Q2 2021 Dollar General Corp Earnings Call
Good morning, My name is Robert and I will be your conference operator today at this time I'd like to welcome everyone to the dollar General second quarter 2021 earnings call. Today's Thursday August 26, 2021, all lines have been placed on.
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.
Now I'd like to turn the conference over to your host Mr. Donny Lau, Vice President of Investor Relations and corporate strategy. Mr. Lau you may begin your conference.
Thank you and good morning, everyone on the call with me today are Todd <unk>, our CEO, Jeff I'll win our CLO and John Garratt, Our CFO our earnings release issued today can be found on our website at Investor <unk> 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 as statements about our strategy plans initiatives goals priorities opportunities investments guidance expectations or beliefs about future matters and other statements that are not limited to historical facts.
Statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include but are not limited to those identified in our earnings release issued this morning under risk factors in our 2020 Form 10-K filed on March 19th 2021 and in the comments that.
During this call you should not unduly rely on forward looking statements, which speak only as of today's date.
Dollar general disclaims any obligations to update or revise any information discussed in this call unless required by law.
We also will reference certain non-GAAP financial measures reconciliations to the most comparable GAAP.
Measures are included in this morning's earnings release, which as I mentioned is posted on Investor 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 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 second quarter results and continue to be grateful to our associates for their dedication to fulfilling our mission of serving others.
Despite what remains a challenging operating environment, including additional uncertainties brought on by the Delta.
Delta variant and pressures on the global supply chain, our teams continue to successfully adapt and deliver for our customers.
Because of their efforts during the quarter, we saw an improvement in customer traffic as compared to Q1 and once again increased our market share in highly consumable product sales.
Sales as measured by syndicated data.
Looking ahead, we remain focused on controlling the things we can control and believe we are well positioned to navigate the current inflationary environment and global supply chain challenges.
As always the health and safety of our employees and customers.
<unk> is our primary focus while meeting the needs of the communities we serve.
And with more than 17500 stores located within five miles of about 75% of the U S. Population. We believe we are well positioned to continue supporting our customers through our unique.
Unique combination of value and convenience.
To that end, we recently hired our first Chief Medical Officer going forward. Our plans include further expansion of our health offering with the goal of increasing access to affordable health care products and services, particularly in Rural America.
Overall, we remain focused on 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.
Turning now to our second quarter performance as we continue to lap difficult quarterly sales comparisons.
<unk> from the prior year net sales decreased <unk>, 4% to $8.7 billion, followed by a 24, 4% increase in Q2 of 'twenty 'twenty.
Comp sales declined four 7% compared to the prior year period, which translates into a robust 14.
<unk>, 1% increase on a two year stack basis.
Our Q2 sales results include a year over year decline in customer traffic, which was partially offset by the growth in average basket size.
From a monthly cadence perspective com sales were lowest in may with.
July being our strongest month of performance and I'm pleased to report that Q3 is off to a great start.
Importantly, we continue to be very pleased with the retention rates of new customers acquired in 2020, underscoring the broad appeal of our value and convenience proposition.
We believe we will ultimately exit the pandemic with a larger broader and more engaged customer base than when we entered it resulting in even stronger foundation from which to grow.
Overall, our second quarter results reflect strong execution across many fronts as we continue to.
And our position, while further differentiating and distancing dollar general from the rest of the discount retail landscape.
We operate in one of the most attractive sectors in retail and we believe our unique store footprint further enhanced through our multi year initiatives provides a distinct.
The strength of the advantage and positions us well for continued success.
As a mature retailer in growth mode. We are also laying the groundwork for future initiatives, which we believe will unlock significant growth opportunities as we move forward.
In short I feel very.
Very good about the underlying strength of the business and we're confident we are pursuing the right strategies to enable balanced and sustainable growth, while creating meaningful long term shareholder value with that I'll now turn the call over to John Thank.
Thank you Todd and good morning, everyone now that Todd has taking it through.
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 in all years noted referred to the corresponding fiscal year.
As Todd already discussed sales I will start with gross profit as a reminder.
Profit in Q2, 2020 was positively impacted by a significant increase in sales, including net sales growth of 41% and our combined non consumables categories for Q2 2021 gross profit as a percentage of sales was 31, 6% a decrease of 80 basis points, but an increase.
<unk> of 87 basis points compared to Q2 2019.
The decrease compared to Q2 2020 was primarily attributable to increased transportation costs, a higher LIFO provision a greater proportion of sales coming from the consumable categories and an increase in inventory damages. These factors were partially.
<unk> grown it by higher inventory markups, and a reduction in shrink as a percentage of sales.
SG&A as a percentage of sales was 21, 8% an increase of 138 basis points. This increase was driven by expenses that were greater as a percentage of sales. The most significant of which were retail labor and store occupancy costs moving.
Moving down the income statement operating profit for the second quarter decreased 18, 5% to $849.6 million.
As a percentage of sales operating profit was nine 8% a decrease of 219 basis points.
And while the unusual and difficult prior year comparison created pressure on our operating margin rate.
