Q1 2022 Dollar General Corp Earnings Call
Good morning, My name is Robert and I'll be your conference operator today at this time I'd like to welcome everyone to dollar General's first quarter 2022 earnings call today is Thursday may 26th.
May 'twenty six 2022 all lines have been placed on mute to prevent any background noise.
This call is being recorded instructions for listening to the replay of this call are available in the 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 the conference.
Thank you and good morning, everyone on the call with me today are Todd <unk>, our CEO , just all when 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.
We 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 investment expectations or beliefs about future matters and other statements that are not limited to.
<unk> historical facts these.
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 2021 and Form 10-K filed on March 18th 2022 and any later filed.
Periodic report and in the comments that are made on this call you should not unduly rely on forward looking statements, which speak only as of today's date dollar general disclaims any obligation to update or revise any information discussed in this call unless required by law 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's my pleasure to turn the call over to Todd.
You Donny and welcome to everyone. Joining our call. We are pleased with our strong start to 2022.
Wanted to thank our associates for their unwavering commitment to serving our customers communities and each other.
Our Q1 performance was led by stronger than expected sales results in our consumable category.
Where we delivered comp sales growth of four 6%.
This increase was offset by a decline of 15, 1% and our combined non consumable categories, which we believe reflects the challenging lap of the stimulus benefit in Q1 of 2021.
In addition, we continued to experience headwinds from ongoing global supply chain pressures and rising cost inflation.
Despite these challenges we remain focused on controlling what we can control and the team's disciplined execution was the key to delivering solid financial results that exceeded our Q1 expectations for both sales and EPS, while also advancing our key operating priorities and strategic.
Initiatives.
I'm also pleased to report that we have continued to make improvements in our overall in stock position, which we believe positions us well to drive strong top line performance through the remainder of the year.
In addition, while we continue to see ongoing product cost inflation, we feel good about 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 with more than 18000 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 combination of value and convenience, especially in a more 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.
Now, let me recap some of the additional additional financial results for the first quarter.
Despite lapping a difficult quarterly sales comparisons from prior year net sales increased four 2% to $8 $8 billion and comp sales were essentially flat with a slight decrease of <unk>, 1%.
From a monthly cadence perspective comp sales were positive in February before turning negative in mid March as we began to lap the stimulus benefit from prior year.
As we moved past the most challenging portion of the sales lapped from 2021 comp sales turned positive in April and we are pleased with our strong start to Q2, which has exceeded our initial expectations.
As a result of our Q1 outperformance and strong start to Q2 as well as our expectations for the remainder of the year, we are increasing our sales outlook for fiscal 2022, which John will discuss in more detail shortly.
Our first quarter sales results included a decline in customer traffic, which was mostly offset by growth in average basket size driven largely by inflation.
Importantly, we are pleased with our market share gains in highly consumable product category sales for the quarter.
These results were highlighted by gains in our frozen and refrigerated product categories, where we have placed a good deal of emphasis over the past few years in an effort to provide customers with an even wider variety of options.
I'm also excited to note that we recently published our fourth annual serving other report which provides several important updates on our ongoing ESG efforts as well as new and updated performance metrics and targets.
We are proud of the team's efforts to serve our employees customers communities and the environment and we look forward to continued progress on our journey as we move ahead.
Overall, we are proud of our Q1 results our mission and culture remain unchanged and we believe our strategic actions, which have transformed this company in recent years positions us well for continued success, while supporting long term shareholder value creation.
We continue to operate in one of the most attractive sectors in retail and our unique value and convenience offering continues to resonate with both new and existing customers.
I have never felt better about the underlying business model and I'm excited about the opportunities ahead of us in 2022 and beyond.
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. 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.
Diluted earnings per share in all periods noted referred to the corresponding fiscal period.
As Todd already discussed sales I will start with gross profit as a reminder, we expanded our gross margin rate by 208 basis points in Q1, 2021 which was positively impacted by a significant increase in sales, including net sales growth of 16% and our combined non consumable categories.
Q1, 2022 gross profit as a percentage of sales was 31.3% a decrease of 151 basis points.
The decrease compared to Q1, 2020, one was primarily attributable to a greater proportion of sales coming from our consumables category a.
Higher LIFO provision increases in transportation costs, Mark Downs, as a percentage of sales and distribution costs and higher inventory damages.
Of note, while we have seen some moderation from Q4 or Q1 supply chain expenses were significantly higher compared to Q1, 2021 resulting in a headwind to gross margin of approximately $85 million. In addition product cost inflation was greater than expected, resulting in a LIFO provision of approximately $61 million during.
The quarter. These factors were partially offset by higher inventory markups.
SG&A as a percentage of sales was 22, 8% an increase of 78 basis points. This increase was driven by expenses that were greater as a percentage of sales. The most significant of which were retail labor store occupancy costs, depreciation and amortization and utilities.
