Q2 2023 Dollar General Corp Earnings Call

Good morning, My name is Robert and I will be your conference operator today at this time I'd like to welcome everyone to the dollar General second quarter 2023 earnings Conference call.

Today is Thursday August 31st 2023, all lines have been placed on mute to prevent any background noise.

This call is being recorded instructions for listening to the replay of the call are available in the company's earnings press release issued this morning.

Now I'd like to turn the conference over to your host Mr. Kevin Walker, Vice President of Investor Relations. Kevin You May now begin your conference.

Thank you and good morning, everyone on the call with me today are Jeff <unk>, our CEO and Kelly our CFO .

Earnings release issued today can be found on our website at Investor dollar General Dot Com under news and events let.

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 expectations or beliefs about future matters and other statements that are not limited to historical fact.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include but are not limited to those identified in our earnings release issued this morning.

The risk factors in our 2023 Form 10-K filed on March 24, 2023, 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.

Our general disclaims any obligation to update or revise any information discussed in this call unless required by law at.

At the end of our prepared remarks, we will open the call up for your questions.

Please limit your questions to one and one related follow up question if necessary now it is my pleasure to turn the call over to Jeff.

Thank you, Kevin and welcome to everyone joining our call.

Before we discuss the quarter I want to address the tragic events of last Saturday.

On August 26th we lost one member of the D G family and to customers to a senseless and hate filled act of violence in our store in Jacksonville, Florida.

We extend our deepest sympathies to their families and friends as well as to the greater Jacksonville community.

It is in times of tragedy, when community matters more than ever.

Right now we are focused on providing support counseling and resources to our teams and their loved ones.

We are evaluating how we can best support the local community. During this difficult time, and we stand with our team in Jacksonville and across the organization, who are leading with empathy and courage.

We are appreciative of local law enforcement quick response in Jacksonville, and their continued support and protecting our associates customers and communities every day across this country.

Yeah.

Thank you and with that well now begin today's call.

We made significant progress in the second quarter advancing several important goals I'd like to give you an update on the actions we have taken to improve execution and better serve our customers.

While we are pleased with our progress we are not satisfied with our overall financial results. So.

So I also would like to walk you through how we plan to do even more in pursuit of these goals in the coming months and how we plan to get there more quickly.

We are continuing to improve execution in our distribution centers and stores, providing our customers with even lower prices and an improved shopping experience and working towards right sizing our inventory levels.

Within our supply chain, we are pleased to note that our service levels in stock levels and on time delivery rates from our distribution centers have all returned to the levels. We saw before our capacity challenges began last year.

This improvement has benefited our overall supply chain costs and has also been an important factor in positioning our stores to better serve our customers.

As a result of that progress and as we had previously announced we accelerated our investment in incremental retail labor during the second quarter.

While the investment in labor hours was initially allocated across the store base. We also strategically deployed <unk>.

<unk> hours to a set of focused stores based on the areas of greatest need and opportunity and also through high performing teams in each district that could assist in stores, where they were needed the most.

While early we are pleased with the impact of these labor investments, including the positive impact on overall customer satisfaction and store standards.

Yeah.

Finally, I also want to highlight the pricing actions, we completed in the second quarter as we made targeted price reductions on key items that matter most to our customers to provide them with even more affordable solutions.

We have been pleased with the customer response, both in terms of basket size and composition when the basket includes one of these items.

These actions have further solidified our strong pricing position relative to competitors in other classes of trade and we feel great about our strong value proposition.

With all that in mind I want to recap some of our Q2 top line results.

Net sales increased three 9% to nine $8 billion compared to net sales of $9 $4 billion in Q2 2022.

Importantly, our quarter was highlighted by growth in market share of both highly consumable and non consumable product sales as well as accelerating unit share growth all of which we believe is a testament to the improvements in actions I mentioned earlier.

With that said our core customers continue to tell us they feel financially constrained, which we believe contributed to a slight decrease of <unk>, 1% and same store sales in Q2.

While customer traffic was negative during the quarter it did improve sequentially each period.

The decrease in traffic was essentially offset by an increase in average ticket, which was primarily driven by the impact of inflation.

From a monthly cadence perspective same store sales growth was strongest and positive in may before declining in June and July .

We have seen this trend continue into August with negative comp sales through the FERC first half of the month.

This decline has been driven primarily by lower average ticket as we lap the more significant price increases from 2022.

While we are not satisfied with the comp sales. We are encouraged by the improvements we saw an overall market share gains and customer traffic during the second quarter, which further support our belief that our actions are resonating with customers.

However, we expect continued pressure in the sales line for the duration of this year, particularly in discretionary sales as our customer focus is more on buying for need.

With sales and shrink not where we want them to be we have evolved how we are thinking about the rest of 2023.

Our improved execution is driving increased customer satisfaction, and we want to accelerate this progress to serve our customers even better as we head into the holiday season, as well into 2024 and beyond.

As a result, we have made some important changes and have additional plans tomorrow.

We returned to the position of strength from which we are accustomed to operating <unk>.

Which are collectively focused on driving sales and lowering our cost to serve.

First we are strategically accelerating the right sizing of our inventory position by expanding promotional markdowns, primarily in our non consumable products.

While we expect this to result in an operating profit headwind of approximately $95 million in the back half of the year. We believe it will drive traffic and also more quickly reduce excess inventory.