We offer very pleased with the improvement in our profitability on a two year basis.
Our effective tax rate for the quarter was 21, 4% and compares to 21, 5% in the second quarter last year. Finally, EPS for the second quarter decreased 13, 8% to $2.69, which reflects a.
We've found annual growth rate of 27.7% or 24, 3% compared to Q2 2019, adjusted EPS over a two year period.
Turning now to our balance sheet and cash flow, which remains strong and provide us the financial flexibility to continue investing for the long term, while delivering significant return.
Comp shareholders merchandise inventories were $5.3 billion at the end of the second quarter, an increase of 20% overall and 13, 7% on a per store basis as we continue to cycle unusually low levels of inventory in Q2, 2020, which were driven by extremely strong sales volumes in that quarter.
Turns to <unk> Q1, we strategically pulled forward certain inventory purchases during the quarter, particularly in select non consumable categories in anticipation of longer lead times. As a result, we were pleased with our strong inventory position for the back to school shopping season, and our teams continue to work closely with suppliers to ensure delivery of seasonal and.
Other goods in the remaining back half of the year.
Year to date through Q2, we generated significant cash flow from operations totaling $1.3 billion total capital expenditures for the quarter were $518 million and included our planned investments in new stores, Remodels and relocations distribution and transportation.
Similar projects and spending related to our strategic initiatives during the quarter, we repurchased three 3 million shares of our common stock for $700 million and paid a quarterly dividend of <unk> 42 cents per common share outstanding at a total cost of $98 million at the end of Q2, the remaining share repurchase authorization was 979 million.
Yeah.
Our capital allocation priorities continue to service well and remain unchanged. Our first priority is investing in high return growth opportunities, including new store expansion and our strategic initiatives. We also remain committed to returning excess 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 about three times adjusted debt to EBITDAR.
Moving to an update on our financial outlook for fiscal 2021, we continue to operate in a time of uncertainty regarding the severity and duration of the COVID-19 pandemic, including.
Impact on the economic recovery global supply chain consumer behavior, and our business. Despite continued uncertainty, including additional pressure throughout the supply chain and cost inflation. We are updating our full year sales and EPS guidance, which reflects our strong first half performance for 2021, we now expect the following.
It's in those growth of half a point to a point and a half a same store sales decline of three 5% to two 5%, which reflects growth of approximately 13% to 14% on a two year stacked basis and EPS in the range of $9.60 to $10.20, which.
Which reflects a compound annual growth rate in the <unk>.
<unk>, 20% to 24% or approximately 19% to 23% compared to 2019 adjusted EPS over a two year period.
GAAP guidance assumes an effective tax rate in the range of 22% to 22, 5%.
Our expectations for real estate projects remain unchanged from what we stated.
<unk> in our earnings release on May 27th 2021.
With regards to share repurchases, we now expect to repurchase approximately $2.4 billion of our common stock this year compared to our previous expectation of about $2.2 billion.
Finally, we are increasing our expectations for capital spending in 2021 to a range.
<unk> of $1.1 billion to $1.2 billion to reflect higher equipment cost for store projects and the pull forward of select supply chain investments. Let me now provide some additional context as it relates to our outlook.
In terms of sales, we remain cautious in our 2021 outlook given the current continued uncertainties.
Arising from COVID-19, pandemic and the impact of the expected end of additional federal unemployment benefits.
Turning to gross margin. Please keep in mind, we will continue to cycle strong gross margin performance from the prior year, where we benefited from a favorable sales mix and a reduction in markdowns, including the benefit of higher sell through rates.
It's much like our Q2 results. We expect continued pressure on our gross margin rate in the second half due to a less favorable sales mix compared to prior year, an increase in markdown rates as we cycle the abnormally low levels in 2020 and higher LIFO provisions as a result of cost of goods increases we also anticipate higher supply chain.
<unk> costs in the second half compared to our previous expectations like other retailers. Our business is seeing the effects of higher costs due to transit and port delays as well as elevated demand for services at third party carriers. However, despite these challenges our team was able to meet strong customer demand during the quarter and we're confident in our ability.
To continue navigating these transitory pressures.
Finally, please keep in mind that the third quarter represents our most challenging lap of the year from a gross profit rate perspective, following an improvement of 178 basis points. In Q3 2020 with regards to SG&A, We now expect about 70 million to $80 million.
An incremental year over year investments in our strategic initiatives as we further their rollouts. This amount includes $40 million in incremental investments made during the first half of the year. However.
However in aggregate, we continue to expect our strategic initiatives will positively contribute to operating profit and margin in 2021 driven by NCI.
In DG fresh as we expect the benefits to gross margin from our initiatives were more than offset the associated SG&A expense in closing we are proud of our second quarter results, which are a testament to the performance and strong execution by the entire team.
As always we continue to be disciplined in how we manage expenses and capital with.
With the goal of delivering consistent strong financial performance, while strategically investing for the long term.
We remain confident in our business model and 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.
All over to Geoff. 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. The team continues to drive strong execution against a robust portfolio of growth initiatives let.
