Q3 2024 Dollar General Corp Earnings Call
Rob: Good morning. My name is Rob, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General third quarter 2024 earnings call.
Rob: Today is Thursday, December 5th, 2024. All lines have been placed on mute to prevent any background noise.
Rob: 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 Mr. Kevin Walker, Vice President of Investor Relations. Kevin, you may begin your conference.
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Kevin Walker: 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 issued today can be found on our website at investor.dollargeneral.com under news and events.
Kevin Walker: 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.
Kevin Walker: These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
Kevin Walker: These factors include, but are not limited to, those identified in our earnings release issued this morning, under risk factors in our 2023 Form 10-K filed on March 25, 2024, and any later filed periodic report, and in the comments that are made on this call.
Kevin Walker: 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: 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 Vasos: Thank you, Kevin, and welcome to everyone joining our call. We are pleased with our third quarter execution, particularly in light of significant impact of multiple hurricanes in the southeast during the quarter.
Todd Vasos: Before discussing our results, I want to express my appreciation for our team's tremendous efforts to serve our hometown communities following these storms.
Todd Vasos: As an essential retailer and often the most convenient source of products our customers need, our teams work diligently to reopen the stores as soon as we could safely do so in the impacted areas.
Todd Vasos: In addition, we have helped those in need through the donations to the American Red Cross, donating gift cards, and through our own Employee Assistance Foundation.
Todd Vasos: We further embrace the opportunity to help in recovery efforts by donating truckloads of products in these communities.
Speaker Change: Kelly will discuss the financial impact of these storms on our results later, but importantly our thoughts remain with those impacted communities and we will continue to seek opportunities to partner with them in the months ahead.
Speaker Change: For today's call, I will begin by recapping our Q3 performance.
Speaker Change: After that, Kelly will share the details of our financial performance as well as our updated financial outlook for fiscal 2024.
Speaker Change: I will then wrap up the call with an update on our back-to-basics work before discussing our new same-day delivery pilot and our real estate plans for 2025, including Project Elevate.
Speaker Change: Turning to our third quarter performance. On the top line, while our core customer remains financially constrained, our results came in near the high end of our expectations for the quarter.
Speaker Change: Specifically, net sales increased 5% to $10.2 billion in Q3 compared to net sales of $9.7 billion in last year's third quarter.
Speaker Change: Importantly, we continue to grow market share in both dollars and units in highly consumable products sales during the quarter and also grew market share in non-consumable product sales.
Speaker Change: Same store sales increased 1.3% during the quarter and was primarily driven by growth of 1.1% in average transaction amount including increases in average items per basket and average unit retail price per item.
Speaker Change: Customer traffic also increased three-tenths of a percent during the quarter.
Speaker Change: The comp sales increase was driven entirely by growth in our consumable category, as customers continued to focus their spending on the items they need most for their families. This growth was partially offset by declines in the home, seasonal, and apparel categories.
Speaker Change: From a monthly cadence perspective, same-store sales growth was strongest in October and was positive in all three periods of the quarter.
Speaker Change: Notably, the last full calendar weeks of both August and September were the weakest of the quarter, suggesting that our customers continue to face significant financial pressure as they are less able to stretch their budgets at the end of the month.
Speaker Change: While we saw an uptick in pre-hurricane sales in areas forecasted to be impacted, we believe it was largely offset by periods of store closures following the storms. As a result, we believe the net impact of our top-line results was immaterial.
Speaker Change: I mentioned our core customers continue to face significant financial pressure, which is having an impact on their shopping behavior. We see this pressure in the timing of their shopping during the month, as well as in the mix of products they're buying.
Speaker Change: We know that they need value, and we are working hard to deliver for them every day.
Speaker Change: We continue to feel very good about our everyday low price position relative to competitors and other classes of trade. However, the heightened promotional environment persisted throughout the third quarter and we anticipate
Speaker Change: that it will continue for at least the duration of the year.
Speaker Change: With that said, we continue to focus on enhancing our unique combination of value and convenience. We believe our results demonstrate that we have made significant progress in our back-to-basics work, which I will discuss in more detail in just a bit.
Speaker Change: Importantly, as we continue to improve our execution and enhance our value and convenient proposition, we believe over the longer term we can capture even more incremental market share, improve our financial results, and create long-term shareholder value.
Speaker Change: Before I discuss our plans to achieve these goals, I'll turn the call over to Kelly to share more on the financial details of our third quarter results.
Kelly Dilts: Thank you, Todd, and good morning, everyone. Now that Todd's taken you through a few of the top-line highlights of the quarter, let me take you through some of the other important financial details.
Kelly Dilts: Unless we specifically note otherwise, all comparisons are year-over-year, all references to EPS refer to diluted earnings per share, and all years noted refer to the corresponding fiscal year.
Kelly Dilts: For Q3, gross profit as a percentage of sales was 28.8%, a decrease of 18 basis points.
Kelly Dilts: This decrease was primarily attributable to increased markdowns, increased inventory damages, and a greater proportion of sales coming from the consumables category.
Kelly Dilts: These factors were partially offset by higher inventory markups, lower shrink, and decreased transportation costs.
Kelly Dilts: Shrink was a year-over-year tailwind of 29 basis points in Q3, which was better than our expectations coming into the quarter.
