continue to pursue other gross margin enhancing opportunities, including improvements in private brand sales global sourcing supply chain efficiencies and shrink.
Our second priority is capturing growth opportunities.
Our proven high return low risk real estate model continues to be of core strength of our business.
In the first quarter, we completed a total of 836 real estate projects, including 260 new stores.
543, Remodels and 33 relocations.
In addition, we now have produce and more than 13 hundreds of stores.
For 2021, we remain on track to open 1050, new stores remodel 1750 stores and relocate 100 stores, representing 2900 real estate projects in total.
We also now plan to add produce and more than 1000 stores, which compares to our previous expectation of approximately 700 stores.
As a reminder, we recently made key changes to our development strategy, including establishing 2 of our larger footprint formats, which each comprise about 8500 square feet of selling space as our base prototypes for nearly all new stores going forward.
With about 200 square feet of additional selling space compared to a traditional store. These larger formats allow for expanded high capacity cooler counts and extended queue line and a broader product assortment, including NCI.
Larger health and beauty section with about 30% more feet of selling space and produce in select stores.
We are especially pleased with the sales productivity of these larger formats as average sales per square foot are currently trending about 15% above an average traditional store, which bodes well for the future as we look to grow these unit counts in the years ahead.
In total we expect more than 550 of our real estate projects. This year will be in these formats as we look to further enhance our value and convenience proposition while driving additional growth.
Next our digital on initiative, which is an important complement to our brick and mortar footprint as we continue to deploy and leverage technology to further enhance convenience and access for customers.
1 such example is contactless payment, which is now available in the vast majority of the chain further extending our convenience proposition, particularly for those seeking a more contactless shopping experience.
Yeah.
Overall, our strategy consists of building of digital ecosystem, specifically tailored to provide our customers with an even more convenient frictionless and personalized shopping experience and we are pleased with the growing engagement, we are seeing across our digital properties.
Going forward, our plans include providing more relevant meaningful and personalized offerings with the goal of driving even higher levels of digital engagement and customer loyalty.
Our third operating priority is to leverage and reinforce our position as of low cost operator.
Over the years, we have established a clear and defined process to control spending which governs our disciplined approach to spending decisions.
The zero based budgeting approach internally branded as safe to serve keeps the customer at the center of all we do while reinforcing our cost control mindset.
Our fast track initiative is a great example of this approach 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 labor productivity improvements we are seeing as a result of our efforts both around rolled Tanger and case pack optimization.
Which have led to even more efficient stocking of our stores.
The second component of fast track of self checkout, which provides customers with another flexible and convenient checkout solution, while also driving greater efficiencies for our store associates.
Self checkout was available in more than 3400 stores at the end of Q1, which represents more than double the store count at the end of Q4, and we are pleased with our results, including customer adoption rates as well as positive feedback both from customers and employees.
Our plans consist of a broader rollout this year and we are focused on introducing this offering into the vast majority of our stores by the end of 2022 as we looked at further enhance our convenience proposition, while extending our position as an innovative leader in small box discount retailer.
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.
Our fourth of operating priority is investing in our diverse teams through development empowerment and inclusion.
As of grown retailer, we 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 pursue innovative opportunities to further develop our teams, including our recent announcement to partner with a leading training provider to deliver more personalized training solutions to our employees.
Importantly, we believe these efforts continue to yield positive results across our organization and are an important driver of our consistent and strong execution.
At the store level, we continue to be pleased with our robust internal promotion pipeline and store manager turnover, which continues to trend below historic levels.
We believe the opportunity to start and develop a career with a growing and purpose driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent.
Overall, we continue to make great progress against our operating priorities and strategic initiatives and we are confident in our plans to drive long term sustainable growth, while creating meaningful value for our shareholders.
In closing I am proud of our team's performance and we are pleased with our strong first quarter results, which further demonstrate that our unique combination of value and convenience continues to resonate with customers and positions us well going forward.
I want to offer my sincere thanks to each of our approximately 157000 employees across the company for their hard work and dedication to fulfilling our mission of serving others.
