Q2 2024 Dollar General Corp Earnings Call
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Robert: Good morning, my name is Robert and I'll be your conference operator today.
Speaker Change: At this time, I'd like to welcome everyone to the Dollar General 2nd Order 2024 earnings conference call.
Speaker Change: Today's Thursday, August 29th, 2024. All lines have been placed on Newt to prevent any background noise.
Speaker Change: 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 Vester Relations. Kevin, you may begin.
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Speaker Change: Thank you and good morning everyone. On the call with me today are Todd Vasos, our CEO, and Kelly Dilts, our CEO. Our earnings release issue today can be found on our website at investor.dollardgeneral.com, Cunder News and Events.
Speaker Change: 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.
Speaker Change: These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
Speaker Change: These factors include, but are not limited to, those identified in our earnings release issued this morning, under risk factors in our 2023 Form 10K filed on March 25, 2024, and any later filed periodic report and in the comments that are made on this call.
Speaker Change: You should not undo the rely on forward-looking statements, which speak only as of today's date. Dollar General disclamed any obligation to update or revise any information discussed in this call in the required by law.
Speaker Change: At the end of our prepared remarks, we will open the call up for your questions. To allow us to address as many questions as possible in the queue, please limit yourself to one question. Now it is my pleasure to turn the call over to Todd.
Todd: Thank you Kevin and welcome to everyone joining our call. I want to begin by thanking our team for their continued dedication to serving our customers while executing our back-to-basics plan across the organization.
Todd: This dedication was on full display at our leadership meeting earlier this month. As we had the opportunity to host more than 1,500 leaders,
Todd: of our organization here in Nashville. This event served as a powerful reminder of the passion and talent of this team and the mission of serving others that unites us.
Todd: On today's call, I will begin by recapping our Q2 performance. I will then share updates on our back-to-basics work, as well as an update on our plans for the remainder of 2024.
Todd: After that, Kelly will share the details of our Q2 financial performance as well as our updated financial outlook for the full year.
Kelly: Turning to our second quarter performance, we continue to make important progress on our back-to-basics plan. However, we are not satisfied with our overall financial results.
Kelly: On the top line, Net Sales increased 4.2% to $10.2 billion in Q2 compared to Net Sales of $9.8 billion in last year's second quarter.
Kelly: Importantly, despite a weaker sales environment for our core customer than we had anticipated, we continued to grow market share in both dollars and units in highly consumable product sales.
Kelly: Same store sales increased to half a percent during the quarter which was below our expectations. The increase was driven by a 1% growth in customer traffic and was partially offset by a half a point to climb in average transaction amount.
Kelly: which was driven by lower average unit retail price for items.
Kelly: The comp sales increase was driven entirely by the growth in our consumable category, as customers continue to focus their spending on the items they need at most for their families.
Kelly: This growth was partially offset by declines in our seasonal home and apparel categories.
Speaker Change: From a monthly cadence perspective, St. St. Sail's growth was strongest in June, before turning negative in July. Notably, the three softest comp sales weeks of the quarter were the last week of each of the calendar months.
Speaker Change: This pattern suggests that our customers are less able to stretch their budgets through the end of the month.
Speaker Change: With that in mind, as well as our continued softness in discretionary sales and our own customer data and survey work, we believe the software that anticipates the sales performance in Q2 is at least partially attributable to a core customer that is less confident of their financial position.
Speaker Change: I want to provide some additional context around what we're seeing and hearing from our customers. The majority of them state that they feel worse off financially than they were six months ago.
Speaker Change: As higher prices, softer employment levels, and increased borrowing costs have negatively impacted low income consumer set of.
Speaker Change: As a result, our core customer who contributes to approximately 60% of our overall sales comes predominantly from households earning less than $35,000 annually.
Speaker Change: Inflation has continued to negatively impact these households with more than 60% claiming they have had the sacrifice on purchasing basic necessities due to the higher cost of those items.
Speaker Change: In addition to paying more for expenses such as rent, utilities and health care.
Speaker Change: More of a customer report that they are now resorting to using credit cards from basic household needs. And approximately 30% have at least one credit card that has reached its limit.
Speaker Change: And in our latest survey, 25% of our customer surveyed noted they anticipated missing a bill payment in the next six months.
Speaker Change: While middle and higher income households are seeking value as well, they don't claim to feel the same level of pressure as low income households.
Speaker Change: As customers have felt more pressure on their spending, we have also seen correspondent elevation in the promotional environment beyond what we had anticipated coming into the year.
Speaker Change: Importantly, we continue to feel very good about our everyday low price position, relative to competitors and other classes of trade. However, the increased promotional activity has pressured both sales and gross margin. And we anticipate this will likely continue for the duration of the year.
Speaker Change: That said, we remain committed to our back-to-basic strategy, which focuses on controlling the things that we can control, including a timely and accurate supply chain, in-store execution, and customer-centric merchandising.
Speaker Change: With this in mind, we have already begun taking decisive action to respond and strengthen our position over the back half of the year.
Speaker Change: I want to take the next few minutes to update you on our back-to-basage progress, which is foundational to our future. And then I will discuss the actions we are taking to build on that progress and deliver a stronger customer experience.
Speaker Change: I will start with our stores where everything begins and ends for our customer.
Speaker Change: Our efforts in the stores have centered around further enhancing the customer experience to deliver the value and convenience they expect in a clean and friendly shopping environment.
Speaker Change: We have increased the employee presence at the front end of our stores with our associates committed to providing friendly, welcomed and elevated loved women engagement to our customers while also facilitating the positive check out experience.
Speaker Change: We have also focused labor hours on perpetual inventory management and our stores. And an effort to significantly improve our stock levels and support our sales growth.
Speaker Change: These efforts have paid dividends as we continue to see year-over-year improvements in our in stock levels.
Speaker Change: Our supply chain and merchandising teams have also contributed to the install progress by helping to simplify operations for our teams, which should enhance both the associate and customer experience in our stores.
Speaker Change: All of these improvements have continued to drive lower year-over year turnover at all levels within our retail operations, including regional director, district manager, store manager, assistant store manager and sales associates.
Speaker Change: We are proud of the progress in the stores and pleased to see our actions continue to resonate with our team in the field as well as with our customers.
Speaker Change: and we are working hard to continue to advance our progress and further elevate the experience within our stories.
Speaker Change: Next, let me provide a quick update on our supply chain.
Speaker Change: Our top priority in this area continues to be improving our rate of on time and in full truck deliveries, which we refer to as O-tiff.
Speaker Change: Our focused efforts here have led to significantly higher O-Tif levels compared to the same time last year and we are pleased with what we have seen both in our traditional and fresh supply chain.
Speaker Change: We have also made good progress in optimizing our distribution capacity. As a reminder, we had previously announced plans to close 12 temporary facilities by the end of the year.
Speaker Change: We have already exited 11 of these buildings and now believe we can close at least two more by the end of this year.
Speaker Change: While closing the left-efficient temporary facilities,
Speaker Change: We have built and open to new permanent distribution centers in Arkansas and Colorado.
Speaker Change: We expect both to ramp up operations in the coming months and to ultimately contribute to reductionist demands and lower transportation costs over time.
Speaker Change: Finally, we are undertaking the first full-scale refresh of our sorting process within our distribution centers since the launch of our fast track initiative in 2017.
Speaker Change: As a reminder, the ultimate goal of this effort is to enable our store teams to stock shelves more quickly, which should drive greater on-shelf availability for our customers and ultimately support ongoing sales groups.
Speaker Change: We have made significant progress on this front, and as planned, we are on pace to complete this work by the end of the year.
Speaker Change: Over all, we remain focused on enhancing the agility of our supply chain allowing us to meet changing demands and respond quickly to challenges, all while keeping costs low, driving greater efficiencies, and further improving the experience for our store teams and customers.
Speaker Change: Finally, I want to provide an update on getting back to the basics of merchandising. Providing a meaningful value to our customer continues to be a top priority. We have a multifaceted approach to deliver that value including
Speaker Change: A strong everyday low price on national and private brands, compelling promotions on sales events and low opening price points, including approximately 2000 items, adder below $1 every day.
Speaker Change: We have also continued to make strong progress reducing total inventory this year, which Kelly will discuss in more detail in a moment.
Kelly: In 2024, we began working toward a net reduction of approximately 1,000 skews within our chain by the end of the year, and we are well on our way to meeting that goal.
Kelly: Finally, our merchants have done a fantastic job working with our operators to reduce activity and simplify work inside the stores.
Kelly: For example, we have reduced the number of floor stands by approximately 25% through the first half of the year and we anticipate removing more than 50% by the end of the year.
Kelly: Additionally, we have reduced the number of times we rotate some of our displays, allowing our store teams to spend more time engaging with our customers.
Kelly: Collectively, these actions are designed to save time within our stores for our teams and ultimately result in an improved associate and customer experience.
Kelly: Over all, we are making nice progress as you have heard and we are executing on the goals we have set for our team. And importantly, we believe we will continue advancing these efforts as we move throughout the remainder of the year.
Kelly: Moving forward, we believe our back-to-basic actions will drive improvements in customer satisfaction, including on-shelf availability and convenience.
Kelly: Further enhance the associate experience and stores, including improved employee engagement and retention, and ultimately drive improvements in financial results in 2025 and beyond.
Kelly: However, as I previously mentioned, we are not happy with our Q2 financial results.
Kelly: We know the retail landscape has continued to evolve in terms of the promotional environment and financial constraints filled by our customers. And we are taking immediate action to respond to serve them, while also positioning the business for growth and value creation.
Kelly: With all of that in mind, we are increasing our investment in markdown activity in an effort to support our customers for the drive customer traffic and improve sales.
Kelly: We are investing from a strong everyday price position to further support our customer and maintain a favorable confedent positioning.
Kelly: We believe this investment will work in conjunction with our back-to-basic efforts to further enhance our value and convenience proposition.
Kelly: In summary, I want to reiterate that we are pleased with the operational progress we're making and feel good about the actions we are taking to build on that momentum. We need to be at our best for our customers and times like this, and we are excited about the opportunity to serve them.
Kelly: We have a strong track record of delivering exceptional value, and we have seen that when we do so consistently, we build strong brand loyalty that contributes to healthy share games over the long-term.
Kelly: And with store locations within five miles of approximately 75% of the US population, we are uniquely positioned to serve customers and communities with value and convenience.
Kelly: I am confident this team will continue to rise to the occasion and seize the opportunities in front of us to further enhance the way we serve our customers and prove our financial results and create long-term shared older values. With that, I'll now turn the call over to Kelly.
Kelly: Thank you, Todd, and good morning everyone. Now that Todd's taking you through a few highlights of the quarter, let me take you through some of the important financial details.
