Dollar General Corporation

Good morning. My name is Robert, and I will be your conference operator today. At this time, I'd like to welcome everyone to Dollar General First Quarter 2020 Earnings Conference Call. Today is Thursday, May 28, 2020. All lines have been placed on mute to prevent any background noise. This call is being recorded. Instructions for listening to the replay of the call are available in the company's earnings press release issued this morning. Now I'd like to turn the conference over to Mr. Donnie Lau, Vice President of Investor Relations and Corporate Strategy. Mr. Lau, you may begin.

Thank you, Robert. Good morning, everyone. On the call with me today are Todd Bezos, our CEO, Jeff Owen, our COO, and John Garrett, our CFO. Our earnings release issue today can be found on our website at investor.dollargeneral.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 strategy, plans, initiatives, goals, financial guidance, or beliefs about future matters, including but not limited to beliefs about COVID-19's future impact on the economy, our business, and our customer. Forward-looking statements can be identified because they are not limited to statements of historical fact. or use words such as may, will, should, could, would, can, believe, anticipate, expect, assume, intend, outlook, estimate, guidance, plan, opportunity, long-term, look to, committed to, continue, ahead, seek, likely, potential, or go, and similar expressions. THESE STATEMENTS ARE SUBJECT TO RISK 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 2019 FORUM 10-K FILED ON MARCH 19, 2020, OUR FORUM 10-Q FILED THIS MORNING, AND IN THE COMMENTS THAT ARE MADE ON THIS CALL. YOU SHOULD NOT UNDULY RELY ON FORWARD-LOOKING STATEMENTS WHICH SPEAK ONLY AS OF TODAY'S CALL. DOLLAR GENERAL DISCLAIMS ANY OBLIGATION to update or revise any information discussed in this call unless required by law. At the end of our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one follow-up question if necessary. Now, it is my pleasure to turn the call over to Todd.

