Q2 2022 Dollar General Corp Earnings Call
Good morning, My name is Robert and I'll be your conference operator today at this time I would like to welcome everyone to dollar General second quarter 2022 earnings conference call. Today is Thursday August 25th 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 your host 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 , Jeff I'll win 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 investment expectations or beliefs about future matters and other statements.
But are not limited to 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 Form 10-K filed on March 18th 2022, and any later followed purion.
Arctic report and in the comments that are made on this call.
You should not unduly rely on forward looking statements 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 is my pleasure to turn the call over to Todd.
Thank you Donny and welcome to everyone joining our call.
We are pleased with our second quarter results and I want to thank our associates for delivering another quarter of strong performance and for their dedication to serving our customers communities and each other.
The quarter was highlighted by comp sales growth of four 6%.
Slight increase in customer traffic accelerated growth and market share of highly consumable product sales, including in both dollars and units and double digit growth in diluted EPS.
Our Q2 performance was led by stronger than expected sales in our consumable category.
This increase was partially offset by a decline in our combined non consumable categories, which we believe reflects the evolving consumer demand during a period of inflation and economic uncertainty.
During the quarter and from a position of strength, we made targeted investments in both the incremental labor hours and wages to further enhance the customer experience and build on our sales momentum. We believe these investments contributed to an improvement in our overall in stock position and our strong sales results.
And despite challenges from rising product cost inflation and ongoing supply chain pressures. Our teams remain focused on controlling what we can control while continuing to deliver value for our customers, which we believe is seen even more important in the current environment.
To that end, we remain committed to offering products at the one dollar or less price point and we're pleased with the strong performance of this program during Q2, especially in the latter part of the quarter.
Importantly, we continue to feel very good about our price position relative to competitors and other classes of trade.
And with more than 18500 stores located within five miles about 75% of the U S population, where you believe we are well positioned to navigate the current environment, while continuing to support our customers through our unique combination of value and convenience.
Looking ahead, we remain focused on advancing our operating priorities and strategic initiatives as we look to strengthen our competitive position, while further distancing and differentiating dollar general from the rest of the retail landscape.
Now, let me recap some of the additional additional financial results for the second quarter net sales increased 9% to $9 $4 billion compared to net sales of $8 $7 billion in Q2 of 2021 from a monthly cadence perspective comp sales were lowest but positive.
May with July being our strongest month of performance and I'm pleased with the momentum we see so far in Q3.
In fact, as a result of our first half outperformance and strong start to Q3 as well as our expectations for the remainder of the year, we are increasing our sales outlook for fiscal 'twenty, 'twenty, two which John will discuss in more detail shortly.
Our Q2 results included an increase in average basket size largely driven by inflation.
We would expect during a more challenging economic environment average units per basket, we're down well as I mentioned earlier customer traffic increased slightly.
As the quarter progressed, we saw additional signs of our core customer shopping more intentionally and closer to need as well as an increase in trade down activity.
For example, during Q2 customers appeared to be making tradeoffs of some of their food choices contributing to an increase in private brand penetration was in our consumables business.
We also saw growth in the number of higher income households shopping with us, which we believe reflects more consumers choosing dollar general as they seek value.
Collectively we view our Q2 results as further validation that our strategic actions, which are 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 given our strong competitive position further enhanced by a robust portfolio of short and long term initiatives I have never felt better about the underlying business model or our future growth potential.
With that said I'd like to take this opportunity to congratulate Jeff Owen who will officially take over as CEO in November no one understands and embodies our culture more than Jeff and his contributions to our strategic direction over the years have been instrumental to our success.
I've had the pleasure of working with Jeff for many years and I'm confident he is the best and most capable person to lead the next phase of growth here at dollar general.
And finally, while Jeff will speak more to this later I also want to congratulate John Garrett on his well deserved promotion to president and CFO .
With that I will now turn the call over to John Thank you Todd and good morning, everyone. First let me take a moment to thank Todd for his tremendous leadership and passion for our customers. Our culture in this company he's been a wonderful mentor and friend and we wish him all the very best as he prepares to begin this new chapter.
And let me also add my congratulations to Jeff, who I have known and worked closely with for several years. He is a highly respected leaders throughout the organization and we look forward to his leadership in the years ahead.
Given Todd has taken you through a few highlights of the quarter. Let me now 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.
For Q2 gross profit as a percentage of sales was 32, 3% an increase of 69 basis points. This increase was primarily attributable to higher inventory markups, partially offset by higher LIFO provision a greater proportion of sales coming from our consumables category as well as increases in markdowns trans.
<unk> costs distribution costs and damages of note product cost inflation was greater than anticipated, resulting in a LIFO provision of approximately $144 million during the quarter.
SG&A as a percentage of sales was 22, 6% an increase of 82 basis points. This increase was driven by expenses that were greater as a percentage of sales. The most significant of which were retail labor repairs and maintenance utilities and payroll taxes.