With that operator, we would now like to open the lines for questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May press star 2 if you'd like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up here.
Handset before pressing the star keys in order to allow for as many questions as possible. We ask that you each keep to 1 question and 1 follow up.
Our first question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.
Hey, Good morning, everyone. My first question is on the business of look maybe a year later or 1 year. After this COVID-19 started can you talk about the traffic I know the rural store bases across retail seem to do well can you talk about how you're doing on the lap and then anything changing in the basket that you're seeing meat.
You're doing well in film of consumables or how the basket may be evolving.
Yes, I mean, it's Todd Thanks for the question Yeah, you know, we're very happy with what we're seeing.
As you indicated are now a year out of the pandemic or.
Then lapping the pandemic, maybe at a better term.
You know when you when you look at at what we.
We have seen is those customers that we were able to.
Bring in dairy.
On the Covid crisis or the the heat of it.
We have retained a very large portion of better than what we had anticipated doing as you may recall, we launched a very aggressive back end.
At August September timeframe, and aggressive campaign to not only retain but keep her engaged at.
At dollar general and that seems to be working very very nicely.
But as we've indicated in the past.
When we see that our core consumer has more money to spend and stimulus has given us some of that that tailwind if you will.
She tends to do is contract on.
On the number of visits but spends a lot more in at.
That's exactly what we saw we saw of our basket size increased very nicely with our core consumer as well as with these trade in consumers that we saw during the heat of the battle Covid that we've been able to retain so it really sets us up nicely as we continue to move through this year, we feel very good about what we're seeing.
And you know, where we're staying squarely focused on what we can control here end and thats driving profitable sales growth.
And the 2 year stack I think if I did the math right. If I heard the number is right I think it's running now of 14 in May if that's right and what are the puts and takes to that I think theres a little more stimulus coming do you think this could be the run rate that you can hold going forward.
Yeah.
Yes in terms of Youre right in terms of the.
Stack in terms of the cadence if you look at the cadence of the quarter at picked up nicely with the onset of the stimulus, where we're very well positioned to get.
More of their fair share of that you did see sequentially on a 2 year stacked basis at moderate somewhat but remains very strong and very strong across the board. When you look at 2 year stacks, both on the non consumables as well as the consumables, but particularly when you look at the non consumables just.
Just a fantastic 2 year stack as we shared and I think that really speaks to the strength of of what we've done with the initiatives on both the consumable side of the business to provide that full or fill in trip grocery shop as well as on the non consumable side to get our fair share of these folks coming in.
We take share from specialty retail as we look ahead.
Our laps get actually easier on the back half of the year from a comp standpoint, but we just feel fantastic about the fundamentals of the business.
Thank you good luck.
Thank you.
Thank you. Our next question comes from the line of Matthew Boss with Jpmorgan. Please proceed with your question.
Great Thanks, and congrats on the performance.
Thank you.
So Todd maybe just take a step back could you speak to new customer acquisition that Youre seeing end market share that you see driving the performance continuing and maybe you know on that taking a step back how would you compare what you're seeing today to maybe at the time at which we were exiting the financial crisis as we think about customer acquisition.
New household shopping dollar general and then if you would of rank where do you see market share opportunities by category from here.
Yeah, Matt I'll try to weave all of that in but I would tell you that we're very happy with what we see on that customer acquisition side.
Let me let me try to go to 1 part of your question that is financial crisis coming out of that compared to what we are seeing now on the back side of Covid.
Very similar from the standpoint that.
That consumer is still a very engaged I think the biggest difference here is the amount of stimulus that debt is in the system right now so our of course shopper continues to be.
Have a lot more money than she normally would.
And she is spending a great deal of that with US which is great to see.
And I think the other side of that equation is at that trade in shopper.
Is is financially doing pretty well as the economy opens back up because we can see it's opening up in a very robust manner.