We believe this right sizing supports our operating priority of enhancing our position as a low cost operator and that it will accelerate improvement in a number of areas, including store and supply chain efficiencies as well as shrink damages and cash flow.

Next we are increasing our planned investment in incremental retail labor from approximately $100 million this year to approximately $150 million.

We like the returns we have seen on this investment to date and believe that this additional investment will support acceleration of our progress and allow us to continue driving in store improvements through the back half of the year and to begin next year and an even stronger position.

Finally, with our strong and growing store base of nearly 20000 stope ports. We also plan to invest up to $25 million in other areas such as an improved inventory demand forecasting tool to better support our stores and distribution centers, while lowering our call.

Cost to serve.

Collectively we believe these investments and actions will further strengthen our position in more quickly restore the strong execution that allows us to deliver on our unique value and convenience proposition for our customers.

Importantly, all of these actions align with and support our DG forward strategy.

We are managing this business for the long term and our mission of serving others.

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Our vision for the future as clear as we seek to be a force for opportunity for our customers associates communities and shareholders.

And we will focus relentlessly on delivering the value and convenience our customers expect and returning to the position of operational excellence that we expect of ourselves.

We operate in one of the most attractive sectors in retail and this model is resilient and strong.

We have a multitude of strategic initiatives to drive future growth, which I'll discuss in more detail shortly.

Now I'd like to turn the call over to Kelly.

Thank you, Jeff and good morning, everyone I want to say again that all of that said dollar general are heartbroken over the Jacksonville tragedy, and our thoughts remain with all of that is impacted.

Now let me take you through some of the important financial details.

Unless we specifically note otherwise all comparisons are year over year, all references to EPS refer to diluted earnings per share and all years noted refer to the corresponding fiscal year <unk>.

Jeff already discussed sales, so I'll start with gross profit.

For Q2 gross profit as a percentage of sales was 31, 1% a decrease of 126 basis points does.

This decrease was primarily attributable to lower mark apps as well as increases in shrink markdowns and inventory damages and a greater proportion of sales coming from the consumables category.

These were partially offset by a decreased LIFO provision and decreased transportation cost SG&A as a percentage of sales was 24% an increase of 136 basis points.

This increase was driven by retail labor, including approximately $40 million of our targeted labor investment as well as utilities, depreciation and amortization and rent.

These were partially offset by a decrease in incentive compensation moving.

Moving down the income statement operating profit for the second quarter decreased 24, 2% to $692 million.

As a percentage of sales operating profit was seven 1% a decrease of 262 basis points intra.

Interest expense increased to 84 4 million in Q2 and that compares to 43 million in last year's second quarter, driven by higher average borrowings and higher interest rates.

Our effective tax rate quarter was 22, 9% and compares to 22, 1% in the second quarter last year.

Finally, EPS for the quarter decreased 28, 5% to $2.13.

Turning now to our balance sheet and cash flow.

Merchandise inventories were $7.5 billion at the end of the quarter, an increase of three 4% on a per store basis, which is notably lower than our increase of 14.7% on a per store basis in the first quarter.

Inventory growth is still elevated the pace has significantly moderated from its peak last year.

As we discussed last quarter, we have sharpened our focus on inventory as we adjusted to evolving customer demand, we made progress towards our goal of reducing inventory growth rates by the end of the year and with the strategic actions as Jeff mentioned, we will be able to accelerate our progress by expanding promotional markdowns.

Primarily on non consumable products in the back half of the year we.

We expect these additional markdowns and associated cost will result in an incremental headwind of approximately $95 million to operating profit in the back half of the year.

Although we continue to believe the quality of our inventory is in good shape. We also believe this is the right decision given the current environment to better support our customers stores distribution centers and growth plans.

Year to date through Q2, the business generated cash flows from operations of $727 million a decrease of 23%.

Total capital expenditures for the first half or $768 million and included the following first our planned investments in new stores, Remodels and relocations next distribution and transportation projects and finally spending related to our strategic.

Initiatives.

During the quarter, we paid a quarterly dividend of 59 cents per common share outstanding for a total payment of $129 million as planned and we did not repurchase shares this quarter.

Our capital allocation priorities have served us well for many years and continue to guide US today, our first priority is investing in our business, including our existing store base as well as high return organic growth opportunities such as new store expansion and our strategic initiatives.

We remain committed to returning cash to shareholders through our quarterly dividend payment and overtime and when appropriate share repurchases all while targeting a leverage ratio of approximately three times adjusted debt to EBITDAR in order to maintain our current investment grade rating.

Moving to an update on our financial outlook for fiscal 'twenty three.

We are updating our sales expectations for the year to reflect the softer sales trends, we have seen to date as well as what we now anticipate for the back half of the year in.

In addition, the shrink environment has continued to worsen we now expect approximately $100 million of additional shrink headwind since last quarter's call. While we expect this pressure to continue for the remainder of the year and recognize this is a challenge throughout retail we are actively working to reduce.

These levels through multiple targeted action.

These include reducing our inventory position refreshing and refining our processes, leveraging additional tools and technology and improving execution in our stores.

As a result of these changes to sales and shrink and the actions and investments Jeff outlined earlier, we are updating our earnings per share guidance.

We now expect the following for fiscal year 2023, net sales growth in the range of 1.3% to three 3% compared to our previous expectation of 3.5% to 5%.