Moving down the income statement operating profit for the second quarter increased seven 5% to $913 million as a percentage of sales operating profit was nine 7% a decrease of 13 basis points, our effective tax rate for the quarter was 22, 1% and compares to 21, 4% in the second quarter last.
Year.
Finally, as Todd noted EPS for the second quarter increased 10, 8% to $2.98.
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 $9 billion at the end of the second quarter, an increase of 31, 4% overall and 25, 1% on a per store basis.
Similar to Q1. This increase primarily reflects the impact of product cost inflation as well as a greater mix of higher value products, particularly in the home and seasonal categories. As a result of the continued rollout of our non consumables initiative.
And importantly, we continue to believe the quality of our inventory is in good shape.
As Todd noted we're also pleased with the improvements we saw in our in stock levels during the quarter and expect continued improvement as we move through 2022, underscoring our optimism that we are well positioned to better serve our customers in the back half of the year.
Year to date through Q2, the business generated cash flows from operations totaling $948 million a decrease of 28% total capital expenditures for the first half were $659 million and included our planned investments in new stores, Remodels, and relocations distribution and transportation projects and spending relate.
To our strategic initiatives during.
During the quarter, we repurchased one 5 million shares of our common stock for $349 million and paid a quarterly dividend of 55 cents per common share outstanding for a total payout of $124 million.
At the end of Q2, the remaining share repurchase repurchase authorization was $1 billion.
We announced today that our board has increased this authorization by $2 billion.
Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high return growth opportunities, including new store expansion and our strategic initiatives.
We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment grade credit rating and managing to a leverage ratio of approximately three times adjusted debt to EBITDAR.
Moving to an update on our financial outlook for fiscal 2022, we continue to experience uncertainties with respect to product cost inflation and supply chain dynamics, the evolution of consumer spending throughout the year and most recently new store opening delays, which Jeff will discuss in more detail.
Despite these challenges we are confident in the business and as Todd mentioned, we are increasing our sales outlook for 2022 for the full year. We now expect the following net sales growth of approximately 11%, including an estimated benefit of approximately two percentage points from the 50, <unk> week and same store sales growth of approximately 4% to four and a half.
Percent.
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 and capital spending in the range of $1 $4 billion.
$1.5 billion, our EPS outlook also now assumes an effective tax rate in the range of 22% to 22, 5%.
Let me now provide some additional context as it relates to our outlook in terms of the quarterly cadence, we anticipate comp sales to be fairly consistent between Q3, and Q4, but EPS growth to be much higher in the fourth quarter, which include the anticipated benefit from the 50 <unk> week.
In addition, we expect share repurchases in Q3 to be slightly higher than the Q2 amount before increasing more substantially in Q4, partially as a result of the extra week in our fourth quarter.
Finally, as a result of an increase in interest rates and additional borrowings we expect interest expense will be higher in the second half of the 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 continued expansion of our private fleet will drive additional benefits despite anticipated and continued cost pressures in.
The near term.
Offsetting some of these benefits is an expected continuation of sales mix pressure as well as sales outperformance 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 with regards to SG&A. We expect continued investments in our strategic.
Initiatives as we further their rollouts. However in aggregate we continue to expect they will positively contribute to operating profit and 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 savings in 2022 will continue to offset a portion of expected wage inflation.
Finally, and consistent with Q2, our outlook includes continued investments to further enhance the customer experience, including incremental labor hours and wages to drive continued improvement in overall in stock levels and customer service in.
In summary, we are proud of our team's hard work and commitment to execution, which has resulted in our strong second quarter results as always we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent strong financial performance, while strategically investing for the long term, we remain confident in our business model.
And our ongoing financial priorities to drive profitable same store sales growth healthy new store returns strong free cash flow and long term shareholder value.
With that I will turn the call over to Jeff.
Thank you John let me take a moment to express my appreciation for all Todd has done for this company throughout his 14 year career. He has led us through a transformational period and has positioned us extremely well for the future.
On behalf of the entire dollar general team, we want to sincerely. Thank them for the impact. He has made on our business I am fortunate to have been able to learn from him and I look forward to his ongoing counsel.
And as Todd noted we were excited to announce that John has been promoted to president while continuing to serve as CFO . John has made many significant contributions to dollar general during his time, leading our finance and corporate strategy teams and I look forward to his continued leadership and partnership as he steps into this new rule.
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Finally, let me also say, how humbled and privileged I am by the opportunity to serve this great team as the next CEO of dollar general I couldn't be more excited about our future and all that we can accomplish together.
Now let me take the next few minutes to update you on our operating priorities and strategic initiatives as we continue to create opportunities for meaningful growth.
Our first operating priority is driving profitable sales growth.
We continue to make progress executing against our robust portfolio of initiatives.
Let me take you through some of the recent highlights.
Starting with our non consumables initiative or NCI, which was available in nearly 15000 stores at the end of the second quarter.
We continue to be very pleased with the strong sales and margin performance, we are seeing across our NCI store base.