Thank you, Donnie, and welcome to everyone joining our call. These are certainly unprecedented times for us all, and our hearts go out to the communities and individuals affected by the COVID-19 crisis. On behalf of the Dollar General, I want to express our deepest gratitude to those serving on the front lines and especially to our teammates for their dedicated and efforts in fulfilling our mission of serving others by providing affordable, convenient, and close to home access to essential items at a time when our customers need them most. I'm inspired by the phenomenal work our associates are doing. and could not be more proud of how they've responded to the needs of our communities. In recognition of the essential work performed by our employees, in April, the New York Stock Exchange recognized one of our store managers, Crystal Burrows, during the Gratitude Campaign, where the exchange joined millions of others in honoring the way people on the front lines have responded to the COVID-19 crisis. As one of America's essential retailers, we are committed to being part of the solution during these difficult times and are continuing to support these efforts through our expansive network of more than 16,000 store locations currently located within five miles of more than 75% of the U.S. population. Our convenient small box format providing for quick in and out access and limited crowds, both of which are conducive to social distancing. our broad assortment of everyday household essential items, our ongoing commitment to everyday low prices, our flexible supply chain, our growing digital capabilities, and recent measures taken to further safeguard the well-being of both our team members and customers, and, of course, our talented and committed associates. For more than 80 years, Dollar General has served customers through a unique combination of value and convenience. and we will continue to be there for them in both good and challenging times. Let me now highlight some of the key actions we've taken in response to COVID-19 with two key priorities in mind. First is the health and safety of our employees, customers, and communities we serve. Second is maintaining the continuity of our business and operations. For our employees and customers, we took swift and proactive action to keep them safe while keeping stores open and running with minimal disruption. We closed an hour early to allow greater time for stocking and enhanced cleaning protocols, distributed masks and gloves to all employees, implemented social distancing measures in our stores, distribution centers, and at the store support center, and completed the installation of nearly 40,000 plexiglass barriers at checkout across the entire chain. To further support, Heightened demand, we have hired over 50,000 people since mid-March, nearly double our normal hiring rate. We are happy to welcome these new employees to our team, and our hiring efforts are continuing. We also invested approximately $60 million in employee appreciation bonuses and provided enhanced benefits and resources, including expanded paid leave and greater access to telehealth services. and we contributed to our Employee Assistance Foundation to assist our coworkers during times of need. All these actions have helped ensure the continuity of our business at a time when customers need us most. To support our communities, we dedicated the first hour of each day to seniors and provided a discount for first responders, medical personnel, and National Guard members. and through the Dollar General Literacy Foundation, Save the Children, an organization working to ensure children in rural America continue to learn and have access to nutritious food during nationwide school closures, will receive a $2 million donation. Beyond these actions, we remain focused on advancing our operating priorities and strategic initiatives as we look to further meet the evolving needs of our customers. and better positioned Dollar General to emerge from this crisis even stronger than before. Turning now to our first quarter performance. The quarter was highlighted by extraordinary growth in both top and bottom lines. These results reflect significant changes in shopping patterns, which began in March as consumers reacted to the COVID-19 pandemic. For the month of February, same-store sales increased 5.5%. driven by broad-based performance across many fronts, which we believe speaks to the continued strength and sustained momentum of the underlying business. Beginning in March, we experienced a significant surge in demand and sales as consumers began to stock up, and category mix shifted even more than usual to our consumable category. For the month in total, comp sales increased 34.5%. April sales moderated in comparison to March, but remained elevated as consumers continue to replenish household essentials at a rate greater than normal. During April, we also experienced significant growth in our non-consumable businesses, and our three non-consumable categories delivered a combined comp sales increase in excess of our consumable business. For the month in total, same-store sales increased 21.5%. Overall, first quarter, Net sales increased 27.6% to $8.4 billion, driven by comp sales growth of 21.7%, including significant growth in average basket size and a meaningful increase in customer traffic. Once again this quarter, we increased our market share in highly consumable product sales as measured by syndicated data. Importantly, our data suggests a meaningful increase in new customers, underscoring the broadening appeal of our value and convenience proposition. We're particularly pleased that we delivered a significant operating margin expansion this quarter, which contributed to diluted EPS of $2.56, an increase of 73% over prior year. Collectively, these results reflect our commitment to doing everything we can to support our employees customers and communities during this time and further validates our belief that we are pursuing the right strategies to create meaningful long-term shareholder value. We continue to believe we operate in one of the most attractive sectors in retail and have an established and even stronger bond with existing customers during these unprecedented times. Combined with the actions we've taken to forge new customer relationships, we believe we are well positioned to drive continued growth, even in what's expected to be a challenging economic environment. With that, I'll now turn the call over to John.

