Q4 2024 Dollar General Corp Earnings Call
Good morning, My name is Robert and I'll be your conference operator today at this time I would like to welcome everyone to the dollar General fourth quarter 2024 earnings call. Today is Thursday March 13th 2025, 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: Now I'd like to turn the conference over to your host Mr. Kevin Walker, Vice President of Investor Relations.
Speaker Change: You May now begin your conference.
Kevin Walker: Thank you and good morning, everyone on the call with me today are Todd <unk>, our CEO and Kelly Dilts CFO. Our earnings release issued today can be found on our website at Investor dollar General Dot Com under news and events.
Let me caution you that today's comments include forward looking statements as defined in the private Securities Litigation Reform Act of 1995, such as statements about our financial guidance long term growth framework strategy initiatives plans goals priorities opportunities expectations or beliefs about future matters and other statements that are not limited to <unk>.
Kevin Walker: Oracle Faq.
Kevin Walker: These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include but are not limited to those identified in our earnings release issued this morning under risk factors in our 2023 Form 10-K filed on March 25th 2024, and any later filed periodically.
Kevin Walker: And then 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.
Kevin Walker: Dollar general disclaims any obligation to update or revise any information discussed in this call unless required by law.
Kevin Walker: At the end of our prepared remarks, we will open up the call for your questions to allow us to address as many questions as possible in the queue. Please limit yourself to one question.
Todd: Now it is my pleasure to turn the call over to Todd.
Todd: Thank you, Kevin and welcome to everyone. Joining our call. We are pleased with our performance in the fourth quarter, including solid execution and topline results.
Todd: As we reflect on the quarter as well as the full year. It is clear that our back to basics work has yielded positive results position us well as we enter 2025 and look to the future.
Todd: I wanted to thank our associates for their ongoing commitment to serving our customers and communities. Their dedication is on display every day and thousands of dollar general stores and in our distribution centers private fleet and store support center as we all work together to fulfill our mission of serving others.
Todd: On today's call I will begin by recapping some of the highlights of our Q4 performance as well as discussing the portfolio optimization actions. We recently undertook for both dollar general and pop shelf.
Todd: After that Kelly will share details of our financial performance as well as our financial guidance for 2025 and will conclude with thoughts on our long term financial framework.
Todd: And then I will wrap up the call with an update on some of our key initiatives that we believe will be important drivers of our performance in 2025 and beyond.
Todd: Turning now to the fourth quarter performance net sales increased four 5% to $10 $3 billion in Q4 compared to net sales of $9.9 billion in last year's fourth quarter with this solid finish to 2024 I'm excited to note that for the first time in the company's history.
Todd: We delivered fiscal year sales of more than $40 billion.
This is a testament to the central role of dollar General serves as America's neighborhood General store in more than 20000 communities across the country.
Todd: We are here for what matters for the customers every day and the relevance of our value and convenience offering is clear.
Todd: During the fourth quarter, we continued to grow market share in both dollars and units in highly consumable product sales and also grew market share in non consumable product sales.
Todd: Same store sales increased one 2% during the quarter and was driven entirely by growth of two 3% and average transaction amount. This included relatively even contributions from increases in average unit retail price per item and average items per transaction.
Todd: This growth was partially offset by a decline of one 1% and customer traffic during the quarter, which was impacted by ongoing financial pressures of our core consumer as well as lapping strong traffic increase of three 7% from Q4 of 2023.
Todd: The comp sales increase was driven entirely by growth in our consumable category.
Todd: And was partially offset by declines in our seasonal home and apparel categories.
Todd: From a monthly cadence perspective, all three periods were positive with comp sales growth in December and January relatively even and both outpacing November.
Our customers continue to report that their financial situation has worsened over the last year as they have been negatively impacted by ongoing inflation.
Many of our customers report that only have enough money for basic essentials, what some noting that they have had to sacrifice even on the necessities.
Todd: As we enter 2025, we are not anticipating an improvement in the macro environment, particularly for our core customer.
Todd: In turn we know our customers expect value and convenience more than ever we are committed to providing the value they need and continue to feel very good about our everyday low price position relative to competitors and other classes of trade.
Todd: With regards to current tariffs that have been announced on products that we sell we believe we are well positioned to mitigate the impact in 2020 five.
Todd: We were able to successfully mitigate the tariff impact in 2018 in 2019.
Todd: Though we did take retail price increases in some instances along with others across the industry.
Todd: Given the already stressed financial condition of our core customer we are closely monitoring these and any other potential economic headwinds, including any changes to government entitlement programs.
Todd: Importantly, we remain focused on doing everything we can to deliver the value our customers want and need.
Before I turn the call over to Kelly I wanted to share an update on our work to continue to strengthen our foundation for future growth.
Todd: As we look to build on the success of our back to basics work, we have undertaken a thorough review of our business to identify opportunities to further strengthen our foundation.
Kelly: With this in mind, we conducted a real estate portfolio optimization review of both our dollar general and pop shelf banners during the fourth quarter.
Kelly: As a result of the review of our dollar General portfolio, we made the decision to close 96 stores.
Kelly: While this is less than 1% of our overall store base those stores many of which are in urban locations have become increasingly challenging to successfully operate.
Kelly: These stores likely would have been closed in ordinary course of the stores lifecycle when their leases expired. However, we determined that closing these locations now well that was to optimize our allocation of resources going forward.
Kelly: I also want to discuss the results of our pop shelf portfolio review.
Kelly: After analyzing business performance and revised outlooks for our current portfolio of pop shop locations. We identified 51 store closure candidates based on financial and operational considerations from our test and learn phase.
Kelly: We plan to convert six of these 51 locations to dollar general stores and close the remaining 45 stores.
Kelly: This will leave 180 stores remaining as part of the pop shelf banner.
Kelly: As a result of these actions as well as impairment charges, primarily associated with top shelf go forward stores. Our Q4 financial results include a negative impact to operating profit of $232 million or approximately 81 sets in E. P. S.