Kelly: and Leslie specifically note otherwise, all comparisons are year over year, all references to EPS refer to deleted earnings per share, and all years needed refer to the corresponding fiscal year.
Speaker Change: As Todd already discussed sales, I'll start with gross profit. For the second quarter, gross profit as a percentage of sales was 30% at decrease of 112 basis points.
Speaker Change: This decrease was primarily attributable to increased markdowns, increased inventory damages, a greater proportion of sales coming from the consumables category and increase shrink.
Speaker Change: These factors were partially offset by a lower life-of-provision.
Mark: With regards to Mark Downs, we are now seeing promotional levels greater than we had anticipated coming into the year. As Todd noted, customers are increasingly seeking value in their purchasing behavior, in addition to an overall increased promotional environment.
Todd: Shrink was a year over year headwind of 21 basis points in Q2, which was in line with our expectations coming into the quarter.
Speaker Change: and I want to note that while shrink continues to be a significant headwind, we are pleased with the progress we're making and believe our actions, including our self-checkout conversions, are having a positive impact.
Speaker Change: Turning to SGNA, it was 24.6% of the percentage of fails, an increase of 57 basis points.
Speaker Change: The primary expenses that were greater percentage of net sales in the current year period were retail labor, depreciation and amortization.
Speaker Change: Store occupancy costs and utilities. These factors will partially offset by a decrease in incentive compensation.
Speaker Change: Moving down the income statement, operating profit for the second quarter decreased 20.6% to $550 million. As a percentage of sales, operating profit was 5.4% and decreased at 168 basis points.
Speaker Change: Net interest expense for the quarter decreased to 68 million dollars compared to 84 million dollars and last year's second quarter.
Speaker Change: Our effective tax rate for the quarter was 22.3% and compares to 22.9% in the second quarter last year.
Speaker Change: This lower rate is primarily due to the effective certain rate impacting items such as federal tax credits on lower earnings before taxes.
Speaker Change: Finally, EPS for the quarter decreased 20.2% to $1.0.0.
Speaker Change: Now turning to our balance sheet and cash flow. Merchandise inventories were $7 billion at the end of second quarter, a decrease of 7% compared to the prior year and a decrease of 11% on a per store basis.
Speaker Change: Notably, total non-consumable inventory decreased 13% compared to last year and decreased 17% on a per store basis.
Speaker Change: And importantly, we continue to believe that the quality of our inventory remains good. The team has done a nice job reducing our overall inventory position while simultaneously optimizing our mix and writing higher-end stock levels.
Speaker Change: We will continue to focus on maintaining the appropriate balance of mix of inventory to drive sales while also mitigating shrink risk and improving our working capital.
Speaker Change: The business has generated cash flows from operations of $1.7 billion here today, and increase of $127 percent as we continue to improve our working capital position primarily through inventory management.
Speaker Change: Total Capital expenditures for the 26-week period were $696 million and included our planned investments in new stores, remodels and relocations.
Speaker Change: Distribution and Transportation Projects, and spending related to our strategic initiatives.
Speaker Change: During the quarter, we returned cash to shareholders through a quarterly dividend at 59 cents for common share outstanding. For a total payout of $130 million.
Speaker Change: Now I want to provide an update on our financial outlook for fiscal 2024.
Speaker Change: On the top line, we've updated our guidance to reflect our second quarter results, as well as our expectations that the customer will continue to feel financial pressure for the duration of the year. And the promotional environment will remain elevated beyond what we had initially anticipated.
Speaker Change: With that in mind, we now expect net sales growth in the range of approximately 4.7% to 5.3%. And same store sales growth in the range of approximately 1% to 1.6%.
Robert: Good morning, my name is Robert, and I'll be your conference operator today. At this time I'd like to welcome everyone to the Dollar General's second quarter, 2024 Earnings Conference call. Today, Thursday, August 29, 2024.
Speaker Change: Turning to growth margin, we expect additional pressure as a result of the increased promotional markdown activity that Todd noted, as well as increased sales mixt pressure due to the customers need to prioritize their spending on the consumables category.
Operator: 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.
Speaker Change: With regard to damages, our guidance now assumes no improvement in the back cap of the year. Though we are focused on addressing this headwind through our continued emphasis on getting back to basics.
Kevin Walker: Now I'd like to turn the conference over to your host, Mr. Kevin Walker, Vice President of Vestor Relations. Kevin, you may begin. Thank you and good morning everyone. On the call with me today are Todd Vasos, our CEO and Kelly Dilts, our CFO. Our earnings release issue today can be found on our website at investor. Dollar General dot com under news and events.
Speaker Change: And while we expect shrink to be a headwind for the full year, our results from the second quarter, as well as positive trends and other metrics that are highly correlative to shrink, including inventory reductions, supporting our belief that we are moving in the right direction to continue mitigating this headwind.
Speaker Change: Looking ahead, we are cautiously optimistic that we will see shrink begin to turn to a tailwind later in Q4 and then become a more material tailwind in 2025.
Kevin Walker: Let me caution you that today's comments include forward-looking statements as defined in the Private Security's 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.
Speaker Change: Within S.G. and A, we are seeing an elevated rate of maintenance expense, particularly with HVAC units and coolers during the summer months.
Speaker Change: We're taking steps in the back half of the year to be more proactive in addressing these opportunities in order to provide a more consistent customer experience across our store footprint, while office supporting ongoing sales growth.
Speaker Change: As a result, we expect incremental pressure from the increased repairs and maintenance expense to continue within SGA in the back half of the year.
Kevin Walker: Under risk factors in our 2023 Form 10K followed on March 25th, 2024, and any later filed periodic report and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law.
Speaker Change: Finally, we are also seeing pressure from wage rate inflation closer to approximately 4% this year which is higher than was contemplated in our initial guidance for the year.
Speaker Change: With all of this in mind, we are updating our EPS guidance and now expect to deliver EPS in the range of approximately $5.50 to $6.20.
Kevin Walker: At the end of our prepared remarks, we will open the call up for your questions to allow us to address as many questions as possible in the queue. Please limit yourself to one question.
Speaker Change: This guidance now assumes an effective tax rate of approximately 23%.
Todd Vasos: Now it is my pleasure to turn the call over to Todd. Thank you, Kevin, and welcome to everyone joining our call. I want to begin by thanking our team for their continued dedication to serving our customers while executing our back-to-basics plan across the organization.
Speaker Change: We also continue to anticipate capital spending in the range of 1.3 to 1.4 billion dollars as we invest to drive on going growth.
Speaker Change: This is Capital Spending Remains Aligned with our Capital Allocation Priorities, which continue to serve us well.
Todd Vasos: This dedication was on full display in our leadership meeting earlier this month as we had the opportunity to host more than 1500 leaders of our organization here in Nashville. This event served as a powerful reminder of the passion and talent of this team. And the mission of serving others that unites us.
Speaker Change: Our first priority is investing in our business, including our existing store base, as well as high return organic growth opportunities such as new storage expansion and strategic initiatives.
Speaker Change: To that end, we remain on track to deliver on our plans of approximately 2,435 real estate projects this year, including 730 new stores, 1,620 remodeled and 85 relocations.
Todd Vasos: On today's call, I will begin by recapping our Q2 performance. I will then share updates on our back-to-basics work as well as an update on our plans for the remainder of 2024.
Todd Vasos: After that, Kelly will share the details of our Q2 financial performance as well as our updated financial outlook for the full year. Turning to our second quarter performance, we continue to make important progress on our back-to-basics plan. However, we are not satisfied with our overall financial results. On the top line, net sales increased 4.2% to 10.2 billion dollars in Q2 compared to net sales of 9.8 billion dollars in last year's second quarter.
Speaker Change: Next in our capital allocation priorities, we seek to return cash to shareholders through a quarterly dividend payment and over time and when appropriate, share repurchases.
Speaker Change: Finally, although our leverage ratio remains above our target at approximately three times adjusted debt to adjusted EBITAR, we are focused on improving our debt metrics and support of our commitment to our current investment grade credit ratings.
Speaker Change: Which, as a reminder, are triple B and B AA too.
Todd Vasos: Importantly, despite a weaker sales environment for our core customer than we had anticipated, we continue to grow market share in both dollars and units in highly consumable product sales. Sales. Same-store sales increased to half a percent during the quarter, which was below our expectations. The increase was driven by a 1% growth in customer traffic, and was partially offset by a half a point decline in average transaction amount, which was driven by lower average unit retail price per item.
Speaker Change: In summary, while we're not satisfied with the financial results for the second quarter, we are pleased with the continuing progress in our back-to-basics work. And we believe we're taking the necessary actions to build on this progress and drive the business forward.
Speaker Change: We remain committed to disciplined expense and capital management as a low-cost operator, with the goal of delivering consistent, strong financial performance, whilst strategically investing for the long term. And we continue to believe that this model is resilient and strong.
Todd Vasos: The Comp Sales increase was driven entirely by the growth in our consumable category. Customers continued to focus their spending on the items they needed most for their families. This growth was partially offset by declines in our seasonal home and apparel categories. From a monthly cadence perspective, same-store sales growth was strongest in June before turning negative in July. Notably, the three softest Comp Sales weeks of the quarter were the last week of each of the calendar months.
Speaker Change: I want to emphasize that we're confident and excited about the long-term future of this business.
Speaker Change: including driving profitable things to ourselves.
Todd: and Deliver meaningful operating margin expansion while generating healthy new store returns, strong free cash flow and creating long-term shareholder value. With that, I'll turn the call back over to Todd.
Todd: Thank you, Kelly. As we wrap up, let me say again that 2024 is about executing on our foundational back to basics plan. And we are pleased to be on schedule and making great progress against the goals we had previously outlined.
Todd Vasos: This pattern suggests that our customers are less able to stretch their budgets through the end of the month. With that in mind, as well as our continued softness in discretionary sales in our own customer data and survey work, we believe the software that anticipated sales performance in Q2 is at least partially attributable to a core customer that is less confident of their financial position. I want to provide some additional context around what we're seeing and hearing from our customers.
Todd: We are confident that the actions we are taken will strengthen our foundation for the long-term.
Todd: This team is energized and laser focused on our strategy to restore operational excellence while delivering value for our customers and shareholders alike.
Todd: I want to close by thanking our more than a hundred and ninety-three thousand employees for their commitment to fulfilling our mission of serving others. It is a privilege to serve alongside them each and every day, and we are looking forward to all we can accomplish together in the back half of the year.