These increases were partially offset by reductions in incentive compensation and winter storm related disaster expenses.
Moving down the income statement operating profit for the first quarter decreased 17, 9% to $746 million as a percentage of sales operating profit was eight 5% a decrease of 229 basis points, our effective tax rate for the quarter was 21, 8% and compares to 22% in the first quarter.
Last year.
Finally, EPS for the first quarter decreased 14, 5% to $2.41.
Turning now to our balance sheet and cash flow, which remains strong and provides us the financial flexibility to continue investing for the long term, while delivering significant returns to shareholders merchandise inventories were $6 $1 billion at the end of the first quarter, an increase of 19, 4% overall and 13, 3% on a per store basis.
This increase primarily reflects the impact of product cost inflation as well as a greater mix of higher value products. Importantly, we continue to believe the quality of our inventory is in good shape and we are well positioned with the right mix and balance of products going forward as Todd mentioned, we expect continued improvement in our overall in stock levels.
As we move through 2022, underscoring our optimism that we are well positioned to serve our customers the business generated cash flow from operations during the quarter totaling $450 million a decrease of 36%.
Total capital expenditures for the quarter were $282 million and included our planned investments in new stores, Remodels, and relocations distribution and transportation projects and spending related to the strategic initiatives during the quarter, we repurchased three 4 million shares of our common stock for $747 million and paid a quarterly cash.
Dividend of 55 cents per common share outstanding for a total payout of $125 million at the end of Q1, the remaining share repurchase authorization was $1 $4 billion.
Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high return growth opportunities, including new store expansion and our strategic initiatives. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly cash dividends all while maintaining.
<unk>, our current investment grade credit rating and managing to a leverage ratio of approximately three times adjusted debt to EBITDAR.
Moving to an update on our financial outlook for fiscal 2022 despite.
Despite the ongoing uncertainties arising from cost inflation and continued pressure in the supply chain. We are confident in the business as a result, and as Todd noted we are increasing our sales outlook for 2022 as we now expect the following net sales growth of approximately 10% to 10, 5%, including an estimated benefit of approximately.
Only two percentage points from the 53rd week and same store sales growth of approximately 3% to 3.5%.
Additionally, we are reiterating the remainder of our financial guidance for 2022, which includes EPS growth of approximately 12% to 14%, including an estimated benefit of approximately four percentage points from the 50 <unk> week share repurchases of approximately $2 $75 billion in capital spending in the range of $1 4 billion.
Dollars to $1 $5 billion, our updated outlook reflects our strong year to date topline performance and current sales expectations for the remainder of the year as well as updated margin and expense expectations. Let me now provide some additional context as it relates to our outlook in terms of the quarterly cadence we continue to anticipate both.
Comp sales and EPS growth to be stronger in the second half of the year than the first half. We also expect our share repurchases to be lower in Q2, and Q3 compared to the Q1 amount before increasing in Q4, partially as a result of the extra week in our fiscal year.
Turning now to gross margin for 2022, we expect to continue realizing benefits from our initiatives, including DG fresh and NCI throughout the year. In addition, we are optimistic that distribution and transportation efficiencies, including significant expansion of our private fleet can drive additional benefits despite anticipated continued.
Cost pressures in the near term.
Offsetting some of these benefits is an expected increase in sales mix pressure as our sales outperformance has been predominantly driven by growth in our consumables category, which generally has a lower gross profit rate than other product categories.
In addition, we expect ongoing supply chain pressures, including higher fuel cost increased product cost inflation and expected return to pre pandemic rates of seasonal markdowns and increased inventory damages all of which are expected to be headwinds in 2022 with regards to SG&A. We expect continued investment in our strategic.
<unk> as we further their rollouts.
However in aggregate, we continue to expect they will positively contribute to operating profit margin in 2022, 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 in savings through our safe to serve program, including fast track and we believe these safe.
Things in 2022 will offset a portion of expected wage inflation.
Finally, our updated outlook includes plans to build on our sales momentum with targeted investments to further enhance the customer experience, including incremental labor hours to drive an even greater improvement in overall in stock levels and customer service. In summary, we are proud of our team's resilience and commitment to execution, which resulted in our strong first quarter result.
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As always we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent strong financial performance, while strategically investing for the long term, we remain confident in our business model and our ongoing financial priorities to drive profitable same store sales growth healthy new store returns strong free cash.
Hello, and long term shareholder value with that I will turn the call over to Jeff.
Thanks, John Let me take the next few minutes to update you on our operating priorities and strategic initiatives.
Our first operating priority is driving profitable sales growth.
We are off to a great start to the year as we continue to make good progress across our portfolio of growth initiatives. Let me take you through some of the recent highlights.
Starting with our non consumables initiative or NCI, which was available in more than 13000 stores at the end of the first quarter.
We continue to be very pleased with the strong sales and margin performance. We are seeing across our NCI store base, including continued incremental 2.5% total comp sales increase on average and NCI stores in their first year post implementation, along with a meaningful improvement in gross margin rate.