Let me take you through some of our more recent highlights.
Lights, starting with our non consumables initiative or NCI. The NCI offering was available in more than 8800 stores at the end of Q2, and we continue to be very pleased with the strong sales and margin performance, we are seeing across our NCI store base.
In fact this performance.
Contributing to an incremental 1% to two 5% total comp sales increase in NCI stores and a meaningful improvement in gross margin rate as compared to stores without the NCI offering.
Overall, we remain on track to expand this offering to a total of more than 11000.
<unk> by year end, including over 2100 stores and our light version with the goal of completing the rollout of NCI across nearly the entire chain by year end 2022.
Moving to our newest store concept pop shelf, which further builds on our success and learnings with NCI.
Stores pop shelf aimed to engage customers by offering a 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.
Eight new pop shelf locations, bringing the total number of stores to 16, including four conversions of a traditional dollar general store into our pop shelf concept.
And while still early we remain extremely pleased with our results, which continue to exceed our expectations for both sales and gross.
<unk>.
We also recently opened our first two store within a store concepts, which incorporates a smaller footprint pop shelf shop into one of our larger dollar general market stores and we're encouraged by the initial results, including positive reaction from customers.
For 2000.
'twenty one 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 as we continued to lay the foundation for future growth.
Overall, we remain very excited about the significant and incremental growth opportunity.
<unk>, we see available for this unique and differentiated concept.
Turning now to DG fresh, which is a strategic multi phase shift to self distribution of frozen and refrigerated goods.
I am very pleased to report that during the quarter. We completed the initial rollout of DG fresh across.
<unk>, an entire chain and are now delivering to more than 17500 stores from 12 facilities.
This important milestone as it is a direct reflection of the hard work and dedication of the team and I want to thank them for their incredible execution over the past two and a half years.
Notably the.
Across the was completed about six months ahead of our initial rollout schedule.
As a reminder, the primary objective of DG fresh is to reduce product costs on our frozen and refrigerated items and we continue to be very pleased with the savings we are seeing.
In fact, DG fresh continues to be the largest.
Larger contributor to the gross margin benefit we are realizing from higher inventory markups and we expect additional benefits going forward 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.
Our rollout we are seeing on this front driven by higher overall in stock levels and the introduction of additional products, including both national and private brands for.
For example, we recently introduced about 25, new and exclusive items under the armor brand as we continue to optimize our assortment while.
Success, we're differentiating our product offering from others.
And while produce was not included in our initial rollout plans. We believe DG fresh provides a potential path to accelerating our produce offering and up to 10000 stores over time as we look to further capitalize on our extensive self distribution.
Abuse capabilities.
Moving to our cooler expansion program, which continues to be our most impactful merchandising initiative.
During the first half we added more than 34000 cooler doors across our store base and remain on track to install approximately 65000 cooler doors.
I'll first year.
Notably the majority of these doors will be in high capacity coolers, creating additional opportunities to drive higher on shelf availability and deliver an even wider product selection all enabled by DG fresh.
In addition to the gross margin benefits associated with NCR.
<unk> 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.
NCS real estate model continues to be a core strength of our business.
In the second quarter, we completed a total of 772 real estate projects, including 270, new stores 477, Remodels and twenty-five relocations.
For the full year, we remain on track.
Low risk to open 1050, new stores remodel 1750 stores and relocate 100 stores.
In addition, we now have produce and more than 1500 stores with plans to expand this offering to a total of more than 2000 stores by year end.
Rack.
As a reminder, we recently made key changes to our development strategy, including establishing our larger 8500 square foot format as our base prototype for nearly all new stores going forward.
We're especially pleased with the sales productivity of this larger format.
As average sales per square foot continue to trend well above an average traditional store.
In total we expect to have nearly 2000 stores in this format.
By the end of the year.
As we look to further enhance our value and convenience proposition, particularly in rural America.
Next our digital 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.
Our efforts remain centered around building engagement across our digital properties, including our mobile app.
Which continues to grow in popularity in fact, we ended Q2 with nearly 4 million monthly active users on the app at 28% increase over prior year.
Importantly, as we continued to drive higher levels of digital engagement or D. G Media network, which we launched in 2000.
<unk> team has become an increasingly more relevant platform for connecting our brand partners with our customers.
Of note during the first half the number of campaigns on our platform increased 65% compared to the prior year period, and we are very excited about the growth potential of this.
As we look to further enhance the value proposition for both our customers and brand partners.
Overall, our strategy consists of building a digital ecosystem, specifically tailored to provide our customers with an even more convenient frictionless and personalized shopping experience.
Business and we are pleased with the growing engagement, we are seeing across our digital properties.
Our third operating priority is to leverage and reinforce our position as a low cost operator.
We have a clear and defined process to control spending which continues to govern our disciplined approach to spending decision.
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.
Our stores enhancing customer convenience and further improving on shelf availability.
The first phase of fast track consisted of optimizing our role painters and case pack sizes, resulting in the more efficient stocking of our stores.
The second component of fast track is self checkout.