Todd Vasos: The majority of them state that they feel worse off financially than they were six months ago. As higher prices, softer employment levels and increased borrowing costs have negatively impacted low income consumer service. As a result, our core customer who contributes approximately 60% of our overall sales comes predominantly from households earning less than $35,000 annually. Inflation has continued to negatively impact these households with more than 60% claiming they have had to sacrifice on purchasing basic necessities due to the higher cost of those items.
Speaker Change: With that operator, we would now like to open the lines for questions.
Speaker Change: Thank you. At this time we'll be conducting a question and answer session. If you like to ask a question, please press star one on your telephone keypad. As a reminder, we ask you, please limit to one question.
Speaker Change: A confirmation, tell when to get your linings in the question queue. You may press star 2 if you like to remove your question from the queue. For participants you can speak or equipment, and maybe necessary to pick up your hands at before pressing the star keys. One moment please, let me poll for questions.
Todd Vasos: In addition to paying more for expenses such as rent, utilities and health care. More of our customers report that they are now resorting to using credit cards from basic household needs and approximately 30% have at least one credit card that has reached its limit. And in our latest survey, 25% of our customer survey noted they anticipated missing a bill payment in the next six months. While middle and higher income households are seeking value as well, they don't claim to feel the same level of pressure as low income households.
Speaker Change: Our first question comes from Michael Lasser with UBS, please proceed with your question.
Michael Lasser: Good morning. Thank you so much for taking my question.
Todd: Todd, the market is saying that Dollar General and the small box value model is to simply structurally challenge either because there's...
Speaker Change: Too many stores, it's not a sufficiently exposed to the online channel or not attracting enough incremental customers, perhaps due to competition.
Speaker Change: So, why is that wrong? And as you are trying to invest in Markdown and Promotion.
Todd Vasos: As customers have felt more pressure on their spending, we have also seen corresponding elevation in the promotional environment beyond what we had anticipated coming into the year. Importantly, we continue to feel very good about our everyday low price position relative to competitors and other classes of trade. However, the increased promotional activity has pressured both sales and gross margin. And we anticipate this will likely continue for the duration of the year. That said, we remain committed to our back-to-basic strategy, which focuses on controlling the things that we can control, including a timely and accurate supply chain, in-store execution, and customer-centric merchandising. With this in mind, we have already begun taking decisive action to respond and strengthen our position over the back half of the year.
Speaker Change: to regain customers. How do you build back the margin over time? Is it simply a function of leveraging sales growth? Thank you very much.
Speaker Change: Thank you Michael and I appreciate the question. Yeah, I fundamentally, we fundamentally don't believe at all that.
Speaker Change: the model is structurally challenged, but there are challenges to the businesses as this quarter indicated.
Speaker Change: Let me first start by saying that our new store productivity as well as our strong returns and new stores.
Speaker Change: Continue to serve as well. We continue to gain market share with these new store openings.
Speaker Change: and Cannibalization with these newspapers continue to be very much in line to where it's been historically. So we don't believe that slowing down to any large degree new stores.
Todd Vasos: I want to take the next few minutes to update you on our back-to-basic progress, which is finally foundational to our future. And then I will discuss the actions we are taking to build on that progress and deliver a stronger customer experience. I will start with our stores where everything begins and ends for our customer. Our efforts in the stores have centered around further enhancing the customer experience to deliver the value and convenience they expect in a clean and friendly shopping environment.
Speaker Change: would be the answer here. What we do believe is that this quarter in particular, with a half a point of con versus last quarters of a fairly strong 2.4% con.
Speaker Change: As I look at what transpired here, I would tell you that...
Todd Vasos: We have increased the employee presence at the front end of our stores with our associates committed to providing friendly, welcomed, and elevated level of engagement to our customers, while also facilitating the positive checkout experience. We have also focused labor hours on perpetual inventory management in our stores. In an effort to significantly improve our in-stock levels and support our sales growth. These efforts have paid dividends as we continue to see year-over-year improvements in our in-stock levels.
Speaker Change: It appears to us very strongly that one, this lower-end consumer continues to be very much financially strapped.
Speaker Change: especially as it relates to our ability to feed our families and supporter families. As I look at our results throughout the quarter, I would tell you that from our perspective.
Speaker Change: The last week of the calendar month of each of the calendar months.
Speaker Change: was the weakest by far.
Todd Vasos: Our supply chain and merchandising teams have also contributed to the in-store progress by helping to simplify operations for our teams, which should enhance both the associate and customer experience in our stores. All of these improvements have continued to drive lower year-over-year turnover at all levels within our retail operations, including regional director, district manager, store manager, assistant store manager, and sales associates. We are proud of the progress in the stores and pleased to see our actions continue to resonate with our team in the field as well as with our customers. And we are working hard to continue to advance our progress and further elevate the experience within our stores.
Speaker Change: When you couple that with...
Michael Lasser: Private brand being a strong as it is for us, our value value, which is you probably would call Michael is our $1 or below offering inside of our store which by the way.
Michael Lasser: Still 2000 items, we've never walked away from that $1 price point.
Michael Lasser: It is, by far, the strongest planet-grand that we have out there, and I would tell you that, all those...
Michael Lasser: Points would indicate.
Michael Lasser: that this is a cast-strap consumer right now, even more so than what we saw in Q1.
Michael Lasser: What we also saw was that while we're not losing share, we're actually gaining share against all classes of trade in the consumable realm, what we did see in the quarter, which was different than last quarter, is the available share to take, if you will out there, from other cohorts.
Todd Vasos: Next, let me provide a quick update on our supply chain. Our top priority in this area continues to be improving our rates of on-time and in-full truck deliveries, which we refer to as OTIF. Our focus efforts here have led to significantly higher OTIF levels compared to the same time last year, and we are pleased with what we have seen both in our traditional and fresh supply chain. We have also made good progress in optimizing our distribution capacity.
Michael Lasser: We didn't get our fair share of that. Now we didn't lose, right? We're not seeing any one competitor, a mass or anywhere else.
Michael Lasser: Take our core customer, but what we did see was, at least in this quarter, the mass channel, especially those that are down south, actually did a lot better in gaining the share that was available in the marketplace.
Todd Vasos: As a reminder, we had previously announced plans to close 12 temporary facilities by the end of the year. We have already exited 11 of these buildings, and now believe we can close at least two more by the end of this year. While closing the less sufficient temporary facilities, we have built and opened two new permanent distribution centers in Arkansas and Colorado. We expect both to ramp up operations in the coming months and to ultimately contribute to reduction in STEM miles and lower transportation costs over time.
Michael Lasser: We didn't get our fair share of that.
Michael Lasser: So, what are we going to do about it? Well, it's exactly what we talked about in our prepare remarks. We don't want the offense.
Michael Lasser: and we've done that very successfully here over the years, Michael, you know, as a merchant and now as the CEO of this company, we don't want to do this.
Michael Lasser: and we're matching that up as we speak. We believe that the share that's available out there. We have every right to get more than our share of that out there. So we're working that really hard and you heard that in our prepare be more.
Todd Vasos: 13. Finally, we are undertaking the first full scale refresh of our sorting process within our distribution centers since the launch of our fast track initiative in 2017. As a reminder, the ultimate goal of this effort is to enable our store teams to stock shelves more quickly, which should drive greater on-shelf availability for our customers and ultimately support ongoing sales growth. We have made significant progress on this front, and as planned, we are on pace to complete this work by the end of the year.
Speaker Change: I say that this box...
Speaker Change: This company and the small box in general is very much alive as well. We just go through a little bit of a transition period as...
Speaker Change: and a transformation as you know and it's never usually straight line to the top when you do these, right? And so if you bumps in a row but we feel that we know exactly how we can go about.
Kelly: Garner in that share that's available out there. And Kelly, you may want to take this second part. Yeah, absolutely so, yeah, just how do we build that margin back over time? I think it's...
Todd Vasos: Overall, we remain focused on enhancing the agility of our supply chain, allowing us to meet changing demands and respond quickly to challenges, all while keeping costs low, driving greater efficiencies, and further improving the experience for our store teams and customers.
Speaker Change: and important to call out one, you nailed it, it's a softer sales environment. So with the softer top line, that does put pressure on our fixed top leverage.
Kelly: specifically labor and ransom those type of things as you well know, but I'm as talk about I think in the near term one is just going on the offense and taking the mark down investment that we need to take on GoFloal with basis to drive sales and to be there for our customer.
Todd Vasos: Finally, I want to provide an update on getting back to the basics of merchandising. Providing a meaningful value to our customer continues to be a top priority. We have a multifaceted approach to deliver that value, including a strong everyday low price on national and private brands, compelling promotions on sales events, and low opening price points, including approximately 2,000 items at or below $1 every day. We have also continued to make strong progress reducing total inventory this year, which Kelly will discuss in more detail in a moment.
Speaker Change: And to kind of put that in context, I would say that what we're looking at in this back cap is going to be a similar mark down rate to what we saw last year in the back cap as well. So more than we had anticipated, but absolutely the right decision, and not necessarily one that we have to think about over the long term, as that can come back in line when circumstances change.
Speaker Change: You know, the other piece of this and we've talked a lot about it, obviously, a shrink in mixed headwins. And so we're certainly experiencing those. Although, I think we have a lot of good news here to report on the shrink side of things, starting to see that trend then. It just takes a while to slow that through the financial statements.
Todd Vasos: In 2024, we began working toward a net reduction of approximately 1,000 skews within our chain by the end of the year, and we are well on our way to meeting that goal. Finally, our merchants have done a fantastic job working with our operators to reduce activity and simplify work inside the stores. For example, we have reduced the number of floor stands by approximately 25% through the first half of the year, and we anticipate removing more than 50% by the end of the year.
Speaker Change: and then, you know, the damage piece of this as well is putting a little pressure on the second half, but again, all the things that we're doing on a back to basics.
Speaker Change: Efforts are going to help to mitigate that as well as just having a focus team on that. So, I think those are kind of the narrow things that we'll be dealing with that will get in line and then over the long term, our underlying long term drivers are still in place.
Speaker Change: We still have a long runway for new store opportunities with high returns. We have high returns with the opportunities that we have with our existing stores. And then you saw, you know, this period our cash from operations was up to 127%. So we are still generating a significant amount of cash flow, which gives us the ability to invest in the business. So we feel good about the long term potential of getting those margins back every time.
Todd Vasos: Additionally, we have reduced the number of times we rotate some of our displays and allowing our store teams to spend more time engaging with our customers. Collectively, these actions are designed to save time within our stores for our teams and ultimately result in an improved associate and customer experience. Overall, we are making nice progress as you have heard, and we are executing on the goals we have set for our team. And importantly, we believe we will continue advancing these efforts as we move throughout the remainder of the year.
Speaker Change: Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question.