This net sales growth range continues to include an anticipated negative impact of approximately two percentage points due to lapping last year's 50 <unk> week next we expect same store sales in the range of a decline of approximately negative 1% to growth of one person.

This compares to our previous expectation of approximately 1% to 2% growth.

Finally, we expect E. P S in the range of $7.10 to $8.30 or a decline of negative 34% to negative 22%. This compares to our previous expected range of an approximately 8% decline to flat year over year.

And it also includes our actions and investments of up to $170 million or almost 60 cents of EPS.

Additionally, our updated guidance includes the same negative impact as our previous guidance of lapping last year's 50, <unk> week and incurring higher interest expense. This year, both negatively impacted by four percentage points for a total of eight percentage points of headwind.

Our EPS continues to assume an effective tax rate of approximately 22, 5%.

Finally, we continue to expect our capital spending range of one six to $1 $7 billion and no share repurchase activity.

Let me now provide some additional context as it relates to our outlook. While we are closely monitoring the impact of student loan repayments on our customers our guidance does not contemplate any significant impact from the restart of these payments with regards to our updated actions and investments that Jeff outlined we expect.

The total increments until operating profit headwind of up to $170 million in the back half of the year due to the increased markdown activity additional retail labor and investments in other areas to better support our customers stores and distribution centers.

In terms of the back half for the year, we expect comp sales to be negative again in Q3, as we lap the significant price increases from 2022.

And while we expect traffic trends to improve we do not expect positive traffic until the fourth quarter.

In addition, our guidance assumes that the benefit of our actions and investments will grow as we move throughout the remainder of the year, which along with lapping the winter storm impacts from 'twenty. Two should result in a greater overall sales benefit to the fourth quarter.

As a result, we expect fourth quarter to be significantly better than the third quarter from both a comp sales and EPS perspective.

Turning to gross margin for 2023. In addition to the increased markdowns associated with our inventory reduction plan and additional pressure from shrink. We also anticipate pressure from sales mix and lower inventory markups and this year's back half compared to last year.

Partially offsetting these challenges we expect benefits from greater distribution center capacity and performance lower carrier rates expansion of our private tractor fleet and other distribution and transportation efficiencies. We also expect to continue realizing benefits from our initiatives including D.

<unk> fresh and D G media network.

Turning to SG&A, we expect continued investments in our strategic initiatives as we further their rollouts.

And we plan to make the remaining $80 million of the planned total incremental investment of approximately $150 million in our stores primarily through additional labor hours.

Overall, while our App updated actions and plans for investments will pressure our financial results in 2023, we believe they will have a material positive.

Positive impact as we drive stronger in store execution, and a better customer experience this positions us well to deliver growth in 2024 and beyond.

In summary, we are laser focused on maintaining our discipline in how we manage expenses and capital as a low cost operator with the goal of delivering consistent strong financial performance, while strategically investing for the long term and we are confident in our business model and our ongoing long term.

Our 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 back over to Jeff.

Thank you Kelly.

Last quarter, we introduced our DG forward strategy, which is how we will position dollar general to be a force for opportunity for our customers associates communities and shareholders.

Digi Board is in execution and innovation strategy, and we remain focused on driving execution through our operating priorities, including driving profitable sales growth.

Capturing growth opportunities, leveraging and reinforcing our position as a low cost operator and investing in our diverse teams through development empowerment and inclusion.

We will sharpen our strategic focus in four key ways.

First we are focused on winning in rural.

Today, approximately 80% of our stores serve rural communities with fewer than 20000 residents.

Our high return low risk real estate model continues to serve us well as a core strength of the business.

In the second quarter, we completed 849 real estate projects, including 215, new stores 614, Remodels and 20 relocations.

For 2023, our plan remains to execute 3110 real estate projects in total in the U S, including 990, new stores 2000, Remodels and 120 relocations.

We now expect over 80% of our new stores in 2023, and nearly all of our relocations will be in one of our larger store format, which continue to drive increased sales productivity per square foot as compared to our traditional store.

With regard to Remodels, approximately 80% will be in our D. G. G P format.

Which provides the opportunity for a significant increase in cooler count as well as the ability to add fresh produce as many stores.

One way we continue to serve these locations is through DG fresh.

Our current focus is increasing sales in frozen and refrigerated categories through enhanced product offerings and building on our multiyear track record of growth in cooler doors and associated sales.

During Q2, we added more than 19000 cooler doors across our store base and we plan to install a total of more than 65000 incremental cooler doors in 2023.

And while produce is not currently serviced by our internal supply chain. We continue to believe that DG fresh provides a potential path forward to expanding our produce offering to more than 10000 stores over time.

We know this offering is important to customers, especially in rural areas.

And at the end of Q2, we offered fresh produce and more than 4400 stores with plans to expand this offering to a total of more than 5000 stores by the end of 2023.

Importantly.

Despite the meaningful improvements, we've made and savings we've realized to date as a result of DG fresh we believe we still have an opportunity to drive significant additional returns with this initiative in the years ahead.

Our second focus area as we move <unk> forward is extending our reach.

We are striving to expand the DG universe by attracting and serving new customers through new formats.

While also reaching existing customers in unique and differentiated ways.

Starting with our digital initiative.

Where we are investing to further extend our digital front porch to build even deeper connections and extend our reach beyond our substantial physical brick and mortar footprint.