This treasure hunt offering continues to resonate with value seeking customers as approximately 80% of the assortment is priced at $5 or less.
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 merchandise a differentiated in store experience and exceptional value with the vast majority of our items priced at $5 or less.
During the quarter, we opened 14, new pop shelf locations, bringing the total number of stores to 80 located within eight states.
Additionally, we opened seven new store within a store concepts during the second quarter. This brings the total number of dollar general market stores, which incorporates a smaller footprint pop shelf store to a total of 32 at the end of the quarter.
We plan to nearly triple the pop shelf store count this year and now expect to open a total of 15 store within store concepts, which would bring us to about 150, Standalone pop shelf locations and approximately 40 store within a store concepts by year end.
Over the long term, we anticipate year, one annualized sales volumes for these stores to be between one seven and $2 million per store and expect the average gross margin rate to exceed 40%.
Overall, we continue to be pleased with the results of 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 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.
And are now delivering to nearly 19000 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 frozen and refrigerated categories. We are also pleased with the performance on this front, including enhanced product offerings and stores and strong performance from our Perishables Department, which had our strongest rate of comp sales growth during the first half of the year.
Looking ahead, we expect to realize additional benefits from DG fresh as we continue to optimize our network further leverage our scale delivering even wider product selection and build on our multiyear track record of growth in cooler doors and associated sales.
And while produce was 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.
Notably at the end of Q2, we offered produce in more than 2700 stores with plans to expand this offering to a total of more than 3000 stores by the end of 2022.
Finally, as I previously mentioned DG fresh has also extended the reach of our cooler expansion program.
During Q2, we added over 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 opportunity to drive additional returns with this initiative in the years ahead.
Turning now to an update on our health initiative branded as D. G wellbeing.
The initial focus of this project is an expanded health offering which consists of approximately 30% more feet of selling space and up to 400 additional items as compared to our standard offering.
This offering was available in approximately 2700 stores at the end of Q2, and we are on track to expand to a total of more than 4000 stores by the end of 2022.
During the quarter, we announced the establishment of a new health care Advisory panel, which recently convened its first quarterly meeting.
The panel is composed of highly regarded health care industry subject matter experts, who will serve as thought partners to our team, including advising on how best to invest resources to better serve our customers and the health and wellness space.
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.
To that end, we recently announced plans to significantly increase our supply chain capacity by building three new distribution centers in North Little Rock, Arkansas, Aurora, Colorado, and Salem, Oregon.
Each facility will be approximately 1 million square feet and supported in part by our growing private fleet.
We expect to begin construction on the Arkansas, and Oregon facilities. This fall with both of which will be combo traditional and fresh distribution centers.
We've already begun construction on the Colorado facility, which will be a traditional dry goods distribution center.
We are excited about these new projects, which we expect will add more than 1000, new jobs supporting our ongoing store growth and drive additional efficiencies in our supply chain.
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 second quarter, we completed a total of 790 real estate projects, including 227, New stores 533, Remodels and 30 relocations.
For 2022, we are updating our real estate plans to reflect adjustments made primarily in response to ongoing delays related to permitting and the receipt of construction materials associated with the new store openings.
For 2022, we now plan to execute in the range of 2930 to 2980 real estate projects in total, including 1010 to 1060, new stores, approximately 1795, Remodels and about 125.
Store relocations.
We continue to expect approximately 80% of our new dollar general stores in 2022 to be in our larger 8500 square foot store format, which allows us for an even greater assortment as we look to serve our customers with products they want and need.
Importantly, we continue to be very pleased with the unit economics of this larger format highlighted by increased sales productivity and we continue to target returns in the range of 20% to 22%.
In addition to our planned dollar general and pop shelf growth in 2022, we are very excited about our plans to expand internationally and we continue to make good progress towards our goal of opening our first stores in Mexico by the end of 2022.
I am pleased to announce that these stores will be branded under the name me Super dollar general, which resonated well with customer focus groups and connotes the idea of a local general store focused on serving customers with products they want and need most.
In addition, the initial stores will be located in underserved communities in northern Mexico, as we look to initially leverage our brand awareness, while extending our value and convenience proposition to a customer base that is similar to our core customer in the United States.
Overall, our real estate pipeline remains robust and with more U S brick and mortar stores than 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 creating a digital front porch to our stores as we look to create deeper and more meaningful connections with our customers.
We ended Q2 with nearly $4 5 million monthly active users on the digital App and expect this number to grow as we look to further enhance our digital offerings.
Our partnership with door Dash continues to resonate with both new and existing customers as we look to extend the value offering a dollar general combined with the convenience of same day delivery in an hour or less.
This offering was available in more than 13300 stores at the end of Q2, and we continue to be very pleased with the results, including sales above our initial expectations for the first half of the year.
In addition, we are we are also excited about the continued growth of our D. G Media network.
We are seeing significant interest in participation from CPG companies and brands, who are seeking to connect with the more than 80 million unique customer profiles, especially our rural customers, who represent about 30% of the country and allude the reach of other retail media networks.