Kelly: As we enter 2025, we are optimistic about the pop shelf banner and our opportunity to drive improvements in our sales results as customers feedback on the brand and shopping experience continues to be strong.
Kelly: Going forward, we plan to build on this strength to increase sales through a variety of initiatives centered around new brand partnerships and enhanced in store experience, new and expanded categories.
Kelly: And a new loyalty and digital experience.
Kelly: As an example of these efforts we recently implemented a new store layout with a heightened focused on toys party candy and the beauty categories.
Kelly: While still early we have been pleased with the results as we have seen a nice double digit sales lift across a broad array of our pop shelf stores.
Kelly: In addition to the opportunity to increase sales and ultimately realize further growth in the pop shelf banner. We are also able to leverage learnings from this banner and apply them in our non consumable categories and our dollar general stores to further strengthen that offering for our D. G customers.
Kelly: Well, we are looking forward to the opportunity to improve pop shelf results in 2025, and we will continue to evaluate the brands to ensure we are seeing the desired impact of these activities and optimization.
Kelly: In summary, while we never like to close stores before their lease expiration. We believe this portfolio review across both our D. G and pop shell banners has further strengthened the foundation of this business as we position the company for the future.
Kelly: Finally, I want to take a moment to congratulate both Steve Dechert and Tracy Herman on their new leadership roles within the organization.
Kelly: Steve has been a valued strategic leader at dollar general for many years and I'm confident he will serve the company well in his new role focused on expansion of the dollar general footprint.
Kelly: Process improvement and leadership of our corporate strategy.
Kelly: And Tracey has deep experience in connection with our field teams along with her commitment to operational excellence.
Kelly: Execution and innovation make her the ideal leader for our store operations team as we focus on delivering the best in store experience for our customers and associates.
Kelly: Overall, we are proud of the continued progress we're making and are pleased with how it has positioned us to drive profitable sales growth and capture growth opportunities, while creating long term shareholder value.
Kelly: I will discuss more about our plans and initiatives to drive these results in a few moments, but first let me turn the call over to Kelly to discuss our Q4 financial results as well as our 2025 financial guidance and long term financial goals. Thank.
Kelly: Thank you Todd and good morning, everyone now that Todd has taken you through a few of the topline highlights of the quarter. Let me take you through some of the other important financial details unless we specifically note otherwise all comparisons are year every year all references to EPS refer to diluted earnings per share and all yours noted refer.
Kelly: To the corresponding fiscal year.
Kelly: For Q4 gross profit as a percentage of sales was 29, 4% a decrease of eight basis points.
Kelly: This decrease was primarily attributable to increases in markdown inventory damages and distribution cost and a greater proportion of sales coming from the consumables category. These factors were partially offset by lower shrink and higher inventory markups.
We continue to be pleased with the results of our shrink mitigation efforts, which drove a year every year shrink improvement of 68 basis points in Q4.
Kelly: Shrink improvements have continued through the early part of the first quarter and we anticipate this benefit should continue throughout 2025 now.
Kelly: Now turning to SG&A, which was 26, 5% as a percentage of sales an increase of 294 basis points. The increase reflects the fourth quarter impairment charges totaling $214 million related to the portfolio optimization review Todd discussed earlier.
Kelly: The other expenses that were a greater percentage of net sales in the fourth quarter, where retail labor incentive compensation repairs and maintenance depreciation and amortization and technology related expenses.
Kelly: Partially offset by a decrease in professional fees.
Kelly: Going down the income statement operating profit for the fourth quarter decreased 49% to $294 million, including the negative impact of approximately $232 million associated with the charges, resulting from the portfolio reveal.
Kelly: As a percentage of sales operating profit was two 9% a decrease of 302 basis points.
Kelly: Net interest expense for the quarter decreased to $66 million compared to $77 million in last year's fourth quarter.
Alright effective tax rate for the quarter was 16, 2% and compares to 20% in the fourth quarter last year.
Kelly: This lower rate is primarily due to the effect of certain rate impacting items on lower earnings before taxes.
Kelly: Finally, EPS for the quarter decreased 52.5% to 87 cents, including a negative impact of approximately 81 cents per share associated with the charges, resulting from the portfolio review.
Turning now to our balance sheet and cash flow merchandise inventories were $6 $7 billion at the end of the year, a decrease of $283 million or 4% compared to prior year and a decrease of six 9% on a per store basis.
Kelly: I'd like to recognize the great work the team has done to reduce our inventory position, while increasing sales and improving in stocks, while also providing positive operational impacts in both our stores and distribution centers.
Kelly: In 2020 for the business generated cash flows from operations of $3 billion, an increase of $604 million or 25%, which was driven by improved working capital management in 2020 for total capital expenditures were $1 $3 billion and included.
Our planned investments in new stores, Remodels, and relocations distribution and transportation projects and spending related to our strategic initiatives.
Kelly: During the quarter, we returned cash to shareholders through our quarterly dividend at 59 cents per common share outstanding for a total payout of $130 million.
Kelly: Overall, we're pleased with our cash and inventory positions and the progress we've made in strengthening our balance sheet over this last year. These results are a testament to the strength of this business model as well as the focused effort on getting back to basics across the organization.
Kelly: With that in mind I'd like to discuss our financial outlook for 2025.
Kelly: We plan to continue building on the progress we've made and our guidance for 2025 contemplates continued investment and work to further strengthen the foundation of this business importantly, we believe these efforts will lay the groundwork for growth in the years ahead, which I'll discuss in just a moment.
Kelly: With that in mind, we expect the following for 2025.
Kelly: Net sales growth in the range of 3.4% to 4.4% same store sales growth in the range of 1.2% to 2.2% and E. P. S. In the range of $5.10 to $5.80.
Kelly: Our EPS guidance assumes an effective tax rate of approximately 23, 5% we.
We expect capital spending in the range of 1.3 to $1 $4 billion designed to support our ongoing growth and which is aligned to our capital allocation priorities that continue to serve us well.