<unk>, which provides customers with another flexible and convenient checkout solution, while also driving greater efficiencies for our store associates.
Self checkout was available and approximately 4300 stores at the end of the Q2 and we continue to be pleased with our results including customer adoption rates.
Higher overall satisfaction scores in stores that include this offering.
Our plans consist of a broader rollout this year and we remain focused on introducing self checkout into the vast majority of our stores by the end of 2022 as we look to further extend our position as an innovative leader.
It's small box discount retail.
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 operating priority is investing in our diverse teams through development.
<unk> and <unk>.
Empowerment and inclusion.
As a growing retailer we continue to create new jobs in the communities we serve.
As evidence, we recently launched a national hiring event with the goal of hiring up to an additional 50000 employees by Labor day, and I am pleased to note that.
<unk> on track to meet our goal.
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.
And because over 75% of our store associates.
We are at or above the lead sales associate position, where internally placed employees, who joined dollar general know they have an opportunity to grow their career with us.
We also continued to innovate on the development opportunities we can offer our teams, including continued expansion of our private fleet.
At and those associated with DG fresh as well as pop shelf.
Importantly, we believe these efforts continue to yield positive results across our store base as evidenced by our robust internal promotion pipeline and staffing above traditional levels.
We also.
<unk> held our annual leadership meeting earlier this month, resulting in a rich and virtual development experience for more than 1500 leaders of our company.
This is one of my favorite events every year and I was once again inspired by the incredible talent and dedication of our people.
In closing I am proud of our.
Our team's performance as we continue to advance our operating priorities and strategic initiatives. Overall, we are very pleased with our position as we head into the back half of the year and I'm excited about the significant growth opportunities ahead.
I want to offer my sincere thanks to each of our more than 159000 employees.
Across the company for their unwavering commitment 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 one on your telephone keypad.
We ask that you please limit to one question and one follow up if necessary.
A confirmation tailwind to Kate your line is in the question queue. You May Press Star two if you like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pickup your handset before pressing the star keys, one moment, please while we.
Poll for questions.
My first question comes from.
With Oppenheimer. Please proceed with your question.
Good morning, Thanks for taking my question. So Todd I wanted to go back to one of the comments you made in the script. You said Q3 is off to a good start or a great start you said any more color.
Caller you can Friday in terms of what you guys are seeing.
Yes.
We are happy with the way Q3 started out.
To school is doing very well for us.
We got.
All of our product that that we anticipated getting from overseas.
As well as domestically.
And the consumer has a little extra money in their pocket. So.
As evidenced by our guidance in the back half, we feel pretty good about our sales line as we go forward.
Okay, Great and then maybe just one follow up just on that gross margin line for John.
Any more color you can provide in terms of the puts and takes to think about it on the gross.
Margin line in the back half of the year and then if you look at the distribution of freight pressures would you expect them to persist into next year.
Yes, so in terms of gross margin and I'll start by saying, we're very pleased with the performance up 62 basis points year to date, while down 80 basis points in Q2 were up 87 basis points.
Q2, 2019, as we continue to see initiatives like DG fresh NCI and others really contributing.
But you know like with our Q2 results. We do expect some continued pressure on gross margin in the second half due primarily to inflation, which we believe to be transitory but related.
<unk> two higher transportation costs.
Higher than previously expected of course, we're seeing elevated demand with the great sales and that's resulting in some transportation and supply capacity challenges with our third party carriers.
And then on top of that we did mention a higher LIFO provision as a result of product cost.
Cost increases some others have seen similar inflation and pass some of that along and then of course, we have a very challenging lap as we talked about with the year over year mix in Q2, we lapped 40% non consumable sales and so while non consumables business is still doing fabulously, it's a very difficult lap in the back half and certainly.
You have a very favorable last year mixed profile with that mix and then you also had unusually low clearance activity associated with non consumables on that high sell through so while we expect to continue to do well. It provides a challenging lap so a difficult lap near term inflationary pressures, which again we.
We believe it to be transitory.
But as you look ahead, we believe still that with a growing benefit from initiatives with all the levers at our disposal between private brands for in sourcing shrink supply chain efficiencies as we get through the near term pressures and of course category management and of course, our scale. We believe we're.
In a great position to continue to expand margins over the long term and believe we're in a great spot right now in terms of price to and don't see the need to invest there so near term pressure for sure but the fundamentals of the business I would say are stronger than ever and we feel very good about the future in terms of how long. This persists, we said that we expected.
To be elevated through the end of the year at least through Chinese new year, it's hard to say how long beyond that this is really a supply and a demand issue. We would expect this to start to normalize, but it's hard to say hopefully as we pushed through next year, but hard to say exactly when that will happen.
Great. Thank you best of luck for the balance of the year.
Spec.
Our next question comes from Matthew Boss with J P. Morgan. Please proceed with your question.
So Todd maybe could you speak to new customer acquisition that Youre seeing.