We expect to realize ongoing sales and margin benefits from NCI in 2022 and are on track to complete the rollout across nearly the entire chain by the end of the year.
Moving to our pop shelf store concept, 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 merchandize and differentiated in store experience and exceptional value with the vast majority of our items priced at $5 or less.
During the quarter, we opened 11, new pop shelf locations, bringing the total number of stores to 66.
Additionally, at the end of Q1, we had a total of 25 store within a store concepts, which incorporates a smaller footprint pop shelf store into one of our larger format dollar general market stores as we continue to be pleased with the results.
We are on track to nearly triple the pop shelf store count this year as well as open up to 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 by year end.
We continue to anticipate year, one annualized sales volumes for pop shop locations to be between one seven and $2 million per store and expect the initial average gross margin rate for these stores to exceed 40%.
Overall, we are very pleased with the results from this unique and differentiated concept and we are excited about our goal of a burn of approximately 1000 pop shelf locations by end of 2025.
Turning now to DG fresh, which is a strategic multiphase 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 initial objective of DG fresh was to reduce product costs on our frozen and refrigerated items and we continue to be very pleased with the savings we are seeing.
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.
Looking ahead, we expect to realize additional benefits from DG fresh as we continue to optimize our network further leverage our scale delivered deliver even wider product selection and build on our multiyear track record of growth in cooler doors and associated sales.
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 produce offering to more than 10000 stores over time.
To that end, we offered produce at more than 2300 stores at the end of the first quarter with plans to expand this offering to a total of more than 3000 stores by the end of 2022.
Notably DG fresh has also extended the reach of our cooler expansion program in.
In fact during Q1, we added more than 17000 cooler doors across our store base and we are on track to install more than 65000 cooler doors in 2022.
Importantly, despite the meaningful improvements we've made to date as a result of DG fresh we believe we still have significant incremental opportunity to drive additional returns with this initiative in the years ahead.
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 1800 stores at the end of Q1, and we are on track to expand to a total of more than 4000 stores by the end of 2020 two.
Looking ahead. 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, particularly in Rural America.
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.
Yes.
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 the first quarter, we completed more than 800 real estate projects, including 239, New stores 532, Remodels and 32 relocations.
For 2022 our plans remain to execute 2900 80 real estate projects in total, including 1110, new stores 1750, Remodels and 120 store relocations.
As a reminder, we expect approximately 800 of our new stores in 2022 to be in our larger 8500 square foot store format as we respond to our customers' desire for even wider product selection.
With about 200 square feet of additional selling space compared to a traditional store. These larger formats allow for expanded high capacity cooler counts and extended queue line and a broader product assortment, including NCI or larger health and beauty offering and produce in many stores.
Importantly, we continue to be very pleased with the unit economics of this larger format while.
While the initial cost to open this larger stores about $300000, including fixed assets and working capital. We are seeing increased sales productivity and continue to generate returns in the range of 20% to 22%.
In addition to our planned dollar general and pop shelf growth in 2022.
And included in our total new store goal. We are also very excited about our plans to expand internationally with the goal of opening up to 10 stores in Mexico by the end of 2022.
Overall, our real estate pipeline remains robust with more U S brick and mortar stores in any retailer. 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 customers.
Our efforts remain centered around building engagement across our digital properties, including our mobile app.
We ended Q1 with more than 4 million monthly active users on the App and expect this number to grow as we look to further enhance our digital offerings.
Our partnership with door Dash continues to yield strong results 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 about 11000 stores at the end of Q1, and we continue to be pleased with the early results, including better than expected customer trial strong repurchase rates high levels of sales incrementally and a broadening of our customer base.
In addition, we are excited about the continued growth of our dollar General media network.
Which is becoming increasingly more relevant and connecting our participating brand partners with over 90% of our unique customer base.
After establishing the foundation over the last few years, we are poised to meaningfully grow this business in 2022 and beyond as we expand the program and further enhance the value proposition for customers and brand partners, while increasing the overall net financial benefit for the business.
Most recently, we launched a suite of financial offerings as we look to further leverage our unique footprint to provide our customers with additional services they want and need.
These services include a spend well branded bank account and debit card offering a buy now pay later pilot in select number of stores and a test of a rewards redemption program.
These offerings aimed to provide greater financial empowerment for customers, while driving incremental traffic and profitability within our stores.
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 zero based budgeting approach internally branded as saved to serve keeps the customer at the center of all we do while reinforcing our cost control mindset.
Our 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 Tyner and case pack 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 8000 stores at the end of Q1, and we continue to be pleased with our results, including strong customer adoption rates.
As a result of the success of self checkout and popularity with customers. We have recently launched a pilot of stores that are entirely self checkout.
While our associates will remain available to assist customers if needed in these stores. We believe this 100% self checkout option could further enhance the convenience proposition, while enabling our associates to dedicate even more time to serving customers.