Kelly Dilts: While shrink rates as a percentage of sales continue to be higher than we would like to see in our stores, we are making progress as we work to get closer to pre-pandemic levels and believe our actions are having a positive impact.
Kelly Dilts: Now turning to SG&A, as a percentage of sales, it was 25.7%, an increase of 111 basis points.
Kelly Dilts: The primary expenses that were greater percentage of net sales in the current year period were hurricane-related costs, retail labor, and depreciation and amortization, partially offset by a decrease in professional fees.
Speaker Change: As Todd noted, our stores have been heavily impacted by multiple hurricanes in recent months. While we believe the net impact of these storms was immaterial to both sales and gross margin, they resulted in a negative impact to SG&A of $32.7 million during Q3.
Speaker Change: Moving down the income statement, operating profit for the third quarter decreased 25.3% to $323.8 million. As a percentage of sales, operating profit was 3.2%, a decrease of 129 basis points.
Speaker Change: Net interest expense for the quarter decreased to $68 million compared to $82 million in last year's third quarter.
Speaker Change: Our effective tax rate for the quarter was 23.2% and compares to 21.3% in the third quarter last year.
Speaker Change: This higher rate is primarily due to a decreased benefit from federal tax credits offset by the effect of certain rate-impacting items on lower earnings before taxes.
Finally, EPS for the quarter decreased 29.4% to $0.89.
Turning now to our balance sheet and cash flow.
Speaker Change: Merchandise inventories were $7.1 billion at the end of Q3, a decrease of 3% compared to prior year, and a decrease of 7% on a per store basis.
Speaker Change: Notably, total non-consumable inventory decreased 6% compared to last year and decreased approximately 9% on a per store basis.
Speaker Change: In addition to the financial benefit to our balance sheet, the significant improvement in our inventory position is having a positive impact operationally in our DCs and is beginning to positively impact our stores as well.
Speaker Change: We continue to focus on maintaining the appropriate mix and balance of inventory to improve in-stock levels and drive sales, while also mitigating shrink risk and improving working capital. Importantly, we continue to believe the quality of our inventory remains good.
Speaker Change: The business has generated cash flows from operations of $2.2 billion through the end of the third quarter, an increase of 52% as we continue to improve our working capital position, primarily through inventory management.
Speaker Change: In addition, we repaid our maturing $750 million of notes with cash during the quarter.
Speaker Change: Total capital expenditures in the 39-week period were $1 billion and included our planned investments in new stores, remodels and relocations, distribution and transportation projects, and spending related to our strategic initiatives.
Speaker Change: During the quarter, we return cash to shareholders through a quarterly dividend of $0.59 per 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: Our updated guidance includes the negative impact of the hurricane-related expenses of $32.7 million in third quarter.
Speaker Change: as well as an estimated Q4 negative impact of approximately $10 million from expenses related to the third quarter hurricanes as we continue to work through the necessary repairs.
Speaker Change: Hurricane-related expenses are significantly greater than what was contemplated in the company's previous financial guidance.
Speaker Change: Our updated guidance includes expected net sales growth in the range of approximately 4.8% to 5.1% and same-store sales growth in the range of approximately 1.1% to 1.4%.
Speaker Change: These updated amounts contemplate our start to Q4, as well as the expected impact of five fewer holiday shopping days between Thanksgiving and Christmas this year.
Speaker Change: Turning to gross margin, we continue to expect pressure as a result of increased promotional markdown activity in the back half of the year, as well as increased sales mix pressure due to the customer's need to prioritize their spending on the consumables category.
Speaker Change: With regard to damages, our guidance assumes current rates will continue for the remainder of the year, though we remain focused on addressing this headwind through our continued emphasis on getting back to basics.
Speaker Change: With all of this in mind, we're updating our EPS guidance and now expect to deliver EPS in the range of approximately $5.50 to $5.90.
Speaker Change: This guidance continues to assume 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.
Speaker Change: This capital spending remains aligned with our capital allocation priorities, which continue to serve us well.
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 store expansion and strategic initiatives.
Speaker Change: To that end, we remain on track to deliver our plans of approximately 2,435 real estate projects this year, including 730 new stores, 1,620 remodels, and 85 relocations.
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 of approximately three times adjusted debt to adjusted EBITDA, we are focused on improving our debt metrics in support of our commitment to our current investment grade credit ratings.
which, as a reminder, are BBB and BAAA too.
Speaker Change: In summary, we're pleased with our progress in the quarter, however we still have significant room for improvement in our financial performance and we're staying focused on continuing to advance our progress.
Speaker Change: To achieve our goals, 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.
Speaker Change: We're confident in our business model and our ongoing long-term financial priorities to drive profitable same-store sales growth meaningful operating margin expansion healthy new store returns
Speaker Change: Strong free cash flow and long-term shareholder value with that. I'll turn the call back over to Todd
Todd Vasos: Thank you, Kelly. I want to take the next few minutes to provide an update on our back-to-basic efforts in our stores, supply chain, and merchandising.
Todd Vasos: When I spoke with you one year ago and announced this plan, we noted that our customers rely on Dollar General to provide the products they need at great values in convenient, friendly, and easy-to-shop stores.