Kelly: As a reminder, our first priority is investing in our business, including our existing store base as well as high return growth opportunities such as new store expansion and strategic initiatives.
Kelly: Yeah.
Kelly: To that end, we're excited to begin work on approximately 4885 real estate projects in 2020, five including 575, new store openings in the United States 2000, full Remodels 2250 project elevate Remodels and 45 location.
Kelly: <unk>.
And up to 15 additional new stores in Mexico.
Kelly: In addition, we are investing in a number of technology projects, including a finance and HR modernization project, which is primarily focused on a new enterprise resource planning system that will be implemented over the next couple of years.
Kelly: Next in our capital allocation priorities, we seek to return cash to shareholders through our quarterly dividend payment and overtime and when appropriate share repurchases to that end our board of directors recently approved a quarterly cash dividend at 59 cents per share, we do not plan to repurchase common stock.
Kelly: This year, although share repurchases remain an important part of our future capital allocation strategy.
Kelly: Finally, although our leverage ratio remains above our target of approximately three times adjusted debt to adjusted EBITDAR. We are focused on improving our debt metrics in support of our commitment to our current investment grade credit ratings, which as a reminder, our triple B M B double H T M.
Kelly: Now, let me provide some additional context as it relates to our outlook for 2025, well our guidance is centered around macro neutral outlook. The full range does recognize that there's still uncertainty both in the broader macro environment as well as for our core customer we.
Kelly: We are currently anticipating continued economic pressure on our core customer, though at a relatively consistent level to what they were experiencing as we close 2024.
Kelly: With regards to gross margin, we expect the most significant factor to be continued positive shrink results, which we anticipate will be a tailwind throughout 2025.
Kelly: Within SG&A, we're taking action to reduce controllable expenses throughout the business that said, we expect to deleverage in 2025, and our current expected levels of sales and operating expenses. This pressure includes an ongoing headwind from retail wage rate inflation.
Kelly: We expect to continue between three and a half and 4%. In addition, we expect our operating leverage to be pressured by a return to normalized short term and long term incentive compensation. After two years, it's significantly lower than average pay out.
Kelly: At target payout this where was that represents a headwind of approximately $120 million.
Finally, we expect a continued headwind from depreciation and amortization, primarily as a result of higher capital spending in inflation and building materials in prior years.
Kelly: We do not anticipate providing quarterly financial guidance I do want to provide a couple of notes on our expected cadence and financial results in 2025.
Kelly: We expect the first half of the year to be more pressured by initial expenses related to our remodels, including project elevate as we expect to execute more real estate projects in the first half of 2025 than we did in the first half of 'twenty 'twenty. Four importantly, we are working to complete the vast majority of our real estate.
Kelly: Projects by the end of Q3 in order to maximize the number of operating weeks, which will benefit 2025 and.
Kelly: In addition, we expect Q1 to be impacted by additional labor expense and labor expense headwinds compared to Q1 of 'twenty 'twenty four when we still had self checkout and a majority of the stores.
Kelly: Importantly, we believe our plans for 2025 or position us well to drive growth in subsequent years as we look to begin moving toward our medium and longer term financial goals and the subsequent years. While the recent focus has been on back to basics actions and supporting the core business. We believe we are.
Kelly: Poised for future growth as we look to 2020 six and beyond.
Kelly: With that in mind I wanted to discuss our long term financial framework, we manage our business with a sharp focus on creating sustainable long term shareholder value.
Kelly: Following a successful year of strengthening the foundation and as a part of our ongoing strategic planning process, we have updated our medium and longer term financial framework, particularly for the next three to five years and we'd like to share our updated perspective with you today. It's important to note that we are aiming to.
Kelly: To achieve some of these components of this model sooner than others. So I will note our specific goals as well as the respective targeted timelines.
Kelly: Starting with net sales, we are targeting annual growth in the range of approximately 3.5% to 4%, including approximately 2% New unit growth both of which we plan to begin in 2025.
Kelly: Beginning in 2026, we're targeting annual same store sales growth in the range of approximately 2% to 3%. These.
Kelly: These ranges assume that our core customer well always seeking value returns to a more stable financial condition and also that we will drive more of our same store sales through our mature stores.
Kelly: Turning to operating margin, we're targeting expansion to begin in 2026, and then longer term to continue expanding toward our goal in the range of approximately 6% to 7% as early as 2028.
Kelly: We have a variety of gross margin and SG&A catalysts catalysts to drive this expansion moving forward.
Kelly: Specifically within gross margin, we are working to drive improvement that will build over the next five years centered around the following first expanding the contribution from our initiatives, particularly our D. G media network, but also including other efforts such as our non consumable merchandizing strategy.
Kelly: <unk>, we believe the potential benefit from all of our initiatives some of which Todd will discuss is approximately 150 basis points next we're focused on returning to pre pandemic shrink levels, which we believe represents a potential benefit of approximately 80 basis points.
Kelly: And also improving damages, which we believe represents a potential benefit of approximately 40 basis points and within SG&A. We are targeting reductions over the next five years through initiatives aimed at simplifying work and driving efficiencies, reducing repairs and maintenance expense and optum.
Kelly: <unk> capital expenditures to stabilize depreciation and amortization expense.
Speaker Change: Much of the focus that Steve Dechert and his team will be centered around many of these areas. Ultimately our goal with these efforts is to increase profitability and minimize SG&A deleverage on sales over the medium to longer term.
Speaker Change: Our capital allocation priorities will continue to drive our financial strategies, we are targeting annual capital expenditures to be approximately 3% of sales and expect to be in position to restart share repurchases as early as 2027.
Speaker Change: We believe this long term framework will enable us to continue investing in growth initiatives that expand our ability to serve customers with value and convenience while also returning cash to shareholders.
Speaker Change: Finally, beginning in 2026, our long term financial framework seeks to deliver annual EPS growth of at least 10% on an adjusted basis.