And I think the difference of O 8 and now is at that consumer has more money to spend and the great thing is she continues to come back to dollar general debt higher income shopper and shop with us and that's exactly what we saw on OE, but in a way she didn't have a lot of money at this time. She is she does have money, but still continues of shop. So I think that just speaks to the relative.
Nancy that we've built in this box.
Since that OE crisis at this box as you know has has transformed tremendously.
Since then so we feel good about those trends and in our core our core shopper trends.
As it relates to our market share, we're seeing gains across the board.
Drug continues to be our number 1 donor of.
Sure grocery is of is donating as well as I think consumers start to.
Go back to some normal shopping patterns as it relates to food at home.
And we're seeing those come back to dollar general in a nice way.
And then even in our own space were taken space, we're taking share which is great to see so you know it's really across the board and I think it's a real testament to the initiatives that we put in place years ago. You know this isn't.
Just because of Covid. This underlying business as I've said before is as strong as I've ever seen it.
Todd maybe as a follow up to that.
That what inning would you characterize those key initiatives. If we think about DG fresh NCI private label I think you'd have a laundry list that you've walked through but what inning would you characterize it.
All of these initiatives as we think going forward.
Yeah, you heard Jeff sort of prepared remarks, but if I step back and take a look at NCI as an example.
It will be completely rolled out by the end of 'twenty 2.
So I would tell you we're probably halfway through the game as we as we go through this year.
And then into next which feels really good and in our our cooler initiative and DG fresh just in general I would tell you that we're in the we're still on the fourth inning, maybe closer to the bottom of the fourth inning, but still in the fourth inning. We've got a lot of runway ahead of us there.
And and that's been the largest contributor on our initiative side that we've seen both on the topline and bottom line and the Great thing is is that we've got a lot of runway yet.
To go there pop shelf I mean, we're just coming up to bat.
We're really happy with what we're seeing there and we supplied a little more color hopefully it was helpful.
On what we're seeing early on in our in our sales and margin.
Coming out of there.
And we're very very encouraged there and I would tell you as you know dollar general pretty well you know as we start to see more.
Evidence that this is a very good initiative. We can go very quickly so stay tuned on that.
Our digital side this will be an ongoing initiative, but I would tell you. We're in the emphases stages very early innings on on.
On our on our initiatives there in at around digital so.
There's a tremendous amount of opportunity both topline and bottom line because of these initiatives are aimed at both and that's the I think that's the important.
Aspect here is that we're controlling every line of the P&L.
It sounds like a lot of balls still to play best of luck.
At least.
Thank you. Our next question comes from the line of Karen short with Barclays. Please proceed with your question.
Hi, Thanks very much.
I wanted to see if you could give a little color in terms of the may sales trends with respect to discretionary versus consumables and I do have a question related to how you answer that from a bigger picture perspective.
Yeah. So if you look at May we gave the may through the 23rd comp sales were down 7%, but obviously as we mentioned at pretty strong 2 year stack.
In the 14th.
A question also in terms of the debt month to date differ from the full month of it didn't.
Change much at all so strong performance continued and we saw continued strength in our non consumables, but also the consumables when you look at it at.
2 year stacks of very.
Very strong performance for both sides of the box.
So I guess.
Bigger picture of when I look at.
Thanks.
Question.
Almost.
On the basis point, well at 200 basis points.
In terms of excess in discretionary so and I guess when you look at your overall gross margins. It seems you've talked to the fact that there is significant opportunity on the gross margin front. So I guess, what I'm wondering is at.
Looking at maybe a year or 2 out of what what do you think that discretionary mix can be within your sales and then how should we think about gross margins as we look into 2022.
Realized 21 at some very tough compare at that 2022.
Karen I think is as you look at the non consumables business. Obviously, there is some tailwind that you got from it during the pandemic in front of the stimulus, but I would just point to the ongoing strength that we've shown there we've delivered comp growth of non consumables for 12 consecutive quarters and I think that just really speaks to the relevance we put it.
End of that piece of the box and as you continue to see the share we're taking how we're outperforming others. We have noted that the lap does get tougher as we get into Q2 Youre lapping.