Todd Vasos: And when we stepped back and looked at our business through the eyes of the customer, we weren't meeting that goal consistently across our chain.
Todd Vasos: We laid out several important goals for the team to address these concerns, and I'm proud to note we have made substantial progress executing on these objectives and improving the overall customer experience.
Todd Vasos: With that in mind, I want to share a little about our progress in each area.
Todd Vasos: I'll start with our stores, where everything begins and ends for our customers.
Todd Vasos: Our goal in our stores is to deliver value and convenience in a clean and friendly shopping environment. We have made significant progress on this front with a meaningful increase in the number of stores that we believe meet or exceed our expectations as well as those of our customers.
Todd Vasos: As we view our stores through the eyes of the customer, we have seen this notable improvement continue to develop in our own unannounced store visits.
Todd Vasos: And more importantly, our customers are telling us as they have noted this improvement through our survey results at checkout.
Notably,
Todd Vasos: As of the end of Q3, customer satisfaction levels have increased by more than 900 basis points since Q1, when we first had these surveys available in the majority of our stores.
Todd Vasos: This coincides with improving in-stock levels, which increased approximately 180 basis points from Q3 of 2020 through to the end of Q3 of 2024.
Todd Vasos: These results are a testament to the hard work of the team, as well as the focus on increasing the front of store employee presence and sharpening our perpetual inventory management in our stores.
Todd Vasos: Our supply chain and merchandising teams have made significant contributions to our efforts in the store by helping to simplify operations for our teams, which enhances both the associate and customer experience in our stores.
Todd Vasos: All of these improvements have continued to help 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 Associate.
Todd Vasos: We still have work to do, but we're proud of the progress in the stores over the last year and we continue to be pleased with the associate and customer response to these efforts.
Todd Vasos: As a result, we believe we are well positioned to continue to elevate the in-store experience.
Let me provide a quick update on our supply chain.
Todd Vasos: 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.
Todd Vasos: Our focused efforts here have led to significantly improved OTIF levels in Q3 compared to the same time last year.
Todd Vasos: Notably, we have improved our on-time deliveries by approximately 470 basis points and in full rates by approximately 900 basis points over that period. We continue to be pleased with what we have seen in both our traditional and fresh supply chain, but believe we have room for further improvement.
Todd Vasos: As a reminder, as we drive our OTIP rates higher, we simplify the work inside of our stores, which ultimately results in a better overall experience for both our customers and associates.
Todd Vasos: In addition, we have continued making good progress in optimizing our distribution capacity and in fact have been able to accelerate our plans to exit temporary warehouse facilities.
Todd Vasos: We exited four more facilities in Q3 for a total of 15 within the last 12 months.
Todd Vasos: This will leave us with three remaining opportunities, all of which we plan to exit in 2025.
Todd Vasos: By closing these temporary facilities, we are able to improve overall efficiency in our supply chain while also reducing costs.
Todd Vasos: Meanwhile, we've augmented our permanent DC footprint with two new facilities in Colorado and Arkansas, each of which is open and now shipping to stores.
Todd Vasos: By the end of this year, we anticipate these efforts will result in year-over-year reductions in STEM miles of approximately 4% or greater in both our fresh and traditional supply chains.
I also want to note
Todd Vasos: that we implemented an automated system that utilizes advanced technology to store and retrieve products in our Arkansas, D.C. As a reminder, we added automation in a D.C. for the first time last year in South Carolina.
Todd Vasos: and have been pleased with the performance and results in that facility.
Todd Vasos: Over time we believe automation in these facilities can increase efficiency for our teams, optimize storage in the facility, and drive even greater inventory and order accuracy to further enhance the way we serve our stores.
Todd Vasos: Finally, earlier this year we began the first full-scale refresh of our sorting process within our distribution centers since 2017.
Todd Vasos: 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.
Todd Vasos: 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.
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.
Thank you for watching!
Speaker Change: Finally, I want to provide an update on our merchandising efforts. As a reminder, our top priority is providing meaningful value to our customer.
Speaker Change: We have a multi-faceted approach to deliver that value, including strong everyday low prices on national and private brands.
Speaker Change: compelling promotions and sales events such as our DG Deal Days which featured discounts on more than 6,000 items storewide during the holiday season.
Speaker Change: and low opening price points, including approximately 2,000 items at or below $1.
Speaker Change: To that end, Comp Sales in our Value Valley section of the store, which is comprised of a variety of items at the $1 price point, outperformed the rest of the store in Q3 by more than 600 basis points.
Speaker Change: We have also continued our strong progress in total inventory reduction this year. As Kelly previously noted, with a 3% overall decrease and a 7% decrease on a per store basis, all while improving in stock levels and growing sales.
Speaker Change: Earlier this year, we began working toward a net reduction of approximately 1,000 SKUs within our chain by the end of the year.
Speaker Change: And we are well on our way to meeting that goal, with the vast majority of these items already out of the planograms.
Speaker Change: Finally, our merchants have continued working with our operators to reduce activity and simplify work inside of our stores. For example, we recently reached an important goal by completing the reduction of the number of floor stands by approximately 50% compared to Q3 of last year.