Speaker Change: In conclusion, we're excited about the plan and the future of D. G and are confident in our long term approach. We believe the business model is strong and we are well positioned to drive sustainable long term growth on both the top and bottom lines, while creating long term shareholder value with that I will.
Todd: Turn the call back over to Todd.
Todd: Thank you Kelly, we're excited about our plans for both the near term and long term and I wanted to take the next few minutes to highlight some of the most important initiatives across four areas of the business.
Todd: I'll start with some of the near term actions focused on building on our back to basics work to further enhance the in store experience for our associates and customers.
Todd: We know that in a central part of convenience for our customers the ability to not only reach the store usually but also the quality and speed of their in store experience we.
Todd: We are focused on retraining in our stores and asking our teams to recommit to creating a fast and friendly experience for our customers on every visit.
To enable our associates to deliver on this effort and focusing on serving our customers. We are also working to further simplify the operating model by removing unnecessary activities and friction points from our stores.
Todd: These efforts include a continued focus on inventory reduction.
Todd: And SKU productivity, we believe these efforts along with further assortment and allocation optimization will contribute.
Todd: To the shrink and damage improvement contemplated in our long term framework.
Todd: We are also working on tasks upstream such a sorting and our distribution centers and case pack optimization tool.
Todd: To allow our teams to get products to the shelf, even quicker with less touches.
Todd: Finally, we are targeting completion of our next generation point of sale rollout in the first half of the year, which will simplify the checkout process as well as other in store activities.
Todd: Ultimately we believe these efforts focused on our core business will build on the progress we've made and allow us to better serve our stores and our customers.
Todd: Next I want to briefly mention project, elevate which we announced in December.
As a reminder, this is our new incremental remodel initiative aimed at bolstering performance in portions of our mature store base that are not yet old enough to be part of a full remodel pipeline.
Todd: As we focus on driving greater profitability in our mature store base. Our goal for project elevated stores is to drive first year comp sales lifts in the range of 3% to 5%, while also mitigating future expenses, particularly in repairs and maintenance.
Todd: These projects include physical asset refreshes as well as merchandising optimization and will impact approximately 80% of the total store.
Todd: When combined with our enhanced full remodel program, which we call project renovate we expect to touch approximately 20% of our store base annually.
Todd: And to significantly improve the shopping experience in our stores, while elevating the brand and driving greater top and bottom line contributions from our expansive mature store base.
Todd: The third area I want to discuss is our digital initiative.
Todd: Which is an important complement to our unique physical footprint as we continue to deploy and leverage technology to further enhance convenience and access for our customers.
Todd: We are pleased with the growing engagement, we are seeing across our digital properties, including our mobile app.
Todd: Website.
Todd: Delivery options and the D G media networks.
Todd: We have a highly successful and incremental delivery partnership with door dash and more than 16000 of our stores.
We expect to continue growing sales through this channel exclusive partnership in 2025, as we continue to expand the number of stores in the program. In addition, we recently began processing both snap and EBT transactions through this program, which we believe will drive new customer acquisition and.
Todd: <unk> to drive incremental sales.
Todd: Importantly, the learnings from this initiative along with our own customer work have provided the foundation from which to launch our own delivery offering with our unique customer base.
Todd: As we announced last quarter, we began a test of same day home delivery from a handful of our stores in September.
Todd: We have begun expanding this offering more broadly and are currently partnering with door dash to fully execute a delivery offering through our D. G digital solutions from approximately 400 stores.
Todd: While it's still very early we've been pleased with the initial customer response to this offering including higher average baskets than those in our brick and mortar stores.
Todd: We believe our expansive real estate footprint uniquely positions us to offer a compelling home delivery option and ultimately become the fastest delivery alternative for customers and our communities.
Todd: Further expanding their access to value and convenience that saves them time and money every day.
Todd: Looking ahead, we plan marketing to drive awareness of this opportunity in the current stores. While also beginning to scale. This offering more significantly with the goal of up to 10000 stores by the end of 2025.
Todd: The linchpin of our digital initiative is our D. G media network, which enables a more personalized experience for our unique customer base, while delivering a higher return on AD spend for our partners.
Todd: With the expansion of our delivery offering our multichannel platform will enable us to accelerate the scaling of our media network in 2025 as well.
Todd: In turn we believe we can further evolve the relationship with our customers driving greater customer loyalty within the digital platform, while ultimately increasing market share and driving profitable sales growth.
The final initiative I wanted to discuss is our non consumable growth strategy.
Todd: Our three non consumable categories home seasonal and apparel combined to deliver more than $7 billion in sales in 2024.
Todd: Our customers have continued to respond favorably to the treasure Hunt approach, we introduced in our stores as evidenced by our continued market share gains in these categories.
However, as the overall discretionary shopping environment has softened we have seen our consumable sales well outpace our non consumable sales in recent years as a result, the lower margin sales have pressured our overall gross and operating margins as consumable sales mix has continued to climb.
To 82%.
Todd: In conjunction with the financial framework Kelly laid out earlier, our goal is to increase non consumable mix by at least 100 basis points by the end of 2027, and ultimately return non consumable sales closer to approximately 20% of the overall sales mix over the next five years.
Todd: Ours.
Todd: While maintaining our strong performance in our consumer businesses.
Todd: To reach this goal we have identified four pillars of growth to drive sales and non consumable categories over the next three years. These.
Todd: These pillars include first brand partnerships, where we look to build on the success of current programs to work with well known brands to showcase quality and value for our customers.
The second is a revamped treasure hunt, where we plan to upgrade our rotational home assortment to enhance the value equation for our customers.
Todd: Next is the reallocation of space within our home category. This pillar is focused on reducing less productive space in certain departments and reallocating to more productive and relevant offerings for our customers.
Todd: The final pillar is focused on increasing productivity in non consumable categories by injecting newness and core plan O grams, and noncore space allocation, such as new programs in certain categories, while leveraging category innovation and more established programs.
