Q4 2021 Dollar General Corp Earnings Call
22, all lines have been placed on mute to prevent any background noise.
This call is being recorded and 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 Mr. Donny Lau, Vice President of Investor Relations and corporate strategy. Mr. Lau you may begin.
Thank you and good morning, everyone on the call with me today are Todd <unk>, our CEO , Jeff Owen our C O O and John Garratt, our CFO .
Our earnings release issued today can be found on our website at Investor 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 financial guidance strategy initiatives plans goals priorities opportunities investments expectations or beliefs about future matters and other statements that are not.
Limited historical Scott.
These statements are subject to risks and uncertainties.
It 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 any later found periodic report and in the comments that are made on this call.
Should not unduly rely on forward looking statements, which speak only as today as of today's date dollar general disclaims any obligation to update or revise any information discussed in this call unless required by law. We also 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've 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 fourth quarter and fiscal year results and I want to thank our associates for their unwavering commitment to meeting the critical needs of our communities, particularly over the past two years of the Covid pandemic.
Our fourth quarter performance was impacted by sustained and rising inflation ongoing global supply chain pressure and a surge in more chronic cases, which impacted staffing levels at our distribution centers contributing to elevated out of stocks.
Despite these challenging conditions. Our teams continued to focus on controlling what we can control and being there for our customers.
Because of their efforts and great execution over the past two years, we believe our underlying business is even stronger than before the pandemic, which positions us well to deliver solid sales and profit growth in 2022 and beyond.
And while we expect this challenging environment to persist over the near term, which is reflected in our Q1 and fiscal 2022 outlook. We're confident we are taking the appropriate actions to manage through this period and deliver on our full year plan.
In fact, I'm pleased to report our staffing levels are back to 2019 pre COVID-19 levels in both our stores and distribution centers and we are seeing a meaningful improvement in our in stock positions.
Additionally, although we experienced higher than expected product and supply chain cost in Q4, we are very confident in our price position as our price indexes relative to competitors and other classes of trade remain in line with our targeted and historical ranges.
And because so many families depend on us for everyday essentials at the right price, we believe products at the $1 price point are important to our customers and they will continue to have a significant presence in our assortment.
In fact, approximately 20% of our overall assortment is $1 or less and moving forward. We expect to continue to foster and grow this program where appropriate.
And with more than 18000 stores located within five miles about 75% of the U S. Population. We believe we are well positioned to continue supporting our customers through our unique combination of value and convenience even in a challenging economic environment.
Looking ahead, we remain focused on advancing our operating priorities and strategic initiatives as we continue to strengthen our competitive position while further differentiating dollar general from the rest of the retail landscape.
Turning now to our fourth quarter performance net sales increased 2.8% to $8 $7 billion. Following a 17, 6% increase in Q4 of 2020.
Comp sales declined one 4%.
Compared to the prior year period, which translates into a robust 11, 3% increase on a two year stack basis.
From a monthly cadence perspective comp sales were lowest in January with December being our strongest month of performance.
Our fourth quarter sales results include a decline in customer traffic, which was largely offset by growth in average basket size.
Notably our average basket size at year end was approximately $16 and consisted of nearly six items. This compares to an average basket size of about $13 and five items at the end of 2019, which we believe reflects the growing impact of our strategic initiatives and.
A degree of inflation.
In addition, we are pleased with the market share gains as measured by syndicated data and our frozen and refrigerated product categories, where we have placed a good deal of emphasis over the past years.
In an effort to provide customers with an even wider variety of options.
And even as our market share in highly consumable product sales decreased slightly in Q4, we feel good about our share gains on a two year basis. We are also pleased with retention rates of new customers acquired in 2020, which continues to exceed our initial expectations.
For the full year net sales increased 1.4% to $34 $2 billion, which was on the high end of our full year guidance and on top of a robust 21, 6% increase in fiscal 2020.
Comp sales for the year decreased two 8%, which translates into a very healthy 13, 5% increase on a two year stack basis.
In total we completed more than 2900 real estate projects during the year, including the opening of our 18th000 dollar General store and 50 Standalone pop shop locations as we continue to build and strengthen the foundation for future growth.
From a position of strength, we also made targeted investments in key areas, including the acceleration of our Pops up concept as well as our most recent initiatives focused on health and international expansion as we continue to meet the evolving needs of our customers and further positions.
Your general for long term sustainable growth.
Overall, we are proud of our fourth quarter and full year results, which further validate our belief that our strategic actions and targeted investments positions us well for continued success, while supporting long term shareholder value creation, we operate in one of the most attractive.
The sectors in retail.
And while our mission and culture remain unchanged as the foundation for our success with our robust portfolio of short and long term initiatives I believe dollar general is a much different company and is in a much stronger competitive position than it was just a few short years ago.
As a result, I've never felt better about the underlying business model and we are excited about the enormous growth opportunities. We see ahead.
With that I'll now turn the call over to John .
Thank you Todd and good morning, everyone now that Todd has taken you through a few highlights of the quarter and the full year. 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, gross profit in Q4 2020 in fiscal year 'twenty 'twenty were both positively impacted by a significant increase in sales, including net sales growth of 24% and 28%, respectively, and our combined non consumables categories for Q4, 2021 .