Thank you, Todd, and good morning, everyone. Before I begin, I'd like to echo Todd's gratitude to our employees and note that my thoughts are with those who have been impacted by this crisis. Now that Todd is taking you through a few highlights of the first quarter, let me take you through some of the financial details. Unless I specifically note otherwise, all comparisons are year-over-year, and all references to EPS refer to diluted earnings per share. As Todd already discussed sales, I will start with gross profit, which was positively impacted in the quarter by a significant increase in sales, including the impact of COVID-19. As a percentage of net sales, gross profit was 30.7% in the first quarter, an increase of 49 basis points. The gross profit rate increase was primarily attributable to a reduction markdowns as a percentage of net sales and higher initial markups on inventory purchases. These factors were partially offset by increased distribution costs, which were driven by increased volume and our decision to incur discretionary bonus expense. SG&A as a percentage of net sales was 20.5%, a decrease of 204 basis points. Although we incurred certain incremental costs related to COVID-19, these costs were more than offset by the significant increase in sales. Expenses that were lower as a percentage of net sales this quarter include occupancy costs, retail labor, utilities, depreciation and amortization, and taxes and licenses. These items were partially offset by increased incentive compensation expense. Moving down the income statement, operating profit for the first quarter increased 69.2% to $867 million compared to $512 million in the first quarter of 2019. As a percentage of net sales, operating profit was 10.3%, an increase of 253 basis points. We believe the impact of COVID-19 significantly benefited operating profit in Q1, primarily through higher sales, partially offset by approximately $80 million of incremental investments that we made in response to the pandemic, including approximately $60 million in appreciation bonuses and nearly $20 million in measures taken to further protect the health and safety of our employees and customers. as well as enhanced benefits programs to support our store associates, distribution center employees, and private fleet drivers. Our effective tax rate for the quarter was 22.2% and compares to 20.8% in the first quarter last year. Finally, as Todd noted earlier, EPS for the first quarter increased 73% to $2.56. Turning now to our cash flow and balance sheet, which remains strong. and provide us the financial flexibility to better support our customers' employees during these difficult times. The business generated significant cash flow from operations during the quarter, totaling $1.7 billion, an increase of $1.2 billion, or 202%. This increase was primarily driven by strong operating performance combined with lower levels of inventory as we continue to work closely with suppliers to improve in-stocks for high-demand products. Merchandise inventories were $4.1 billion at the end of the first quarter, essentially flat to prior year and a decrease of 5.5% on a per-store basis. Total capital expenditures in the first quarter were $195 million and included our planned investments in new stores, remodels, and relocations, and spending related to our strategic initiatives. During the quarter, we repurchased half a million shares of our common stock for $63 million and and paid a quarterly dividend of 36 cents per common share outstanding at a total cost of $91 million. At the end of Q1, the remaining share repurchase authorization was $1.1 billion. In light of the COVID-19 uncertainty and out of an abundance of caution, we proactively took steps during the quarter to further bolster our already strong liquidity position, including the temporary suspension of share repurchases and the issuance of $1.5 billion of senior notes on April 3rd. These measures, along with our strong