Todd: We are implementing a multi pronged marketing approach to showcase the breadth and quality of our assortment in these areas while amplifying the value message. Ultimately we believe we can capture additional market share to drive significant top and bottom line growth in alignment with our long term.
Todd: Our financial goals.
Todd: In closing we are pleased with our fourth quarter performance and the way we ended the year.
Todd: While 2024 had its challenges, particularly for our core customer. It was an important year for dollar general to get back to basics and fortify the foundation of this great business.
We are proud of the progress we made on this front and it has positioned us to take the next steps forward in 2025.
Kelly: And as Kelly noted.
Kelly: This work has also enabled us to lay the groundwork for our long term financial goals over the next few years.
Kelly: Our mission of serving others continues to guide everything we do and we are excited about our plans for 2025 and beyond.
Kelly: Okay.
Kelly: We were pleased to have the opportunity to spend time with more than 1500 field leaders in various cities across the country in February.
Kelly: From that time together I can tell you. This team is energized and confident in our strategy to restore operational excellence and deliver value for our customers and shareholders alike.
Kelly: I want to thank our more than 194000 employees for their commitment to each other and to our customers I'm looking forward to all that we can accomplish together in 2025 with that operator, we would now like to open the lines for questions.
Kelly: Thank you at this time well be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue.
Kelly: As a reminder, we ask that you please limit to one question.
Kelly: 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: Our first question comes from Kate Mcshane with Goldman Sachs. Please proceed with your question.
Kate Mcshane: Hi, good morning, Thanks for taking our question.
Kate Mcshane: Today, you are getting to operating margin of 6% to 7% by 2028.
Speaker Change: We were wondering if you can talk about what you expect the arc of the margin expansion to look like between now and then and what do you think are the biggest structural changes in the business that are preventing you from getting back to historical operating margins.
Speaker Change: Thanks for your question, so maybe I'll just walk through a few of the assumptions as we think about that mid to longer term and it's not necessarily going to be a straight line, but we know we have a lot of action plans in place. So that we are focused on hitting those targets and the timelines that we identified so I'll just start with sales in our most of our sales.
Speaker Change: That were expecting are going to be driven through that mature store comp. We're taking a lot of actions right now to drive that mature store base and really building on the back to basics and all the initiatives that we have here in 2020 five that that will get US ahead on on that sales number as you think about the gross margin piece and there's a couple of things I think.
Speaker Change: The first thing that I'm excited about is both the shrink and damage lines are well in our control. We've already started seeing improvement on the shrink side with the back to basic work. There. So between those two you've got 80 basis points of shrinking about 40 basis points of damages and it's good to see that and we have a positive.
Speaker Change: <unk> right now in and we're really already winning and just as a reminder of the other things that that we have in play are our private brands. We still have great category management, and we're working hard on inventory optimization and I'm sure you have a little bit more about that today and supply chain efficiencies as well as just our approach to the safety.
Speaker Change: <unk> kind of cost control that we always have in place I think the other important piece of this is really around the initiatives.
Speaker Change: D G mediate media network that the non consumable mix and all the other initiatives that we have in play and May take a little while to get there, but there are certainly driving to the framework that we laid out.
Speaker Change: Yeah.
Speaker Change: Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question.
Simeon Gutman: Good morning, everyone.
Simeon Gutman: I wanted to ask if you can diagnose the consumer it's obviously very fluid at the moment and I don't normally ask about even quarter to date, but you know if you can bring us through the chronology of the last few months and as much as quarter to date as youre willing to talk about what the consumer is doing in terms of spend number of tree.
Rips level of stress or all the above thank you.
Yes sure Simeon.
Speaker Change: It is fluid is as you indicated but I would tell you that you know from our core consumer perspective, what we've seen is about the same here in 2020 five as she was exiting really Q3 of <unk> of last year, She's always strained as.
Speaker Change: We always say right because of her economic well.
Speaker Change: Wellbeing, but I would tell you that.
Speaker Change: She is also resourceful and and so with that you know we have started to see where she's getting her sea legs. If you will on the additional inflation that's been very sticky out there and she's starting to understand her budgets, even more what has really become a P.
Speaker Change: Parent, leaving Q4 and moving into Q1 is the trade down is back both the mid and upper end trade down.
Speaker Change: And as we moved into Q4 seems to be accelerating we'll know a little bit more as we a poll Q1 here, but I would tell you nothing nothing.
Speaker Change: That we see so far which show that that trade down to slow down.
Speaker Change: If anything we may have seen it accelerate a little bit in the last few weeks, but we'll know a little bit more in the next.
Speaker Change: The upcoming weeks as we poll, our our our consumers both our core as well as.
Speaker Change: The upper end, if you will or or non core type of customer are the other thing I think to keep in mind is the initiatives that we have laid out.
Speaker Change: And have been at work here.
Speaker Change: Have you started to really.
Speaker Change: Play into what we've seen in on the top line as well as the bottom line and again not to reiterate but I'm very proud of the work. The team has done on our back to basics work.
Speaker Change: That has gotten us to this position.
Speaker Change: And it's going to really be that framework.
Speaker Change: And foundation to to let us deliver that long term framework, we believe that.
Speaker Change: Everything is in our control, we just have to execute at a real high level and that's exactly what we're aiming to do as we move through 'twenty, five and beyond and be there for that customer. We believe that's going to get even more fluid with some of the tariffs. So we're watching that very closely.
Speaker Change: As we move through the upcoming weeks.
Matthew Boss: Our next question is from Matthew Boss with Jpmorgan. Please proceed with your question.
Speaker Change: Great. Thanks.
Speaker Change: Todd maybe first could you recap learnings from your back to basic strategy in 2024, and just how would you rank incremental initiatives that we should consider for 2025, and then Kelly just maybe what's the comp needed to leverage SG&A in 2025 and can you just recap.
Speaker Change: Cap I think you cited some SG&A as well as gross margin puts and takes that we should just consider for the first quarter relative to the year.