Gross profit as a percentage of sales was 31.2% a decrease of 131 basis points. The decrease compared to Q4, 'twenty 'twenty was primarily attributable to a higher LIFO provision increased transportation distribution costs and a greater proportion of sales coming from our consumables category.
Of note, while we expect some relief as we move through 2022, our Q4 supply chain expenses were significantly higher compared to Q4 2020, resulting in a headwind to gross margin of approximately $100 million. These.
These factors were partially offset by a reduction Mark downs as a percentage of sales and higher inventory markups SG&A as a percentage of sales was 22% in the quarter. A decrease of 16 basis points. This decrease was primarily driven by lower incremental costs related to COVID-19, lower hurricane related expenses and a reduction in incentive compensation.
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These items were partially offset by certain expenses that were higher as a percentage of sales, including retail labor occupancy costs, and depreciation and amortization moving down the income statement operating profit for the fourth quarter decreased eight 7% to $797 million as a percentage of sales operating profit was nine 2%.
A decrease of 116 basis points, our effective tax rate for the quarter was 21, 2% and compares to 22, 7% in the fourth quarter last year. Finally, EPS for the fourth quarter decreased one 9% to $2.57, which reflects a compound annual growth rate of 10, 6% over two year peer.
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 returns to shareholders merchandise inventories were $5 $6 billion at the end of the year, an increase of 7% overall and 1.4% on a per store basis importantly.
As Todd noted, we have begun to see a meaningful improvement in our in stock levels. Since the end of the year and expect continued improvement as we move through 2022, underscoring our optimism that we are well positioned to serve our customers with the products they want and need.
In 2021, we generated significant cash flow from operations totaling $2 $9 billion total capital expenditures for the year were $1 $1 billion 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 repurchase.
2.2 million shares of our common stock for $490 million and paid a quarterly dividend of 42 cents per common share outstanding at a total cost of $97 million at the end of the year. The remaining share repurchase authorization was $2 $1 billion, our capital allocation priorities continue to serve us well and remain unchanged or <unk>.
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 three times adjusted debt to EBITDAR.
Moving to our financial outlook for fiscal 2022 first I want to remind everyone that our fiscal year 'twenty 'twenty. Two includes a 50 <unk> week, which will occur during the last period of the fourth quarter.
We also continue to operate in a time of uncertainty regarding among other things the impacts on the business arising from the current geopolitical conflict and the recovery from the global Covid pandemic, including recovery of the U S economy changes in consumer behavior labor markets and government stimulus and assistance programs.
Spite these uncertainties include including cost inflation ongoing pressure in the supply chain and rising fuel costs. We are pleased to provide annual guidance that reflects our confidence in the business with that in mind. We expect the following for 2022 net sales growth of approximately 10%, including an estimated benefit of approximately two percentage points from the 50 <unk>.
Third week same store sales growth of approximately 2.5% and EPS growth of approximately 12% to 14%, including an estimated benefit of approximately four percentage points from the 50 <unk> week.
Our EPS guidance assumes an effective tax rate range of 22, 5% to 23%.
We also expect capital spending to be in the range of $1 $4 billion to $1 $5 billion, which includes the impact of increased increases in the cost of certain building materials as well as continued investment in our strategic initiatives and core business to support and drive future growth with regards to shareholder returns our board of directors.
Recently approved a quarterly dividend payment of 55 cents per share, which represents an increase of 31%.
We also plan to repurchase a total of approximately $2 $75 billion of our common stock this year, reflecting our continued strong liquidity position the benefit from the 50, <unk> week and our confidence in the long term growth opportunity for our business, but we now provide some additional context as it relates to our outlook in terms of quarterly cadence we anticipate both.
Comp sales and EPS growth to be much stronger in the second half of the year than the first half as a reminder, we are lapping a significant stimulus benefit from Q1, 2021 including gross margin expansion of 208 basis points. We also anticipate ongoing cost inflation, including elevated supply chain and fuel costs, while we do not typically.
Quarterly guidance, given the unusual lapped and the significant inflationary environment in Q1, we are providing more specific detail on our expectations for the first quarter.
To that end, we expect a comp sales decline of 1% to 2% in Q1 with an EPS in the range of approximately $2.25 to $2.35.
Turning now to gross margin for 2022 we expect to continue realizing benefits from our initiatives, including DG fresh and NCI. In addition, we are optimistic that distribution and transportation efficiencies, including significant expansion of our private fleet can drive additional benefits over the year. Despite continued cost pressures in the near term.
Partially offsetting some of these benefits are rising fuel costs as well as an expected return to recent historical rates of markdowns and shrink all of which are expected to be headwinds in 2022 with regards to SG&A. We expect continued investments in our strategic initiatives as we further their rollouts. However in aggregate we continue to.
<unk>, they will positively contribute to operating profit and margin in 2020 two as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense. We also continue to pursue efficiencies and savings through our safe to serve program, including fast track and we believe these savings in 2022 will offset a poor.
<unk> of an expected increase in wage inflation.
In summary, we are proud of our fourth quarter and full year results in 2020 , one which are a testament to the perseverance and execution by the team. Looking ahead. We are excited about our plans for 2022 including our outlook for sales and EPS growth as well as our planned significant returns to shareholders via an increased dividend payout and increased share repurchases is.