We plan to ultimately test this lay out in about 200 stores throughout 2022.
Looking ahead, we are on track to expand our self checkout 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.
Moving forward. The next phase of fast track consist of increasing our utilization of emerging technology and data strategies, which includes putting new digital tools in the hands of our field leaders.
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 950 tractors at the end of Q1 as compared to over 700 tractors at the end of 2021.
As a reminder, we are focused on significantly expanding our private fleet in 2022, as we plan to more than double the number of tractors from 'twenty to 'twenty, one, which we expect will account for approximately 40% of our outbound transportation fleet by the end of the year.
As a result of this planned growth we believe our private fleet will become an increasingly significant competitive advantage as it gives us greater operational control within our own 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 continue to create new jobs and opportunities for personal and professional development and ultimately career advancement.
To that end, we recently began offering access to 100% employer paid college degree programs for all full time employees.
In addition, all dollar general employees and their immediate family members now have access to online on demand self paced learning platform that provides college level General education courses at no cost to them, which is intended to help initiate or further their education journey and development.
These programs are in addition to several other existing development programs, including our fully paid private fleet driver training program as well as the ability to earn undergraduate credits through the American Council on education upon completion of our store manager training program.
We continue to innovate on additional development opportunities for our teams to provide ongoing opportunities for career advancement and in turn meaningful wage growth.
Our internal promotion pipeline remains robust as evidenced by internal placement rates of more than 75% at or above the lead sales associate position.
Additionally, approximately 15% of our private fleet team began their careers with us in either a store or distribution center.
We continue to monitor our competitive position in the market closely and we are pleased with our turnover rates staffing levels and applicant flow further validating our belief that we are taking the right actions to attract and retain talent.
We believe the opportunity to start and develop a career with a growing and purpose driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent.
Overall, we continue to make great progress against our operating priorities and strategic initiatives and we are confident in our plans to drive long term sustainable growth, while creating meaningful value for our shareholders.
In closing I am proud of the team's strong performance and we're pleased with our great start to the year.
I want to thank our more than 164000 employees for their hard work as we all focus on fulfilling our mission of serving others every day and I am excited about our plans for 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. If you'd like to ask a question. Please press star one on your telephone keypad.
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Okay.
Our first question comes from Karen short with Barclays. Please proceed with your question.
Okay. Thanks very much.
Congratulations on a good quarter.
Yeah.
I wanted to just ask so obviously your format is very resilient in a weaker macro and should outperform it in general.
Weaker macro.
But I think investors have been very concerns regarding discretionary risk as it relates to the comp and also to gross margin.
So I was wondering if you could provide a little more color.
Sure.
In respect to your guidance on how you're thinking about comps with respect specifically to discretionary versus non and then general gross margin outlet.
As it relates to both categories because I'm I mean, my personal view is that you are obviously a lot more resilient than people realize.
Busters realize in terms of both those segments comps and gross margins.
Color on that would be helpful.
Sure I'll take that question, Karen with respect to sales and with both of these that's obviously factored in with respect to sales.
Feel very good about the raised guidance that we've provided there.
Now we have taken into account that the over performance was really driven by consumables. So that's been factored into the margin as well. So we continue to feel great about both sides of the business, but have reflected the fact that it is more driven by the consumables and the team has done a fantastic job of proactively adjusting the orders accordingly to minimize.
Mark down risk the other thing I'll note just to give a little more color on the shape of the year with regard to sales the way.
We see this is as we get past the a now passed the stimulus lap that had a significant impact on last year, both with sales, but also you know it's the most difficult mark that is the most difficult rather mixed lap of the year because they had a disproportionate effect on non consumables now that we're past that.
We see a market improvement in our sales are.
Throughout the year relatively even throughout the year and strongly positive and then obviously you don't have as much while we expect a continued mix towards consumables. The lap isn't as significant now that you're past Q1 and again, that's all been reflected.
Okay, and then just to clarify in terms of April .
<unk> off to a strong start.
Granularity.
Matt.
Yeah, Karen you know were happy with what how we ended Q1 and as I indicated in my opening remarks, you know pretty.
Pretty upbeat on what we have seen in the first few weeks of Q2 and you know I would tell you you know from a consumer perspective.
The consumer is behaving intentional inner purchases I have to say.
But in saying that she's still is shopping both sides of the fence, both consumables and non consumables and I think that really goes to the the value that we have.
In in both consumables and non consumables side of the business. We've done so much work around that discretionary side with NCI and all the other work that we've done that it's a compelling offering even when times are tough for the consumer.
She always wants a little bit of an indulgence and we offer that ability at a real low price. So yeah. We feel good about about the equation as we move forward as John indicated.
Great. Thank you appreciate it.
Our next question comes from Michael Lasser with UBS. Please proceed with your question.