cash flow, put us in an even stronger liquidity position with $2.7 billion of cash and cash equivalents and $1.1 billion of availability under our undrawn revolving credit facility at the end of Q1. Importantly, our capital allocation priorities remain unchanged. Our first priority is investing in high return growth opportunities, including new store expansion and our strategic initiatives. We also remain committed to returning significant cash to shareholders through anticipated share repurchases when it is prudent to do so and quarterly dividends, all while maintaining our current investment grade credit rating and managing to a leverage ratio approximately three times adjusted debt to EBITDA. Moving to an update on our financial outlook for fiscal 2020. Let me start by acknowledging the inherent and significant uncertainty that continues to exist around the severity and duration of the COVID-19 pandemic including its impact on the economy, consumer behavior, and our business. In addition, the timing, scope, and impact of both current and anticipated stimulus legislation and other governmental responses to the pandemic remains to be seen. As a result, it is difficult to predict specific outcomes, and while we expect to exceed our prior guidance for fiscal 2020 net sales, same-store sales, and EPS, we are unable to estimate the extent of such upside with reasonable accuracy. Accordingly, we are withdrawing our sales, earnings, and share repurchase guidance for fiscal 2020 that was issued on March 12, 2020 in conjunction with our Q4 earnings call. With regards to share repurchases, we are constantly evaluating our position and intend to resume our share buyback activity when it is prudent and advisable to do so, which may be as early as the 2020 second quarter. Finally, our 2020 outlook for capital spending and real estate projects remain unchanged from what we issued in our Q4 earnings release on March 12, 2020. Let me now provide some additional context as it relates to our full-year outlook. Given the unusual situation, I will elaborate on our comp sales trends thus far in May. Since the end of Q1 and through May 26, we have continued to experience elevated consumer demand in our stores, albeit with some intermittent moderation and, in particular, over some of the more recent days. Overall, same-store sales have increased by approximately 22% during this timeframe. That said, it is important to note that there are a number of factors which suggest that sales will moderate to more normalized levels beginning during the latter part of Q2, including the duration and impact of shelter in place restrictions and social distancing measures, the gradual reopening of other retailers, the tapering of benefits included in recent stimulus legislation, and managing through what is likely to be a more challenging economic environment for our consumers. With regards to our strategic initiatives, we continue to anticipate they will positively contribute to gross profit rate this year, specifically our Non-Consumables Initiative, or NCI, and DG Fresh. In addition, we also expect continued and meaningful investment in our initiatives this year, including ongoing expenses associated with each. We continue to believe these investments will improve operating margin over time, particularly as the benefits to gross margin continue to scale and ultimately outpace the associated expense with both NCI and DG Fresh expected to be accretive to operating margin in 2020. However, these investments will continue to pressure SG&A rates this year as we accelerate their rollouts. In closing, I want to reiterate that we are very proud of the team's execution and service during the quarter. We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow, in long-term shareholder value. As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance while strategically investing for the long term. With that, I will turn the call over to Jeff. Thank you, John.