Speaker Change: As demonstrated by these results, Back to Basics has a significant positive impact on our business over the last year. While we still have room to improve, we have made substantial progress in each of our three priority areas, and we believe we are well positioned to continue advancing this progress moving forward.
Speaker Change: I am excited about the work we have done to solidify our foundation and position us to deliver even stronger customer experience in 2025 and beyond.
Speaker Change: With that in mind, while we are committed to executing on these basics at even a higher level as we move forward, we are excited to progress our discussion beyond back-to-basics and focus on our initiatives and plans to drive growth and value for customers and shareholders.
Speaker Change: I'll share a couple of updates today on how we are enhancing the value and convenience proposition in new and exciting ways for our customers.
Speaker Change: And then we expect to share more of our plans for 2025 on our Q4 call in March.
Speaker Change: First, I'm excited to announce that we began a test of same-day home delivery from our stores during the quarter. This pilot launched in September and we're currently partnering with a third party to offer delivery through our DG app from approximately 75 stores.
Speaker Change: As a reminder, we have a highly successful and incremental delivery partnership with DoorDash in approximately 16,000 of our stores, and the learnings from that initiative and our own customer work have provided the foundation.
Speaker Change: from which to test our own delivery offering with our unique customer base.
Speaker Change: We believe this offering will even further enhance the convenience of our customers expect from Dollar General while still providing the value they need.
Speaker Change: We are quickly learning and refining our process, and over time we believe we can have delivery through the DG app available the same number of stores as our DoorDash offering, which we expect to continue expanding over time.
Speaker Change: We are excited about the opportunity for our customers. Our goal is to drive greater customer loyalty within the digital platform, while ultimately increasing market share and accelerating growth.
Speaker Change: Next, as we look to extend and enhance the unique combination of value and convenience to Dollar General, I want to discuss our plans for real estate growth in 2025.
Speaker Change: With more than 20,000 stores across 48 states, Dollar General is located within 5 miles or less of approximately 75% of the U.S. population.
Speaker Change: And with approximately 80% of these stores in towns of 20,000 or fewer people, we are uniquely positioned to serve an underserved customer in rural America.
Speaker Change: As we look to leverage our real estate strength, we plan to increase the number of real estate projects next year. More specifically, we continue to see very strong returns in our remodel projects. We are expanding and enhancing our efforts to impact our mature stores.
Speaker Change: Accordingly, the growth in projects this year is focused on our remodels, while continuing to balance our portfolio and capture growth opportunities through a significant number of new stores as well.
Speaker Change: With that in mind, in fiscal 2025, we plan to execute approximately 4,885 projects, including 575 new store openings in the U.S.
Speaker Change: 2,000 full remodels and an additional 2,250 project elevate remodels and 45 relocations.
Speaker Change: And we plan to open up to 15 additional stores in Mexico.
Speaker Change: With regards to our remodels, we are revamping our approach to further improve the shopping experience and elevate our brand to our mature store base.
Speaker Change: In our full remodels, we are increasing the scope of work to include additional upgrades and refreshes to the physical store assets.
Speaker Change: We expect more than 80% next year to be in our DGTP format, which will continue to allow for incremental cooler counts to provide a fuller shopping trip for our customers.
Speaker Change: We continue to expect average returns in our remodels that are consistent with what we have seen historically and are even greater than what we have seen from our new stores, driven by expected first-year comp sales lifts in our full remodels of approximately 6-8% on average.
Speaker Change: We are also introducing a new remodel approach that is incremental to our full remodel program in order to expand the number of mature stores we impact each year.
We are calling this incremental remodel initiative Project Elevate.
Speaker Change: And our goal is to bolster performance in portions of the mature store base that are not yet old enough to be part of the full remodel pipeline.
Speaker Change: These projects will include nearly all of the same assortment updates as our full remodels other than cooler expansion and the addition of produce.
Speaker Change: Notably, they will include planogram optimizations and expansions across the store, updated adjacencies and physical asset refreshes in most prominent customer facing areas in the store.
Speaker Change: Our investment in these stores will be less than our full remodels and in turn our goal is to drive first-year comp sales lifts in the range of approximately three to five percent in these projects.
Speaker Change: We believe our customers will respond very favorably to these updates in their local stores and ultimately believe that this will enhance the associate and customer experience in our mature stores while also driving incremental sales growth.
Speaker Change: Turning to our new stores. As a reminder, we monitor the following five metrics of our portfolio, including performance against pro forma sales expectations, new store productivity compared to the mature store base, cannibalization, which overall has remained consistent and predictable.
Speaker Change: Cash Payback, which we continue to expect in approximately two years. And New Store Returns, which we expect to be approximately 17% on average in 2025.
Speaker Change: I want to note that our expectations for new store returns, while still very strong, have been down modestly from our historic targets of 20% plus.
Speaker Change: As we discussed for our 24 pipeline, this change is also driven by higher new store occupancy costs as well as by higher operating costs.
Speaker Change: We continue to work to mitigate some of these higher costs where possible and continue to see significant opportunities for growth with approximately 12,000 opportunities for Dollar Joe branded stores in the U.S.
Speaker Change: As we said before, for a variety of reasons, we will not capture each of these opportunities, but we are pleased that the overall number of opportunities remains high.
and will predominantly be located in rural communities.