Sales growth in the non consumables category of 48% last year. So that's a tough lap puts pressure on that but I would tell you we feel great about the non consumables business as we look forward and as we continue to scale that.
Almost doubling that this year.
And then taking the best of the best from that importing data across the chain and then taking the learnings from that and putting that into pop shelf and then cross pollinating. The best ideas between the 2 we feel fantastic about that business.
And any thoughts on how well it would be at normalized or not normalize, but how that how we should think about gross margins going into 2022.
Yeah, obviously, we're not giving 'twenty 2 guidance just yet, but what I'd tell you at this as you look at the performance in gross margin daily.
<unk> delivered 8 consecutive quarters of gross margin growth of 208 basis points. This quarter lapping 49 basis points. This quarter last year and when you look at the drivers of that again, there was some tailwind from non consumables from the stimulus, but when you look at the drivers it's the strategic initiatives driving that.
The top 3 and we've been talking about these top 3 for several quarters now it's higher initial markups that DG fresh is driving that and that is the gift that keeps on giving as we scaled at complete debt across the chain and then drive efficiency then that the next 2 we talked about were lower markdowns and the mixed benefit and again, you've got some extra tailwind.
From the stimulus, but it's non consumables driving that and that's been at consistent.
Driver for some time now and then you look at shrink shrink was another benefit now as you look at the near term you know as I mentioned, we hit a very difficult lap around non consumables, which will pressure of that year over year mix, even though we feel great about the non consumables and then.
As others have talked about at you know, we do see pressures this year associated with transportation costs, but we do believe that's more of a near term pressure not something structural that will last forever and so as we pushed through those.
Those 2 pressure points, we feel good about what we've been doing in terms of driving gross margin and operating margin expansion and our ability to keep doing so not only with these strategic initiatives I mentioned, but then all of the other drivers. We talk about you know not just shrink, but private brand penetration foreign sourcing penetration supply chain efficiencies, we continue to drive to.
To mitigate.
Pressures that others are seeing and so it's not as impactful to US and then we always talk about our buying power and then last but not least we will invest in price if needed if warranted, but I can tell you we feel like we're at a great pricing position right now and don't see the need to so we feel good about our ability to drive it higher over time.
Gross margin and operating margin overall.
Great. Thank you.
Thank you. Our next question comes from the line of Edward Kelly with Wells Fargo. Please proceed with your question.
Yeah, Hi, guys good morning.
Nice quarter, maybe at first 1 turns out to be a little bit of a follow up now, but as it relates to product cost inflation can you just talk about what you are seeing and what you're expecting from product cost inflation standpoint, especially in consumables and then what are your expectations for pass through end to what extent are you on the drivers.
To what extent do you kind of need to follow what Walmart does are you seeing anything out there to suggest that you wouldn't be able to pass through a higher product cost inflation of that happens.
Hi, Ed This is Jeff Thanks for the question.
Certainly on the on.
On the product cost on the first part of that question.
I'd tell you is that our merchants have done a fantastic job of partnering with our suppliers and this is where the model at dollar general really.
Performed well in the sense that our scale and our limited SKU assortment allows us the opportunity.
To really find innovative ways to protect that underserved customer end and certainly find ways that we can mitigate the cost pressures, but certainly as many retailers have talked about we have seen that.
But again.
Real pleased with our pricing position, we feel really good about where we are we talked about this before we've made some strategic decisions last year to get in some of the best pricing position. We've been in so feel good about where we are we'll continue.
To fight for that customer every day as you know here at dollar general price and value are so important to her and we're here to serve her so I'm real pleased with where they are we'll continue to monitor that but.
But feel good about the team's performance to date on that front.
Okay, and then just 1 on on labor cost here can you just provide some color on what you're seeing out there I mean, obviously a lot of companies have talked about challenges you grow a lot so you're adding a lot of employees.
Has it caused you to rethink wage levels at all do you see this as transitory just how do we think about.