Matthew Boss: Yeah, Matt I'll start and then pass it over to Kelly.
Matthew Boss: So we're again, we're very proud of what the team has done here on that foundational work.
Speaker Change: Yeah that back to basics work was exactly what we needed here at dollar general and we've been executing again against it for the better part of a 13, well now about 15 months or so and I would tell you that you know some of the big takeaways I would tell you is and you heard from Kelly shrink is starting to turn into.
Speaker Change: A tailwind, which we knew would happen with all the work that we've done we've done this before we know exactly how to attack that shrink line, it's not easy work, it's pick and shovel work, but I would tell you. The teams have done a really nice job and the great thing with that is it should be the gift that keeps on giving as we move into 'twenty five.
Speaker Change: And even 26, so stay tuned a lot of work is being done as we speak around around ensuring that the the productivity of our stores are in.
Speaker Change: Is exactly where it needs to be so we started that work on back to basics last year, but I would tell you that it is in overdrive starting in 'twenty five.
Speaker Change: Bye bye moving Steve dechert into that role where he is going to be squarely focused on productivity measures.
Speaker Change: Being able to leverage what we do at a really high level I know for sure that we're gonna be.
Working every single lever that we can to to better our our numbers as we move into 2025 here.
Speaker Change: We're already starting to see some of the effects of that inventory was the other piece that I wanted to highlight for twenty-five when when you look at our inventory levels and you see the the.
Speaker Change: Work that's been done there.
Speaker Change: With.
Speaker Change: With a six 9% decrease per store in Q4, a very very strong a thousand skus have been taken out of the plan O Gram. So the stores are much more productive in.
Speaker Change: And our D. CS are more productive I would tell you. We're not finished there'll be more SKU reduction in 2025, along with even more SKU optimization.
Speaker Change: In 2025, so both of those pieces.
Speaker Change: And then as you as you take a look at that.
Speaker Change: The productivity that Steve was working on with or without.
Speaker Change: With our D. CS is.
Speaker Change: Is the other piece and that is where we can optimize what's coming into our stores.
Speaker Change: Through the royalty in their process and optimizing that the less touches that the store has to do that.
Speaker Change: The better off we'll be Soc rotator sorts important.
Speaker Change: Our plan O gram sort by deliveries important and that work was done in 2025, and we're starting to reap the benefits of that in 'twenty.
Speaker Change: Sorry, It was done in 'twenty four we reopen that in 'twenty five and then as you think about the next step is case pack optimization here and then what that does for US is insurers whatever comes in goes to the shelf, where the store doesn't have to touch it multiple times from the time they started to the time it gets put into the cusp.
Speaker Change: <unk> bag.
Speaker Change: When you think about 20000 stores across our network. If I can save a few touches per store per day that adds up to very meaningful numbers at the end of the day. So a lot to be proud of a lot of work yet to do but.
Speaker Change: We're squarely focused on getting that done that yeah, and if I can just jump in on that a little bit you know before I go into the detail then and I think what I'll do Matt to kind of address your question. On 25 is just tell you what we're what we're thinking about all the way through the P&L and then just some of the SG&A headwinds that we're seeing in 25 to <unk> to talk to your leverage question, but before.
Speaker Change: I go into all of that and I just want to reiterate we're excited about our 2025 plans, we think that what we've done in back to basics sets us up nicely and then all of the actions you know that Todd has been talking about is going to continue to drive growth in subsequent years really moving towards that medium and longer term financial goals.
Speaker Change: That we laid out today and maybe I'll start with just kind of what is reflected in our 2025 our guidance.
Speaker Change: Especially from the consumer side of things you know currently we're anticipating that that there is continued economic pressure on that core consumer that we had a relatively consistent level is as they were experiencing as we exited 2024 and the guidance is centered around a macro neutral outlook and I'll tell you that the full range really allows for.
Speaker Change: For some uncertainty on macro in our core customer at about that that low end and high end, but there's a couple of things that are not contemplated in our guidance and one would be any changes to the tariff expectations from from what we maybe don't know as of today and we also don't specifically contemplate any changes to snap.
Speaker Change: Our our other benefit programs in our in our guidance and then the other thing would be any significant impact to consumer demand Brian brought on by those impacts of tariffs and has not been contemplated in the guidance as well.
Speaker Change: What has been contemplated as we kind of move through if we think about margin really the primary driver there is going to be the shrink improvement as we move through the year on the SG&A side I think this will probably talk to you a cadence question that I'm sure that that and you all are wondering as well as to your headwind question during.
Speaker Change: Our Q1 and Q2, we are expecting the most pressure on a year over year comparison in and are expecting EPS to be below last year for those two quarters. When we think about the first half. There's a couple of things that are going on first there are just initial expenses related to our remodels, including project elevate.
Speaker Change: And so as we expect to execute more real estate projects in the in the first half this year than we did last year, you'll see some pressure on that but the goal here is really to complete a vast majority of our real estate projects by the end of the third quarter and that helps us maximize that is operating weeks that can benefit us later and in.
Speaker Change: 2025.
And as I think about Q1 and Q2 there is a another couple of call outs Q1, obviously has the toughest that comp lap them to prior year, and that's going to pressure SG&A as a percent of sales and we do have some additional labor expense headwinds in Q1, and that's really related to self checkout. So he's still.
Speaker Change: Had a at the self checkouts and a majority of our store base and before the conversions began in later Q1 of last year and then the other call out I would just say on Q1 with the store closures that we announced we do expect to have costs associated with those and in the realm of about $20 million and in the first quarter.
Speaker Change: And then as you think about the second quarter, it's really SG&A is impacted by incentive comp headwinds last year. The accrual was lower than what we would expect in Q1 of 25, and that's really when we lowered expectations last year in Q2, and then finally I'll just.
Speaker Change: Talk through kind of the full year and we talked about this in our prepared remarks, but just to reiterate it a little bit we are expecting for the full year wage rate inflation of between three and a half and 4% and then that normalized short term and long term incentive compensation you know at our target it's about 120 million.