Speaker Change: And nearly all of our relocations are planned for one of our 8,500 or 9,500 square foot stores.
Speaker Change: These stores continue to drive increased sales productivity per square foot as compared to our traditional 7,300 square foot box and also provide additional opportunities to serve our customers including expanded cooler offerings, more health and beauty products, and we anticipate adding fresh produce to approximately 300 new stores in 2025.
Speaker Change: bringing our expected total to approximately $7,000 by the end of next year.
Speaker Change: I also want to note that we do not plan to open any additional PopShelf stores in 2025. We have continued to test and learn in our existing store base with new products and layouts, but in light of the current weaker customer shopping trends in discretionary categories,
Speaker Change: Do not believe opening new stores in the coming year is in the best use of our capital.
Speaker Change: Collectively, we believe our planned real estate projects will further solidify Dollar General as an essential partner to communities in rural America while strengthening our foundation to drive long-term sustainable growth.
In closing, I want to reiterate
Speaker Change: that we are pleased with the tremendous progress the team has delivered through our Back to Basics plan.
Speaker Change: and we are poised to continue building on that progress through the remainder of this year and into 2025 as we continue to strengthen the foundation for more meaningful growth in the future.
Speaker Change: With that in mind, I'm looking forward to sharing more about our plans and goals for 2025 and beyond in the months ahead. We are confident in this business and the actions we are taking to deliver value for our associates, customers, and shareholders.
Speaker Change: As we move through our busy holiday season, I want to again thank our more than 195,000 employees for their commitment and dedication to fulfilling our mission of serving others.
Speaker Change: With that, Operator, we would now like to open the lines for questions.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question at this time, please press star 1 on your telephone keypad and a confirmation tone will indicate your line is in the question queue.
Speaker Change: You may press star 2 if you would like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: To allow as many as possible to ask questions, we ask you please limit yourself to one question. One moment please while we poll for the first question.
Speaker Change: Thank you, and our first question is from the line of Simeon Gutmann with Morgan Stanley. Please proceed with your question.
Simeon Gutmann: Hey, good morning, Todd and Kelly. My question is on the, good morning, the comp algorithm.
Simeon Gutmann: How does it move now that you're mixing to a higher level of remodels versus store growth? It sounds like you could get almost a point of remodeled lift.
Assuming they continue, you know, they continue to...
Simeon Gutmann: grow at the rate you expect over the next few years? Where does the comp algorithm land? And then consequently, if it's a little lower than what DG is used to,
Simeon Gutmann: How much does the cost structure need to evolve? It sounds like you're making progress in a lot of areas. Some of the supply chain may take a little bit longer, but can you match that cost structure so that you can deliver some of the former earnings growth prior to the last couple years?
Speaker Change: Thanks, Simeon, for the question. I think as we go forward, especially with the introduction of Project Elevate, that we feel good that we can get back to the contribution that our real estate programs have given us on a comparable sales line. But with that, I'd also say you're absolutely right on the cost structure, and that's something we're focused on as we go forward into 2025 and beyond, certainly around shrink and damages. We've got a lot of focus on what that can do. Depreciation, that will play out over time, and same will retail salaries as we move through the year. So I would say we're going to focus on all those components, both top line and cost structure, as we work to get back to our long-term double-digit EPS
growth target.
Speaker Change: Thank you. The next question is from the line of Michael Lasser with UBS. Please proceed with your question. Good morning. Thank you so much.
Speaker Change: Thank you for taking my question. Had you seen enough progress with improved execution as well as the mitigation in shrink
Speaker Change: for you to see line-of-sight to restoring double-digit EPS growth in 2025 despite having some incentive comp returning next year.
Todd Vasos: Michael, this is Todd. Just real quickly, I do want to say that we're really pleased with the progress we have made on Back to Basics.
Todd Vasos: I'm very happy with the Merck side as well as our operators and our DC pieces of the back to basics work because it is laying that strong foundation for the future and getting back to where Kelly indicated over the long term, those double digit EPS algorithm growth models that we've traditionally have had. Now in saying that, you know, we have still more work to do. We're never happy here at Dollar General, right? We want to capture as much growth as we possibly can. So we'll continue to work hard, not only on back to basics, but all the initiatives as we go forward.
Speaker Change: Thank you. The next question is from the line of Matthew Boss with J.P. Morgan. Please proceed with your question.
Speaker Change: Maybe could you talk to top line trends that you've seen in November, maybe relative to same store sales in the third quarter and then.
Speaker Change: Kelly, just with the heightened promotional backdrop, I think you cited now expected at least through year end, how best to think about gross margin puts and takes in the fourth quarter, maybe notably markdown?
Speaker Change: I'll start, Matt. Thanks for the question. I'll pass it over to Kelly. You know, from the consumer perspective, I would tell you very similar consumer behavior as we exited Q2, as we did now exiting Q3. So, very similar. Buying very close to need, being very selective at the shelf.
Kelly Dilts: as a couple examples of our discretionary side as well as our non-discretionary side of the business. If you think about the core consumer, what we saw in Q3, private brand continues to do very well. Also our value valley area, which is that $1 offering, you know, up to 24 to 36 feet of product depending on the size store. Matter of fact, value valley, that $1 offering was our best performing category for the quarter, as much as 600 basis points above the nearest category. So it really goes to show that the consumer is seeking value, trying to make ends meet. And then in our prepared remarks, we did talk about.