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 in our business and employees 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, including our plans for 2022, our first operating priority is driving profitable sales growth, we have a growing portfolio of initiatives, which are contributing to our strong results as well as strengthening the foundation for.
Future growth, let me take you through some of the recent highlights as well as some of our next steps.
Starting with our non consumables initiative or NCI, which was available in more than 11700 stores at the end of 'twenty 'twenty. One we continued to be very pleased with the strong sales and margin performance, we are seeing across the NCI store base.
Notably NCI stores outperform non NCI stores in both average ticket and customer traffic driving an incremental two 5% total comp sales increase on average and NCI stores, along with a meaningful improvement in gross margin rate.
We expect to realize ongoing sales and margin benefits from NCI in 2022, and we are on track to complete the rollout across nearly the entire chain by the end of the year.
Moving to our newest store concept pop shelf, which further builds on our success and learnings with NCI as a reminder, pop shelf aims to engage customers by offering a fun affordable and differentiated treasure hunt experience delivered through continually refreshed merchandise a differentiated in storage.
Experience and exceptional value with the vast majority of our items priced at $5 or less.
During the quarter, we opened 25, new pop shelf locations, bringing the total number of stores to 55 and exceeding our initial goal of 50 stores. Additionally.
Additionally, we opened 11, new store within a store concepts during Q4, bringing the total number of dollar general market stores with a smaller footprint pop shelf store included to a total of 25 at the end of the year and we continue to be pleased with the results.
In 2022, we plan to nearly triple the pop shelf store count and open up to an additional 25 store within a store concepts, which would bring us to a total of more than 150, Standalone pop shelf locations and a total of approximately 50 store within a store concepts.
We continue to anticipate year, one annualized sales volumes for our current locations to be between one seven and $2 million per store and expect the average gross margin rate for these stores to exceed 40%.
In addition to the early success of pop shelf, we have been able to take some of our learnings and apply them in our dollar general store base, particularly in further enhancing our non consumables offering.
Overall, we are very pleased with the results from this unique and differentiated concept and we are excited about our goal of approximately 1000 pop shop locations by year end 2025.
Turning now to DG fresh.
Which is a strategic multi phase shift to self distribution of frozen and refrigerated goods.
Along with a focus on driving continued sales growth in these areas.
As a reminder, we completed the initial rollout of DG fresh across the entire chain in 2021 and are now delivering to more than 18000 stores from 12 facilities.
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.
Notably DG fresh was a meaningful positive contributor to our gross margin rate in 2021, and we expect to see continued benefits in 2022.
Another important goal of DG fresh is to increase sales in our frozen and refrigerated categories. We are pleased with the performance on this front, including enhanced product offerings and stores and strong performance from our Perishables Department.
In fact, our Perishables Department had a high single digit comp increase in Q4 and contributed more comp sales dollars than any other department for both Q4 and the full year importantly, the sales penetration of these categories has increased to approximately 9% as compared to approximately 8%.
Prior to the rollout of DG fresh and.
In 2022 we expect to realize additional benefits from DG fresh as we continue to optimize our network further leverage our scale and deliver an even wider product selection.
And while produce is not included in our initial rollout. We continue to believe that DG fresh provides a potential path forward to expanding our produce offering to more than 10000 stores over time.
To that end at the end of Q4, we offered produce in more than 2100 stores with plans to expand this offering to a total of more than 3000 stores by the end of 2020 two.
Finally D. G. Fresh has also extended the reach of our cooler expansion program.
During 2021 we added more than 65000 cooler doors across our store base in 'twenty 'twenty. Two we again expect to install more than 65000 additional doors as we continue to build on our multiyear track record of growth in cooler doors and associated sales.
Turning now to an update on our expanded health offering which consists of up to 30% more feet of selling space and up to 400 additional items as compared to our standard offering.
This offering was available in nearly 1200 stores at the end of 2020 , one with plans to expand to a total of more than 4000 stores by the end of 2022.
As we move toward becoming more of a health destination, particularly in Rural America. Our plans include further expansion of our health offering with the goal of increasing access to basic health care products and ultimately services over time.
In addition to the gross margin benefits associated with the initiatives I just discussed we continue to pursue other opportunities to enhance gross margin, including improvements in private brand sales global sourcing supply chain efficiencies and shrink reduction.
Our second priority is capturing growth opportunities.
Our proven high return low risk real estate model has served us well for many years and continues to be a core strength of our business.
In 2020 , one we completed a total of 2902 real estate projects, including 1050, New stores 1007 hundred 52, Remodels and 100 relocations.
For 2022, we remain on track to execute nearly 3000 real estate projects in total, including 1110, new stores 1750, Remodels and 120 store relocation.
As a reminder, we expect approximately 800 of our new stores in 2022 to be in our larger 8500 square foot store format, allowing for an expanded assortment and room to accommodate future growth as we respond to our customers' desire for an even wider product selection.
Importantly, we continued to be very pleased with the sales productivity of all of our larger format stores as average sales per square foot or about 15% above in an average traditional store.
In addition to our planned dollar general and pop shelf growth in 2022 and included in our expected New store total we are very excited about our plans to expand internationally with the goal of opening up to 10 stores in Mexico by the end of 2020 two.