We are excited about the growth, we're seeing across our digital properties, including an increase of more than 20% in monthly active users. Since this time last year.

Further we are seeing tremendous success through our partnership with door Dash, which is now available in more than 15000 stores and continues to drive significant incremental transactions with customers.

Our DG media network is also extending our reach with customers with a more personalized experience, while delivering a higher return on AD spend for our partners and profitable growth for our business.

Overall, our digital strategy consists of building an 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.

Next we extended our reach beyond the borders for the first time earlier this year with the opening of our first <unk> Super dollar General store in Monterrey, Mexico, We continue to be very encouraged by the customer response and the early results which include sales results that are significantly.

Feeding our initial expectations.

Looking ahead, our updated goal is to have up to 10 stores, serving underserved communities in northern Mexico by the end of 2023, as we look to 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.

The third way, we are extending our reach is through our prop shell format.

Which is now nearly three years old.

This format provides a stress free guilt free shopping experience designed around non consumable shopping occasions.

During the quarter, we opened 26, new pop shelf locations, bringing the total number of stores to 190 at the end of Q2 located within 20 states.

We are continuing to refine the ideal layout and assortment for these stores and we have actively leveraged our learnings to develop our three point over <unk>, which will begin rolling out next month.

Looking ahead, we are taking a balanced approach to opening the right number of new pop shelf stores in the right locations in this macroeconomic environment and expects to operate a total of approximately 230 stores by the end of 2023.

Importantly, we still believe pop shelf adds approximately 3000 opportunities to our total addressable market over the long term and we remain excited about the growth opportunity.

Finally, we are extending our reach through our health initiative branded as D. G wellbeing.

Our customer research continues to show that not only our rural communities underserved with basic staple offerings, but they also have trouble accessing health care goods and services.

In response, we continue to focus on rolling out an expanded health care product assortment, which was available in nearly 6000 stores at the end of Q2.

And we now plan to expand to a total of more than 7000 stores by the end of 2023.

Looking ahead. Our plans include further expansion of our health offering and also of our partnership with a third party payment platform to allow customers to use health plans supplemental benefits to purchase various health and wellness related items in their local dollar general stores.

This helped benefit option is now available in approximately 13000 stores with the goal of being available chain wide by the end of the year as we continue to focus on increasing access to basic health care products and ultimately services over time, particularly in Rural America.

Yeah.

Our third area of strategic focus is to fuel our growth.

These efforts are comprised of strengthening and modernizing three critical components to improve execution.

Our supply chain, our operating model and our foundation.

We planned to fuel our best in class growth by investing in high return projects and resources to enable our teams to execute at the highest levels to serve our customers.

Within our supply chain, we have made significant progress, adding capacity and increasing the productivity and efficiency of operations within our distribution centers.

And with three additional facilities under construction in Colorado, Arkansas, and Oregon, we are on pace to add significant incremental capacity in 2024.

Furthermore, we recently went live in South Carolina with our first distribution center to feature large scale automation to replenish stores.

Once fully ramped this automation will be able to deliver half of the skus serve from this facility to over 1000 stores.

Ultimately this will allow the team to process thousands of additional skus.

While improving our storage per square foot inside the facility and lowering our cost to serve we.

We are excited about this opportunity to support our growth more effectively and efficiently and look forward to adding automated functionality to more facilities moving forward.

We also continue to expand our private tractor fleet, which consisted of more than 1800 tractors at the end of Q2 and accounted for nearly 50% of our outbound transportation needs.

As a reminder, we save approximately 20% of associated cost every time, we replace a third party tractor with one from our private fleet.

Looking ahead, we plan to have more than 2000 tractors in our private fleet by the end of 2023.

These efforts have been and will continue to be an important driver in lowering our overall transportation costs.

Within our stores, we are intensely focused on reducing complexity to create a better in store experience for customers and associates.

We have simplified operations by optimizing our role painter delivery and rolling out self checkout option, which was available in nearly 14000 stores at the end of Q2.

Finally over the past year, we have been working to implement a full and and transformation of our retail operating model. Its first major overhaul in nearly 20 years.

We recently launched a pilot of this model and while it's still very early we believe this will significantly enhance the in store experience for our teams. While also further enhancing our position as a low cost operator.

We will have more to share on this in the coming months, but we are excited about this opportunity as we leverage enhanced technology and innovation to further support and fuel our growth in the years ahead.

The fourth area of focus with DG forward.

Is that it's all powered by our people.

The strength of our people was on display recently as we hosted more than 500 leaders of our company in Nashville for our annual leadership meeting.

This is my favorite week of the year and I was once again inspired and humbled by the commitment of our people to move DG forward, while fulfilling our mission of serving others every day.

So people are dollar general are our greatest strategic advantage and to further enhance our position we are investing in our people and creating opportunities for growth and development and amplifying our culture, where our people can enjoy a meaningful career, where the work they do every day.

A difference.

Our commitment to growth and development is as strong as ever.

And with our robust footprint ongoing growth and strong sense of purpose. We believe there's no better place to start and develop a career then with dollar general.

Our internal promotion pipeline remains robust as evidenced by internal placement rates of more than 70% at or above the lead sales associate position.

Additionally, more than 10% of our growing private fleet team began their careers with us in either a store or a distribution center.

We continue to have great success hiring the talent, we need and we are pleased with our staffing levels and Apple can flow.