Kelly Dilts: and she is buying the discretionary side. It's just she's being very selective when she does and she's buying it very close to need. As an example, we were pretty pleased with our Halloween offering as well as the take away from the consumer on the discretionary side of Halloween. So not the candy side, while that was good as well, but the other side of that.
Kelly Dilts: So, there is a lot of hope there. Our offering is solid for holiday, and while there's a lot of selling left, and unfortunately five less selling days between Thanksgiving and Christmas, we're optimistic on what that consumer will start to spend as we get a little closer in.
Kelly Dilts: Yeah and just to give you a little bit more color on Q4, so you know what we're seeing as we move into November, obviously the calendar shifts are pretty significant and that makes 2019 the best comparison and we did talk about that a little bit on the last call that it's probably if you take take sales on a 2019 CAGR basis that may be the best way to look at it. On a little color for November, we did come in slightly above the midpoint of our sales expectations
Kelly Dilts: So certainly contemplated in our guidance and there is a lot of selling season left.
Kelly Dilts: which is why we slightly narrowed our expectations of our previous sales guidance to make sure that we're capturing that. I'll tell you on the high end what we're expecting is just kind of a macro-neutral environment and then on the lower end it does provide for some softening of that.
Kelly Dilts: The other primary driver, really, of the guidance is around the hurricane-related expenses. And so you heard us talk about $33 million of pressure in the third quarter. And then we're expecting another $10 million of pressure from those same hurricanes in Q4. And that's really as we work to finish all of the repairs that we need to do on the stores that were impacted. To your question on the margin piece of that, the promo backdrop.
Kelly Dilts: It is a little bit elevated, but it's not anything outside of our expectations. So that didn't really change much, and neither did the other expectations around shrink or damages. So shrink is still considered to be a tailwind in Q4.
Speaker Change: Our next question is from the line of Kelly Banyu with BMO Capital Markets. Please proceed with your question.
Speaker Change: Hi, good morning. Thanks for taking our question. Todd and Kelly, I was wondering if you could talk a little bit more about the same-day delivery.
Speaker Change: What have you learned so far from there? How much does that cost your consumer if they would like the added convenience of that program? And how are you thinking about...
Speaker Change: The margin implications, either passing on the cost of that to the consumer or absorbing those and just kind of big picture thoughts about what that could add to the DG kind of growth profile going forward.
Yeah.
Speaker Change: Thank you for the question. We're excited about the pilot. We soft-launched it very tail-end of Q2 and now through Q3 we've got up to 75 stores up and running. I would tell you that we're testing, we're learning, we're refining both the native app and of course our website to make sure the experience is just right. But so far the customer is gravitating toward it.
Speaker Change: It is something, you know, we do everything through the eyes of the customer here, Kelly, and I would tell you that, you know, as we launch this...
The customer is saying to us...
Speaker Change: One, we want convenience. Two, we want, you know, an opportunity to always save money. And then third,
Speaker Change: Believe it or not, they want that personalized experience. They don't want to stay anonymous. They want that, and because they know with that...
Speaker Change: come specialize offerings. So we're able to also offer that through this delivery means. The great thing about the delivery piece, a few anecdotes as we just start here, is that it is
Speaker Change: something that's a little bit different than what you see in other offerings.
Speaker Change: in that we are using a third party, so no labor expended or expelled by our own folks. It's being done through a third party. Eventually, I believe it'll be thousands of stores. It could marry very, very closely due to this third party, our DoorDash kind of offering that we have today, which we've been very happy with so far. So there's a lot of good news there and not a lot of burden on our stores. And as it relates to cost, again, we'll continue to refine that as well. But we've always said here we're going to do delivery our way when it's time.
Speaker Change: We do believe it's time. We believe it's time. We believe that we are doing it our way, meaning the DG way and the way that our Dollar General customer wants it. And with that, comes low costs to both our customer and to Dollar General. And there's always ways to offset, you know, some of those costs that will be inherent in the delivery piece with the vendor community and others. So, we feel good about the start of this. It will also, the last thing I do want to mention, while the top line will benefit greatly eventually with this offering, we're also excited about the margin potential this has beyond just the product margin that we'll enjoy from it.
Speaker Change: to our media network. And we've got a very robust media network today that we started to build years ago. And the one area that was lacking for us to really put it into hyperdrive, if you will, was the delivery piece. And now with that starting to emerge, we'll be able to leverage that media network to even greater heights.
Speaker Change: And so stay tuned. We're excited about what delivery in totality from a top-line and bottom-line perspective will produce for Dollar General.
Speaker Change: Our next question is from the line of Rupesh Parikh with Oppenheimer. Pleased to see you with your question.
Good morning, and thanks for taking my question
Speaker Change: So I just want to go to it towards FY25. You know, any initial puts and takes you can provide, you know, I know you'll incentive comp can normalize, there could be some hurricane expense benefits, and including that, you know, any initial thoughts on CapEx spend just given the significant increase in real estate products anticipated next year. Thank you.