Overall, our real estate pipeline remains robust with more brick and mortar stores than any retailer in the country and we are excited about our ability to capture significant growth opportunities in the years ahead.
Next our digital initiative, which is an important complement to our physical footprint as we continue to deploy and leverage technology to further enhance convenience and access for our customers. Our efforts remain centered around building engagement across our digital properties, including our mobile App we.
We ended 2021 with over 4 million monthly active users on the App and expect this number to grow as we look to further enhance our digital offerings.
As with everything we do the customer is at the center of our digital initiative.
Our partnership with door Dash is the latest example of these efforts as we look to extend the value offering of dollar general combined with the convenience of same day delivery in an hour or less.
This offering was available in more than 10700 stores at the end of Q4, and we are very pleased with the early results, including our ability to generate profitable transactions as well as better than expected customer trial strong repurchase rates high levels of sales incrementally and a broadening of our customer base.
This.
In addition, our D. G median network is becoming increasingly more relevant and connecting our brand partners with our customers to that end. We significantly grew the reach of this network in 2020 , one increasing from 6 million unique active profiles to more than $75 million, enabling our vendors.
Now reach over 90% of our D. G customers through the D. G Media network.
After establishing the foundation over the last few years, we are poised to meaningfully grow this business in 2022 and beyond and as we expand the program and enhance the value proposition for both our customers and brand partners, while increasing the overall net financial benefit for the business.
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 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 decisions.
This euro 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.
Notably the safe to serve program contributed more than $800 million in cumulative cost savings from its inception in 2015 through the end of 2021 .
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.
The first phase of fast track consisted of both roll painter and case pack top optimization, which has led to the more efficient stocking of our stores.
The second component of fast track is self checkout, which provides customers with another flexible and convenient checkout solution, while also driving greater efficiencies for our store associates.
Self checkout was available in more than 6100 stores at the end of 'twenty 'twenty. One we continue to be pleased with our results, including strong and growing customer adoption rates and high scores on speed and ease of checkout.
In 2022, we plan to expand this offering to a total of up to 11000 stores by the end of the year as we look to further extend our position as an innovative leader in small box discount retail.
Looking ahead. The next phase of fast track consists of increasing our utilization of emerging technology and data strategies, which includes putting new digital tools in the hands of our field leaders in 2022.
When combined with our data driven inventory management. We believe these efforts will reduce store workload and drive greater efficiencies for our retail associates and leaders.
I also want to highlight our growing private fleet, which consisted of more than 700 tractors and accounted for approximately 20% of our outbound transportation fleet at the end of 2020 one.
We are focused on significantly expanding our private fleet in 2022, as we plan to more than double the number of tractors. We expect will account for approximately 40% of our outbound transportation fleet by the end of the year.
Importantly, we save an average of 20% of associated cost every time, we replace a third party tractor with one from our private fleet.
Moving forward, we believe our private fleet will become an increasingly significant competitive advantage as it gives us greater operational controls and our supply chain, while further optimizing our cost structure.
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 empowerment and inclusion.
As a growing retailer we created thousands of new jobs in 2021, providing career growth opportunities for existing associates and the start of a career for many others in 'twenty 'twenty. Two we now expect to create more than 10000 net new jobs as a result of our continued growth.
Our internal promotion pipeline remains robust as evidenced by our internal placement of more than 75% of our store associates at or above the lead sales associate positions.
We also continue to innovate on development for our teams to provide ongoing opportunities for career advancement and in turn meaningful wage growth.
These investments include offering an enhanced college tuition benefit for our associates and their families as well as continuing to facilitate driver training programs for associates, who would like to become drivers and our private fleet.
In addition to our focus on development, we continue to focus on further enhancing the associate experience and are strong workplace culture.
<unk>. These investments continue to yield positive results across our organization, including healthy applicant flow and strong critical staffing 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 made significant progress against our operating priorities and strategic initiatives. In 2021. These efforts have further strengthened our foundation and position heading into 2020 two as we continue to drive long term sustainable growth.
In closing I'm proud of the team's strong and resilient performance in 2020 one as we enter 2022, we are laser focused on executing and delivering a robust plans, which we believe will further enhance our unique combination of value and convenience for our customers, while delivering strong returns for our <unk>.
Our holders.
I want to thank our approximately 163000 employees for their tireless dedication to fulfilling our mission of serving others every day and I'm looking forward to all we will accomplish together in the year ahead 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.
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Press Star two if you'd like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes on the line of Matthew Boss with J P. Morgan. Please proceed with your question.
Great. Thanks.
So maybe to kick off Todd with a number of moving pieces between employment and inflation could you speak to health of your low income consumer how do you view the opportunity to potentially take share in this environment and just drivers of top line improvement that you see.
Year progresses within your 2.5% comp guide.
Sure Matt. Thank you for the question, Yeah, I'll first start by saying.
We've always said here that the health of the consumer this low end consumer that we serve the the most here at dollar general is usually geared and and attached to whether they are gainfully employed or not I'm happy to say that with with the labor market.
<unk> the way it is that she is gainfully employed working as many hours as as she would like to right now matter of fact, we believe that approximately.