Good morning, Thanks, a lot for taking my question, how much did tree down contribute or customers trading down those who may be facing incremental economic stress contribute Q1, Q. How much have you assumed that will contribute to the rest of the year and in that vein, how much did a like for like price increase.
You.
Contribute in the quarter and how much do you expect it to contribute to the rest of the year.
Yeah. Thanks for the question, Michael I'll take that and I'll tell you that the consumer overall has been fairly resilient through.
You know through this hyper inflation that we've seen not only in the products that she has to buy but the fuel she has to put in a car and other means so I would tell you that the consumers holding up well and it really goes toward what I've talked about all along and that is as long as she's gainfully employed that makes.
The biggest difference in how she shops and gives you that confidence to spend our the great thing at dollar general is that we offer that value that I, just mentioned earlier and we're already starting to see that our core customers start to shop more intentionally and we're starting to see.
That next tier of customers start to shop with us a little bit more as well a matter of fact.
You know when you look at the Covid customer I would call. It the one that we we attracted and now have retained since COVID-19.
It is still running at or slightly above where we thought we would be right now and that's a little higher end consumer. So that tells you that that trade down this and trade in as is alive and well and it's starting to probably pick up steam as we move.
Through Q2 and into the back part of the year as things continue to tighten up lastly, I'll mention is the gas prices what would normally also occur and we're starting to see as she starts to shop closer to home not only our core consumer but that next cohort up so that trade in that you mentioned because of the low submitted right.
The gas prices at $4 and $44.50 a gallon now on average.
Is keeping her closer to home so those shopping patterns are definitely changing and we're seeing it happening right before our eyes.
Thank you and at the risk of being a little bit of a down a down here and I apologize for that.
One of your big competitors, this morning announced theyre going to be making some investments to narrow the price gap.
Seek you'll need to take down your prices further and maintain that price gap to continue to enjoy the success that dollar general has achieved.
Yeah, you know Michael I would tell you you know we look at all competitors when we look at our price and.
Theres some a much bigger competitors out there than the one that you are referring to that we watch really closely the great thing is is that our prices are right in our historical ranges and we feel great about price you know, we've got plenty of ammunition to do whatever we need to do but I would tell you that we've never.
Felt better about our price position as we continue to move through Q2 and into the back half of the year.
We've taken the opportunity and I've mentioned this before over the many many months of through Covid to sharpen our prices, even more and I believe that that what we're seeing right now against all classes of trade would tell you that dollar general isn't great a great spot.
And it has all of the levers at our disposal to continue to keep that positioning we we don't see anything on the horizon that gives us any concern there at all.
Thank you very much and good luck.
Sure.
Our next question comes from Matthew Boss with J P. Morgan. Please proceed with your question.
Thanks, and congrats on another nice quarter.
Thank you.
So todd on value and convenience. It seems like this is really the key driver that you're citing is one of the main pieces to the continued momentum in the business I guess, how much do you attribute all of this to company specific topline drivers what initiatives do you think you're the most excited about that still have.
And then more so as we think about the back half of the year, how best to think about the in stock opportunity or other key drivers of the business on a year over year basis.
Yeah, Matt. Thanks for the question I would tell you that you know our initiatives continue to.
To.
Push forward.
And also drive that top line. So if you think of DG fresh that continues to be our our top driver, but one area that we you know have started to talk about recently and will continue to hear more and more about is our digital initiative and I would tell you that that digital initiative.
We will continue to help propel that top line as well, it's driving not only our current customer, but a different cohort of customer into dollar general.
And that is that cohort that is a little bit more digitally savvy are we have we have.
Spent some some nice capital over the many years building the the platform for this and really in earnest in the last six to eight months have really turned the dial up on moving that digital piece. So why others or are worried about fixing fundamentals, we're really moving the needle for.
Forward on a lot of those.
Big initiatives. So you think of DG fresh self distribution approach of produce coming up in our in our supply chain as well.
Think about digital.
And then of course, we're so excited still about NCI and pop shelf pop shelf is performing very well even in a climate that one would consider.
The non consumable discretionary side of the business may be challenged but pop shelf continues to do well that's what gives us a lot of confidence as we move forward into.
And to the upcoming months and years ahead. So we've got a tremendous amount of drivers.
A lot more than value and convenience, but but when they come into the store through all of these other means that we're driving traffic into the store they are definitely gravitating to value and convenience because everybody loves a deal.
Great and then John maybe on the gross margin how best to think about the build for the second quarter in the back half of the year relative to the first quarter and just with that if we think larger picture and maybe similar to my top line question. What inning would you say the company specific benefits that you've seen from DG fresh NCI, maybe the <unk>.
Pivot fleet, what inning are these and today as we think about margin benefits.
Sure Great questions, Matt I'll start with the first part of the question just around how we're looking at gross margin I'll start by saying, we're very pleased with what we've been able to do to hang on to that gross margin goodness, while we were down about a point and a half this quarter. We were lapping over two points of expansion last year and if you go back to pre pandemic levels were still.