I'd like to start by also thanking our employees for their hard work and dedication as we navigate this difficult time. I want to take the next few minutes to update you on our four operating priorities. Our first operating priority is driving profitable sales growth. The team did an outstanding job this quarter executing against a portfolio of growth initiatives, despite the challenges surrounding COVID-19. Let me highlight some of our recent efforts. Starting with our cooler door expansion, which continues to be our most impactful merchandising initiative. During the quarter, we installed more than 15,000 cooler doors across our store base. In total, we expect to install approximately 55,000 cooler doors in 2020, the majority of which will be in our higher-capacity coolers, as we continue to build on our multi-year track record of growth in cooler doors and associated sales. Turning now to private brands, which continues to be a priority as we pursue opportunities to deliver even greater value for our customers while also driving profitable sales growth. During the quarter, we made great progress with our rebranding and repositioning efforts, including the relaunch of our laundry brand under the True Living label. In addition, our Clover Valley redesign has begun rolling out, with over 250 items now available and more to come as we seek to drive greater category awareness and even higher customer adoption. Moving to our Better for You offering. which is especially important during a time when more food is being consumed at home. This offering is now available in approximately 6,000 stores, with plans to expand to nearly 7,000 stores by year end. Finally, a quick update on our FedEx relationship. This service is currently available in approximately 4,800 locations, with plans to expand to over 8,500 stores by year end. further advancing our strategy of leveraging our unique real estate footprint to increase customer access to services in convenient and nearby locations. Beyond these sales driving initiatives, enhancing gross margin remains a critical area of focus for us. In addition to some of our strategic initiatives, which Todd will discuss later, as well as our private brand efforts, foreign sourcing remains an important gross margin opportunity for us. Our efforts this quarter were focused on supporting the business in a rapidly changing global environment. The team did a tremendous job of working closely with each of our supply partners to ensure product availability, including pursuing product substitutions and shifting production to other countries when warranted. Looking ahead, we continue to see significant opportunity to increase our foreign sourcing penetration, while also further diversifying our countries of origin. as we seek to provide even greater value and an enhanced assortment offering for our customers. We also continue to pursue supply chain efficiencies through the further reduction of stem miles and continued expansion of our private fleet. We're especially proud of the team's efforts during the quarter as we delivered against record volumes while constantly working with our vendor partners to minimize disruptions to supply. We are also executing against additional opportunities to enhance gross margin, including further improvements in shrink and to our category management process. Our second priority is capturing growth opportunities. Our proven high return, low risk real estate model continues to be a core strength of the business and enhances our ability to bring value and convenience to even more customers across the country. As one of America's essential retailers, We are committed to providing customers with even greater access to essential goods, especially during these unprecedented times. To that end, in the first quarter, we opened 250 new stores, remodeled 481 stores, including 332 in the higher cooler count DGTP or DGP formats, and relocated 17 stores. We also expanded the number of stores offering fresh produce. bringing the total number produce to approximately 750. And despite the added complexities as a result of COVID-19, our best-in-class real estate team has worked diligently with our communities and business partners to keep our real estate plans on track for 2020. As a result, we are maintaining our real estate outlook for the year. as we plan to open 1,000 new stores, remodel 1,500 new stores, excuse me, run 1,500 stores, and relocate 80 stores, representing nearly 2,600 real estate projects in total. Overall, I am extremely proud of the team's continued ability to execute such high volumes of real estate projects, which is a testament to their dedication to serving new and existing customers. Our third operating priority is to leverage and reinforce our position as a low-cost operator. Over the years, we have established a clear and defined process to control spending, which governs our disciplined approach to spending decisions. This save-to-serve approach has served us well in navigating the current environment while keeping the customer at the center of everything we do. Our ongoing efforts to further simplify our operations have been an important factor in eliminating unnecessary tasks. In turn, this has allowed for our store associates to better serve our customers during this period of heightened demand. Beyond enhancing our ability to serve, this process has also generated significant savings across the business. Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities. while controlling expenses and always seeking to be a low-cost operator. Our fourth operating priority is to invest in our people as we believe they are a competitive advantage. The strength and dedication of our people was on full display during the quarter as we heard countless stories of our frontline employees going above and beyond the call of duty to serve our customers and communities. As Todd noted earlier, we made a significant investment of approximately $60 million in employee bonuses to demonstrate continued appreciation for their exceptional efforts to serve our customers and fulfill the company's mission of serving others. We believe these bonuses, as well as our other investments and benefits, such as additional paid leave, were well received. In fact, we continue to see record low turnover at the store manager level. as well as lower turnover across our associate base. Additionally, we continue to be pleased with our strong applicant flows, as evidenced by the hiring of more than 50,000 people since mid-March. We also continue to embrace innovative approaches to training and development and have recently transitioned to a virtual training environment, resulting in the continued development of our people despite the inability to travel. We believe the opportunity to start and develop a career with an innovative and growing retailer is a unique competitive advantage and remains our greatest currency in attracting and retaining talent. In summary, we are executing well from a position of strength, and these opportunities continue to provide the foundation from which we can drive continued growth in the years ahead. With that, I will turn the call back over to Todd.