A dollar in 'twenty, some increase year over year in her wages are or in her wallet. So that is a significant amount now to your point there are some other things other headwinds here that we watch out for obviously inflation has his.
<unk> has definitely taken a toll on on some of that additional wage growth that she's seen and then recently you know over the last couple of weeks gas prices are up 70 cents a gallon so that that we watch that very carefully now.
We always also said that once that gas price reaches over $4, a gallon, which it has now that we normally see the consumers stay closer to home, which bodes very well for that value and convenient a message that we have out there for our core consumer and that we deliver everyday that valley.
Convenient message reigned Supreme.
At the end of the day across across.
Across the the.
A company here at dollar general and with our core customer. So again as you think about it tougher times for the consumer normally means that where she needs us more and we normally start to see a trade down once that occurs and we will be watching out for that again that value and convenience really attracts that trade in.
Trade down customer.
And as far as the drivers of what we believe well our initiatives Matt as you know have been very very successful over the last six to seven years here at dollar general and they are the cornerstone of why we feel confident.
In our guide for 2022, obviously, a lot of year ahead of us.
But those initiatives are truly the cornerstone of that but then when you think again about that value and convenience message. We have if if the if the market gets a little tighter from a labor perspective or inflation continues to.
To to pull more money out of the consumer's wallet, we feel that we're very well positioned as we move through 'twenty two as well.
Great and then maybe John as a follow up on gross margin just to dig a bit deeper I guess what level of runway remains with DG fresh in terms of the gross margin opportunity from here are you seeing anything in pricing and the promotional landscape as we think about your assumption for markdowns.
A return to historical levels and then just lastly, the net of distribution and transportation efficiencies relative to fuel costs is that a net headwind tailwind neutral just kind of trying to size those three up in terms of a net for the year.
Sure sure. So a lot of pieces, there I'll try and attack all of those as I kind of walk through the puts and takes of gross margin I'll start by saying, we're really pleased what we've done with gross margin in recent years as you look at 2021 it's up about 100 basis points over 2019 levels now we didn't give specific margin gross margin guidance for 2022, but we did meant.
And that Q1 in particular would be pressured as we're lapping pretty significant expansion last year of 208 basis points that certainly benefited from favorable mix fueled by stimulus.
In addition to that tough lap, we have cost inflation, continuing in Q1, which is driven by supply chain fuel and product costs and to a lesser extent a return to recent historical rates of markdowns and shrink still lower than the pandemic levels, but normalizing a little bit so certainly theres some near term pressures.
Persisting in Q1 in the first part of the year, but bear in mind as we move through the year the lap gets easier in the second half as we're lapping the heavy inflation from this year and just as a frame of reference.
In Q4, we had about 200 basis points of added pressure to gross margin from the combination of supply chain, which was about $100 million incremental year over year impact and the LIFO provision, which was $72 million. We don't see this as structural we anticipate some moderation in cost pressures we're already seeing this.
In our transportation and supply chain for instance.
You know when you look at the benefits of the initiatives and the cost reduction actions. We have in place we see it growing benefit from that for instance, if you look at private fleet. We mentioned, we're going to double that in size from the end of 2021 to the end of 2022 that drives as Jeff mentioned about 20% savings each time, we switched from a third party carrier.
To in house and of course, we have the growing benefit of the initiatives initiatives that Todd mentioned, which not only helped the top line, but the bottom line. When you think of DG fresh NCI and pop shop, and Theres still to your other question, there's still a lot of runway there as we continue to optimize DG fresh.
The leverage from that now that we can negotiate directly on that and we're top three.
Vendors are.
Our customers in many cases NCI will continue the rollout of that and virtually complete that this year and then you have the growing benefit of pop shop, which we mentioned comes out of the ground with margins north of 40% and should only grow from there as we get scale and we've talked about all the other levers we have and then not to mention just are.
<unk> ability to leverage our scale as a limited SKU operator so.
We've contemplated all of this in the EPS guidance, which we feel very good about while there is some near term pressures, especially in the early part of the year, we feel great about the initiatives. The other levers we have and we still believe we can expand gross margin over the long term.
That's great color best of luck guys.
Our next question comes from Karen short with Barclays. Please proceed with your question.
Hi, Thanks very much.
So I wanted to just talk a little bit about the longer term algorithm and relationship between sales growth and EBIT. So when I look at 2022, excluding the extra week it looks like 8%, while it is 8% to the top line and about 6% EBIT gorilla.
I just wanted to get a sense is that the right relationship our algorithm to think about going forward.
So like slight EBIT margin expansion.
Off of the 9.3 that I think you're guiding to excluding the extra week and then I had a bigger picture question.
Sure you know I would say as you think about the 10% plus model every element of that is very well intact starting at the top.
Never had a bigger pipeline of new unit growth with the for everybody and discount retail about 17000 potential opportunities, they're not dimension, Mexico, we're still seeing the same great unit level economics on the top line the bottom line and the returns a ton of initiatives in place to drive sales as well as we're seeing an outsized bigger imp.
<unk> from real estate, you know not only we're seeing a 15% increase in sales per square foot productivity and the bigger box stores, but as we've mentioned we're accelerating the number of new stores, we're putting out there and again seeing really good impact on comp sales from the initiatives and as you look at margin overall operating <unk>.