As a result, we're enabling advertisers to both digitally and physically build awareness and drive purchase consideration while positioning dollar general as the retailer of choice for customers seeking many of America's most trusted brands.
After establishing the foundation over the last few years, we are beginning to meaningfully grow this business 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 zero based budgeting approach internally branded as safe to serve keeps the customer at the center of all we do while reinforcing our cost control mindset.
Our fast track initiative is a great example of this approach what our current goals include increasing labor productivity in our stores and enhancing customer convenience.
The first phase of fast track consisted of both roll painter 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 and approximately 10000 stores at the end of Q2, and we continue to be pleased with our results, including strong customer adoption rates.
We are also excited about our pilot in select stores, which provides customers the option to utilize self checkout and all lanes, but also choose a staffed registered preferred.
We believe this full self checkout option could further enhance our convenience proposition, while enabling store teams to dedicate even more time serving customers.
We plan to ultimately test is lay out in about 200 stores by the end of this year.
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 retail and small box discount retail.
Moving forward. 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.
When combined with our data driven inventory management. We believe these efforts will drive greater efficiencies for our retail leaders and their teams.
Our efforts to reduce costs have also benefited from our growing private fleet, which consisted of more than 1100 tractors at the end of Q2.
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 2021, which we expect will account for approximately 40% of our outbound transportation fleet by the end of the year.
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 are very pleased with our D. G discover hiring event in Q2, which exceeded our goal for new hires while adding significant talent to our teams in the field distribution centers and private fleet.
With regards to development, 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.
Again their careers with us in either a store or distribution center.
We also continue to be pleased with our turnover rates staffing levels and Apple can flow further validating our belief that we are taking the right actions to attract and retain talent.
Ultimately, 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.
We also held our annual leadership meeting earlier this month in Nashville, providing an important collaboration and development experience for more than 1500 leaders of our company.
This event is a high point for me every year and I am always inspired by the incredible talent of our people and humbled by the way they live out their personal purpose, while fulfilling our mission to serve others.
In closing I am proud of the team's strong performance as we continue to make great progress against our operating priorities and strategic initiatives, while creating meaningful value for our shareholders.
I want to thank our approximately 173000 employees for their work every day to make a difference in the lives of our customers, especially at times like this when they need us the most.
I am excited about all that we will accomplish together in the second half of 2022 and beyond.
With that operator, we would now like to open the lines for questions.
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Our first question comes from real Passion Perique with Oppenheimer. Please proceed with your question.
Good morning, So first Todd Congrats on all the successor of ears, and Jeff and John Congrats on your well deserved promotions.
Thank you. Thank you.
I was hoping to first touch on your price position. So how do you feel about your pricing position today in light in light of some of the competitive actions that are that are taking place right now and are expected to hop in going forward.
Yes. This is Todd I'll take I'll take that one we feel great about our price position.
I just want to remind everybody you know well over a year ago.
We took a very aggressive price stance as you may recall me talking about over the last 18 months or so and it positions us so well in the pandemic and now exiting the pandemic timeframe and we feel great about where we are on prices against all classes of trade.
And of course against even our chief competitors, we're in really good shape.
And obviously.
As we continue to move forward with this environment. We will continue to look at how we how we service our customer. The Fabulous thing is we're in a great great position and our customers are really showing through our <unk>.
The increase in trips that we saw for the quarter that they rely on our everyday low price here at dollar general always first before anything else.
Great and then my one follow up question, maybe for John So there was pretty significant deleverage on that you know more than 4% comp. So anything unusual that happened in Q2 that doesn't repeat for the back half of the year and then just any more color in terms of how to think about SG&A for the back half. Thank you.
Well. Thanks for all you know as you look at SG&A nothing unusual there you know one thing we had talked about was from a position of strength and given the sales outperformance and momentum that we were going to be making targeted proactive investments to build on that momentum to help drive sales as well as in an enhanced customer experience. So really it was consistent with that.
The most notable one was adding some labor hours to help further improve our in stock levels as well as that customer service, we really like what we're seeing there also to a lesser extent.
Make targeted investments in wages and the physical box itself, but I would say more normal course proactive actions to drive the business. You know we also did see some inflation on utilities and did have some higher than normal R&M expenses associated with the weather, but I think when you look at just overall operating margin we feel really good about what we're doing.
We feel great about the gross margin expansion you know a lot of the investments we make in SG&A really drive that gross margin expansion, which was up 69 basis points for the quarter and importantly, a point and a half above where we were three years ago. So we really like to look at operating profit overall, because as we said before the geography and the leverage changes a little bit.
As we spend a little bit on SG&A to drive more on gross margin as you look at the implied guidance with the sales.
And the strong bottom line guide for the year that implies operating margin expansion over the back half. So we feel very well position that we're making the right tradeoffs and investments to drive that sales growth.
Great. Thank you.