Coming out of this crisis, maybe if we compared it to customer acquisition or customers that shop dollar general for the first time coming out of the financial crisis and with that you know if you think about the behavior that you're seeing near term how would you map out traffic versus basket moving forward.
And today, just again, given the current customer behavior that you're seeing today.
Yeah, Matt that's a great question and I'd tell you. What we are we are very very pleased with what we are seeing.
With that consumer, especially that new consumer.
When you think.
Third we launched that retention program back last summer and really.
Pushed the pedal down if you will as we move through the back half of last year, and we never took our foot off the accelerator I'm happy to say that.
Right now through second quarter, what we're seeing is double.
Our expectation of that retention rate of that new.
That new found consumer that is higher by a long shot quite frankly than we saw in O eight.
During the financial crisis so.
I attribute that quite frankly to the relevancy of this box that we have today.
Today, while we made some really nice changes in the in coming out of that Oh nine timeframe. This box now is much more relevant and I think the important pieces much more relevant across a broad spectrum of the consumer base and I believe that's why we're keeping that consumer and then when you think about how.
That mix is looking as John indicated we are very very pleased with our non consumables discretionary side and that is really enhanced compared to 2008. When you really go back to take a look at it so not only our consumable business, but our non consumable business is doing.
Doing very very well and then.
As I look at.
And how some of the other components are looking thinking about units for a moment on a two year stack basis.
Our units are up 11, 5% that is very very strong.
And that's again a real Testament.
Two.
Two the ability for us to drive that topline with these new consumers in our our existing consumers still see that value obviously that she needs. So we'll continue to watch that.
We go forward our goal as you know long term is always to drive that traffic number and.
But this consumer.
Our core consumer acts a little different when she has a little extra money just as a reminder, when she has extra money in her pocket we saw it in a way we see it now she comes a little less often spends more when she comes in and we've seen that on.
On our our numbers matter of fact, our two year stack.
<unk> traffic number is up about 25% and again very very robust. So we believe when things start to normalize and some of this extra money that is in the system through government stimulus may start to wane here, we believe that youll start coming more often and probably spending a little less.
Yes, getting back to a normal shopping pattern most likely Matt.
That's great color, maybe just as a follow up Todd or maybe even Jeff.
By category, where do you see the most low hanging fruit remaining on the market share front as we think about where you're focusing your initiative efforts.
Coming out of the pandemic from here.
Yeah.
Thank you Matt This is Jeff.
I'm really proud of the teams.
Ability to really as you know they do such a great job of knowing what the customer wants talking to our customers, but also our category management skills and our supply chain.
And our operators give us a lot of flexibility to be able to serve that customer the way. She wants to be served and so very pleased with our DG fresh rollout and.
The ability that gives us to continue to broaden that assortment and that very important category for that customer.
So very pleased that the gains that we're seeing there.
Of course also very pleased that our ability to continue to grow our health and beauty business and are very pleased that the share we've seen.
There as well and quite frankly, as you think about it very pleased overall and our ability to grow share in the quarter and when you look at it on two year basis.
This is well very pleased and strong results. So I would say as we look forward. Our goal is always to make this boxed the most relevant it can be and to serve the customer the way. She wants to be served in and quite frankly, our teams do that better than anybody.
That's great color best of luck.
Thank you Matt.
Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question.
Hi, Good morning, everyone I wanted to ask on the algorithm into 'twenty, two and I know, it's early and we're not talking guidance, but maybe just some of the puts and takes on the top line you know compare.
<unk> will start to ease when you get into next year, but we'll also going to be lapping all the stimulus and then margin picture some of the pressures could linger into next year or so.
Curious if I don't think you'll commit to any algo, but how the puts and takes look in relation to the long term algo for this business.
I'll start by saying that we feel great about the fundamentals that I've never felt better about the algorithm I'm not going to obviously give any specific guidance on 2022 as we don't normally at this point, obviously things are fluid.
In terms of the duration and depth of the pandemic and how long these inflationary pressures.
Persist, but as we said we do believe these are transitory the team's doing a great job to mitigate these and that would provide a tailwind at some point as these we believe as as these normalize as well as as we get to more normalized mix levels again thats. The other big pressure. This year is just lapping unusually.
Yes.
Consumables sales and unusually low clearance activity, but.
As you look at the fundamentals.
Said before you know we were at the high end of our 2% to 4% algorithm going into this.
We are delighted with what we've seen in terms of the stickiness of the new customers, we've brought in even above expectations as well as how we.
Really hard to hold onto these larger baskets and so I think the brand has never been more relevant and I think this really bodes well going forward on the sales momentum with the initiatives are really coming together to help the bottom line on the top line and again, what we're doing to hang on to these new customers and bigger baskets with this fuller fill in trip, we've been able to provide with the initiatives.
Been able to and in terms of the.
<unk> margin would say, we still see benefit growing benefit from our strategic initiatives with more to come and.
Still have all the levers I mentioned at our disposal and see a lot of opportunity there as things normalize so as we pushed through these again, what we believe to be transitory.
<unk> pressures, we see ourselves in a position to continue to expand our.
Margin and again, when you tease out the impact of the strategic initiatives too.