A point above where we were I think it really speaks to.
The impact of the initiatives now you know certainly there are some near term pressures you know that we called out we talked about on the call the pressure from supply chain costs, which were at $885 million year over year headwind and that was down from Q4, which was $100 million you know the other thing that we talked about was the LIFO provision of 61 million.
That we booked based on the anticipated inflation for the full year and of course, we had the mix challenge, but again as I mentioned before.
More pronounced in Q1, as we lapped the significant impact of stimulus. So as we look forward you know I mentioned, we expect continued mix pressure on a year over year basis, not as much as we saw in Q1 as we get away from stimulus. We also expect continued pressure from supply chain field.
Costs as well as product cost and from <unk>.
Inflation, however, we expect it to improve as we move through the year the lapse ease, particularly in the second half of the year as we lap the very heavy inflation from last year and we anticipate some moderation we're seeing some moderation in the and the cost pressures due in part to the benefits of the initiatives and the cost reduction actions we've put in.
Place you know we mentioned the private fleet, we're going to double that in size. This year as we convert tractors and trailers in house that drives 20% savings and we've done other actions to lock in more third party capacity to manage our inventory very well adjust to the changing demand of the customers. So we feel we're very well.
And as we look ahead, we are not giving specific guidance on gross margin, but we expect EPS to improve sequentially as we go from quarter to quarter throughout the year for the reasons I mentioned and really see ourselves as you look at again the scaling impact of the initiatives. You mentioned, we're in early innings. There you know they vary but I would say.
In macro we're probably on average third fourth inning in most of these on average both in terms of the sales benefit as well as the gross margin benefit so as these scale and.
As we work the other levers we've talked about as we leverage our scale and as Todd mentioned is we're in a very good place in price, we see ourselves in a very nice position to over time, continuing enhancing our gross margins.
Great color congrats again.
Thank you.
Our next question is from Simeon Gutman with Morgan Stanley . Please proceed with your question.
Good morning, everyone, John I have a follow up to that question.
On overall margin or incremental margins I think you spoke to gross so this was embedded in the guidance even when you issued it in the fourth quarter that you have the step up in incremental margins sequentially throughout the year sales get better, but if you look at the incrementals against the sale of its still an above average rate for what this business has done historically.
I heard some of the commentary that you just said within the gross and why that gets better but it seems like the cost pressures that you know that we're present three months ago, maybe getting worse not better and then how do you reconcile that versus you know accelerating incremental throughout the year.
No I wouldn't say, we see cost pressures getting worse, you know we mentioned the cadence around the.
The inflation you know I would say the moderation is going to be more gradual than originally thought but we still are seeing moderation, we still expect moderation and that's why we see that sequential improvement in EPS and overall margins as we move through the year.
In terms of SG&A.
We don't see any increased cost pressure there in terms of wage inflation, we've talked about that we expect that.
Growth in wage inflation to be a.
Well less than prior year little more than pre pandemic levels, but still manageable and it's tracking where we expected. There. We also mentioned, making some targeted investments in <unk> and <unk>.
Specifically labor hours, it's really from a position of strength to continue driving the sales momentum to make sure. We're good for the customer in terms of in stock levels and customer experience, but not a material step up there. So we feel very good about the guidance, we provided MEO maintaining the full year EPS guidance.
Despite enhanced as everyone has called out inflationary pressures I think the team's done a great job mitigating those and improving the in stocks in the right categories to be ready to drive the top line and the bottom line.
And Todd mentioned that Theres, some tightening that's happening that maybe trade down is starting to pick up steam are you willing to share was that originally that was that built into your plan are you seeing it happen quicker than the way you plan was built.
Yeah.
Yeah, I would tell you that some of it was built in we knew that.
The consumer was going to get tighter in 2022, just because of the lack of stimulus compared to last year, but I would tell you that.
Cause of other other pressures more inflation coming through on her everyday needs as well as that fuel that I talked about.
Has quickened the pace a little bit. So you know, we we believe that she'll.
She'll fleet, even further to value as she moves into the back half of the year, especially as she gets so that holiday timeframe I believe that that youll see that so we're very prepared for that the last thing I'll also mention that.
That shows us that that she is starting to move that way a little quicker is one is she's coming more often than those basket.
Unit sizes are a little bit smaller that's the true sign and also the $1 price point that we are really pushing and getting behind has has really accelerated as well and we're seeing that so that would tell you that she is trying to make ends meet.
And we will be therefore, because that's what we do best.
Yeah. Thanks, guys. Good luck.
Sure.
Our next question is from John <unk> with Guggenheim Guggenheim Partners. Please proceed with your question.
Maybe start with the business is in a far better place than it was.
Alright, we did extremely well.
How does the recession playbook look differently than back then in terms of.