Our next question is from Matthew Boss with J P. Morgan. Please proceed with your question.
Thanks, and congrats on another great quarter guys.
Thank you.
So first could you just speak to the topline acceleration that youre seeing despite the tougher backdrop for low income households that I think broadly we're seeing how best to think about the inflection back to positive traffic that you saw this quarter and what are you seeing from retention of new customers that you've recently acquired.
Yeah, Matt. Thanks for the question, Yes, I would tell you that.
As expected.
The customer is reacting just like we thought she would and that is she's shopping closer to need she's berry being very intentional and her shopping patterns as well as our her shopping while she is inside the four walls of a dollar general store it is a little bit.
More skewed to need based which we thought would would also occur but the great thing is what we're seeing that if if we do have the right product out there, which we do on the discretionary side you know she's shopping that as well as an example.
Our harvest and Halloween is off to a fabulous start well over what we expected so again.
You got to have the right items at the right value and Thats. What dollar general is all about as as you know, but with that what that more intentional shopping. We also see her buying more private brands. So our private brand sales have continued to increase.
Over quarter as well as year over year.
And so we're seeing that and then the all important $1 price point by the way the $1 price point was one of if not the fastest growing subcategory, we had here at dollar general and Q2.
And we're seeing that it is so much more important for her today than ever before to be able to feed her family toward the end of the month. So we're definitely leaning in Bolton private brand and the $1 price point.
Hey, remember I mentioned, a couple of quarters ago that we anticipated. This so we started to bring in more of this type product as well as our merchants under Emily Taylor and her group to really highlight that and off shelf displays and caps.
And that has been ongoing and will continue to press forward on that as we move to the back half of the year because again, we believe that $1 price point will be a very very important and then lastly, just like we thought again.
Again trips being up so she's coming more often but spending less on each trip and again, that's a reversal to what we saw during the pandemic. So she's really coming back to where we we suspected she would.
But the great thing about about dollar general is our prices Fabulous our price position as I mentioned earlier couldn't be better and and she's she's showing it.
Within those trips that that should bring into dollar general so more to come as we move through the back half of this year and into 'twenty, three but I would tell you I've never felt better about our positioning as we are here to help that customer through probably the toughest time she's seen in quite a while.
That's great and then maybe John on gross margin, how best to think about the components in the back half if we're thinking about mark on LIFO or mix and then just larger picture.
Holding the earnings guide today, despite the better sales outlook. So is this solely the targeted investments that you cited that's holding back incremental model flow through.
Sure I'll start with gross margin you know we didn't give specific guidance on gross margin, but to give you some color around the puts and the takes you know we do expect to continue to see mixed pressure over.
Over the course of the remainder of the year as sales outperformance exceeds on consumables exceeds non consumables as everybody is seeing and we also do expect to see ongoing supply supply chain pressures, including higher fuel costs as well as increased product cost inflation. So we expect that to continue but I would tell you on the.
Transportation side and supply chain in general you know we are seeing moderation there.
And we do get an easier lap in the back half as we lap pretty substantial and growing supply chain inflation last year, and we're doing a lot of good things to help mitigate that as Jeff mentioned in the prepared comments you know doubling the size of the private fleet really has a meaningful impact on that where we save about 20% on a per driver basis. There. The other thing we called out.
Was markdowns, but I would tell you with the markdowns, that's really a function of normalization, we were lapping unusually low clearance markdowns and promotional markdowns last year. If you look at where we're at now.
Well below pre pandemic levels, but that lapped will continue to be a bit of a pressure to us, but you know as we look at the back half of the year. In addition to the easing inflationary pressures, particularly on the supply chain.
Some other areas and the actions, we're taking we're continuing to see growing benefits from our strategic initiatives, which go after the top line and the bottom line other actions to help mitigate that and as you know I mentioned previously when you look at operating margin overall it suggest expansion in the in the back half given all the actions we're taking so.
And as we look ahead, you know I think we're very well positioned to continue to expand our gross margin over the long term Todd talked about being in a great spot on price position and again as a limited SKU operator, with our growth and size I think it really positions us well in this environment to serve that customer very well be sharper on price, but to continue to expand.
And our margins over the long term and in terms of the question around why not raise EPS guidance. You know I would say that first you know very pleased based on the strength of the first half of the year and the anticipated results in the back half to raise the sales guidance and pleased to reiterate the strong EPS guidance, while others have had to lower it.
The challenging environment.
We see the business fundamentals is very strong.
<unk> is very well to continue to be double digit EPS growers over the long term, which we were at 10, 8% this quarter, but there are some near term headwinds we mentioned the ongoing mixed pressure the over performance in sales has been on the consumables side, which has lower margins and while we do expect some moderation in inflation.
The near term it remains pressured with elevated elevated supply chain costs fuel costs and product cost inflation of course, the LIFO charge, which continues throughout the year is that spread over the year.