Speaker Change: Yeah Rupesh, thanks for the question. You know I think obviously we're not we're not ready to to give 2025 guidance yet but I can absolutely give you a few of the put and takes that we are taking a look at. So you know one of those pressures that's going to be going into 2025 is going to be incentive compensation. We'll give you a better idea of what that looks like when we have our conversations in March but that will put pressure on 2025. The other two pieces are pieces that you've seen put pressure on this year as well which would be around retail salaries. So we're seeing and we talked about this a little bit last quarter some wage rate pressure and so that continued into Q3 and will continue into Q4. We expect it could continue
and the Court of Appeal.
Speaker Change: and the capital allocation that's associated with that. So with that and the new stores, what we're expecting right now is a CapEx that would be similar to this year's CapEx as a percentage of sales and making sure that we're investing in those high return projects.
Speaker Change: Our next question is from the line of Zeehan Mott with Bernstein. Please proceed with your question.
Zeehan Mott: Hi, Todd and Kelly. Thank you for taking my question. I wanted to circle back on the remodeling side of things. It's going to be a two-part question.
Zeehan Mott: One, I believe you historically mentioned that the DGTP remodels had an 8 to 11 percent
Thank you.
Speaker Change: Yeah, absolutely. Thanks for the question. And so, yeah, we are expecting a comp lift of around 6% to 8%. You're right, we had quoted 8% to 11% last year. What it is, is really a function of what is occurring in the remodels. So as the base has a higher cooler count, when we go to remodel those stores, we are not including as many cooler counts. And so that impacts the top line. What I will say, though, is that the IRR, they're still better than the new store returns. So we're really pleased with where those are landing. And then now that we've got Project Elevate, we're looking to add an additional comp lift of 3% to 5%, again, with a great IRR in those projects as well, higher than our new store returns. So anytime you can touch that many
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Speaker Change: Yeah, and I think I would also add on that, Kelly, that, you know, while we're not here to talk about the years ahead, but as you think about Project Elevate and our mature store base,
Speaker Change: and making sure that we're offering the customer exactly what she needs.
Speaker Change: We're excited about the opportunity that additional remodels every year could offer. If you think about it and you move in the next three to five years, you could essentially touch 80% to 90% of your store base over time. On a much quicker basis, less than half the time, quite frankly, that we would have done so in the past. More to come. We're just starting the journey. The great thing about Project Elevate, and I just want to get you in the ballgame, is from a customer perspective, they see everything in Project Elevate
Speaker Change: that they would see in a normal remodel, less the additional coolers and produce.
Speaker Change: Everything else, the experience they see in a remodel, which they love today, they'll see in this project Elevate. So, excited about it. We'll talk, I'm sure, a lot more about it as we move through 2025.
Speaker Change: Our next question is from the line of Kate McShane with Colvin Sachs. Please proceed with your question.
Speaker Change: Hi, good morning. Thanks for taking our question. Todd, you had mentioned last quarter that of the share gain that was up for grabs at the time that you didn't quite get your fair share. I know there's still been quite a few door closures in Q3, and we were wondering if you've seen any change with what you've seen with those opportunities this quarter.
Speaker Change: Interestingly, what we've seen is a little bit of a rebound of that. As a matter of fact, our mid to high-end consumer, we gained a share once again in Q3, so happy to see that start to bounce back. So it's interesting how the consumer is reacting. She's being a little finicky, but at the end of the day, value always wins. It appears, and so she's starting to seek more and more value. So good to see that customer that's available out there in the marketplace, that we were able to capture more of our fair share this quarter than we did last.
Speaker Change: and we've got our sights set on that very same type of dynamic as we move through Q4 here and into early 25.
Speaker Change: Thank you. The next question is from the line of Karen Short with Mellius Research. Please receive your question.
Speaker Change: Hey, thanks very much. Good to talk to you. I'm wondering if you could just give a little bit more color on the actual dollars going into the standard remodels versus Project Elevate, and also what the return profile, what the actual return is.
Speaker Change: As you calculated, I know it's probably a little early on Project Elevate, but I'm curious if you could give color on both those.
Speaker Change: Yeah, so for our traditional remodels, we're expecting a similar investment on the capital expenditure side. And I would tell you on Project Elevated, it's significantly less than that.
Speaker Change: So that's why it fits really nicely into our capital allocation structure. On the returns, you're right, on Project Elevate a little early, but I will tell you that what we are contemplating are IRRs that are significantly higher than our new store IRRs and are relatively in line with the traditional remodels.
Speaker Change: Our next question comes from the line of Seth Sigman with Barclays. Please proceed with your question.
Seth Sigman: Hey, good morning everyone. I wanted to focus on the gross margin. The trend is improving down less this quarter than prior quarters. As you think about some of the tailwinds such as shrink on paper that should build into the fourth quarter and into next year,
Seth Sigman: Can you speak about that and how you're thinking about gross margin expansion year-over-year starting in the fourth quarter?
Seth Sigman: and maybe just in general how you think about the recoverability of the gross margin from here. Thanks so much.
Speaker Change: Yeah, I think shrink is probably our biggest opportunity and so as we think about you know what the Q4 looks like you know it should certainly add some benefit.
Speaker Change: pre-pandemic shrink levels and we feel like we have a path to get there.