The pressure there on how that's changing.
And we have seen some pressure as many retailers have said.
But you know what I'm, so proud of what our team has done to respond and certainly.
On April we announced our national hiring event.
With a goal to hire up to 20000 additional employees and I'm very pleased that already we have beaten that goal by 50%. So I think it points to the the thing we've said all along and that is dollar general is such an amazing place to start of career and so again.
We feel real good about the opportunities we can provide with over 12000 store managers internally promoted we've got a robust internal pipeline, we still we're still able to attract some of it.
We feel real good there and certainly as we have always talked here at dollar general where surgical in the way that we responded to different challenges. So.
On the comments you mentioned you know we're not seeing at widespread their pockets and so we will certainly tailor our solution to where it makes sense, we always pay competitive wages. We have on we will continue to end still very pleased at our turnover rates debt point to this this opportunity here at dollar general to attract.
<unk> provide a great growth opportunity and so right now.
We are certainly making progress mitigating these challenges and I'm really pleased with the progress I'm seeing.
Great. Thank you.
Thank you. Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.
Good morning, Thanks, a lot for taking my question.
Our 2 year compound annual growth.
12% of fourth quarter 2 of them.
Third and fourth quarter of last year.
On the first quarter with total.
Only by 100 basis points, how much of that flow down would you attribute to some of its calling back.
And so they don't need.
General and often for the trip.
Or how much.
Each of them at some of that in Q2.
I think of it was at about 1400 dollar check of elite.
And so they might go into a walmart or target or some other discretionary retailer.
Really what lot of big ticket items and while they're there.
Good day.
Trip from dollar general.
Yeah. It was very difficult Michael Dunn to understand your question, but but if I got some of the sense of it.
Yeah.
We feel good about our consumable and non consumable businesses.
Or where they're at and as I mentioned earlier, we continue to take share from from all different.
Classes of trade out there.
Yeah.
I am I feel better than I ever have on us.
Being able to to continue too.
Drive the top line on both on consumables and non consumables side of the business and.
And if I missed that question or if you'd like to ask it again I'm happy to answer it.
The question is your 2 year compound annual growth rate.
You can do business slowed modestly from <unk> at <unk>, how much do you attribute that to the people going back out to eat and they don't need to fill in.
Hi.
Or if you got of 1400 dollar check.
On the Walmart by TV at while they're there they're filling up their basket, which may also be taking away at fill in trip from D. J.
Yeah, I I apologize Michael Thank you for for repeating that.
Yeah, I would tell you it's definitely not the ladder that we've seen.
It's probably more on.
The end of the little slowdown that we have seen there was 1 such a robust last year and even into the fourth quarter. The economies opened it up a little bit so that consumer has.
The ability to go do some other things end food away from home.
I'm sure like like yourself, a lot of people wanted to get out and and get out of the house. So I think that that definitely played into Q1, what were already seeing though in in early Q2 is that you know.
Some of that food at home is being it looks like it's pretty sticky and while I'm not ready to talk about Q2, right now I can tell you that.
Especially in those areas like DG fresh our perishable areas we're seeing.
We're seeing very very nice sales robust sales.
There. So it really shows that that consumer still has the propensity to to have food at home and I would tell you just like anything.
When things last more than a quarter or 2 or half of year, they become pretty ingrained and I think I think food at home at has become pretty ingrained now that doesn't mean that they won't go out to eat, but I think theyre going to be doing more food at home than they had prior to the pandemic and we're already seeing that as I mentioned.
Start to materialize here in Q2.
Got it.
On the gross margin.
200, plus basis points, John you did provide the order of magnitude.
Could you put a quantification around how much of the gross margin was due to.
Factors that had been driven by your initiatives like DG fresh and NCI, which should continue at the 100 basis points over the next couple of quarters.
Burst at the other factors that might be temporary at just mix or a lack of promotions within the environment and are you already starting to see more promotions come back that could be of risk factor.
Those factors that you have within your control over the next few quarters.