Also another piece, which you mentioned is the SG&A and SG&A investment, which I talked about I wouldn't say, that's the only driver the primary driver, but that is a driver to that but again, we like what we're seeing there in terms of the investment in labor hours to help drive a better customer experience to help drive sales and we are investing as I mentioned, a little bit in target.
Investments in wages in the box itself and then the other thing we called out was interest interest will be higher in the back half of the year, given higher interest rates and higher borrowings. So you know a number of near term tailwind, but we feel really good to be able to maintain that guidance continue to see ourselves as double digit EPS growers over the long term and there's a lot of you.
Our left but feel good about the guidance we provided.
Congrats again and best of luck.
Yes.
Our next question is from Simeon Gutman with Morgan Stanley . Please proceed with your question.
Hey, good morning, everyone probes.
Probing a bit on the sales guidance for the back half are.
Recognize that the one year comp is guided to accelerate if we look at the three year stacks. It looks like Q2 accelerated quite a bit and that the second half actually doesn't imply much of an acceleration.
Curious given the trade down and I guess, where the customer's going seems to benefit you right now any other any assumptions other than conservatism that you're thinking about in terms of sales for the second half.
Yeah as you look at sales in the second half I mean, when you do the squeeze on that that's quite quite healthy sales.
Not only a three year basis, but as you look at the one year basis to your point, we did see accelerating comps we saw accelerating comps throughout the quarter. So we feel really good about the momentum of the business going in we feel really good about the new customers and back basket size growth that we've been able to rate retained coming out of the pandemic and we are starting to see.
Signs of more customer trade down.
Contemplated in the guidance I wouldn't say, we have a significant impact from that built into the guidance, but based on what we're seeing that is contemplated in there.
We're seeing a bigger impact as big as ever impact from a real estate with the strong performance of Remodels and new units, which are exceeding their pro forma and the initiatives are delivering so we feel really good about where we're at the momentum of the business the fundamentals and I think the guidance reflects that as well as a little bit in there.
Contemplated around that trade down.
And maybe the follow up just hone in on the gross margin a bit Q2 was quite good and at a structurally higher level can you talk about the sustainability of this and if there was some maybe some some some puts and some takes but it feels like we're run rating at a higher level.
Yeah, you know not thinking about guidance into 'twenty, three but what are the drivers actually accelerating you mentioned some some relief on import costs are the drivers accelerating such that this is only going to build from here.
Yeah, again, I didn't want to get too specific around gross margin guidance, but again as you do the squeeze in the back half it implies healthy positive operating margin expansion in gross margin, we feel good about where we're at her here in terms of the sustainability over the long term to drive that the biggest driver. When you look again you go back to pre pandemic.
Levels, where we're up a point and a half in this quarter.
The initiatives is a huge piece of that and you know the ongoing benefit of DG fresh and NCI as we optimize and scale those that's the gift that keeps on giving.
The things around the DG media network, just while promotional activity.
It was a little bit higher versus pandemic, where there was none.
We remain very targeted in that and they're doing a great job.
Minimizing the clearance activity. So I think as you think the fundamental drivers of the initiatives as you think about the other levers we've talked about.
Efficiencies were driving and supply chain, including the private fleet and the other levers we've talked about and we do see spots, where the inflation is starting to moderate particularly around carrier rates.
Ocean freight we're seeing moderation there remains to be see be seen what happens to inflation overall with vendors.
Vendors, but we would expect over time that growth that pace of increases to start to moderate as well and again as you get in the back half of the year, we're lapping pretty substantial increasing supply chain inflationary laps and so as we see some moderation and get easing lapsed that that will help as well and that's all contemplated.
In the guide.
Great. Thanks, Good luck congratulations.
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, Todd, Jeff and John Congratulations on all your new endeavors.
First question is well.
Dollar general over many years has been driven by not only superior execution and formal strategy, but also some of the competitors in the small bulk value retail space being on a long journey to try and find their way.
And now there could be some changes in the competitive environment.
Family dollar make price investments.
It could be the perception that you are making investments in store hours store labor as another way to beef up in the event that you are now going to be a stronger competitor. So the net result of all this could mean that the profit rate the operating model.
It's small box retail had peaked and now two competitors that are going to be stronger and well positioned are fighting a little bit harder against each other why or why not is that the case.
I'll start it out.
Well I would tell you that obviously.
You're zeroing in on our chief competitor there. So I'll just say this that.
It's been not only a long journey for them I would say, it's yeah. It's been it's been even tougher than that we've heard over the last seven years.
That theyre getting traction and they're doing this and doing that.
We're still talking about that so I think we're still talking about it.
What we're here to do as you know us pretty well Michael is controlling what we can control and forging ahead on our initiatives. We have left are our chief competitor completely in the dust that would take years years to catch up.
And I would also tell you that.
That we feel very very strongly that.
That peak margins haven't yet been obtained and that we have a lot of room to go grow you've heard from John not only short term, but long term.
Our initiatives alone are driving a tremendous amount of that.