We also note that our customer experience at dollar general will never exceed the experience of our associates and we are committed to continuing to elevate the experience for our people as they power our DG forward strategy.

In closing I want to thank our more than 185000 employees for their commitment and hard work to serve our customers and the communities we call home.

General and a central part of small towns across America that form the backbone of our country and we are focused on serving our customers with value and convenience. They deserve every day.

We are taking the actions and making the investments we believe are necessary to accelerate our progress and return even more quickly to executing with the operational excellence that has long been a hallmark of this company.

The opportunities ahead of us are significant and we are excited about the steps, we're taking to drive sustainable long term growth and shareholder value.

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.

As a reminder, we ask you to please limit to one question and one related follow up if necessary.

A confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Our first question comes from Michael Lasser with UBS. Please proceed with your question.

Good morning. Thank you so much for taking my question. So you've taken your labor investment for this year from $100 million to $115 million. The perception is that that is not enough and it will take more than that too.

<unk>.

Resume the type of performance that the market has been accustomed to from dollar general.

What evidence would you provide to refute the skepticism that this $150 million.

Is not the right amount and it's going to be much more than that in as you think about these investments how is this going to impact the long term operating margin for dollar general given that its own piece this year to be much lower than it has been previously and then I have one quick follow up.

Thank you Michael this is Jeff.

On the labor front I'll start with that.

We feel really good about the labor investments that we've made I think you've got to keep in mind.

<unk> General we've invested in wages and have a strong foundation for quite some time.

And really at store level whats important is stability in the supply chain and when you have stability in the supply chain that leads to stability inside the store and so now that we're seeing our supply chain, which quite frankly, we've had some significant challenges over the last couple of years.

Stabilizing we're seeing that show up in more stability inside the store and then you combine that with the labor investment that we've made plus in the second quarter. One of the things we deployed which is new for dollar general is a smart team and every single district in our company and what a smart team is is dedicated team.

That are the disposal of a district manager deploy where they need to be deployed most and we've been very pleased with what we've seen there.

With that new tool in our toolbox.

The stores that these teams have been able to touch we've seen the sales accelerate and continue and they haven't plateaued, we feel real good about that we see our store standards, improving and we believe now by making the smart team, which is now going to be permanent with this new investment when you combine that with the other investments we.

Just announced which is reducing inventory certainly through the markdowns, we discussed and also investing in technology to further pull more inventory out of the system. When we have optimized inventory a stable supply chain that equals stability inside the store and so what we're beginning to see also is our store manager turn.

Over has benefited from these investments as well so we're starting to see the theme of stability I guess is what I'm trying to share with you. So that's showing up inside the store, which gives us great confidence that the announcement today of the investments, we're making while we've seen some progress and we're not pleased with the results. We've achieved we believe.

These are the right amount to get us to excellence that we're accustomed to achieving much faster as we back as we go through the back half of 2023 and more importantly in 2024, and that's absolutely right, Jeff and just to give you a little bit more color on the labor and what gets us comfortable there we did pull forward is significant.

Mount of our investment into Q2, so that we could do what we always do here at dollar general, which is test and learn and so as we went through that process, we really liked to Jeff's point, the smart teams and what that was paying off but on the labor hours piece. We did a lot of work around just various store attribute in understanding what the optimal level was of the <unk>.

Inventory or of the.

As labor hours associated with the stores and so we feel like we did get to that optimal level of investment on the on the inventory side I would say you know we've made some really good progress on the inventory piece already and so if you look at Q2 versus Q1 were down eight 5% on a year over.

Your basis much better than we were in Q1, but what I really want to highlight is our non consumable inventory was actually a decline of 4% on a year over year basis. So a lot of good work done there and we actually saw a 40% reduction in the inventory receipts for the second quarter as well and so you know that's a lot of good work.

From our merchandising group I'm, just buying around what the inventory, we already had in and getting that out to the store and certainly feel good about the quality of that inventory, but we are excited to be able to.

Accelerated action as we move through that inventory, specifically non consumable inventory as we go through the year and as Jeff noted them for many reasons driving sales is a is probably the top of the list and then inventory reductions is certainly next on that so we feel really good about the the level of both of those investments.

Mike My follow up question is historically dollar general is targeted in the algorithm of mid single digit unit expansion in 2% to 4% comp growth.

Stable to growing margins, and then buying back 4% to 5% in the stock to get to double digit EPS growth.

If you take all of the different pieces of that algorithm, especially store growth.

Is it realistic that dollar general can get back to that algorithm by 2024 based on what you know now.

Yeah, I'd say as usual, we won't give 24 guidance, but what I can say is everything that we're doing is focused on the long term and delivering results and are delivering what we need to deliver for our customers. So we feel good about the investments that we're making the ability for those to set us up for 24 and beyond I'd say you know.

This model has gotten and you pointed it out just an incredible history of delivering results and so we feel good about getting back to driving profitable sales and we're going to strengthen our foundation and continue to focus on being a low cost operator, I think that the actions. We're taking are really only going to strengthen that that great business model.

You know as well so you know we've got a lot of existing initiatives as well as some of these new initiatives that will support that so we've got significant number of new stores that we still have opportunities into open in the U S and we're still seeing the same fantastic returns of 20% IRR and cash paybacks of less than two years.