Speaker Change: But depending on where we land with a guy that could be it could be less could be more of that.
Speaker Change: Wind is as we move forward and then finally and depreciation rent utilities R&M as the things that we've been talking about are presenting a headwind, but the good news. There is we have a lot of actions in place, they're gonna help mitigate that deleverage as we move into 'twenty, six and beyond and that's what's embedded in our framework. So all.
Speaker Change: All that said I think that 25 is is a year, that's just going to position us well to drive that growth in subsequent years and he saw our call out of are they expecting double digit EPS growth and in 2026, and we're looking forward to moving towards those medium and long term financial goals.
Speaker Change: Okay.
Speaker Change: Our next question is from high on MA with Bernstein. Please proceed with your question.
Said Hung: Great. Thank you for taking my question. This is said he hung from Bernstein.
Speaker Change: Follow up on the real estate side first.
Speaker Change: First of all beyond the existing kind of 96 dollar general stores forty-five pop self stores are you expecting more to the coast at least on your portfolio optimization and longer term as you think about the IRR between new store openings project elevates and there's full remodels how would you can be.
The returns on those projects and how they view how does that change how you think about the balance between the theory going forward. Thank you.
Speaker Change: Yeah. Thank you for the question I'll start and I'll pass it over to Kelly.
Speaker Change: I believe that we did exactly the right thing in taking a look at our full portfolio of of stores. You know, we do that every year, but we did it with a little bit of a different I this year and ensuring that we looked at our both our or dollar general and pop.
Speaker Change: Shelf locations and I have to say.
While it's never easy to close stores. It was exactly the right thing to do 96 dollar general stores less than 1% of our over our fleet if you will.
Speaker Change: And it comes at no surprise, probably to you and maybe others.
Speaker Change: They were predominantly in.
Speaker Change: Urban and Metro settings, where it has become very very difficult to.
Speaker Change: To run a profitable store for a lot of different reasons at obviously.
Speaker Change: Obviously, you've been out in the news for many years. So we continue to to watch that the great thing is because we look at our prospects.
Speaker Change: We still see there's 12000 and see points out there and in the U S to put a dollar general store a pop shelf store, while we won't get all of those we still believe there's a lot of runway for growth.
Speaker Change: Within our within the Continental United States, not to even mentioned, Mexico, which we've committed to put in upwards of 15 stores. This year.
Speaker Change: And the ground in Mexico, and then as I think about pop shelf.
Speaker Change: You know they they have done a really nice job the customer is still very very positive on the bran, we need a little economic help there, but I would tell you we're not waiting around you heard in our prepared remarks, we've seen the vast majority of our go forward pop shelf stores have some double digit increases as of late on the <unk>.
Speaker Change: <unk> line and that's from all the work that the team has done to position that pop shelf brand.
Speaker Change: Exactly where the customer wants it so more to come I would call that where our where we're in the very early innings of our test and learn with pop shelf and by the way when we closed 51 stores and end up obviously, turning six of those in the dollar generals.
Speaker Change: It was really centered.
Speaker Change: Squarely around.
Speaker Change: Our test and learn mentality and what I mean by that is we we tested the outer limits in bounds in many instances to see what the elasticity would look like.
Speaker Change: On different demographics to put a pop shelf store and some worked really well and some didn't work as well when we learned a lot there and so those are the ones that were that we're closing down so while.
Speaker Change: While we will always watch and look at our portfolio. We believe this was exactly the right thing to do at the right time, Yeah, and just to cover the financial side of all of that what I would say is we're still very excited about the opportunities that we have around new store growth and so we're seeing IRR still are at 17% and we've got it.
Payback period of approximately two years and we have a lot of locations left there that we can go into so we're we're feeling good about the pipeline and just the ability to produce the results that we have seen historically and I think right. Now you know we've done a nice job of balancing the capital allocation between new stores and existing stores.
Speaker Change: And as we think about that maximizing the current store base is just really powerful as we worked to gain that mature store comps. So with project elevate we're expecting a sales lift outs and between three and 5% and the exciting thing. There is we're going to cover about 20% of our stores. This year and if you think about.
Speaker Change: That in terms of the mature store base, that's actually about 25% of our mature stores. So very significant for us and then on our traditional remodels, which we're calling our project renovate and we still expect to see that 6% to 8% lift and and we're often going in and enhancing some of the things that we're doing specific.
Speaker Change: To to work towards mitigating repairs and maintenance and so all of the all of what we're expecting we have seen and and we're excited about how this is going to play out over the next couple of years in our framework.
Speaker Change: Okay.
Speaker Change: Our next question comes from Rupert <unk> per week with Oppenheimer. Please proceed with your question good morning, and thanks for taking my questions. So two three years of focus one is the latest on your store conditions at this point versus your expectations inventory in stock shopping et cetera, and secondary secondly related to that just curious on the opera.
Speaker Change: He still sees or further improve working capital from here.
Speaker Change: Yeah, I'll I'll take I'll take that and then Kelly add anything he would like to I.
Speaker Change: I would tell you that.
Again, our back to basic work has done exactly what we thought it would do.
Speaker Change: In Q4.
Speaker Change: At 70% or better and our conditions in our stores, meaning 70% or better.
Speaker Change: The stores that we.
Speaker Change: We will serve the customer very well we saw working like we always will work on some of those that we saw some pockets that we're working on but I would tell you.
Speaker Change: With the recent move with Steve coming in and then Tracey moving too.
Speaker Change: To have the stores her number one and only go is execution execution execution for twenty-five and with that we feel very confident that will make us even further headwinds are in our in stock positions, which by the way or if some of the highest levels we've seen.
Speaker Change: In years, right now and getting better.
Speaker Change: I believe that that execution will also move.
Speaker Change: Move over to moving that 70 plus percent that we have today are closer to the 80 range, where we feel more comfortable and so where we're moving toward that direction.