Leverage our SG&A at the rates that we have done in the past and then again the business generates a tremendous amount of cash which allows us to buyback.
Back shares.
So we feel good all around with the outlook for the business and believe the algorithm is very well intact.
When you look at real estate, that's the other piece I would point to that bodes very well for the future in terms of upping the potential units for everybody in our space to 17000 units we're seeing.
Being unit level economics as good as ever.
And we continue to innovate with new format continues to extend the runway so feel great about the algorithm will comment on the specifics of 2022.
As we go into the next year.
Okay. Thanks for that and then the follow up is regarding the second half.
Snap and child care tax credits, how how much if any is factored into your second half top line guide.
Yeah, what I would say is we've considered all of that and I would say theres a lot of moving pieces here that seemingly are directionally offsetting you do have the roll off of the enhanced unemployment benefits.
Which is a bit of a headwind, but then you have the child tax credit, which is a bit of a tailwind and then when you look at snap there's puts and takes there that are directionally offsetting the 15% benefit expires on October 1st, but then with the Usda's action with the Thrifty food plan that puts back some enhanced benefits and then they.
Did extend the emergency supplemental benefits, which allows waivers waivers allows.
Folks to get maximum benefits regardless of income so as you look at all the pieces, it's hard to say exactly what the net impact would be but right now it looks directionally offsetting and that's contemplated in the guidance and we feel very good about the guidance.
Based on what we know now.
Thanks appreciate it.
Yeah.
Our next question comes from Karen short with Barclays. Please proceed with your question.
Hi, Thanks, very much I guess.
And guidance and the implied second half so you obviously.
Your topline guidance for the full year, but not obviously raised the second half, but when we look at the guidance for the EBIT margin implied guide for the second half that's come down despite the higher sales. So I realize you did call out one or two things, but I still can't get it to quite account for the change and what nameplate.
<unk>.
Hum.
<unk> for the second half so maybe a little more color there and then I had another bigger picture.
Okay. So good question, Karen I'll start by saying, we feel good about the updated guidance based on the strong first half results and as you mentioned, we did raise our.
Our sales outlook, we raised.
<unk> the floor on EPS held the ceiling on the EPS guidance.
But I think when you look at the two year lap it's important to look at what this implies in terms of a two year CAGR and that's the CAGR of 20% to 24%. So we feel great about that outsized performance relative to the algorithm, but I would.
I'd tell you is we have seen as we mentioned seen increased pressure from freight and so that is the limiting factor here in terms of the ability to take that up we did as others saw we did see heightened pressures around transportation to a lesser extent, we mentioned with our LIFO provision we did see higher.
Costs in terms of product cost and that's largely a function of some transportation costs being passed through so really that's that's the driver of that.
But again I would tell you we feel great about the fundamentals of the business never been better and we're going to wait and see how things play out but that's.
It's really the pressures as we look at the back half of the year and again, we believe them to be transitory in nature and very pleased with the performance based on the guidance that the guidance would indicate in terms of being a step change to the topline and the bottomline over the normal algorithm.
Okay. That's helpful and then I guess.
There's kind of this view that.
General that the lower end consumer will really struggle next year.
All of these benefits lap and I think there is some perspective that that will negatively impact disproportionately I'm not sure I agree with that but how do you think about the puts and takes to D. G. If that is true in general.
General in terms of your core customer feeling much more challenged.
Yes, Kevin This is Todd I'll take that one and I would tell you we feel very good about this.
This core customer and also remember there's a customer that we've retained during this pandemic and continuing.
To retain we feel very good about but keeping her well engaged into next year as well you couple that with all the initiatives that we have in front of US both in play and as you heard from Jeff Some newer ones like health care that.
That will in fact.
Start to.
To play out.
As we go into next year, but even longer term than that but when you start to think about who we are right and who we serve we were an all weather brand and always have been and is even more pronounced now I believe than ever.
Before right. So when times are good we do pretty well and when times aren't so good that consumer needs us more and that we've got that that new trading customer that we've gotten that seemingly will have a little bit more money even when.
Times turned a little negative for our core customers. So once again, we feel good about it.
We're not prepared to give guidance yet for 'twenty two.
But.
We hear always control, what we can control and we feel good about that that algorithm over time growing the comps that you know 2% to 4% over the long term and that is still our vision.
<unk>.
Weird toward that hear each and everyday.
Great. Thanks very much.
Sure.
Yeah.
Our next question comes from Michael Lasser with UBS. Please proceed with your question.
Good morning, Thanks, a lot for taking my question Todd you feel like you've worked off some of that.
We work at that.
A lot of the consumable retailers experienced during the heart of the pandemic and another way to look at it is your guidance for the back half of the year implies two year compound annual sales growth rate.
I went to 10%, which is largely consistent with what you were doing in 2000.
In prior to the pandemic towards other consumable retailers are experiencing a drag from a further return to normalcy unless new occasions at home.
Perhaps youll face less of a drag because your workers who've been working at the work site a whole time, you've gotten customers and you've got your initiatives.