Overall, a lot of levers yeah as I just mentioned on Matt's question with gross margin SG&A, we stay laser focused on that we'd mentioned in the prepared comments you know are safe to serve program is alive and well and since 2015, we've saved over $800 million from that and so as you look at all the pieces.
Each year might be a little bit different but I think that's the way to think about that as the unit growth we've talked about.
We feel very good about and are accelerating that a bit were seeing.
We've talked before about the impact of real estate, you know 150 to 200 basis points and we're seeing the benefit at the high end of that and then you have the initiatives on top of that and all the levers so.
Feel very good about our ability to drive 10% growth over the long term and I think directionally, you're thinking about it right in terms of ongoing top line strength in that 2% to 4% comp range and the ability over time, we believe to.
Hold in cases expand our EBIT margins.
Okay. That's helpful. And then you know just in general I think.
Definitely been of concern that you're lapping in 2022.
Tough discretionary comparisons obviously.
Talked about that but wondering if you could give a little bit of color on how you think about that discretionary specifically.
Baked it in terms of expectations baked into your guidance.
Then.
It sounds like you're certainly not leaning away from discretionary in calendar 'twenty. Two so maybe just some color on that given that that is probably a category that will be pressured in the air this year.
Sure you know as you think about the non consumable sales and discretionary sales.
We have contemplated in our guidance is some moderation of that we still continue to feel great about that side of the business the growing benefit of the non consumable initiative as well as the scaling of pop shelf, but what we have contemplated given the backdrop.
From a macro perspective is somewhat of a moderation of mix back towards consumables.
But not going back to where they were so holding a lot of holding on to a lot of the strength in that business and the mix benefit from that but some moderation.
Great. Thanks very much.
Our next question comes from Simeon Gutman with Morgan Stanley . Please proceed with your question.
Hey, guys wondering.
In addition to the 20% of the mix.
And there have been any debate around that mix moving and then Todd.
You mentioned.
This could be a good environment for you I think you haven't seen any signs yet.
Then any sensitivity to that.
We didn't hear your first part of the question Simeon.
The 20% of the merchandise mix.
Our debate about changing that.
Oh, the one dollar mix, yeah, but I would tell you that.
Every time, we talk to our core customer. She tells US the same thing how important that one dollar is.
So that she can round out her month, we've always said here, it's an unfortunate situation, but our customer runs out of money before that month runs out and that one dollar bridges that last few days for her always has and that continues to do so so what we've done is in light of that.
Information also with some of the inflationary pressures.
That we're seeing on other goods, we've actually leaned into our $1 price point and what you'll see if you come into our stores over the near term will be even more displays of one dollar items on end caps and off shelf displays and really pushing that side of the business because I think our customers will need us.
Even more there.
We believe that over time, we could grow that where appropriate and.
And not even stay at that 20% level. So we feel really good.
About that $1 price point and the great thing is our.
Our our vendor community across the board has leaned into that $1 price point with us as well.
Hey, guys. This is.
Michael Kessler.
Oh, yes.
Yeah, I just wanted to any signs of trade down yet or there hasn't been any Todd.
Yeah right.
Right now we haven't seen a lot of trade down yet the great thing, though Simeon is that we actually have a lot of that trade down.
Already embedded in then I think there'll be more as inflation comes in and the reason I say it's embedded in.
Is that.
We are extremely extremely confident and glad to see that the gains that we got during COVID-19 . So call. It the the 'twenty 'twenty gains.
We've kept a lot more of those customers than we even thought we would have kept.
And that continues actually we saw a slight acceleration of that as we moved through Q4. So it was great to see and we know that based on the credit card data and our marketing against that.
A lot of these customers are in that in that trade down area that would happen when.
One trade down occur so we've got some of it already and I believe we'll get even more as inflation continues to take hold across the U S.
Thank you very much.
Yes.
Our next question comes from real Passion per week. Please proceed with your question excuse me with Oppenheimer.
Good morning, Thanks for taking my question I was hoping to just touch on I guess on the comp line I wanted to better understand the building blocks for comp growth. This year, whether you can touch on inflation traffic the new store contribution and the guidance implies an acceleration on the comp line as the year progresses. So just wanted to better understand you know what gives you confidence to drive that accelerates.
So just any color there in terms of the stronger trends in the back half of the year.
Yeah, I think youre thinking about it the right way as we see our comp growth accelerating as we move sequentially from quarter to quarter throughout the year.
We feel great about what we've said before this model works very well at 2% to 4% comp and we feel very good about the two 5% comp guide which would imply.
Pretty healthy a three year stack with that as you look at the building blocks of that.
What we're seeing right now is we're retaining.
Exceeding our expectations in terms of what we've done in terms of retaining the new customers holding on to those bigger basket sizes, we're seeing a bigger impact from real estate you know at the high end of that 150 to 200 basis points, we've talked about and as we mentioned are seeing a growing impact from our initiatives as they scale and the other thing to point out.
Is we're improving our in stocks as we improve our in stocks that that's driving sales as well Todd mentioned.
That we're closely watching the consumer but history tells us that we do very well in all cycles of the economy and if the consumer is pressured as they are increasingly with inflation. What we've seen is that customer more productive with high fuel prices, we've seen them shop as we mentioned.