Speaker Change: But I would tell you that the customers are any ceiling seen it feeling it we're hearing it in.
Speaker Change: Our customer work, our customer surveys and obviously seeing that in our sales and so feel very good about about what that looks like and where we will continue to make good headwind sorry, good headway into 25 yeah.
Speaker Change: And to piggyback off of that I, just I just wanted to call out I really think the team threaded the needle here on inventory in stocks and making significant reductions in inventory, while increasing in stocks and having positive sales is just remarkable and to your point re Pasha. It did play well with our working capital. So we felt like we did.
Speaker Change: Managed that very well our cash flow from operations was up 25% free cash flow is up 144%. So good discipline around capital expenditures and we were able earlier this year to pay down debt to help help our leverage there at $750 million and as we look at.
Speaker Change: Ahead in 2025, we have another 500 million maturing in the fall, but we expect to that to pay down that early and with cash and in Q1, so making additional progress on on that as well.
Speaker Change: One thing I'll say on that Kelly is that as we move into 'twenty five as I mentioned earlier, we're not finished with that optimization of inventory there'll be further reductions of skus and further optimization, so more to come as we move into 'twenty five.
Speaker Change: Our next question comes from Seth Sigman with Barclays. Please proceed with your question.
Speaker Change: Everyone I wanted to follow up on the long term margin bridge to 6% to 7% when you add up the different buckets that you cited it would seem to drive margins well above that target. So I'm just curious what is the offset there it.
Speaker Change: It sounds like the message on investments is relatively stable outside of some of the early pressures here in 2025. So is that conservative or are there offsets that that we should be thinking about thanks. So much.
Speaker Change: So I'll start and then pass over to Kelly you know as we look at it obviously, it's it's a long term framework, we believe it strikes the right balance that.
Speaker Change: We need to ensure that we continue to.
Speaker Change: Serve the customer the way we need to serve the customer and also serve our employee base. The way we need to and then obviously serve all of our shareholders and saying that we always strive to do more and we will do that.
Speaker Change: It wasn't lost on us that it does add up to a higher number.
Speaker Change: But.
Speaker Change: We continue to move forward those of you that know me pretty well know that as we laid out an algorithm way back in the day, we strove stride to outpace that and we did and in many instances and that'll be no different here, but in the meantime, I would tell you that we believe this is the right anchor point.
Speaker Change: As we move in.
Speaker Change: Thank you.
Speaker Change: Our final question comes from Robby <unk> with Bank of America. Please proceed with your question.
Speaker Change: Oh, Hey, Thanks for sneaking me in here Todd I was hoping maybe to conclude you could.
Speaker Change: Talk a little bit about the puts and takes on how you see the competitive environment in 2025, and if it's if it's different you know.
One way or another from 2024, and maybe specifically you know thoughts on Walmart delivery penetration into your markets.
Speaker Change: The drug stores closing.
Speaker Change: Any any benefit from family dollar closings you know just just would love your thoughts on how what kind of environment you see any changes for this year versus 2024.
Speaker Change: Yeah absolutely.
Speaker Change: I'd have to say you know, it's always a competitive market. So I'll start there, but I would tell you it is fluid.
Speaker Change: You named some of the things that we're that we're obviously watching and some of the competitors. There's been a lot of a lot of competitors closing.
Many not in our space directly, but some that were like for instance.
With party city moving out that's one reason and you heard in our prepared remarks that we went in and and rebalanced the inventory in our pop shelf stores, bringing in more party more occasions more toys things that will go directly.
Speaker Change: For that consumer that is probably left looking for a place to shop.
So I believe in the competitive closings there are opportunities drug continues to be our largest share donor as we look at at our our non or I'm, sorry, a consumable share gains, which we're very proud of and our non consumable share gains, which we've been very proud of coming out of.
Speaker Change: Q4, now moving into Q1.
Speaker Change: So I believe that there'll be further opportunity and for US. That's the reason we're squarely focused on ensuring that we have our best foot forward. So when these customers come in our stores.
Speaker Change: They become sticky and continue to shop with US. The good thing is what we're seeing is that trade down or trade in as we like to speak.
Speaker Change: Speak to it.
Speaker Change: Has it accelerated going through Q4 and into Q1, so it's really nice to see that that tells me that.
Speaker Change: She likes what she sees as she comes in we're going to deliver even I'm, even more of that as we move forward as it relates to delivery.
Would tell you that.
Speaker Change: Expanding our delivery up to 400 stores and then aiming to to move to 10000 by the end of the year is is and should be a competitive advantage and the reason being is that.
Speaker Change: There is no one out there today that can deliver to a small town Rural America within an hour we can do that.
Speaker Change: And that's what we aim to do with our delivery initiative.
Speaker Change: Initiative I'm very pleased with how we've started the 400 stores the.
Speaker Change: I asked it is.
Speaker Change: At a very large pace a lot larger than our our our basket that obviously when people come in our stores.
Speaker Change: So a lot of the.
Speaker Change: Go forward initiatives that would say continue to move forward are.
Speaker Change: Flashing green and it's all systems go for us as we as we look to light up close to 10000 stores or more as we move into into the back half of this year.
Speaker Change: The linchpin, there and I have to say is the dollar general mediate network and the reason being is that it gives us the opportunity to be able to get more eyes on our apps more on our website all of our digital tools, which we then can turn around and.
Speaker Change: And work with our vendor partners to leverage that as.
Speaker Change: As you May remember, we were one of the first to.
Speaker Change: Institute, a media network years ago, and and so we've got a a really good track record of of ensuring that we can maximize that and so more to come and there's a nice margin tailwind that's contemplated.
Speaker Change: Contemplated in our long term framework around.
Speaker Change: Around the media network, and and we feel very confident ability to get our arms around that and deliver that as well.
Speaker Change: This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Speaker Change: Today's conference has ended please disconnect your lines.
Speaker Change: At this time thank you.