Simeon Gutman: Hi, good morning. I have two parts and one question. Todd, I want to ask if this transition period changes the way you think about reinvestment now going forward.
Todd Vasos: Moving forward, we believe our back-to-basic actions will drive improvements in customer satisfaction, including on-shelf availability and convenience. Further enhance the associate experience in stores, including improved employee engagement and retention, and ultimately drive improvements in financial results in 2025 and beyond.
Simeon Gutman: Thinking about all the levers of pricing and merchandising in labor, meaning that even if the business comes positive, that margin just stays subdued for an extended period of time while you get all the pieces in order, and then the second part of it is.
Todd Vasos: However, as I previously mentioned, we are not happy with our Q2 financial results. We know the retail landscape has continued to evolve in terms of the promotion environment and financial constraints felt by our customers, and we are taking immediate action to respond to serve them while also positioning the business for growth and value creation. With all of that in mind, we are increasing our investment in markdown activity in an effort to support our customers for the drive customer traffic and improved sales.
Speaker Change: Are there any cohorts of stores where it would make sense to rationalize them because they're undercomping and or they're margin dilutive to the overall chain. Thanks.
Speaker Change: Yes, I mean, thanks for the question, and as we continue to move through this transformation period, obviously as we said, it's never a straight line to the top, there's bumps in the road, the margin is one of those as we've indicated right from the start, the biggest opportunity we have in the margin that's a differentiator than just a few years ago, is in that shrink area. We believe we've got ample opportunity there to get our shrink back in line as Kelly indicated in her prepare remarks. We're starting to see some benefit from all the work that we've done around that, and we still very much believe it will turn.
Todd Vasos: We are investing from a strong everyday price position to further support our customer and maintain a favorable competitive positioning. We believe this investment will work in conjunction with our back to basic efforts to further enhance our value and convenience proposition.
Todd Vasos: In summary, I want to reiterate that we are pleased with the operational progress we're making and feel good about the actions we are taking to build on that momentum. We need to be at our best for our customers in times like this and we are excited about the opportunity to serve them. We have a strong track record of delivering exceptional value and we have seen that when we do so consistently, we build strong brand loyalty that contributes to healthy share gains over the long term.
Speaker Change: to a tailwind as we move into Q4, and then much more substantial of a tailwind in the 25. Now, you know, shrink is a constant battle, it's work every day, but it's that pick and shovel work that we know how to do, we know how to do very well here at dollar general. The other thing I do want to point out to me is that...
Speaker Change: You know, as we continue to move, I would tell you that I'm back to Basics Plan.
Todd Vasos: And with store locations within five miles of approximately 75% of the US population, we are uniquely positioned to serve customers and communities with value and convenience. I am confident this team will continue to rise to the occasion and seize the opportunities in front of us to further enhance the way we serve our customers, improve our financial results and create long term shareholder value.
Speaker Change: has started to really show some signs of light fear. And when I say that, when I look at our operations as an example, we've been using the football analogy for the last few quarters. And I would tell you that we across the 50 yard line, last quarter and Q1, I would tell you we're around the opponent's 40 yard line at this point, which is good to see. We're making progress.
Kelly Dilts: With that, I'll now turn the call over to Kelly.
Speaker Change: We're making progress in a lot of fronts there, one being our stamping of the front ends, the reduction, take away of the self-checkouts and moving those to assistant lanes. It was in full swing. Our customers, our talents, they will take it a lot more, not surprising. They like the interaction instead of having to check out themselves.
Kelly Dilts: Thank you Todd and good morning everyone. Now that Todd's taking you through a few highlights of the quarter, 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 deleted earnings per share and all years noted refer to the corresponding fiscal year. As Todd already discussed sales, I'll start with gross profit. For the second quarter, gross profit as a percentage of sales was 30% a decrease of 112 basis points.
Speaker Change: and we like what we see on that front and I believe that's what's starting to show up on our shrink results as well in a positive manner. You know, the other thing that we're working hard on, we're starting to see that shrink traction as I talked about, we're also starting to see Instox better each and every quarter, really each and every period as we continue to move through. So Instox are getting better, are turnover inside of our stores and all levels of our operating group is getting better from our regional director DM.
Kelly Dilts: This decrease was primarily attributable to increased markdowns, increased inventory damages, a greater proportion of sales coming from the consumables category and increased shrink. These factors were partially offset by a lower life vote provision. With regards to markdowns, we are now seeing promotional levels greater than we had anticipated coming into the year. As Todd noted, customers are increasingly seeking value in their purchasing behavior in addition to an overall increased promotional environment. Shrink was a year over year headwind of 21 basis points in Q2, which was in line with our expectations coming into the quarter.
Speaker Change: Store Manager right down to the sales associates inside of our stores, which is usually a true testament that we're doing the right things for our employees, which in turn is normally the right thing for our customers. So we believe that those are all a green light. On our merchandising side, I'm very proud of the inventory reductions that took place on the same store basis, especially 11% down in total inventory on the same store basis. Thanks for watching!
Kelly Dilts: And I want to note that while Shrink continues to be a significant headwind, we are pleased with the progress we're making and believe our actions, including our self checkout conversions, are having a positive impact. Turning to SGNA, it was 24.6% of the percentage of sales, an increase of 57 basis points. The primary expenses that were greater percentage of net sales in the current year period were retail labor, depreciation and amortization, Store occupancy costs and utilities.
Speaker Change: 16% down on the same store bases in Nankon, and 7.6% a decrease per store out of
Speaker Change: All while driving greater share gains through our consumable categories.
Speaker Change: Where we're working hard is to continue to engage in that consumer now through this promotional lever. We have a very strong everyday price out there. This will just the lever on top of that.
Kelly Dilts: These factors were partially offset by a decrease in incentive compensation. Moving down the income statement, operating profit for the second quarter decreased 20.6% to $550 million. As a percentage of sales, operating profit was 5.4%, a decrease of 168 basis points. Net interest expense for the quarter decreased to $68 million compared to $84 million in last year's second quarter. Our effective tax rate for the quarter was 22.3% and compares to 22.9% in the second quarter last year. This lower rate is primarily due to the effect of certain rate impacting items such as federal tax credits on lower earnings before taxes. Finally, EPS for the quarter decreased 20.2% to $1.70.
Speaker Change: The only thing that I do want to talk about as well is that we've reduced in the process of reducing the 1000 skews.
Speaker Change: That continues to do very well. We are well on track and we'll hit our goal by the end of this fiscal year and reducing the 1000 course use. And we're evaluating what that may look like in 25 for additional opportunities to continue to reduce that inventory level and simplify work at the store level.
Speaker Change: Offshelped displays are down by 25% as you heard in our prepare remarks on the first half. Going to be down over 50% in the back half.
Speaker Change: And of course, all the work simplification that we've done, I think is going to be very important and lastly, our supply chain continues to really do well when I think about where we are in the football field. We're down around the 30 yard line at this point, give you ready to get into the red zone here and that is.
Kelly Dilts: Now turning to our balance sheet and cash flow. Merchandise inventories were $7 billion at the end of second quarter, a decrease of 7% compared to the prior year, and a decrease of 11% on a per-store basis. Notably, total non-consumable inventory decreased 13% compared to last year, and decreased 17% on a per-store basis. Importantly, we continue to believe that the quality of our inventory remains good. The team has done a nice job reducing our overall inventory position while simultaneously optimizing our mix and driving higher end stock levels.
Speaker Change: True Testaments are the hard work of our supply chain, but also a cross-functional work of our operators and our merchants. Our on-time and in full rates are exceeding our expectations into this.
Speaker Change: Coming Quarter, and right now what we're working on hard is making sure that we are consistent, right? Because consistency here is going to be the key. If I can deliver on time to our stores consistently.
Speaker Change: It gives them a full leg up and able to work that seven day workflow that we know when executed at the store level is a real positive for our stores in serving the customer each and every day.
Kelly Dilts: We will continue to focus on maintaining the appropriate balance of mix of inventory to drive sales while also mitigating shrink risk and improving our working capital. The business has generated cash flows from operations of $1.7 billion year to date, an increase of 127%. As we continue to improve our working capital position, primarily through inventory management. Total capital expenditures for the 26-week period were $696 million, and included our plan investments in new stores, remodels and relocations, distribution and transportation projects, and spending related to our strategic initiatives. During the quarter, we returned cash to shareholders through a quarterly dividend at $0.59 per common share outstanding, for a total payout of $130 million.
Speaker Change: So a lot of great things are going on, yes, a little pressure on certain lines.
Speaker Change: We believe that our guidance is very prudent, based on where that consumer is right now and our transformation progress, as well as where we want to make sure that we continue to drive that traffic very nice to see a positive 1% traffic gain spill for the quarter. We're not happy with just a 1% we're going to drive for more.
Speaker Change: But we don't want to do this to me and we've done it, we've proven that once we continue to bat that consumer through tough times, she's there when the better times come and she's very sticky and that's exactly how we're approaching it this time around.
Speaker Change: Our next question comes some Matthew Boss with JPMorgan Chase, please proceed with your question.
Kelly Dilts: Now, I want to provide an update on our financial outlook for fiscal 2024. On the top line, we've updated our guidance to reflect our second quarter results, as well as our expectations that the customer will continue to feel financial pressure for the duration of the year, and the promotional environment will remain elevated beyond what we had initially anticipated. With that in mind, we now expect net sales growth in the range of approximately 4.7 percent to 5.3 percent, and same-store sales growth in the range of approximately 1 percent to 1.6 percent.
Matthew Boss: Great thanks. So Todd, just to take the cadence of comps, maybe a step further.
Matthew Boss: Could you elaborate on underlying traffic versus ticket as a quarter-progress?
Matthew Boss: Any concerns that are now more top of mind today relative to call it three months ago from your survey work on the low-income consumer. Have you seen any improvement in August?
Todd: Yeah, I don't want to talk too much about August, but I would tell you that what we've seen in so far in this quarter is in our guidance and you know, feel that we're on track there, so you know, we're much believe in that guidance that we put out there. Now I would tell you that you know, while we're happy with the one percent that we gained on traffic, we believe there's more to gain there. And as I indicated in my first question, answer there, I would tell you that that.
Kelly Dilts: Turning to growth margin, we expect additional pressure as a result of the increased promotional of markdown activity that Todd noted, as well as increased sales and mixed pressure due to the customer's need to prioritize their spending on the consumables category, with regard to damages. Our guidance now assumes no improvement in the back cap of the year, though we are focused on addressing this headwind through our continued emphasis on getting back to basics.