Thank you, Jeff. As I've shared with you over the past several quarters, We're investing in and building momentum behind certain strategic initiatives to strengthen our competitive position and further support long-term sustainable growth. Importantly, as a result of our efforts and investments to date, we believe we are even better positioned to move quickly alongside our customers as we continue to meet their rapidly evolving needs, further accelerated by COVID-19. Let me take you through some of the most recent highlights. starting with our non-consumable initiative, or NCI. As a reminder, NCI consists of a new and expanded product offering in key non-consumable categories. The NCI offering was available in more than 3,200 stores at the end of the quarter, and we plan to expand the offering to a total of approximately 5,000 stores by the end of 2020. We're especially pleased with the strong sales and margin performance our NCI stores delivered in the quarter. We also continue to realize meaningful benefits from incorporating select NCI products and planograms throughout the broader store base, resulting in positive sales and margin contributions to all of our overall first quarter results. These results reinforce our belief that NCI will continue to be a meaningful sales and margin driver as we move forward and gives us confidence in our rollout plans for 2020. Turning now to DG Fresh, which is a strategic multi-phase shift to self-distribution of frozen and refrigerated goods. As a reminder, the preliminary objective of DG Fresh is to reduce product costs on our frozen and refrigerated items by removing the markup paid to third-party distributors, thereby enhancing gross margin, and we continue to be very pleased with the product cost savings we are seeing. Another important goal of DG Fresh is to increase sales in these categories by enabling the accelerated rollout of our high-capacity coolers, increasing in-stock levels, and eventually expanding our overall assortment offering. Importantly, we are already seeing evidence of success against these goals, including meaningful increase in perishable sales and higher overall in-stock levels in stores being serviced by DG Fresh. In total, we are now self-distributing to more than 9,000 stores from six DG Fresh facilities. Our goal for 2020 is to capture benefits from DG Fresh in approximately 12,000 stores from up to 10 facilities, including our first combination facility co-located with our existing dry goods distribution center in Zanesville, Ohio. We continue to believe this initiative will be accretive to operating margin in 2020. as the benefits begin to exceed associated expenses and growing in the years ahead, as we continue to scale this transformational initiative. Turning to our digital initiative, where our strategy consists of building a digital ecosystem that is specifically tailored to providing our core customer with even more convenient, frictionless, and personalized shopping experience. We believe essential brick-and-mortar retailers continue to serve a critical role, and that has never been more evident than in the past few months. We believe our unique store footprint combined with our digital efforts have positioned us well in a challenging and changing retail landscape, particularly as we consider the possibilities in a post-COVID-19 environment. More specifically, DG Pickup, which is our buy online and pick up in the store offering, provides an important access point for those seeking a more contactless customer experience. We launched a pilot of this solution at the end of Q4 and are very pleased with the initial results, including positive feedback from both customers and employees. Importantly, we are well positioned to scale quickly with plans for rapid expansion as we move ahead. Beyond DG Pickup, DG Go Mobile Checkout is currently available in approximately 750 stores with plans to further expand as we look to combine this feature with self-checkout, providing an even more convenient and contactless checkout solution. Moving now to Fast Track, where our goals include increasing labor productivity in our stores, enhancing customer convenience, and further improving on-shelf availability. We are pleased with the store labor productivity improvements we are seeing as a result of our efforts around roll-tailor optimization and even more shelf-ready packaging. These improvements are particularly notable in the quarter as our teams work diligently and efficiently to keep products on the shelf. The second component of Fast-Track is self-checkout, which represents added flexibility for consumers who may seek to limit face-to-face interaction. while also driving greater efficiencies in the store for our associates. Self-checkout is currently available in more than 30 stores, and our plans consist of a broader rollout later this year as we look to further enhance our convenience proposition. Overall, we continue to make great progress with our strategic initiatives while advancing our goal of further differentiating and distancing Dollar General from the rest of the discount retail landscape. As a mature retailer in growth mode, we are also laying the groundwork for future initiatives as we are constantly evaluating what lies ahead for our customers and our business. We continue to believe we are pursuing the right strategies to capture additional growth opportunities in a rapidly evolving retail landscape. In closing, we are proud of our strong start to 2020. Our results are a testament to the strong execution and disciplined approach of our team. And with our unique combination of value and convenience further enhanced through our initiatives, we believe we are well positioned to navigate the current environment and come out the other side stronger together with the communities we serve. Importantly, we are very proud of our people, specifically those serving on the front lines, including our store associates, distribution center employees, and those in our private fleet. I want to offer my sincere thanks to each of our more than 155,000 employees across the company for their tireless commitment and dedication to fulfilling our mission of serving others. With that, Operator, I'd now like to open the lines for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. As a reminder, we ask that you please limit to one question and one follow-up. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Michael Lasser with UBS. Please proceed with your question.