That growth and that confidence and I would tell you that Jeff and the team as we go forward have got a lot of initiatives in the hopper that we haven't even talked about yet that are that are percolating. So we're looking out as we promised everyone six years ago. When we started the strategic journey that we've been on that.
We would look out five to 10 years down the road and around the corner and I think you've seen from us that we've done that and I think you've seen the fruits of that as we continue to rollout these initiatives and to your point have you know.
Some of the best execution in the retail industry against initiatives lastly, coming being here for 14 years and thinking back to the the last time, we had a recession.
We had the.
The customer that was really strained.
The one thing that dollar general had is that we had already fixed a lot of the basic railroad by the time, we really hit stride in late nine and 10 I would hate to be trying to fix the railroad right now it would be like one of the toughest times to do it and so I would like to just point out that we're in such a great position.
That as we continue to move forward. We believe we will be able to capitalize on that trade down that were that were already seen and that trade down is coming from income levels that are upwards of $100000, which we really are encouraged and seen a younger consumer a little bit more affluent.
And again very digitally and tech savvy.
Got it Super helpful. My follow up question is on the outlook for these trade down.
Your comp in the quarter was obviously well above your algorithm you're guiding conservatively for the back half of the year.
So you have a lot of inventory.
Why wouldnt the above algorithm com continue well into next year.
Assuming that the macro environment stays where it is and if it gets a little word that dragged down benefit will be even greater.
Okay.
Yeah. So I would tell you that I will first start and just say that.
We feel that that trade down will.
Continuing to come in and benefit us.
As it relates to the inventory levels, you know, we we couldnt be happier with.
Where we sit today on inventory.
We did all the right things early on Michael is as you would imagine coming from a dollar general we were well ahead of any inventory issues that may pop up. Unlike some of our competitors out there we canceled orders as early as December .
We saw where the customer was headed.
We actually have canceled orders not only in into Q2, but into the back half of the year.
All of our guidance is contemplated on that so we feel very strong the quality of our inventory couldn't be better and and then as we move forward. We believe that will benefit us as we move into the back half of this year and into next year.
Thank you so much and good luck.
Our next question is from Kate Mcshane with Goldman Sachs. Please proceed with your question.
Hi, Thanks, good morning.
Wanted to go back on the trade down commentary if there are certain categories being sought out by the higher end consumer and.
And what categories are you seeing heavier trade down to with regards to private label.
Then just as a follow up with the higher end consumer coming into the store now how long do they traditionally stick around and how might you be trying to keep them as more permanent customers.
Yeah. Those are those are great questions I would tell you what we're seeing on that on that higher end consumer.
Is that she does shop more holistic part of the store.
And you May I made mention on the harvest and Halloween as an example, very discretionary but doing extremely well and some of that comes from that trade down right because that consumer it does have a little bit more money to spend and as you think about how sticky that that customer is well well dial the clock back.
Just a bit to the pandemic and now coming out of the pandemic.
We've retained a lot more of those customers and we thought we would so were very happy on that retention. So we know that they're sticky because again that consumer was that consumer making.
The majority of them, making that 50 to 75 range. So this one extends up to 100, but again the experience is very very similar to those for those consumers when they come in so we believe that that will be sticky as well. So when you think about.
Our market share in just discretionary items I also want to point out that that was positive as well.
For the for the quarter. So we're picking up share even in a very tough environment on the discretionary side and then lastly, your other question was around what type of items that we've seen as well even from our core customer trading down and trade down doesn't also always mean just trey.
Trading down from other retailers. It also is trading down when you get inside the box in our core customer has been buying more private brands that $1 price point very very important to her if you think about things that have accelerated greatly over the last quarter. If you think of basic proteins at our core customer need.
<unk>. So what we've seen is 15% to 20% increases over the last couple of quarters in canned meat seafood dry pasta soups rice and beans. So those core proteins as all those things that the consumer needs to feed her family, but can do it.
At a at a much reduced price. So we're seeing that trade down effect as well and we're in great position to take advantage of that both from our everyday low retail price stance as well as our supply chain is as much more healthier there than we were last year at this time.
Thank you.
Our next question is from John <unk> with Guggenheim Guggenheim Partners. Please proceed with your question.
Hey, guys congrats congratulations.
Todd I Wonder if you can you can talk to you you referenced the strategic journey, which is one of the most significant things I think you brought in.
Where are we on that in terms of the pipeline of things well first of all I think youre looking out two or three years.
And with that effort Where's the pipeline versus where it's been historically right is at Fuller.
And then where do you think.
Talk specifics, but when you think about you know kind of functional areas right merchandising marketing.
Where do you think there's the most fertile ground right two to use those strategic ideas.
To further the D G brand.
Let me start and I'm going to turn it over to Jeff as well, but I would tell you that.
John Yes, we feel great about those strategic initiatives and to your point not only a couple of years out, but five and 10 years out is the look and if you look at the majority of them are there for instance, NCI as an example, while we're close to the end of that.