90, <unk> entered into a sustainable sales rhythm from here.
Well you know we look at all of that as you as you say, Michael and I would tell you that we do feel good about where the consumer is and and how she lines up if you will based on what is.
But.
Again that whole notion that we control what we can control is is really what we're squarely focused on but yeah. You know I would tell you.
The implied number that you're talking about is that in that 4% to 5% type of a comp rate, whether we hit that or not.
[noise] ahead, or if that's still well on top of our or our algorithm. If you will so we.
Good about it I don't want to I don't want to get ahead of our skis and say that.
That it'll be.
Even better but I would tell you with the initiatives that we have and the retention rates, we're seeing from that new consumer.
So it gives us the confidence to raise that sales guidance in the back half of this year and will propel us into 'twenty two.
My follow up question is on the gross margin. The 87 basis point increase over 2019 is it fair for us to assume half of that was due to your.
That's like DG fresh and Ti and the other half is from a favorable environment, where promotions have not returned.
So the level of 2019 and can you quantify just for simplicity sake, Jon how much gross margin pressure you were expecting because of these elevated.
Our initiatives.
Yeah in terms of when you strip out the noise of the freight cost. It is the same fundamental drivers and we continue to see huge benefits from initiatives like DG fresh NCI and again, we've been talking for several quarters around as we kept calling.
The three biggest drivers.
It was slower.
Product cost associated with DG fresh it was lower markdowns and favorable mix and a big driver of that was NCI. So we're continuing to see that was benefit they're continuing to grow.
I don't want to give a specific number on that but I would say.
<unk> continues to be the biggest drivers.
When you strip out the noise of what's been the biggest levers to improve our gross margin. So that's not changed what has changed is one the much more difficult lap of NCI from lack of the not the 40% non consumables growth we lapped in this quarter.
And then the heightened pressures associated with freight and to a lesser extent product costs. So the fundamentals are unchanged. That's really the drivers we didn't give a specific number on freight but what I would tell you is as we listed out the headwinds that was the number one headwind that we called out and then we did say as we look.
<unk> at half of the year.
Similar to Q2, we expect that to be a although we think it's transitory over the longer term that continued to be a.
A growing headwind for us versus what we previously thought.
Got it.
Thank you so much.
And the next question comes from John <unk> with Guggenheim Partners. Please proceed with your question.
It's not like I've got two but I'll just start with you.
You guys have always said the biggest share donor T or the drug stores.
Curious about your thoughts on health care.
And then you know in particular, when you think about services.
Hello.
Maybe is there an opportunity to partner with independent pharmacists in a way how do you think about the sources and magnitude of that opportunity is that does that rise to a NCI type of opportunity do you think in magnitude.
Yes, John that's a great question and thanks for asking it because.
Pretty excited about what this healthcare initiative could hold but I want to caution everybody. This will be a journey over many years right, but what we're gonna be squarely focused on here is <unk>.
What you talked about those services that rural America today, especially.
It doesn't have access to.
We talk a lot about.
<unk> re deserts are food deserts.
There is as equal health care deserts out there across the U S and we're in all of these communities and then when you step back from that.
With my background in health.
We really know that that there is an opportunity.
For the server so whether it be eye care as an example, whether it be telemedicine, whether it be prescription delivery not by the way not pharmacies.
Our stores, but.
Build to order and maybe pickup.
Inside of our store are those types of things mail order.
So could could we benefit with a partnership possibly we're gonna be fishing all that out over the next many quarters, but could it be bigger than Mci.
I think this could easily eclipse NCI I don't.
And again get in front of our skis, but it could be a really.
Big deal not only for our topline and Bottomline at dollar general, but even more so making that box even more relevant to those consumers in rural America that have to drive now 30.40 minutes for.
For an eye exam.
As an example, or even to see a doctor. So we believe that there's some real opportunity here you could probably tell it my voice I'm pretty excited about it but the journey is just beginning.
And then just as a follow up to that right. When you think about doing these store within a store right in the DG markets.
Examine this all the time, but the bus getting bigger.
There's a small version of DG market eventually come on come on the radar screen again as another format.
Rather use the 80.502.
To accomplish that.
No you know John we've got a smaller version.
Right.
The DG market already and matter of fact, we continue to grow that and that's the Genesis of that was.
The Walmart express stores that we bought back a few years ago and we've cultivated those 44 stores, we bought and have grown that format as well.
I'll talk about it a lot because we believe that.
Over time, it could be a big piece, though of our rural strategy, especially as you just mentioned in that combo piece, because if we already have stores in.
Within 775% of our stores within <unk>.
We don't know radius.
The overall population and if we could.
<unk>, even more options, including health care, including pop shelf inside of a smaller box I believe it could be really powerful and I know, Jeff believes that as well.
And we'll be working towards that over the next few years.
Thank you.
Youre welcome.
Our next question comes from Kelly Bania with BMO capital. Please proceed with your question.
Hi, good morning, Thanks for taking my question.
And in terms of freight just to be clear how much of that is domestic.