And how quickly do you do you play that what do you have to see to.
Want to lean into that playbook.
Yeah, John It's a good question and thanks for that.
I would tell you that we're in a much different spot.
Not only economically meeting the the consumer's in a little different spot here and I think the biggest pieces that her employment is still very healthy.
Across all cohorts of customer that we serve so I think that's one of the big differences here than OE, though nine now could that rollover, we're watching that.
Very well could which would then just quicken the pace of that flight to value, but we haven't seen that yet.
But because of the other inflationary pieces, we have seen so.
It really isn't a lean in in the play book as much as it is knowing what that customer is going to do from historical times, and then servicing that I mentioned and the reason we're leaning in that $1 price point is because we know how important that is during those times private brand, we've seen an acceleration in our <unk>.
But brand business as well in recent weeks, that's a true sign that you're starting to feel that pressure. So how do we respond well you'll see more end caps more off shelf displays both $1 and private brand as we move through Q2, and then to the back half of the year. So we're really good and nimble as you know.
And to be able to move very quickly so you'll see you'll see more and more of that I think the important thing here is we're so different as a company than we were in <unk> nine I would hate to be fixing fundamentals right now because the opportunity to gain share is going to be tremendous as as we've I believe move through this year.
And we're so far beyond that with all of the initiatives that we've put in place over the last six seven years. It's.
It's nice to see that we're going to be in a position to take an oversized amount of share. We believe as we move through the back half of the year.
And then maybe secondly, right on your health and beauty assortment, maybe it's too early to tell but when you look at those items in the basket.
We're buying them.
What are you seeing right in terms of the frequency of shop basket size.
You know co purchases.
That's typically a very loyal customer do you think that will drive more frequency.
The primary benefit Youll think youll see.
Hey, John This is Jeff and thank you for that question you know as we think about health you know, we've been saying that for quite some time the largest share donor we're seeing in our business certainly is from the drug channel and so that's one of the reasons as you've heard us say before while we're leaning in here and so certainly with 30 <unk>.
Percent more selling space and 400 additional items and we're real pleased to be in 1800 stores and be in 4000 by the end of the year and what we're seeing in the in the customer's response is is very good and we're excited about what we're seeing not only in her take rates, but also when you break down the basket. So.
When you think about dollar general is I think the best way to think about this is this way when you look at our mainstays like home cleaning and paper, where we have closer to a 10 share and when you think about this particular area when we're closer to afford it really paints the opportunity for us to continue to grow share in this particular area.
As we've said before we do classify this as consumable, but it has margins that are akin more to non consumable and when you step back and you think about the larger footprint that we talk about where 80% of our stores in 2022 will be in that larger 8500 square foot footprint. It gives us the full theater to put this in.
Place, so I think you'll see from us.
Why we're so excited but also I think you'd see the intentional nature of how we layer this into our strategic view of the business and how we look forward and around the corner. So I think you'll see more to come there were real excited about what we see.
Thank you very much.
Mhm.
Our next question is from <unk> <unk> with Oppenheimer. Please proceed with your question.
Good morning, Thanks for taking my question. So I have two quick questions on the inflation front. So first what are you seeing right now for our products product cost inflation perspective, and then second are you are there any challenges you're seeing right now are passing through some of the higher prices.
Our repurchase Todd real quickly obviously, we've seen what others have seen on that were a little different spot though.
In our product mix is much different than the broader retail spectrum. So I would tell you that we're seeing on average a lot less cost pressure than what you would find in retail in general that's number one.
The second pieces, we have the ability here to trade off items and to trade downsizes, which we've been very active over the last six eight months on when we saw inflation is starting to move in a little different direction. So we've got the ability to do that that's what we do best.
At our merch side and and so we've done a lot of that to also push off some of those costs to the consumer.
But as it relates to when we do have to to put cost out there I'm sorry, additional retail to cover some of that CPG cost we've been able to do that because we do it the dollar general way right and and we make sure that we can layer it in where the consumer still knows and sees the value of.
<unk> of what we offer.
And again as I mentioned in my earlier comment we haven't felt better about where we are we're right in historical levels of our of our pricing index as compared to all classes of trade. So.
I believe we've got the ability to pass on where we need to but more importantly to help defray some of that pass on to the consumer through our category management efforts, which again, we're probably one of the best in the industry.
Great and then maybe just one follow up question just on your discretionary categories. Just given many of the concerns out there did anything differ versus your versus your expectations during the quarter and I know weather did have an impact potentially on some of the categories, but just curious if you're if you've if you've seen any changes in consumer behavior within those discretionary categories.
Yeah as I mentioned also a little earlier than the consumers, becoming more and more intentional winter purchases we've seen that.
And what that means is is taking care of her family a little bit more on the consumable side of the business, where she needs to make sure. She buys and then on that discretionary side, obviously tiny tightening the belt a little bit. So yes. We we saw that we knew that was going to occur just because of the stimulus lab, but as.