Yeah, Michael So as you look at is as you pointed out those are in the order of importance at the number 1 called out and it was a good bit higher than the other 2 although all were quite impactful.
Higher initial markups and that with DG fresh and that is something I would say continues and actually improves as we scale of that across the system and get the efficiencies you know as you get to the next to the lower markdowns certainly a big piece of that was the higher sell through on the non consumables, but if you recall, we were calling out lower markdowns even before that.
As we got tighter and tighter around promotional activity and we've stayed tight on promotional activity, while I would say compared to last year, it's up a little bit because last year. There was virtually no promotional activity. If you compare to 2019, it's down so we're not seeing that much more promotional activity, we're actually seeing a little bit less if you go back to 2019.
They're just with none last year end, so things remain pretty came that way and then on the mix benefit again, certainly got some extra juice from the stimulus, but again 12 consecutive quarters of non consumable comp growth and when were virtually doubling that initiatives and putting the best of the best across the chain, we think that.
To help us and again shrink.
That was the benefit not related to the current environment. So it's certainly of mix its hard to when you look at non consumables to untangle what was stimulus and what was just what we did to make debt piece of the box more relevant I'd say, we set ourselves up very well in that regard and then again I would like to think that the higher carrier rates as more of it's not something structural it's more of.
Of a supply and demand imbalance that should sort itself out later 1 of the thing I'll mention debt is a wildcard that's not in our guidance and that is what impact the child tax credits will have and so while there is.
We've not assumed any more stimulus we've not assumed any more child tax credits just given the number of potential macro of puts and takes including the child tax credits, but then Conversely, what happens when the some of the enhanced benefits are removed. So that's another wildcard in the back portion of the year, but as you look at the gross.
Margin I would tell you a big chunk of this is structural as evidenced.
By the strong fundamentals driving at and the track record we've delivered but as we mentioned there's just some near term pressures over the next few quarters.
And at that variable.
Why.
At 1 point, you mean that youre, not youre seeing promotion better.
Good day than they were in 2019, so you're not seeing conventional grocery stores promote more because of their fields around the of the car on.
On decline.
At the consumers go out more.
Yeah, we we watch this very closely Michael and I would tell you John hit it right on the end and that is at we're seeing a little bit more promotional activity than we did last year, because there was absolutely none last year, but it is substantially substantially lower than it was in 2019.
And so I would tell you that that tame promotional environment that we've been talking about even prior to the pandemic.
And through the pandemic still persist we have not seen that whatsoever.
Great.
Much of the book.
Yes.
Thank you. Our next question comes from the line of her best.
With Oppenheimer and company. Please proceed with your question.
Good morning, Thanks for taking my question. So my first question is with the comp guide I was curious how you guys are thinking about traffic for the balance of the year.
Yes, I think the way you think about traffic we've been talking about debt theres been quite of bit of trip consolidation. So people have been coming in at a little less frequently they've been putting a lot more in their basket now what I would tell you as we looked across recent periods. We've seen the traffic start to pick up and so what we would expect at the mobility picks up.
The traffic will pick up the baskets will come down somewhat but our goal is to hold as much of that bigger basket that we gained that's pretty impressive when you look at the 2 year stacks on the growing basket on top of basket growth last year again, as we provide position ourselves of that full or fill in trip of what we would expect is that traffic to continued pick up as people get out more.
Sure.
Okay, Great and then maybe just 1 follow up on pop shelves. So clearly very upbeat commentary in terms of what you guys are seeing so far.
Yeah. So at so I guess Todd on what is surprising so far with with the with the concept.
I'm sorry, what was the question, yes on pop shelf you guys seeing very strong results. So far so I'm just curious what has surprised you so far with the performance.
Yeah, I would tell you that.
We're very happy with what we're seeing.
I believe it was the biggest surprise probably was when you launch of brand from ground zero.
You don't normally see the the amount of traction and sustained traction.
Net debt, we are seeing and repeat customers that we're seeing.
The other thing that's really a surprise is the the.