Kelly Dilts: And while we expect shrink to be a headwind for the full year, our results from the second quarter, as well as positive trends and other metrics that are highly correlative to shrink, including inventory reductions, supporting our belief that we are moving in the right direction to continue mitigating this headwind. Looking ahead, we are cautiously optimistic that we will see shrink begin to turn to a tailwind layer in Q4 and then become a more material tailwind in 2025.
Todd: Traffic that's out there from other retailers. We haven't seen a deterioration on our side.
Todd: but what we saw in Q1 was a greater pickup.
Todd: from the available share, maybe from other classes of trade, grocery, and drug. While we got some of it, we didn't get our fair share, at least what I would consider to be our fair share. And that's why we're attacking this and going on the offense.
Todd: We believe that as we continue to be there for our customer in this regard, we'll help us gain momentum into the back after the year and hopefully spring bored into 2025 and Kelly, you may want to elaborate a little bit on the other side. Yeah, absolutely. So yeah, take a look at the second quarter of the conference on a cadence basis.
Kelly Dilts: Within SGNA, we are seeing an elevated rate of maintenance expense, particularly with HVAC units and coolers during the summer months. We're taking steps in the back half of the year to be more proactive in addressing these opportunities in order to provide a more consistent customer experience across our store footprint, while office supporting ongoing sales growth. As a result, we expect incremental pressure from the increased repairs and maintenance expense to continue within SGNA in the back half of the year. Finally, we are also seeing pressure from wage rate inflation closer to approximately 4% this year, which is higher than was contemplated in our initial guidance for the year.
Kelly: So June was our strongest month and then it started to turn negative in July and so what we really saw kind of in that mid-quarter time frame, just a general step down and it was all around the transaction side of things to Todd's point. So when we think about what we were contemplating as we went into Q2, I would tell you that on the basket side we were pretty much in line with our expectations. It was on the transaction side, which is why the teams are going to run hard after driving sales and making sure that we get the customers the value that they need right now. So that's really the cadence. The other thing I think that's really important to point out is...
Kelly Dilts: With all of this in mind, we are updating our EPS guidance and now expect to deliver EPS in the range of approximately $5.50 to $6.20. This guidance now assumes an effective tax rate of approximately 23%. We also continue to anticipate capital spending in the range of $1.3 to $1.4 billion as we invest to drive ongoing growth. This capital spending remains aligned with our capital allocation priorities, which continue to serve us well.
Speaker Change: The last week of each of the calendar months were the softest comp weeks of the quarter and for us.
Speaker Change: That really indicates that she started to run out of money by the end of the month. And what we saw in some of our survey work is just that our core customer says that they're feeling worse off financially than they did six months ago. And so again, it just goes back to the point of in this back cap, making sure that we're playing offense on driving sales and taking the mark down investment that we need to do.
Kelly Dilts: 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 strategic initiatives. To that end, we remain on track to deliver on our plans of approximately 2,435 real estate projects this year, including 730 new stores, 1,620 remodeled, and 85 relocations. Next in our capital allocation priorities, we seek to return cash to shareholders through a quarterly dividend payment and overtime and win appropriate share repurchases. Finally, although our leverage ratio remains above our target of approximately 3 times adjusted debt to adjusted EBITAR, we are focused on improving our debt metrics and support of our commitment.
Rupech Parikh: Our next question comes some rupech, per week with Oppenheimer, please proceed with your question.
Rupesh Parikh: Good morning, and thanks for taking my questions. Two quick ones. So first on the guidance, is there any more conservatism than normal with this particular guide? And then second, as you look at the promotional offers that you've done, I guess, in Q2, and then what you plan to do in the back out of here, how is the consumer response versus your expectations? And first is what you typically see when you run these for increased promotions and markdowns.
Speaker Change: Thanks for your touch. Yeah, to give a little bit of color on the guidance, let me walk through a couple of things. I'll tell you that in the back half it was primarily reflective of obviously the softer sales trends that we saw in Q2, but also the impacts associated with those sales. So that sales mix related margin and then the markdowns that we've been talking about. You know, there's a lot of other puts and takes that we talked about in our prepared remarks, but those are really the primary drivers. Alright.
Kelly Dilts: To our current investment grade credit ratings, which as a reminder, our triple B and BWA to in summary, while we're not satisfied with the financial results for the second quarter, we are pleased with the continued progress in our back to basics work, and we believe we're taking the necessary actions to build on this progress and drive the business forward. We remain committed to discipline expense and capital management as a low cost operator with the goal of delivering consistent strong financial performance while strategically investing for the long term. And we continue to believe that this model is resilient and strong.
Speaker Change: And so to that, just to give you a little bit of color on the sail side, but I'll tell you as well, while we're doing all the right things to strengthen our foundation through our back to basics work and the markdowns that we're looking ahead for, you know, our core customers is obviously struggling. And so this guidance really assumes more of a macro and neutral to just light softening of that consumer. And so the low end of the guidance takes that into consideration. So we are looking at it a little different ways than what we may have historically. I think that's important to call out as well. So on that lower end range, we're looking at a comp similar to the comp that we have in the second quarter.
Kelly Dilts: I want to emphasize that we're confident and excited about the long-term future of this business, including driving profitable same-store sales and deliver meaningful operating margin expansion while generating healthy new-store returns, strong free cash flow, and creating long-term shareholder value.
Todd Vasos: With that, I'll turn the call back over to Todd. Thank you, Kelly.
Speaker Change: where as the higher end of the range would assume that there's some acceleration, but I think it's important to unpack that a little bit, you know, and analyzing where we're heading in the second half. The one and two year trends have a lot of noise in them, just given the volatility that we have last year and then just recent step change that we had in the middle of the second quarter. So if you take a step back, we think really looking at the caveer from 2019 is probably a more relevant view.
Todd Vasos: As we wrap up, let me say again that 2024 is about executing on our foundational back-to-basics plan. And we are pleased to be on schedule and making great progress against the goals we had previously outlined. We are confident that the actions we are taken will strengthen our foundation for the long term. This team is energized and laser focused on our strategy to restore operational excellence while delivering value for our customers and shareholders alike.
Speaker Change: That's for a couple of reasons. One is, it's a similar holiday schedule to 2024, which is important. It eliminates that noise of the pandemic and the stimulus as well as inflation. As we've seen in inflation, steady a little bit this year. So we're really using that kind of as a basis of what we're looking for. So with that on the high end of our 24-guide, what we're assuming now is a stable, we're going to take a break to 2019 very close to what it was in Q2. So just continue kind of where we are and that the consumer and the environment don't necessarily get much worse from here. And then on the low-inside of things, it provides for some further softening on our core customers' ability to spend.
Todd Vasos: I want to close by thanking our more than 193,000 employees for their commitment to fulfilling our mission of serving others. It is a privilege to serve alongside them each and every day. And we are looking forward to all we can accomplish together in the back half of the year.
Operator: With that operator, we would now like to open the lines for questions. Thank you. At this time, we will be conducting a question and answer session. If you like to ask a question, please press star one on your telephone keypad. As a reminder, we ask you please limit to one question. A confirmation, till we indicate your line is in the question queue. You may press star two if you like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.
Speaker Change: and so that's how we're thinking about the potential outcomes of what we're seeing today.
Kelly: And especially the other part of the question, as Kelly indicated, we started to see that softening was really evident in the month of July. And so with that, being the last period of the quarter, we really started to ramp up our promotional cadence.
Michael Lasser: Our first question comes from Michael Lasser with UBS. Please proceed with your question. Good morning. Thank you so much for taking my question. Todd, the market is saying that the dollar general and the small box value model is to simply structurally challenge either because there's too many stores. It's not sufficiently exposed to the online channel or not attracting enough incremental customers, perhaps due to competition. So why is that wrong? And as you are trying to invest in markdown and promotion to regain customers, how do you build back the margin over time? Is it simply a function of leveraging sales growth? Thank you very much. Thank you, Michael. And I appreciate the question.
Speaker Change: Middle of that month, as you would imagine, it takes a little time to get moving, but not as long as it used to, because we used our digital tools, which we've done a very nice job over the last many years in enhancing those, and so we were able to go out and fairly quickly with some promotional activity, which now has ramped up even further, as we moved into August, and will continue to ramp up as we moved into the third quarter, and fourth quarter of this.
Speaker Change: This year, and I would tell you, just like we anticipated, or seen the response from the consumer, it was almost immediate. She continues to engage, especially with those digital tools.
Speaker Change: and I would tell you that we're really good at doing this. We've done it many times. We always said we reserved the right to invest in price and for us because of our great everyday low price and continue to be in very great shape there. It's really that promotional lever that we reserved the right and so we know exactly what the consumer wants and needs. We talked to each and every quarter and that's exactly what we're offering right now and we'll continue to do so. So we believe that those promotional cadences will continue to guard a more and more customers and more and more transactions as we move through this quarter and into next.
Todd Vasos: Yeah, I fundamentally, we fundamentally don't believe at all that the model is structurally challenged. But there are challenges to the business as this quarter indicated. Let me first start by saying that our new store productivity as well as our strong returns and new stores continue to service well. We continue to gain market share with these new store openings and cannibalization with these new storepers continue to be very much in line to where it's been historically.
Todd Vasos: So we don't believe that by slowing down to any large degree, new stores would be the answer here. What we do believe is that this quarter in particular with a half a point of con versus last quarters of a fairly strong 2.4% comp. As I look at what transpired here, I would tell you that it appears to us very strongly that one, this lower end consumer continues to be very much financially strapped, especially as it relates to our ability to feeder families and supporter families.
Speaker Change: Our next question comes from Peter Keith with Piper Sandler. Please proceed with your question.
Peter Keith: Hey, that's good morning, Todd, in the past you've always talked about how in tough times your customers need you even more and certainly this is a tough time with inflation and your core customer suffering a bit how come you think you're seeing the normal share gains or spending behavior from your customers like you have in the past?
Speaker Change: Now it's a great question Peter, I would tell you a couple things that we're noticing first of all.
Speaker Change: What we normally say right is is that during any step change which we saw in Q2 to Kelly's point toward the end of Q2, especially it takes a few quarters to come out of that meeting our core customer. What we also see is it takes...
Todd Vasos: As I look at our results throughout the quarter, I would tell you that from our perspective, the last week of the calendar month of each of the calendar months was the weakest by far. When you couple that with private brand being as strong as it is for us, our value value, which is probably what Michael is our $1 or below offering inside of our store, which by the way, still 2,000 items.
Speaker Change: A quarter more for the trade-in to come in at a higher rate. Now, in saying that what we've noticed is the trade-in has been slower to come in to the panel than what we have anticipated and or have seen in the past.