I am also mentioned we saw it.
It probably accelerated a little faster than the than where we thought it would as well.
But the great thing is that the buying team has been all over this so what we're already doing is as we see the with the third and fourth quarter and be able to still yet adjust we're able to go in and adjust the products that we're selling on that discretionary side as well as making sure that the prices are right on that discretion.
Aerie side, especially as we get to the important.
Fourth quarter selling season, so we feel like we've seen where that consumer is probably going to land on a on a mixed basis discretionary versus <unk> versus non but but we also believe we've made the right tradeoffs and as John indicated feel real good about about our inventory levels there.
And and and not concerned at all at this point on any markdown risks that may be there.
Okay, great. Thank you.
Sure.
Our next question is from Kate Mcshane with Goldman Sachs. Please proceed with your question.
Okay.
For taking our questions or first question was just around the snap benefit just terrible snap composition.
Has changed at D. G. A over the last couple of quarters and what your projection is for the rest of the year.
Yeah. It continues to be elevated over pre pandemic levels.
<unk> food plan you know it was still a benefit there and while you have some states are pulling out of the.
The emergency waivers, it's been very gradual and so it's still mixing quite a bit higher than norm just not at the same peak level. It was in the middle of last year, but doing very well there continue to gain share with that customer and serve them very well.
Question is just about <unk>.
<unk> is.
Is there an expectation of when you think that can inflect positively.
Yeah, I would tell you that we actually closed out Q1 with a with a positive traffic number which was really good to see and as I indicated in my opening comments are like what we see on our start to Q2 and.
And I think you can.
You can actually take from that that our traffic numbers looking much better than it was so we feel as we get further and further away from that stimulus lap that John referred to.
We believe we've got the right products initiatives price points, especially in this environment to drive that traffic long term.
Thank you.
Absolutely.
Our final question comes from Cory <unk> with Jefferies. Please proceed with your question.
Hi, good morning, and thank you for taking my questions.
Firstly on international as it relates to Mexico can you provide an update as to where you are on progress for expansion into that region.
Thanks, Cory this is Jeff so.
So in Mexico.
Really pleased with what the team has been able to accomplish in a relatively short period of time I would tell you we have assembled a fantastic team of retailers and and folks are really excited about joining the opportunity. So first and foremost the team is is incredibly impressive.
With decades of experience. That's the first point. The second point is is that we continue to make great progress around learning how to serve this customer and as we've mentioned before we have a lot of analogs that gave us great confidence to even.
To expand internationally from a lot of the performance and customers, we serve along the border, which we've done historically incredibly well here at dollar general so as we learn more and more about that consumer we're really excited about what we are able to offer her and tailor it to her needs and also really rely a lot on what we have.
Been able to do so well here in the United States, So feel great about the assortment and the build that we're doing there feel real good about the supply chain progress and then also on the real estate in fact, we've been down there a couple of weeks ago and headed down there here shortly to to continue to look at the sites and <unk> been very pleased with.
What we're seeing in terms of our ability to be convenient and b that that community serving retailer that we are here in the U S and are excited about what we're going to be able to do in Mexico, and we still feel real good about our initial.
Expectation of up to 10 stores by the end of the year.
That's great and then just a follow up question for John as it relates to capital allocation. How are you thinking about the balance sheet and cash levels are balancing the dividend close to $3 billion in share repurchases and then one 5 billion in Capex.
Yeah, we're still thinking about it the same way in terms of the priorities. Our first priority remains investing in the business. When you can get these kind of returns on new stores and the kind of returns we're getting on our strategic initiative that positions us so well that that's where we're going to continue invest first then its paying a competitive dividend, which we increased <unk> 31.
1%.
The year over year on a quarterly basis, and then the business generates a tremendous amount of cash which allows us to buyback shares and as you mentioned, we're going to target $2 75 billion. This year, so really meaningfully investing in the business meaningfully returning cash to shareholders and these farms and in terms of Capex with these kind of returns.
You know, we're going to invest what.
What we need to but again I think with that amount, we're doing quite a bit with it it is up a little bit as a percent of sales from historical norms, but the biggest piece of that is.
Just steel inflation and so if you strip that out it's kind of back down to that historical level of little over 3% of IRA sale. So feel really good about the allocation is working very well for us and I think working very well for the investors.
Very helpful. Thank you very much and best of luck.
Thank you.
Well. Thank you for all the questions and thanks for your interest in dollar General I am proud of our team, which continues to execute at a high level for our customers every day.
I'm sure you can tell I'm more excited about this business than ever before.
We are a mature retailer in growth mode in our strategic focus has differentiated us in the discount retail landscape, particularly as we have transformed this company in the last few years as a result, I believe we are very well positioned to capitalize on the enormous growth opportunities, we see in front of us.
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.
Yeah.
Today's conference has ended please disconnect your lines at this time. Thank you.
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