We do think we can drive it 2% to 4% comp with our real estate investments and and the impact of the actions and the initiatives.

And then just when we think about the gross margin rate and even in the second quarter with all the pressures that we felt specifically around shrink we were still 30 basis points ahead of where we were in in 2019 and I think that's a testament to all the work we've done and we've still got D. G Media network, that's going to keep contributing private fleet that that.

I've talked about we've got some private brand opportunities as well, we've got supply chain efficiencies and as we lower that inventory, that's only going to benefit us even more and and we're still in the middle innings of fresh and we've got the health initiative assortment, that's still delivering well for US and then you should see us resume back to to lower.

Shrink over time, and then I'd say just on the SG&A side of things you know, we're going to continue to lower our cost to serve we're ramping up that save to serve initiative and we expect to see those benefits next year and then we are we talk just a little bit about taking that end to end view of our operating model and that's really around driving efficiencies and lower cost.

But even more importantly simplicity in our store operations and so we're excited about all of that I'd say in the near term. We do have some pressures. So we've got some pressure from interest expense and from share repurchases, but what we absolutely believe is that we will get back to historic levels of operating profit growth and that our law.

Long term view of this business is excellent.

Thank you.

Our next question is from Chuck Grom with Gordon Haskett. Please proceed with your question.

Thanks, a lot good morning, just to build up your last comment.

New store productivity that came in a little bit below 80%, which outside of the pandemic really the lowest than maybe 10 years. So bigger picture how are you thinking about store growth.

Given some of these issues over the past few quarters on one hand slowing growth would lie to fix things currently but on the other hand or what obviously impair the pompe I'll go to a degree so just any thoughts on store growth over the next few years.

Yeah. Thanks, Chuck this is Jeff.

Our real estate model continues to be the core strength of this business and I am very very.

Pleased with the new store returns, we're seeing also the pipeline that we have in our format innovation really is what's allowed us to really cater to communities. This larger store, we liked the productivity, we're seeing and I'm going to tell you the operational excellence that we're going to return to <unk>.

Especially with the investments, we just announced is only going to benefit not only the core but it will benefit our new store opportunities as well so feel great about the long term prospects of our real estate model and feel even better that these investments were talking about when you think about the value proposition, which we feel great about our <unk>.

Door today since the pricing investments. We've made you think about the stability in the supply chain, we still have a ways to go but I'm very pleased with what we're seeing optimizing our inventory levels and then that will all lead to consistent and excellent execution at store level and you combine all those four things together and that's how we achieve the.

Operating profit, which will certainly allow us to continue to lean into our real estate model as we go forward.

Okay, great. Thanks, Jeff.

Then for Kelly just looking at the change on the guide can you help us think about the shape of the back half and a little bit more detail a little bit more context between the third and the fourth quarter. I guess would you would you expect the third quarter comps to be outside of the band that you provided the down one to up one and any help on how much compression we should expect to see in both grew.

Margin line net operating margin line in the third and fourth quarter. So it will become true up our models. Thanks.

Yes, no absolutely happy to help so I would say first obviously the actions that we're taking to drive sales and lower our costs will set us up for 24 and you know our revised guide is really a function of the slower transactions that we're seeing and and higher are expected to shrink we did give a pretty wide range of the negative one 1%.

Sales range is really a function of how quickly our customer response to our actions and really how they respond honestly to their their own financial situation in the back half of the year. When you think about that EPS range. It's it's it's a flow through of the sales obviously, the higher shrink and the investments and we also have a little more pressure.

[noise] around damages and then around the markdowns associated with the <unk> with the lower sales. So it's probably going to take a couple of quarters just to to get make sure that we're taking out of the rate actions and we get back to that operational excellence, if I break down the quarters to your point, starting with the third quarter, we should see comp sales lower than our range.

What we're seeing now is is with Q2 comp decelerated sequentially by period, but we did see traffic trends improve and what were getting pressure from them and we talked about this a little bit and in the prepared remarks is that we're starting to lap the more significant price increases and in the back half of last year. This is going to pressure.

<unk> Q3 more than any other quarter in particular and so to your point, we do expect comp sales to be negative in Q3, and and we're running as expected to date I'm just on the margin pieces of Q3, that's also going to be more pressure than what we are seeing in Q4 with our inventory actions as well as.

Shrink and so right now we're expecting Q3 gross margin to be below 30% in and obviously that would put pressure on on Q3 EPS on the Q4 side, we believe that that we're gonna start to see the benefit of our actions and our investments a little bit more in Q4, we've also got a tailwind around lapping when.

Our storm Elliot So we will see stronger Q4 comps than we would think for Q3 as well as S. E. T. S. And then just touching on the timing of the investments, especially the inventory actions that we're taking we're going to give ourselves a little bit of wiggle room and make sure that we can react to the customer response and we made.

Choose to pull some of those investments forward into Q3, if it makes sense.

That's very helpful. Thank you.

Thank you.

Our next question is from Matthew Boss with J P. Morgan. Please proceed with your question.

Great. Thanks, So Jeff maybe to break down the macro versus micro I guess first how would you assess the low end backdrop today, notably tying in July and August relative to three months ago or any change in purchase intentions noted from the customer survey work that are then I know you guys do and then on the micra.

Well any change in the competitive landscape as you assess relative comp performance or market share by category.

Thanks, Matt on the customer.

She's still is challenged and we talked about that in the first quarter and that continues.