Todd Vasos: We've never walked away from that $1 price point. It is by far the strongest planogram that we have out there. And I would tell you that all those points would indicate that this is a cash strap consumer right now, even more so than what we saw in Q1. Now, what we also saw was that while we're not losing share, we're actually gaining share against all classes of trade in the consumable realm, what we did see in the quarter which was different than last quarter is the available share to take if you will out there from other cohorts.
Speaker Change: I believe that there's a couple reasons why I think the main reason and I believe this is true because it appears in every piece of data that we have is that the job market is still pretty decent, right? It's not as robust as it was, but also an employment has a spike
Speaker Change: Greatly, if you will in the last quarter or so, normally it takes that joke to get the trade-in to come in at a heavier clip, if you will. Now.
Speaker Change: The middle and the upper middle income are still looking for value so I don't want you to believe that they're not. But usually to get them to trade in at a higher rate usually takes...
Todd Vasos: We didn't get our fair share of that. Now we didn't lose, right? We're not seeing any one competitor, mass or anywhere else take our core customer, but what we did see was at least in this quarter, the mass channel, especially those that are down south, actually did a lot better in gaining the share that was available in the marketplace. We didn't get our fair share of that.
Speaker Change: something a little bit more substantial than we've even seen to occur. I'm not suggesting I want to see that happen to that customer, but we stand ready willing to serve her when that happens. The other thing that we've noticed is more and more online activity comes from that cohort. Our core customer continues her online journey. We have pretty much the way she was.
Kelly Dilts: So what are we going to do about it? Well, it's exactly what we talked about in our prepare remarks. We go on the offense and we've done that very successfully here over the years, Michael, as a merchant and now as the CEO of this company, we know how to do this and we're ratcheting that up as we speak. We believe that the share that's available out there, we have every right to get more than our fair share of that out there.
Speaker Change: It's pretty static, if you will. But we've noticed that middle to upper middle, you know, continues to rely on online a little bit more. And so as that occurs, I believe the trade-in.
Speaker Change: Slow's a little bit on that side. So it's incumbent upon us to take a look at how we offset that piece as well. And I would tell you on that just stay tuned.
Kelly Dilts: So we're working that really hard and you heard that in our prepare remarks. So I say that this box, this company and the small box in general is very much alive and well. We're just going through a little bit of a transition period and a transformation, as you know, and it's never usually a straight line to the top when you do these, right? And so a few bumps in the road, but we feel that we know exactly how we can go about garnering that share that's available out there.
Kelly Dilts: And kill, you may want to take the second part.
Speaker Change: Our next question comes from Seth Sigmund with Barclays. Please receive with your question.
Seth Sigmund: Hey, good morning everyone. I wanted to follow up on tracing, just give in the price investments and the comments about the promotional environment being worse than expected.
Kelly Dilts: Yeah, absolutely.
Seth Sigmund: Can you talk about how your competitive price gaps have evolved through this year, however you look at that? Maybe just elaborate more on the actions that you're taking, how much of the assortment are you looking to mark down here? Maybe the categories that you're focused on, and I guess it's the last piece of that as we try to bridge the guidance.
Kelly Dilts: So yeah, just how do we build that margin back over time? I think it's important to call out one, you nailed it. It's the softer sales environment. So with the softer top line, that does put pressure on our fixed cost leverage, specifically labor and rent and those type of things as you will know.
Speaker Change: How much of that guidance change reflects those price investments if I recall last year, you had about $95 million of markdown impact. It sounds like you're saying something similar to that. I just want to clarify that another $95 million. Thanks so much.
Kelly Dilts: But as Todd talked about, I think in the near term, one is just going on the offense and taking the mark down investment that we need to take on go forward basis to drive sales and to be there for our customer. And to kind of put that in context, I would say that what we're looking at in this back cap is going to be a similar mark down rate to what we saw last year in the back cap as well. So more than we had anticipated, but absolutely the right decision. And not necessarily one that we have to think about over the long term, as that can come back in line when circumstances change.
Speaker Change: I'll start Kelly and I'll turn it over to you. I would tell you that we feel very good about our everyday price position. Matter of fact, we track it and we graph it as you would imagine every which way and it's fairly flat to where we've been over the last many quarters against all classes of trade.
Kelly: So, our everyday retails are in good shape if you recall when I came back in in October last year, I didn't call that out as one of our shining stars that I found coming back is that our everyday little price.
Kelly Dilts: You know, the other piece of this, and we've talked a lot about it, obviously, is shrink and mix headwinds. And so we're certainly experiencing those. Although I think we have a lot of good news here to report on the shrink side of things, starting to see that trend bend. It just takes a while to flow that through the financial statements. And then, the damage piece of this as well is putting a little pressure on the second half.
Kelly: was very competitive and continues to be even today. So that gives us great confidence and a very good springboard to launch this promotional activity that we know exactly how to do and we've done it many times in my time here in the last 16 years.
Kelly: to stimulate that customer and build a bridge that the end of the month for our core customer because she's running out of money. And while I'm not going to give you the exact...
Kelly Dilts: But again, all the things that we're doing on a back to basics efforts are going to help to mitigate that as well as just having a focused team on that. So I think those are kind of the near things that we'll be dealing with that we'll get in line.
Kelly: Playbook is a, that wouldn't be too smart, right, but I would tell you that, that it'll be in categories, mainly that really drive that traffic for us.
Kelly Dilts: And then over the long term, our underlying long-term drivers are still in place. We still have a long runway for new store opportunities with high returns. We have high returns with the opportunities that we have with our existing stores.
Kelly: But more so, what that customer was looking for to bridge that time. So if you think about things like the food categories.
Kelly: Things like cleaning and paper where she really needs us, you know, to again, to bridge her family's gap at the end of the month. Those are those areas that are best suited for this type of activity. And that's exactly how we'll leave a approach in the past.
Kelly Dilts: And then you saw, you know, this period, our cash from operations was up 127%. So we are still generating a significant amount of cash flow, which gives us the ability to invest in the business. So we feel good about the long-term potential of getting those margins back over time.
Kelly: and have so far approached it and we'll continue to approach it as we move through the back half of the year.
Speaker Change: Well, now I'm in just on the Markdown investment as we're thinking about it in the back cap. I'll tell you, it's not a certain dollar amount that we're considering. It's just the overall level of promotion and Markdowns that we need to take. So, you know that.
Simeon Gutman: Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question. Hi, good morning. I have two parts in one question.
Todd Vasos: Todd, I want to ask if this transition period changes the way you think about reinvestment now going forward, thinking about all the levers of pricing and merchandising and labor, meaning that even if the business comps positive that margins just stay subdued for an extended period of time while you get all the pieces in order. And then the second part of it is, are there any cohorts of stores where it would make sense to rationalize them because they're under comping and or they're margin dilutive to the overall change.
Speaker Change: Similar to kind of what I said before what we're expecting is in that second half that the rate would be similar to last year and then as we think about it more on a full year basis what that does is get us back into kind of that
Speaker Change: Mark Downer, promotional range that's very similar to where it was in 2019 and certainly from a front half back cap perspective that the back cap now would be heavier than the front half of the year.
Speaker Change: The End.
Todd Vasos: Thanks. Simeon, thanks for the question. And as we continue to move through this transformation period, obviously, as we said, it's never a straight line to the top. There's bumps in the road. The margin is one of those. As we've indicated right from the start, the biggest opportunity we have in the margin that's a differentiator than just a few years ago is in that shrink area. We believe we've got ample opportunity there to get our shrink back in line as Kelly indicated in her prepare remarks.
Speaker Change: Our next question comes from John Heimbachle with Google and Heim partners. Please proceed with your question.
John Heimbachle: Hey guys, two quick things, Todd, maybe how do you think about our Ohio promotions?
John Heimbachle: And I know a couple of years ago you did promotions in the fourth quarter to jumpstart you going into the year, the following year. And I think that lifted Comps by a couple of hundred basis points.
Speaker Change: How do you think about this environment versus that? And then lastly, when I think about, right, you're the count that you need to leverage expenses, I think it's still in the mid-trees.
Todd Vasos: We're starting to see some benefit from all the work that we've done around that. And we still very much believe it. It will turn to a tailwind as we move into Q4 and then much more substantial of a tailwind into 25. Now, shrink is a constant battle. It's work every day. But it's that pick and shovel work that we know how to do. We know how to do very well here at Dollar General.
Speaker Change: is there an unlock, a roll-tainer type unlock out there that can move that down materially. Or we're kind of stuck with that 3% plus number.
Speaker Change: John, thanks for the question, the two-part question. So I'll take to the first one and I will tell you that, yeah, you know, for us as we can see into look at that promotional lever, we always look at what that return would be. And at this point,
Todd Vasos: The other thing I do want to point out to me is that as we continue to move, I would tell you, our back-to-basics plan has started to really show some signs of life here. And when I say that, when I look at our operations as an example, we've been using the football analogy for the last few quarters. And I would tell you that we had crossed the 50 yard line last quarter in Q1.
Speaker Change: We believe that it's our best use of our gross margin, because to your point, what we've seen the past when we've done this and you alluded to one of the times in the past, but there's been multiple times and again, the 16 years that I've been here and each of those.
Speaker Change: Times came out of that a stickier consumer, right? And so the return is normally very much intact as we pull out of the heavier promotional activity when the time is right.
Todd Vasos: I would tell you we're around the opponents 40 yard line at this point, which is good to see. We're making progress. We're making progress in a lot of fronts there. One being our staffing of the front ends, the reduction, and take away of the self-checkouts and moving those to assistant lanes. It was in full swing. Our customers, our talents, they like it a lot more. Not surprising. They like the interaction instead of having to check out themselves.
Speaker Change: Now a few years ago as well as you know we rationalize.
Speaker Change: How we promote. And so we're a lot smarter today, so utilizing that rationalization approach and tools that we that we have embedded now in our in our process. I believe we'll we'll help us in this.
Speaker Change: Activity to ensure one is driving the most traffic that we can drive but also secondly, it is the best use of our spend.
Todd Vasos: And we like what we see on that front. And I believe that's what's starting to show up on our shrink results as well in a positive manner. The other thing that we're working hard on, we're starting to see that shrink traction as I talked about. We're also starting to see in stocks better each in every quarter. Really, each in every period as we continue to move through. So in stocks are getting better.
Speaker Change: Because what we want to be able to do is utilize us to lift all boats as well, meaning not only the promotional pieces, but within those areas that we are promoting, again, food, paper, cleaning, pet, those areas that I talked about earlier, that we see overall lifts in those categories. And that's what this rationalization of our markdowns in the past have provided for us. We've got a great book.