Or to home and we've seen trade and all of which benefits us. So when you put all these pieces together, we feel great about the fundamentals of the business and we think we're very well positioned for this backdrop to deliver that our comp we've guided to and we're going to go after more.
Great and then maybe just one follow up question on the Capex side. So this year, our capex as a percent of sales is closer to 4% I think historically you've been in that 2.5% to 3% type range. So going forward is this the right way to think about capex at a more elevated level.
No great question, there's two pieces of that and.
And we have been for the last few years, a little above 3%, but rounding down to 3%. This year, we're rounding up to 4% and Theres really two things I'd point to there. One is we've stepped up our real estate, we're accelerating our new unit growth, which obviously delivers great returns and it helps the bottom line, but does at.
A little bit of Capex that impact is outsized this year really due to inflation steel inflation.
Substantially still getting great returns, even with that steel inflation factored in still getting the same returns we've talked about that 20% to 22% after tax IRR, but that really is the nearer term pressure the commodity pressure from fixtures HVAC things like that as we do these projects that we see that coming back down over time.
If you exclude the impact of that near term inflation that puts us back to a point, where we're back to close to where we were rounding down to 3%. So we don't see something structurally different here other than we have stepped up our real estate, which is a great decision, which we're pleased with.
It's really the difference in the short term is that commodity inflation.
Great. Thank you.
Our next question is from Michael Lasser with UBS. Please proceed with your question.
Good morning, Thanks, a lot for taking my question.
There's puts and takes with your margin outlook for this year, but.
I have a little bit of leverage to buy back stock.
Would imply that your operating margin is flat to maybe down 20 basis points versus last year and if that's right.
All the initiatives that you've deployed.
Related to dollar generals operating margin now be about 100 basis points higher than it was in 2019 into.
And to what extent.
Could this be eroded moving forward by a return to promotions and discounting in the broader retail.
Retail environment.
Yeah, I'll, let I'll answer your question if I don't let me, let me know, but what I would start with saying is that we continue to see the initiatives contributing to operating margin at or above what we expected. They are delivering across the board, but there are some near term pressures, we talked about the puts and takes of gross margin.
We as you look at the gross margin.
Biggest piece of that being inflation much of which we don't believe is structural and we see signs of that easing and certainly taking actions to make sure that he says when you look at the SG&A side of that you know there too we don't see a structural change there you know we've talked about some geography is we spend a little bit of SG&A to save more gross.
Margin again, those initiatives are delivering at or above what we expect it throws off the geography, a little bit. The other thing we have talked about is we did see some wage inflation.
Norm, we've said in the past that you know our wage inflation was running about 3% to 4% pre pandemic. It was higher this year as we look ahead to next year, we expect it to be a little bit higher than that 3% to 4%, but lower than what we saw in 2021 and we're already seeing a moderation there and we're in a great spot.
In terms of staffing levels. So you know as I look at our EBIT I don't see anything structurally changing there and as I mentioned the current you'll see the ability for us over the long term too.
Modestly increase that over time, while driving the top line too.
So feel very good about the algorithm and our ability to manage all the levers within gross margin and SG&A hopefully that answers your question.
It's helpful. My follow up question.
Is that right.
And the environment or ever so changing.
The mass merchants in the grocery stores has been.
Comping well above dollar general for the last several quarters, which is unique in recent history and now.
There's likely to be some changes that your big competitor, who how do you see this playing out over the next few quarters do you see some of these share changes. It's just a function of the unique dynamics are in and you can reassert the leadership that that.
Dollar general who historically had in the marketplace.
Yeah. So Michael this is Todd I would tell you that there is nothing that we see that that doesn't suggest that our share gains.
Won't start to to come back to historical levels as we move through 2022.
There's nothing structural that says that.
That are our comps.
Get back to two.
A more algorithmic level.
A level overtime.
And I think you'd have to look at we had well oversized gains in 2020 and when you start looking on a two year stacked basis, we stack up pretty well on a comp too.
Two are.
To those other classes of trade and by far out out exceed our.
Our our chief competitor in the space. So we feel very good and then you've heard John and myself are ready to talk about all these levers that we have are the.
These are not new right. These are these are ones that are well established in some newer ones that are already been embedded in our inside of our chain, where we can deliver we believe comp sales as we continue to move forward.
First quarter is going to be a little challenged as as we've already said, but as we move through the rest of the year, we feel better and better about where that comp is going to be and then lastly, I would tell you that your first part of the question.
Competition I would say, it's very much the way it's been it I would tell you we're on a little over two years now a pretty tame.
Promotional environment, obviously, we've had to take some price as others have done on an everyday basis due to some of the inflationary pressures that have been well documented out there a matter of fact.
Our pricing position has never been better and as I said in my prepared remarks. Our indexes are are as good if not better than they've ever been so we feel great about our everyday price and promotional Lee we.
We don't see anything in the near Horizon that would say promotional pricing is going to escalate to any large degree.
Thank you very much.
Sure.
Our next question is from Chuck Grom with Gordon Haskett. Please proceed with your question.
Hey, Thanks, Good morning, Todd could you size up for us the impact of in stocks have had on comps over the past couple of quarters, particularly.
And your traffic trends.
And looking ahead, where you are on the restoration of those in stocks.