Good morning. Thank you for taking my question. You mentioned that your conference had moderated a bit in recent days. What has been the magnitude of the moderation, and has it been more so due to other stores reopening and shelter in place restrictions being lifted, or because you're seeing a fading benefit of those stimulus dollars?

Thanks, Michael. Thank you, Michael. This is John. And, you know, providing a little more context here, we alluded to in the prepared comments that through Q1, through May 26, our sales increased by 22% during this timeframe. and had mentioned some intermittent moderation over recent days. Given the unprecedented environment and the spirit of transparency, I do think it's fair to give more color on the recent trends. What we've seen in some recent days is some days in the mid-teens, but we've seen it bounce back in recent days into the mid-20s. So things have been fluid, but sales are still very healthy, and we believe we're very well positioned. We're seeing strength in both sides of the box. On the consumable side, and the non-consumables. And I think an interesting stat we've seen floating around is just how much people have their stimulus money still deposited in the banks, which leads you to believe there's some tail to that. But we're still seeing strength in both sides of the business and believe with our unique combination of value and convenience, we're very well positioned.

That's really helpful. Thank you, John. My follow-up question is inevitably, and you mentioned that as part of these very healthy comp trends, You've experienced growth from new customers. How can you size that contribution? Is it a third, a quarter, maybe half of the overall growth in comp from new customers? Do you think these new customers will be stickier than what you've enjoyed in the past?

Yeah, Michael, it's Todd. Thank you. Yeah, you know, we have seen an increase in customers. And no surprise, right, when the going gets tough, We know that our customers need us more and we're there for, but we also know from past recessionary times that and in times of these that we have a customer that also starts to trade into Dollar General. We saw that in a very big way in Q1. We can validate that pretty easily through credit card data that we've seen, but also through, as you know, we do extensive quarterly customer interactions and reach outs. And we know exactly where our customers stand as well as new customers. And I would tell you those reach outs to our customers have told us this quarter that not only did we trade in, we loved what we saw and we plan to repeat shop if they haven't already. So we're very, very bullish on that. And I think it's a real testament to the The work the team has done on this box to make it the most relevant it's been in many, many years. And I would tell you that, you know, just like we probably saw in 08, 09 with new customers coming in, they're delighted to see all the changes that we've made. And just like that, I'm very bullish that we'll continue to hold on to those customers for the long term.

Awesome. Thank you so much. Good luck.

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

Great, thanks, and congrats on a nice quarter, guys.

Thank you.

Todd, maybe could you speak to the overall health of your core consumer today, the push and pull between rising unemployment and your ability to deliver value as we think about the 2008-2009 playbook? I guess maybe larger. What's the economic sweet spot that you think for your model? And if you had to rank initiatives to take additional market share out of this crisis, what would they be?

Michael, thank you. You know, the customer was feeling, you know, very good. I think it was a real testament. She was back to work leading into this crisis. So, you know, when you look at our strong comp in the month of February, which really had virtually no COVID-related retail in it, very, very in very good shape, probably the best we've seen in many, many years. What that enabled her to be able to do was to stock up with confidence, and we saw that early on. She came in and really stocked up, you know, first starting like with paper goods and moving into food, and then obviously when stimulus started to roll out, we saw obviously like other retailers a surge in our discretionary type categories. Right now, I would tell you, because we do talk to her very frequently, as I mentioned earlier, you know, she has a lot more trepidation, obviously, just because of what's going on. But I would tell you that she still has money in her pocket. It's evidenced by what she's doing. But I think a lot of that extra money right now is driven through stimulus. both the basic stimulus that was sent out starting middle of April, but also for perhaps any unemployment that may be needed for our core customer, which, by the way, you know, there's evidence to show maybe our core customer is not having to capitalize yet on that because they're most likely frontline workers like many of America's customers today out there. And so she's got a lot of money still in her pocket, but we're watching it very, very closely because that can turn, and we understand that, and we're watching it. But we're also watching when stimulus starts to taper off, and, of course, with additional SNAP benefits that are out there, that's helping as well. So when you put it all together, you know, we feel that we're very well positioned The sweet spot, I would tell you we do very good in good times and we do fabulous in bad times. But, you know, I would rather see our core consumer have money in her pocket and be able to spend equally on both our consumable and non-consumable businesses. But, you know, we're very, very bullish on what post-COVID looks like because, again, I think we're very well positioned no matter what this economy does to both our core customer and to the customer overall.

Great answer. Maybe, John, to follow up on the gross margin, what's the best way to think about markdowns, markups, and distribution in the second quarter and the back half as we think about the drivers behind your first quarter gross margin expansion and any other accelerating tailwinds to consider as fresh continues to ramp or opportunity on the freight side?