Todd Vasos: Our turnover inside of our stores at all levels of our operating group is getting better from our regional director, DM store manager right down to the sales associates inside of our stores, which is usually a true testament that we're doing the right things for our employees, which in turn is normally the right thing for our customers. So we believe that those are all green light. On our merchandising side, I'm very proud of the inventory reductions that took place on the same store basis, especially 11% down in total inventory on a same store basis, 16% down on the same store basis in non-con.
Speaker Change: to follow there. And then as it relates to the labor side, you know, labor rates are up a little higher than we anticipated this year. The hours that we're providing is right on what we thought. We've still feel very good about the hours that are available to our stores to get the job done. But the labor rates were up a little bit more than we had anticipated coming into this year. In saying that, you know, we are in the process right now of our, our, our retainer sort that you mentioned. The last time we actually did that was in 2017. And you're right, there was a small step change there in in labor. I'm not suggesting that it would be as large as that, by any means. But what I, I mean.
Todd Vasos: And 7.6% decrease per store on a per store basis in consumables all while driving greater share gains through our consumable categories. Where we're working hard is to continue to engage that consumer now through this promotional lever. We have a very strong everyday price out there. This will just lever on top of that. The other thing that I do want to talk about as well is that we've reduced in the process of reducing the 1000 skews.
Speaker Change: I am suggesting is that, um...
Speaker Change: While we feel good about the amount of labor hours we're using today, I want to continue to feel good about that. And I want our operators to continue to feel good about that.
Speaker Change: So, utilizing role-tainer sort and other things that we're taking work out of the stores is not the strip more labor out of the stores but to ensure that they have enough labor to satisfy the customer, give them the best shop and experience possible because we believe right now that is the best use of the labor hours that we have available is to further our back-to-basics work. So, stay tuned. There's always ways that we can look at the SGAA lever because it is a lot larger as you would imagine than just the labor side while labor is a big component of it.
Todd Vasos: That continues to do very well. We are well on track and will hit our goal by the end of this fiscal year in reducing the 1000 course skews. And we're evaluating what that may look like in 25 for additional opportunities to continue to reduce that inventory level and simplify work at the store level. Off-shelf displays are down by 25% as you've heard in our prepare remarks in the first half. Going to be down over 50% in the back half.
Todd Vasos: And of course all the work simplification that we've done I think is going to be very important. And lastly, our supply chain continues to really do well when I think about where we are in the football field. We're down around the 30 yard line at this point, getting ready to get into the red zone here. And that is a true testament to the hard work of our supply chain, but also across functional work of our operators and our merchants.
Speaker Change: So stay tuned, we've got other things that we're working on that we believe can help modify a little bit of that expense as we move through the back after the year and in the next year.
Speaker Change: Our final question comes from Corey Tarlo with Jeffery's, please proceed with your question.
Corey Tarlo: Good morning and thanks for taking my question that soon to ask on inventory, inventories are down, yet in stock levels are stuck.
Todd Vasos: Our on time and in full rates are exceeding our expectations into this coming quarter. And right now, what we're working on hard is making sure that we are consistent. Because consistency here is going to be the key. If I can deliver on time to our stores consistently, it gives them a full leg up and be able to work that seven day workflow that we know when executed at the store level is a real positive for our stores in serving the customer each and every day.
Speaker Change: and Mark Downs should also be increasing, so unit velocity should increase, so I'm curious how you think about it.
Speaker Change: That dynamic and then, secondarily, consumable sales have continued to increase, but seasonal sales were only down slightly close to flat. I'm curious if you saw anything to call out in that category as well.
Speaker Change: So why don't I start Kelly and I'll turn it over to you. Yeah, so let me take the second part of that question, you know, as we acted at Q2, you know, we weren't happy with either side of the consumables or our non-consumable business, but to your point what we saw was a flat-ish non-consumable business quarter over quarter, but a deceleration of the consumable side of the business.
Todd Vasos: So a lot of great things are going on. Yes, a little pressure on certain lines. We believe that our guidance is very prudent based on where that consumer is right now. And our transformation progress as well as where we want to make sure that we continue to drive that traffic. Very nice to see a positive 1 percent traffic gain still for the quarter. We're not happy with just the 1 percent. We're going to drive for more.
Speaker Change: and what that really showed was, once again, that core consumer is a very, very price sensitive at this point and looking for value anywhere she can find it. That's another reason why we're stepping up that promotional activity to re-engage even further that consumable size of the business, which we believe, and we've already have started this venture at the end of Q2 and now in the Q3, we very much believe and are seeing that engagement start to come back in.
Todd Vasos: But we know how to do this in me and we've done it. We've proven that once we continue to back that consumer through tough times, she's there when the better times come and she's very sticky. And that's exactly how we're approaching it this time.
Matthew Boss: Brown.
Todd Vasos: Our next question comes from Matthew Boss with JP Morgan Chase. Please proceed with your question. Great, thanks. So Todd, just to take the cadence of comps maybe a step further, could you elaborate on underlying traffic versus ticket as a quarter progress? Any concerns that are now more top of mind today relative to call it three months ago from your survey work on the low income consumer and have you seen any improvement in August comp?
Speaker Change: So, as we continue to ensure that we're there for the consumer, I believe that that transition into a little bit more of a promotion of our will continue, but we'll also continue to pay off for dollar general. And then as a relates to a little bit of the inventory before I pass it to Kelly.
Kelly: is, you know, I feel very good about the inventory that we're reducing versus having to restart based on sales, as you saw we continue to reduce at the highest level our non-consumable business.
Todd Vasos: Yeah, you know, I don't want to talk too much about August, but I would tell you that what we've seen in so far in this quarter is in our guidance and you know, feel that we're on track there. So, you know, very much believe in that guidance that we put out there. Now I would tell you that, you know, while we're happy with the 1% that we gained on traffic, we've really, there's more to gain there.
Speaker Change: and that's usually the slowest turn business as well.
Speaker Change: And um...
Speaker Change: The good thing as we continue to look forward is these goods are fresh, they're clean and they're very sellable and and as you can see are selling. So it's good to see that, but I believe it's also good that we're seeing some of the reductions.
Todd Vasos: And as I indicated in my first question, answer there. I would tell you, Matt, that what we saw is, you know, the guys down in Betonville are doing a pretty nice job in garnering the available traffic that's out there from other retailers. We haven't seen a deterioration on our side, but what we saw in Q1 was a greater pickup. From the available share, maybe from other classes of trade, grocery and drug, while we got some of it, we didn't get our fair share, at least what I would consider to be our fair share.
Speaker Change: to make a little bit more room inside the stores.
Speaker Change: for our customers to be able to enjoy that shop and experience. And Todd's absolutely right. So we feel really good about the quality of our inventory and I think, and we called it out in the prepared remarks. This team has just done a remarkable job of reducing inventory while improving in stocks. And that is not easy to do. So they're really focused on optimization and, you know, you heard us talk about some investments last year that we put in place in order to help with that and so we're certainly right-sizing what we're bringing into our distribution centers and then out into the stores. And we have, I would tell you that the biggest unit decrease has been in our supply chain, which certainly helps with efficiencies and has driven some of the progress that we've made down that football field. And now we're starting to see it in store.
Todd Vasos: And that's why we're attacking this and going on the offense. We believe that we believe that as we continue to be there for our customer in this regard will help us gain momentum into the back half of the year and hopefully a springboard into into 2025.
Speaker Change: and so that's good to see. So I would say that this is a real bright spot in the border.
Kelly Dilts: And Kelly, you may want to elaborate a little bit on the other side. Yeah, now absolutely. So yeah, taking a look at second quarter comps on the cadence basis. So June was was our strongest month. And then it started to turn negative in July. And so what we really saw kind of in that mid quarter timeframe, just a general step down. And it was, it was all around the transaction side of things to Todd's point.
Speaker Change: This concludes today's conference, you may disconnect your lines at this time and we thank you for your participation.
Speaker Change: [inaudible]
Kelly Dilts: So when we think about what we were contemplating as we went into Q2, I would tell you that on the basket side, we were pretty much in line with our expectations. It was on the transaction side, which is why the teams are going to run hard after after driving sales and making sure that we get the customers the value that they need right now. So that's really the cadence. The other thing I think that's really important to point out is the last week of each of the calendar months were the softest comp weeks of the quarter.
Kelly Dilts: And for us, that really indicates that she started to run out of money by the end of the month. And what we saw and some of our survey work is just that our core customer says that they're feeling worse off financially than they did six months ago. And so again, it just goes back to the point of in this back half, making sure that we're playing offense on driving sales and taking the mark down investment that we need to do.
Rupesh Parikh: Our next question comes some Rupesh Parake with Oppenheimer. Please proceed with your question. Question.
Kelly Dilts: Good morning and thanks for taking my question. So two quick ones. So first on the guidance, is there any more conservatism than normal with this particular guide? And then second, you know, if you look at the promotional offers that you, you know, that you've done, you know, I guess in Q2 and then what you plan to do in the back half of year, how is the consumer response versus your expectations and versus what you typically see when you run these increased promotions and markdowns?
Kelly Dilts: Thanks, Rupesh. Yeah, no, to give a little bit color on on the guidance out. Let me, let me walk through a couple of[inaudible] all the right things to strengthen our foundation through our back-to-basics work and the markdowns that we're looking ahead for, you know, our core customer is obviously struggling. And so this guidance really assumes more of a macro neutral to slight softening of that consumer. And so the low end of the guidance takes that into consideration.
Kelly Dilts: So we are looking at it a little different ways than what we may have historically. I think that's important to call out as well. So on that lower end range, we're looking at a comp similar to the comp that we have in the second quarter, whereas the higher end of the range would assume that there's some acceleration. But I think it's important to unpack that a little bit, you know, in analyzing where we're heading in the second half.
Kelly Dilts: The one and two-year trends have a lot of noise in them, just given the volatility that we had last year and then just recent step change that we had in the middle of the second quarter. So if you take a step back, we think really looking at the keger from 2019 is probably a more relevant view. And that's for a couple of reasons. One is it's a similar holiday schedule to 2024, which is important.
Kelly Dilts: It eliminates that noise of the pandemic and the stimulus as well as inflation, as we've seen inflation steady a little bit this year. So we're really using that kind of as a basis of what we're looking for. So with that on the high end of our 24-guide, what we're assuming now is a stable keger rate to 2019, very close to what it was in Q2. So just continue kind of where we are and that the consumer and the environment don't necessarily get much worse from here.
Kelly Dilts: And then on the low inside of things, it provides for some further softening on our core customer's ability to spend. And so that's how we're thinking about the potential outcomes of what we're seeing today. And professionally, the other part of the question, as Kelly indicated, we started to see that softening was really evident in the month of July. And so with that being the last period of the quarter, we really started to ramp up our promotional cadence middle of that month as you would imagine.