Speaker Change: The next question is from the line of Scott Ciccarelli with Truist Securities. Please receive your question.
Speaker Change: Hey guys. So historically, when your core customer has been pressured, it's usually resulted in higher traffic but lower ticket as folks buy less but come in more frequently. Today we're seeing the opposite happen with traffic dropping in the last few quarters. Todd, why do you think that is playing out that way and would you expect that to change at some point?
Todd Vasos: You know, we are squarely focused, as always, on driving traffic, so that's...
Todd Vasos: First and foremost, I think is is important, but you know as you start to think about the traffic number This was the first quarter that we actually lapped a positive traffic number from LY So we we anticipated it softening As we move through this quarter from a year-over-year perspective, obviously But we were happy with the traffic gains that we did see in the quarter But we're never satisfied with where we are we're always pushing for more now The dynamic that you also indicated that you know the ticket being up is is something to watch You know the good thing is is that a lot of that ticket that we saw was you know really came from?
Todd Vasos: some of the discretionary areas of the store. And so, you know, it is good to see that she's shopping that side as well. So more to come there. I believe, as I indicated earlier, that she has the money to spend, but she's being very, very frugal with that spend and when she spends it. So we'll continue to watch that, but working hard to drive traffic through the back half of this year, which is, or the back quarter of this year here in Q4, but also to start off the year on the right foot here in Q1.
Speaker Change: Our next question is coming from the line of Paul Ledgway with Citi. Please receive your question.
Speaker Change: Hey, thanks guys. I'm curious, when you do a remodel, how much of that expected comp lift is traffic vs. conversion vs. ticket?
Speaker Change: And then second, on that shrink opportunity on the gross margin line, I'm curious if there's an offset on the SG&A line. And then Kelly, maybe just high level how you're thinking about SG&A leverage point for next year.
Thank you.
Speaker Change: Yeah, I'll start Kelly and I'll pass it over to you. Yeah, as we look at that remodel program What we normally see in remodels is is that? Normally it your your uptick
Kelly Dilts: happens from the offering itself so more on the ticket side of the equation and then as time goes the traffic starts to pick up as well so just like any remodel that we've done we believe Project Elevate will probably fall into that same category because what will happen is word-of-mouth will get out that you know that we've we've remodeled the store and then traffic normally builds so it's usually ticket first and then traffic to come as we move through the months beyond those remodels.
Kelly Dilts: On the strength side on 2025, I think it could be a big contributor to gross margin as we move into next year. On the SG&A leverage point, I think it still stays the same as where it's been historically. A 2-4% comp helps us get to that leverage point, and that's what we'd be looking for, and that's what we would want comps to build to over the longer term.
Speaker Change: Thank you. Our final question is from the line of Chuck Crom with Gordon Haskett. Please proceed with your question.
before you build from there.
Speaker Change: Thanks for the question, Chuck. Let me start and I want Kelly to jump in as well. I would tell you that, you know, we're pleased where we came out here in Q3. You know, as you look at our business,
Speaker Change: You know, there is expense headwind that's there. We've got a lot of levers to be able to pull, though, as well into the future. While we're not here yet to talk about 25 and beyond, I would tell you that we are squarely focused.
Speaker Change: on achieving a better rate than where we are today that you mentioned, but we've got some work to do. Now, I would also tell you we feel good about the labor line from the respect of how many hours the stores have. We don't believe a big investment is still needed at this point. I do feel good about the hours we have and the ability of the stores to be able to produce from that. We don't believe a big uptick there, and we don't see any huge upticks in other expense lines other than, obviously, incentive pay and some of the other things that Kelly already mentioned that will come back at us in 2025, Kelly. Yeah, no, absolutely.
Speaker Change: and as you can hear, we're really managing this business for the long term and focusing on double-digit EPS growth. And we do think we can get back to that over time. We've got still a lot of underlying long-term drivers in place, and that includes a long runway for new store opportunities with high returns, and so that hasn't changed. We've got
Speaker Change: of other long-term margin drivers. We think we've got a path to the shrink reduction. We have a path, we believe, to stabilizing the sales mix. And then we have DG Media Network, which we're really excited about and continue to be excited about. And delivery could certainly play a big role in that. You've got private brands and global sourcing opportunities, our category management. I'm really excited about the potential of inventory optimization as we look in the future both on the sales line and as well as what it gives us on working capital, supply chain efficiencies with some of the automation that we talked about.
Speaker Change: Today and then of course our save-to-serve approach of controlling costs and and always being that low-cost Operator and then the other thing I would just point out is is that we have been generating a significant amount of cash flow Which does allow us to invest in the business and and you saw that today with our real estate announcement and being able to To invest even more in our existing store that a rapid pace with with project to elevate With all of those and things in mind We really do believe we've got a long-term opportunity to drive higher sales and margins that would support that double-digit EPS growth So while we're not we're not ready to commit to a timeline or of course the guidance beyond 2024 at this time we do think that that double-digit EPS
Speaker Change: growth remains our long-term target, and we believe it's possible to achieve it.
Speaker Change: Thank you. At this time, this will conclude our question and answer session and also conclude today's conference. We thank you for your participation. You may now disconnect your lines at this time and have a wonderful day.