Chuck that's a great question and thanks for it yeah, we believe it it had a significant impact in Q4, we called it out in our prepared remarks.
And due to many factors one obviously ours, we had some labor challenges.
In Q3 and Q4 in distribution, we're happy to report that we are now back to pre pandemic levels on staffing. So we feel good about that but is it constrained our inbound and outbound. We also if you recall, Jeff indicated in coming out of Q3 that we prioritize.
<unk>.
Two of them to ensure that our seasonal goods got onto the shelf.
Slowed down our our everyday goods onto the shelf and obviously gained more auto stocks there now as we move through Q4.
And now into Q1, we feel much much better about where our in stock levels are are we back to historical levels, yet not quite but I don't think anybody is the majority of our opportunities still lie.
Within the vendor community and that.
The constraints from the vendor community has continued.
Into Q1, not nearly at the levels. We saw at the end of last year, but we continue to work with our vendor partners to ship on time and in full and once we get to that point, which we believe we're working towards pretty quickly here will be in much much better shape as we move through the back half of the year.
Okay, Great. That's helpful and then one for Jeff.
Called out that sales per square foot and the 8500 square foot stores and this is 15% higher than the than the typical box I was wondering if you could just unpack that.
The Delta, where youre getting that greater productivity problem.
Thanks Chuck.
We are pleased with our larger format stores and and and really.
Seeing that sales per square foot productivity I think it goes back to what we've.
Started a while ago and that's really providing a fuller fill and shop for our customers. You know when you build a bigger store and anybody can do that but you got to have what the customer wants and you got to have a customer that wants more from you. So this 8500 and above a square foot store allows us to really expand it all the best of that merchants have brought.
Bear so we've got expanded wellness, we've got our NCI and full we've got our full cooler assortment and in these stores as well and expanded queue line and and quite frankly room to grow and so we also have produce and in many of these stores as well and so.
When you step back and you look at that that's really what has driven the productivity in these stores and I can tell you right now that we're just getting started here and we look to be able to further serve our customer by listening to what she is asking for and leaning on our best in class merchant team, our supply chain team and operators that can.
Execute this across a wide broad group of stores, so feel real good about where that is headed in the future.
That's great. Thank you.
Our final question comes from Edward Kelly with Wells Fargo. Please proceed with your question.
Hey, guys. Good morning, Thanks for all the great color today.
One quick one to start on snap.
A lot of investor anxiety around reduction in snap benefits what it means for you because it has grown considerably as a percentage of sales what are you seeing as these payments have had have decreased.
Yeah, we've seen a modest decrease as we move through the year. It peaked middle of the year around may we've seen it come down a little bit as some of the states rolled off the emergency allotments, but with the thrifty benefit thrifty food plan benefits still in place. It's remained elevated so if you look at Q4 this year versus Q4 last.
Still well above where it had been just not quite where it was at the peak in may as we move into next year, we're anticipating it to continue to moderate somewhat.
However that may be tapered just based on the cadence of when states roll off of that so as we look ahead to next year. What we're assuming is that it's down from the benefit isn't as much as it was this year, but still elevated to pre pandemic levels and again, we've been taking share over a long time with the snap customers as we said.
So Alan.
Continue to see that as a.
A key part of our business.
Great and then just a follow up on.
Self distribution and you talked about significant expansion doubling this year can you talk a bit more about the benefits you know operationally you mentioned significant competitive advantage.
And maybe more detail on what you mean, there and then from a P&L perspective.
This 20% cost saves is that 20% of domestic freight because that's how we think about what you are saying there.
Hey, Ed This is Jeff first of all thank you for the question you know our private fleet.
It's something we started several years ago.
And I think you nailed some of the reasons why we're so excited about it.
First of all.
Our drivers are on the same team as our store teams our merchant teams and that's certainly.
Just.
Brings a better service to the overall operation, but also it allows us much more flexibility in our control over the environment.
And when you think about it right now with about 20% of our outbound fleet, we're pleased with that but we're even more excited about where this thing goes in and we like to use that term early innings. We're certainly in the early innings of its initiative and as you mentioned with the 20% reduction in our outbound transportation.
Every time, we convert it's obviously a very good return. So as you think about this year, we're pleased to be at a doubling that to about 40% of our outbound transportation needs and we look to grow that even further over time as we scale. This initiative and really distance ourselves and provide that competitive advantage.
Because.
It is an incredible lever that we're able to pool and excited that we started this several years ago.
Alright, thanks, guys.
We've reached the end of the question and answer session I'd now like to turn the call back over to Todd vassals.
For closing comments.
Thank you and thanks for everyone joining the call and for all the questions and thanks for your interest in dollar General I am proud of this team, which continues to execute at a high level, even in a consistently involving environment. As you heard today, we're excited to Byron about our initiatives and plans for 2022, which we believe positions.
And so as well to grow same store sales new stores operating profit margins and market share over time.
Overall, a mature retailer in growth mode. We believe this company is in a very strong position, which I think speaks to our strategy, our resilience and the strength of our culture and our people.
As I said earlier I've never felt better about the underlying business model and I can't wait to see what 2022 holes for dollar general. Thank you for listening and have a great day.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Yeah.
Today's conference has ended please disconnect at this time thank you.