The customer feedback that we're getting we're getting promoter scores in the upper eighties of 90% range, which is unheard of.
And so that's what gives us.
Great.
Great Optimist, if you will up optimistic that we will continue.
It continues to be able to grow this this piece stay tuned.
As I mentioned earlier because of what we're seeing not only on the sales line, but I think the other nice surprise wasn't on that margin side at 40% margins and I would tell you the upside of that is great very great quite frankly.
As we scale of that so we think that.
A tween those 2 and you know as well we will move fast.
In in store openings once we get another another few weeks behind our belt here.
Great. Thank you.
Well.
Thank you ladies and gentlemen, our final question. This morning comes from the line of Scott, Michigan with RFID Capital. Please proceed with your question Hey, guys. Thanks for taking my questions and.
You'll see on that pop shelf at assistant at the same format of 1 of the best I've seen them about 20 years. So I look forward to hear more about it but my actual question was my actual question is on D. G. Ex you guys didn't mention it.
Maybe not not as much sizzle as the pop shelf, but.
When I look at that store and say gosh like.
Why why would I ever go to of 711, if there was a D G ex in the neighborhood.
Okay.
Thanks, Scott. Thank you for the question and we are real excited about D. G X.
And certainly as we've talked before.
During the pandemic as you remember <unk> is situated to locate where you work and play and certainly during the pandemic. We saw some pullback obviously with so much remote work at home, but we feel real good about what we're seeing now we've talked earlier about how we're seeing the the the economy.
Kind of open up and folks get out more and we're seeing that come.
Come back nicely in our D. G ex stores and so you're right. We're very excited you'll recall last conference call, we talked about the opportunity for 1000.
On possible D G ex locations across the country and then you know as well if we find a concept that can work, even better and increase that over time, we will certainly try to do that but right now the offering inside of the D. G. Ex we also have very high customer satisfaction scores like like the pop shelf.
Brand as well we were real pleased with what the customer, saying and we're also pleased at the opportunity so stay tuned.
But that just gives us yet another leg of growth. So you got pop shelf, where we've talked about incremental 3000 opportunities D. G. Ex an incremental 1000 opportunities and then our traditional fleet, where we believe there are 13000 additional opportunities. So 17000 opportunities in total gives us great confidence that we can continue.
To grow this great brand across the country. So we're real excited about what the future holds there.
And if I could have a follow up I guess like if I get a follow up on the pricing side kind of taking that and turning on at turning it on its ear of little bit I mean, if you look at what's going on in your business. You, obviously talked about gross margin expansion possibilities as well as labor efficiency possibilities and of course, the limited Skus you guys offer why wouldn't I.
That you can use and we've seen this our pricing surveys kind of coming the GAAP coming down with Walmart why wouldn't we see that continuing like if you have a lot of leveraged of Paul.
Yeah, you know we <unk>.
Watch it very closely.
You know us pretty well.
Pricing is is 1 of my pet.
Pet projects here at dollar General I'm intimately involved in it because it's so important to our consumer end I would tell you that.
And Jeff alluded to it again, we took 2020 and we quietly got in the best position, we've ever been and we took advantage of of that dislocation that was out there.
And that debt advantage continues today and to your point, we've made inroads even against all classes of trade, including mass.
But yeah, but also especially even in our own.
Class of trade here at discount we've made extreme.
Moves as well so we're happy with what we were we are hey at we always reserve the right to.
To continue to make sure our customer.
Has the ability of the shop, what she needs so.
That does need to happen, we have the wherewithal to do do anything on price that we consider we need to do but right now we feel good and as Jeff indicated even in this environment, where we're seeing some price pressure from CPG like other retailers are we have a lot of levers at our exposure at all.
Our disposal to make sure that we don't have to pass all of that out of the consumer and that's exactly what you've seen here in Q1, so far.
Terrific guys. Thanks.
Yeah.
Thank you ladies and gentlemen, this concludes our question and answer session and thus concludes our call today. We thank you for your interest and participation you may now disconnect your lines.