That rollout journey. The next phase of that optimization phase is just starting I would tell you we're probably in the fifth inning and NCI. We're in the late fourth inning and in the fresh piece of the business with produce being a big unlock yet to come as an example.
And then we're just starting the journey, where we're just getting up to the plate.
To use the analogy in both Mexico and in our Health initiative and as I mentioned earlier, we've done others, we haven't even talked about ready to to to push into the pipeline and Jeff you may want to jump in and just briefly.
Tell you John Thank you for the question and.
I think where we've never been more excited about the future and to Todd's point earlier, it's not two to three years out I mean, one of the things you got to think about is our first of all our pipeline for growth.
17000, additional opportunities 13000 dollar general stores 3000, Pops shelf stores and 1000, <unk>. So first and foremost our pipeline is extremely robust and we're very pleased with this larger store format that we've been rolling out 80% of our stores. This year will be in that larger store format and we're seeing the sales per <unk>.
We're footage perform.
Perform extremely well so we're very pleased at how our new store performance as is beating our pro forma expectations and John you've followed us for quite some time, we have pretty high expectations for our new store growth program, but as you think to the future also you got to think about digital as well I mean, our digital.
Our strategy and our acceleration there.
Is serving us tremendously well I mean when you.
Think about over 80 million profiles that we're able to connect with our CPG firms and our brand partners and we believe we can expand that beyond traditional CPG and brand partners. Because we have a unique customer owns almost 30% of the United States population and Rural America, that's really hard to reach and with our.
Our customer profiles, we're able to really connect multiple partners with that unique dollar general customer that no one knows better than we do but as you think down the road in Mexico. We're excited to open stores and we said this before we wouldn't be go into Mexico. We didn't think it was a huge opportunity and then when you think about health health is one of these where we are.
We just.
Had our first meeting with our advisor panel it was incredible and Youre going to hear a lot more about health here in the near term and in the future.
Our Chief Medical Officer, Albert with his strategy and the way, we're going to be able to provide access for a customer that's being underserved right. Now. So when you think down down the road, it's extremely bright and I would tell you your comment about our teams where do we have fertile ground. We have the best team in retail and so when you look at every aspect of this.
General team, it's the unique and secret sauce of our success and our culture has never been stronger our teams.
Are energized to continue to move forward. So I think you can tell from my excitement Todd's excitement Johns that we see tremendous opportunity in the future and I can't wait to update you guys in the near future on where we're going.
Thank you.
Okay.
Our next question comes from Macquarie Carlo with Jefferies. Please proceed with your question.
Hi, good morning, Thanks for taking my questions and congrats to Todd on a successful career with dollar general and two Jeff and John for your new elevated roles.
Thank you.
So first there was an announcement inter quarter about the three D C openings out west or we can read into that that there, perhaps some more incremental store opportunity ahead lies in the regions, where those new Dcs are in fact being built out west in the U S.
Cory. Thank you for the question and thank you for the well wishes.
One of the things we do so well here at dollar general as we anticipate and look down the road and we like to think we look around the corner real well too. So that's exactly what this is our distribution strategy is in lockstep as I mentioned, just a minute ago, we have 17000 additional opportunities and that's across the entire.
U S and so we're very pleased at our ability to expand our distribution network because what it's going to do for us it's going to continue to allow us to serve our stores better make it more efficient and be able to pull cost out of the system and enable us to continue to grow and as you can tell we have significant.
Rose.
Prospects in the future and that's all this is being able to make sure that our distribution is in line with our store opening plans and those two teams work very very well together to plan accordingly.
Great and then just a follow up for John how are you thinking about your expectations for freight expenses throughout the back half of this year within the overall margin guidance that you've given.
Yeah, you know as we touched on earlier, we do see improving conditions, there youre seeing additional supply capacity come on line Youre seeing obviously demand drop as folks cut orders and so when you look at both Ocean freight and you look at domestic carrier rates, we're seeing those rates come down and again actions, we're taking like with the prime.
But fleet is helping mitigate that as well and we're coming up on a time, where youre lapping increasing supply chain costs. As you went from Q3 into Q4 last year. So I think net net we're doing a great job mitigating it and I think that will overtime switched to a tailwind as we see that moderate.
Great. Thank you very much and best of luck.
Thank you.
We have reached the end of the question and answer session I would now like to turn the call back over to Todd.
For closing comments.
Yes. Thank you for all the questions and thanks for your interest in dollar General and I do appreciate all the well wishes that you extended serving with this team has been the highlight of my professional career and its been a blessing and a privilege to serve our customers associates shareholders and communities over the past seven plus years as.
As CEO of dollar general.
Extremely proud of the progress we've made together and look forward to working with Jeff and the team in an advisory and consulting capacity going forward as well as continuing to serve on the board I believe we have the best team in retail our mission and culture are stronger than ever and we are extremely well positioned to capitalize on the.
<unk> growth opportunities, we see ahead.
Again, thank you for listening and I hope you 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 your lines at this time. Thank you.