Our customer what she's telling us is that certainly as gas prices are less than last year, but they are accelerating throughout 2023, and she is still feeling the headwinds of the snap reduction and also the lack of tax refunds and her savings are gone and so certainly she is still.

Living with the inflationary pressures so certainly the customers are challenged but quite frankly, our customers.

<unk> is frequently challenged and we know that.

And we've made actions and I am very pleased with the actions we took to help her and her time of need which is exactly why we did it in the first quarter. So feel good about.

Our ability to offer value to her.

And also be there for her and you know when you think about the.

Houston opportunity, we have in front of us where we've seen initial signs of our progress, but also with the actions that we just announced to accelerate that progress that's only going to allow us to further serve this customer and she's going to lean on dollar general even more like she typically does in times of chat.

Alonge like this and we.

Are going to be even better positioned to serve her.

Certainly as we improve our in stock levels, our store standards and certainly as I said earlier love what we're seeing with these smart teams. We've just deployed so as we think about the competitive landscape.

Dollar General is has has been able to compete quite well for for quite some time and this team knows exactly where we need to course, correct. We know how to course, correct and we've announced today. The actions that are going to course, correct. So we feel great about our ability to return to the excellence that we're accustomed to achieving even fab.

After than we were before and we don't take it lightly that our sales performance right now is not where we want it to be but we're pleased with the actions that we're going to see show up and the early signs that we're seeing already so looking forward to.

The back half of this year and then certainly into 2024.

Great and then Kelly with EBIT margin this year forecasted roughly 200 basis points below pre pandemic, how do the back half investments structurally impact the margin profile for next year or just your margin recapture ability next year and then secondly, with the balance sheet leverage remains.

Above your targeted three times, how does that impact the historical double digit bottom line algorithm.

Yeah, So I'll start with the structural piece berson and break it down a little bit between gross margin and SG&A and so we really think that the current headwinds are more transitory specifically when we talk about shrink and damages in Mark Downs, We think we're well positioned on supply chain efficiencies with structural improvements on the horizon as we talked about.

A little bit with with the automation piece of that and certainly that the private fleet continuation M. D. G Media network should provide significant gross margin opportunity as well and and again, you know DG fresh and NCI as we move forward and maybe mix into more non consumables over the next couple of years. We also continue.

To see some opportunities and in private brands on the SG&A side I'd say you know the labor investment is embedded now in our baseline, but as we go forward. We are really looking at in the end to end operating model to make sure that we're driving efficiencies and in the store and and lowering our cost to serve and as Jeff said.

We are also looking at inventory management as well to to lower our cost of service over the next couple of years I think that that'll help us takes some cost out of the system and then we're ramping up our safety serve initiative and expect to see benefits of that next year. So you know we feel like.

Again, not specifically speaking to 'twenty, four but to the future that we'll be able to get back to that operating profit growth, but we do we will have some near term headwinds just on the financial strategy side of things around share repurchases.

In the near term.

On the remind me again on the balance sheet question.

Just with the balance sheet leverage above your targeted three times, maybe what's the timeline to get back there and how best to think about priorities for cash flow.

Yeah, absolutely. So I'd say you know just going through priorities, we still believe in the capital allocation priorities that we've laid out making sure that we're investing in the business in high growth opportunities and as obviously are our first priority I'm next would be a dividend payments and then of course Ah any any share repurchases with the remainder.

Our cash available for that you're you're right on on the the leverage ratio right. Now we are above our targets. The good news here is that this model has a strong history of generating significant cash flow and we continue to believe that that strength will continue over time, we think this leverage ratio.

Be with us for a little while but we are working to get back to our targeted leverage ratio in the near future.

Great Best of luck.

Thank you so much.

Our next question comes from Simeon Gutman with Morgan Stanley . Please proceed with your question.

Hey, good morning, everyone, Hey, Jeff Kelly.

Wanted to first ask around the comps.

Where they're performing.

If you could put it all together and summarize to what you attribute some of the underperformance to it does sound like traffic is underlying Lee, okay, and it just lapping some some ticket.

You know how you diagnose.

Ranked the pricing of its merchandising anything related to the stores. So how do how should we think about that.

Yeah Simeon this is Jeff.

What I would say is is that when you look at our comps our opportunities are in driving our in stock levels inside the store.

And that is certainly going to help and we're seeing improvements there, but as we've deployed more labor in the stores and as our supply chain gets more stable.

We're gonna be able to get much more consistent than the source and so I feel really good about the plan on driving continued performance and I can't underestimate again, the labor investment we've made the signs that we're seeing in and more importantly that dedicated team that helps a store that might fall off track get back on track quicker because that's one of the the.

The really exciting things about this model is that we're able to get stores back fast. So I'm pleased with that but as we think about it you know in my experience. This is how.

The comp will show up it starts with units and so I was pleased with our unit share trends.

And quite frankly pleased with unit share gains.

And then as units improve and those generally improved through our our in stock levels in our store standards, improving which we're seeing in our customers, saying she's seeing it as well, but we have more to do there. It'll then word of mouth gets out and then traffic will come after that and then once you see traffic that's when you really.

Start to see the comp show up so as Kelly mentioned, we're lapping some some significant price increases, but the underlying trends that starts with units and then traffic as is the next opportunity that I believe.