Okay.
Purses Ocean freight.
And how much are you passing along or not passing along in the current environment.
Yes, I would tell you that the majority of the headwind is coming from the import side of that.
Of that equation, we have seen some tightness in the domestic.
Stick, but.
But pretty manageable overall there it really is the import side.
That we feel.
Is the headwind here and then as far as passing along and what we what we do here at dollar general probably.
Better than most is negotiated with our vendors with our size and scale.
Market, we've been doing that for many years, it's second nature to us if you will but I would tell you that we've been able to.
Offset some of these inflationary pressures that you've seen out there, but yet we have taken price in some instances, but what I'm happy to to say is that our price positioning is as good.
<unk> ever been as you may remember over the last few quarters I I've been very bullish on our positioning and it's just as good as ever so I would tell you we've been we've.
We've been very thoughtful on passing along price because we know that.
Our core consumer can ill afford very many price increases.
But we have the ability with just 10 to 12000 Skus to also pick and choose the skus that we offer our consumer and if we have some price increases that we don't believe we should pass onto her will drop the SKU and move onto something else that in fact shielding.
She'll need also and we've done that.
A lot.
Sure.
Quarter to two quarters.
Great. That's very helpful. And just also wanted to follow up on a comment you made.
You talked about some of the puts and takes in terms of the macro in the back half.
Including the end of the of.
The extended.
In layman benefits I was just curious what you are seeing in some of those states.
From impact on the topline when those states ended the benefits and also just in the bleach and an employee environment.
Yeah, what we have seen is when you look at the employee environment I'll.
I'll start with that what we initially saw as those states rolled off the enhanced unemployment benefits.
What we did see was an initial a nice pickup in applicant flow and staffing. The good news now is we're seeing that across the system and so it's hard to discern that impact now because everything is up and so that's been helpful.
Helpful. We did see.
A little bit not a huge impact, but we did see a little bit of a negative impact in states when the enhanced unemployment benefits rolled off but then as I mentioned then you have the benefit of the child tax credit and that's why we said as we look at all the puts and takes the way we see it now we think it's.
Directional.
Offsetting.
Thank you.
Our last question comes from Michael Montana with Evercore ISI. Please proceed with your question.
Thank you.
Two things to ask on one was just a little bit surprised on some of the discretionary.
Generic headwind given the strength that we've seen.
From some other retailers in that area. So I was just hoping you could help explain a little bit more why that would be a headwind and then what's the timing for that to kind of roll off and then the follow up was on traffic.
Yes, I would tell you Michael I think the.
The discretionary.
When we talk about really stems from the.
The robust number we had last year.
Last year.
Other retailers were either shut down still limited hours, one way aisles, I think you remember all that.
We're pretty much in full.
Generic head last year helped.
Helping out all the communities that we serve so it was really.
On a two year stack basis, we couldn't be more happier are proud of our discretionary business and matter of fact feel very robust about it going into the back half of the year.
And in years to come because of our NCI.
Swing to us because of our pop shelf initiatives.
And many other things that we're working on so I wouldn't I wouldn't characterize it any other way other than on a on a year over year basis is really the headwind I would tell you that starts to subside as we move into 'twenty two right and so.
Initial watch out for that as we move into 'twenty two but.
But right now we feel good about where we are on a discretionary platform basis.
Okay, Great and then just wanted to clarify on the two year traffic stack for <unk> and <unk>.
Was <unk> a high single digit decline.
On traffic if you do a two year stack just trying to see how that's been trending.
Yeah, you know I would tell you we really haven't said what those those numbers were but as I mentioned earlier, we just have to remember on on the traffic side, you've got two things that are that are in play.
Number one.
You still have a consumer that is contracting her shopping patterns due to COVID-19 right and you still have some of that dynamic going on not as much as we saw last year, obviously and we're starting to see those traffic numbers come back and I'll explain that in a second what we're starting to see now.
<unk> is as stimulus starts to wane.
Covid in many states starting to wane I know it's <unk>.
Flaring in certain states and a little less in others, the consumers getting out more and we're seeing our traffic numbers start to rebound and what normally happens with our core consumer is that.
Play here dynamic takes place.
Actually around her income levels.
What we'll start to see is smaller basket sizes and more traffic and that's exactly what we're starting to see occur over the last couple of months and we anticipate that to continue as we move through the back half of the year.
Okay.
Thank you and good luck.
We have reached the end of the question and answer session. At this time I'd like to turn the call back over to Todd pesos for closing comments.
Well. Thank you very much for all the questions and thanks for your interest in dollar general I want to start by saying how proud I am of this team.
Which continues to execute at a high level, resulting in another great quarter.
As you heard today, we have a number of exciting initiatives in place and we believe we are well positioned to grow same store sales new stores operating profit margins and market share over time, while providing a strong employee proposition. So overall.
I'm proud of the year to date results feel very good about the underlying business and very optimistic about the future. Thank you for listening and I Hope you have a great day. Thank you.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Today's conference call has ended please disconnect your lines at this time. Thank you.