Kelly Dilts: It takes a little time to get moving. But not as long as it used to because we used our digital tools, which we've done a very nice job over the last many years in enhancing those. And so we were able to go out fairly quickly with some promotional activity, which now has ramped up even further as we moved into August. And we'll continue to ramp up as we move into the third and the third quarter and the fourth quarter of this year.
Kelly Dilts: And I would tell you, just like we anticipated, we're seeing the response from the consumer. It was almost immediate. She continues to engage, especially with those digital tools. And I would tell you that we're really good at doing this. We've done it many times. We always said we reserved the right to invest in price. And for us, because of our great everyday low price and continue to be in very great shape there, it's really that promotional lever that we reserved the right.
Kelly Dilts: And so we know exactly what the consumer wants and needs. We talked to her each and every quarter. And that's exactly what we're offering her right now. And we'll continue to do so. So we believe that those promotional cadences will continue to guard her more and more customers and more and more transactions as we move through this quarter and into next. Thanks.
Peter Keith: Our next question comes from Peter Keith with Piper Sandler. Please proceed with your question. Hey, thanks. Good morning. Todd, in the past, you've always talked about how in tough times, your customers need you even more. And certainly this is a tough time with inflation and your core customers are suffering a bit. How come you don't think you're seeing the normal share gains or spending behavior from your customers like you have in the past?
Todd Vasos: That's a great question. Peter, I would tell you a couple of things that we're noticing. First of all, what we normally say is that during any step change, which we saw in Q2 to Kelly's point toward the end of Q2 especially, it takes a few quarters to come out of that meaning our core customer. What we also see is it takes a quarter or more for the trade in to come in at a higher rate.
Todd Vasos: Now, in saying that, what we've noticed is the trade in has been has been slower to come in to the channel than what we have anticipated and or have seen in the past. I believe that's there's a couple of reasons why I think the main reason and I believe this is true because it appears in every piece of data that we have is that the job market is still pretty decent, right?
Todd Vasos: It's not as robust as it was but also unemployment hasn't spiked greatly, if you will, in the last quarter or so. Normally it takes that jolt to get the trade in to come in at a heavier clip, if you will. Now, the middle and the upper middle income are still looking for value. So I don't want you to believe that they're not. Usually to get them to trade in at a higher rate usually takes something a little bit more substantial than we've even seen to occur.
Todd Vasos: I'm not suggesting I want to see that happen to that customer but we would stand ready and willing to serve her when that happens. The other thing that we've noticed is more and more online activity comes from that cohort. Our core customer continues her online journey pretty much the way she was. It's pretty static, if you will. But we've noticed that middle to upper middle continues to rely on online a little bit more and so as that occurs, I believe the trade in slows a little bit on that side. So it's incumbent upon us to take a look at how we offset that piece as well.
Todd Vasos: And I would tell you on that, just stay tuned.
Seth Sigman: Our next question comes from Seth Sigmund with Barclays.
Todd Vasos: Please proceed with your question.
Kelly Dilts: Hey, good morning, everyone. I wanted to follow up on pricing, just given the price investments and the comments about the promotional environment being worse than expected. Can you talk about how your competitive price gaps have evolved through this year? However, you look at that. And maybe just elaborate more on the actions that you're taking. How much of the assortment are you looking to mark down here? Maybe the categories that you're focused on.
Kelly Dilts: And I guess just the last piece of that is we try to bridge the guide in, and how much of that guidance change reflects those price investments. If I recall last year, you had about $95 million of markdown impact. It sounds like you're saying something similar to that, so I just want to clarify, is that another $95 million?
Kelly Dilts: Thanks so much. Yeah, I'll start Kelly and I'll turn it over to you. I would tell you that, you know, we feel very good about our everyday price position, matter of fact, you know, we track it and we graph it as you would imagine. And every which way and it's fairly flat to where we've been over the last many quarters against all classes of trade. So our everyday retails are in good shape.
Kelly Dilts: If you recall, when I came back in in October last year, I didn't call that out as a, as a one of our, our shining stars that I found coming back is that our everyday low price was very competitive and continues to be even to today. So that gives us great confidence and a very good springboard to launch this promotional activity that we know exactly how to do and we've done it many times in my time here in the last 16 years to stimulate that customer and build a bridge that the end of the month for our core customer because she's running out of money.
Kelly Dilts: And while I'm not going to give you the exact playbook, because that wouldn't be too smart, right? But I would tell you that it'll be in categories, mainly that really drive that traffic for us, but more so what that customer was looking for to bridge that time. So if you think about things like the food categories, things like cleaning and paper, where she really needs us, you know, again, the bridge, her family's gap at the end of the month.
Kelly Dilts: Those are those areas that that are best suited for this type of activity. And that's exactly how we'll we've approached it in the past and and have so far approached it and we'll continue to approach it as we move through the back half of the year. Well, now and then just on the markdown investment, as we're thinking about it in the back cap, I'll tell you, it's not a certain dollar amount that that we're we're considering.
Kelly Dilts: It's it's just the overall level of promotion and markdowns that we need to take. So, you know, similar to kind of what I said before what we're expecting is in that second half that the rate would be similar to last year. And then as we think about it more on a full year basis, what that does is get us back into kind of that markdown or promotional range that's very similar to where it was in 2019. And certainly from a front half back cap perspective that the back half now would be heavier than than the front half of the year.
John Heinbockel: Our next question comes from John Heinbuckle with Guggenheim partners. Please proceed with your question.
Todd Vasos: Hey guys, two quick things Todd, maybe how do you think about ROI of promotions? And I know a couple of years ago, you did promotions in the fourth quarter to jumpstart you going into the year, the following year. And I think that lifted comes by a couple of hundred basis points. How do you think about this environment versus that? And then lastly, when I think about right here, the count that you need to leverage expenses, I think it's still in the mid three.
Todd Vasos: James, is there an unlock, a roller tanner type unlock out there that can move that down materially or we're kind of stuck with that 3% plus number? Yeah, John, thanks for the question, the two part question. So I'll take the first one and I'll tell you that yeah, you know, for us, as we continue to look at that promotional lever, we always look at what that return would be. And at this point, we believe that it's our best use of our gross margin because to your point, what we've seen the past when we've done this and you alluded to one of the times in the past, but there's been multiple times and again the 16 years that I've been here and each of those times came out of that a stickier consumer right and so the return is normally very much intact as we, you know, as we pull out of it.
Todd Vasos: The heavier promotional activity when one the time is right now a few years ago, as well, as you know, we rationalize how we promote and so we're a lot smarter today, so utilizing that rationalization approach and tools that we that we have embedded now in our in our process, I believe we'll help us in this activity to ensure one is driving the most traffic that we can drive. But also secondly, it is the best use of our spend because what we want to be able to do is utilize us to lift all boats as well, meaning not only the promotional pieces, but you know, within those areas that we are promoting, again, food, paper, cleaning, pet, those areas that I talked about earlier, that we see overall lifts in those categories.
Todd Vasos: And that's what this rationalization of our of our markdowns in the past have provided for us, so we've got a great, a great book to follow there. And then as it relates to the labor side, you know, labor rates are up a little higher than we anticipated this year. The hours that we're providing is right on what we thought. We still feel very good about the hours that are available to our stores to get the job done, but the labor rates were up a little bit more than we had anticipated coming into this year.
Todd Vasos: And saying that, you know, we are in the process right now of our retainer's sort that you mentioned the last time we actually did that was in 2017. And you're right, there was a small step change there in labor. I'm not suggesting that it would be as large as that by any means, but what I am suggesting is that while we feel good about the amount of labor hours we're using today, I want to continue to feel good about that.
Todd Vasos: And I want our operators to continue to feel good about that. So utilizing retainer's sort and other things that we're taking work out of the stores is not the strip more labor out of the stores, but to ensure that they have enough labor to satisfy the customer, or give them the best shopping experience possible because we believe right now that is the best use of the labor hours that we have available is to further our back to basics work.
Todd Vasos: So stay tuned. There's always ways that we can look at the SGNA lever because it is a lot larger as you would imagine than just the labor side while labor is a big component of it. So stay tuned. We've got other things that we're working on that we believe can help modify a little bit of that expense as we move through the back half of the year and into next year.
Corey Tarlowe: Collier, our final question comes from Corey Tarlowe with Jeffries. Please proceed with your question. Good morning and thanks for taking my question. I wanted to ask on inventory. Inventories are down yet in stock levels are up and seemingly markdown should also be increasing. So unit velocity should increase. So I'm curious how you think about that dynamic and then secondarily consumable sales have continued to increase. But seasonal sales were only down slightly close to flat. I'm curious if you saw anything to call out in that category as well.
Todd Vasos: So why won't I start Kelly and I'll turn it over to you. Yeah, so let me take the second part of that question. You know, as we exit the Q2, you know, we, while we weren't happy with either side of consumables or are not a consumable business. But to your point, what we saw was a flatish non-consumable business quarter over quarter, but a deceleration of the consumable side of the business. And what that really showed was that once again, that core consumer is very, very price sensitive at this point and looking for value anywhere she can find it.
Todd Vasos: That's another reason why we're stepping up that promotional activity to re-engage even further that consumable side of the business, which we believe. And we've already have started this venture, you know, at the end of Q2 and now in the Q3, we very much believe and are seeing that engagement start to come back in. So as we continue to ensure that we're there for the consumer, I believe that that that transition into a little bit more of a promotional variable will continue, but we'll also continue to pay off for dollar general.
Todd Vasos: And then as it relates to a little bit of the inventory before I pass up to Kelly is, you know, I feel very good about the inventory that we're reducing versus having to restock based on sales. As you saw, we continue to reduce at the highest level our non-consumable business. And that's usually the slowest term business as well. And the good thing as we continue to look forward is these goods are fresh, they're clean, and they're very sellable, and as you can see are selling.
Todd Vasos: So it's good to see that, but I believe it's also good that we're seeing some of the reductions to make a little bit more room inside the stores for our customers to be able to enjoy that shopping experience.
Kelly Dilts: That's absolutely right. So we feel really good about the quality of our inventory. And I think, and we called it out in the prepared remarks, this team has just done a remarkable job of reducing inventory while improving in stocks. And that is not easy to do. So they're really focused on optimization. And you heard us talk about some investments last year that we put in place in order to help with that.
Kelly Dilts: And so we're certainly right sizing what we're bringing into our distribution centers and then out into the stores. And we have, I would tell you that the biggest unit decrease has been in our supply chain, which certainly helps with efficiencies and has driven some of the progress that we've made down that that football field. And now we're starting to see it in stores as well. And so that's good to see. So I would say that this is a real bright spot in the border.
Operator: 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