The announcement, we just announced today with the promotions specifically around our NCI inventory, we really liked what we saw when we've run those this year. This isn't something new this is stuff we've been testing and so we'll have to wait and see but as you think about the back half our customer will be pressured, but as we move into the fall.

We are excited to offer her these values and she has really shown up and responded very well to them earlier. This year. So hopefully as we look to the back half of this year and into next year. The stability in the store will help us drive continued traffic and and that's one of the metrics were most most focused on.

Proving as we go forward.

Fair enough and then as a follow up.

There's labor investment you've got to clear some.

<unk> it sounds like in a couple of places.

It sounds like the new stores are doing well and the prototypes are great.

Just thinking about managing the business from a practicality standpoint.

Is slowing stores, even a consideration just temporarily.

The Leverages managed properly and nothing to do about how the stores performed in the out years, but just thinking about balancing the SG&A to make to make the leverage point a little bit lower.

So I mean, that's a great question I can tell you.

First and foremost we're focused on returning to operational excellence and this model.

Is tremendously successful when we're able to do that and we have a great value proposition with a stable supply chain with consistency at store level.

That generates tremendous operating profit and allows us quite frankly.

The ability to invest back in the business at a rate we're very pleased with in the new stores I continue we're very very pleased and we have an opportunity.

To be a first mover and we wanted to take advantage of that and so we are always balancing and we will and we will continue to do that because.

Because we base everything on returns and return on capital and that's very important to us, but the nice thing here at dollar General is is that we're confident we can return to the operational excellence level that we are accustomed to achieving and you combine that with the tremendous pipeline for growth that we have and that recipe is in.

Credibly successful and something that I'm very excited to see as we progress through 'twenty three and 'twenty four.

And our ability to continue to to perform at the levels. We're accustomed to performing so I feel great about the pipeline and I also feel great about our return to operational excellence.

Okay. Thanks, guys. Good luck.

Yeah.

Our next question comes from refresh Perique with Oppenheimer. Please proceed with your question.

Good morning, and thanks for taking my question. So I wanted to go back to the comments around the $170 million in investments I was curious what you view as more onetime in nature versus permanent.

Yes repurchase I'll start and Kelly, but but certainly.

You know we've said this before.

We believe these investments are going to accelerate our progress I think as you look at the investments.

When we look at reducing inventory.

We've made progress on our inventory it'll make it even better.

Impressed with the as I said before the tests we've run around this so.

So certainly on the inventory side I don't think that you'll see us having to do that as we look forward.

But certainly the labor.

As you think about the labor that is certainly something that is is going to be embedded in permanent in our model and we like the returns that we're seeing I think that's the key point there and then the other investments or investing in the ability to to.

To really be more efficient long term specifically as you think about the demand forecasting tool that we're investing.

Investing in that we believe will have a tremendous opportunity to make our working capital even more efficient and over the next call. It 12 months to 18 months, we believe we will be able to pull out meaningful inventory I mean.

Ballpark $500 million or more and we're very very excited about how all that's going to play throughout the P&L.

Great and then maybe just one follow up question. So the guidance range is much wider.

Going forward for the annual guide just curious whats.

What's driving this and just your confidence in being able to deliver within this range.

We have a high confidence level that we're going to deliver in this in this range and really that the with US is around the sales piece, primarily repairs and just how quickly the customers are going to respond to the actions that we're taking I mean, we feel good about getting back to operational excellence that we're doing all the right actions and taking on all the right.

<unk> that we need to take and it'll just be a function of of.

Her response to us, but we'll be ready and we think you know after a couple of quarters well will be back to it in 2024.

Great. Thank you I'll pass it along.

Yes.

Our final question comes from Paul away with Citi. Please proceed with your question.

Hey, Thanks, guys.

Curious what was the inflation impact in Q2 versus <unk> and what are your expectations for inflation in <unk> and <unk> and the consumables business, specifically and just how has that changed versus how you were thinking three months ago, and then just one clarification, sorry, if I missed it but are you expecting a positive comp.

In <unk> and I'm, just curious what your transaction versus ticket assumptions are around that.

Yes, its starting with inflation is certainly much less than we saw last year, so inflation over the front half of the year. It's been about 1.5% right now we expect it to be pretty similar as we go in into our Q3 and Q4 mm.

The comp piece of that you know and in the sales for Q4, we're certainly expecting it to be better than than Q3, it could be positive in and we'll just see how this customer reacts to what we're doing.

Thank you good luck.

Thank you.

We have reached the end of the question and answer session I would now like to turn the call over to Jeff Owen for closing comments.

Thank you for all the questions and thanks for your interest in dollar General if I could summarize our discussion today I'd like to leave you with this we've had our share of challenges in recent quarters and some of those have been self inflicted but the actions that we're taking in response are gaining traction and we're making good progress against our goals.

We're taking key steps and making investments to accelerate our progress over the back half of the year as we look to drive sales and lower our cost to serve while solidifying the foundation for growth in 2024 and beyond.

We have a tremendously strong foundation and an incredibly bright future and a strong track record of doing what we say, we're going to do and we believe we are well positioned to do so again.

Before we sign off I want to again express that our hearts are with the victims their families and the community of Jacksonville.

We are proud of our dollar general family for coming together to support each other and our customers.

During this difficult time.

Thank you again for joining us this morning.

This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.

Today's conference has ended please disconnect your lines at this time. Thank you.