Thanks, Matthew. I'll walk you through the puts and takes. I'll start by saying we're very pleased with the Q1 gross margin expansion of 49 basis points. One of the things we didn't call out as a driver was product mix, not a material impact on margin pressure. That really speaks to the surge we saw in non-consumables, particularly as the stimulus payments came out. That, coupled with the mix within the mix, within consumables, we saw strength in categories like health and beauty, which has margin rates more akin to non-consumables. So the combination of those helped balance out the mixed pressure from the initial surge in consumables and made it really not a material impact for Q1. What we did see driving benefit in Q1 is what we have been seeing and calling out in recent quarters. One was lower markdowns as the percentage of net sales was the top one. The team remains very targeted on their promotional spending. And then the second one we called out was initial markups. on inventory purchases, and that's really DG Fresh. We are seeing the substantial cost benefit we expected to see as we self-distribute frozen and refrigerated goods, and seeing a growing benefit from NCI as well. So, you know, while it's hard to get very specific around Q2 or the following quarters given the dynamics, the near-term dynamics, you know, what I would say is that we continue to see opportunities to continue increasing our margins over time with the growing benefit of initiatives like DG Fresh and NCI. And the other levers we have, the team continues to do a fabulous job with category management, private brands where we've seen elevated sales in recent quarters. There's a big opportunity in foreign sourcing, supply chain. You asked specifically around supply chain. Obviously, there's a little bit of geography there as we take over self-distribution of frozen refrigerated goods. We take on a little bit more cost there, but we save a lot more. on the product cost side. But when you strip that out, it's been doing very well driving efficiencies as the team has been working on reducing transportation rates where they've been successful as we've expanded and diversified our carrier base, expanded our private fleet. We're seeing lower fuel costs. And they continue to do an excellent job driving efficiencies through stem mile reduction, load optimization, and DC productivity efforts. And then the other one that we didn't really call out this quarter, because it wasn't material with shrink, we continue to see an opportunity for shrink over the long term. We're looking forward to the latter part of the year as we see the benefit, hope to see the benefit of the EAS units, the 6,000 units we installed completing the chain at the end of last year. Looking to see the continued benefit we've seen in the past from those as well as increased tagging now that we've completed the system. I think when you put all those together, we feel very well positioned. Now, we always reserve the right to invest in price if needed, but we believe we're in a great position right now with price and believe we're making the right investments to drive margin expansion over the long term and believe we have the levers to do so.

Congrats again. Best of luck.

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

Thanks. Good morning. A little bit of a follow-up to the last one. I mean, there's a lot of dollars coming in right now to the business, and I want to ask about reinvestment rate. First, on gross margin, I know, John, you just mentioned you feel good about where pricing is. Can you talk about the price elasticity in general and if you can measure it in this environment and whether it makes sense to lean in? And then related to that, any COVID costs or ongoing wage issue, wage costs that you're contemplating, bonuses or wages, as far as, you know, maybe soaking up some of the reinvestment dollars. Thanks.

Hi, Simeon, this is Todd. I'm going to go answer your first one and then kick it over to John for the second piece. But your first question, you know, our pricing is as competitive as it's been in the time that I've been here, in 11 years that I've been here, We are in very, very good shape against all classes of trade. And, again, that's one of the cornerstones, as you know, of this model and what our consumers look for, very close second to convenient pillar. But I would tell you that right now we don't really need to – we don't see a need to lean in any further on price because we're so well-priced today, again, against all classes of trade. Now, we'll continue to watch that if something changes. The other thing to keep in mind is that we've been very, very vigilant around price, especially during this time. What we don't want to do is to raise prices to our consumers in a time of need, especially in a pandemic. So we've been very, very cautious about that, only raising prices on a few items as you look at milk, eggs, and a few that have just rapidly increased. Others that may have increased, we've actually held prices down some. so that we are able to service the customer the way she needs to be right now. And to your point, you know, we're doing very well and making sure we're passing some of that on to our consumers as well.

You know, on the investment side, you know, first we continue to make meaningful investment to advance our strategic initiatives as well as remodels and new stores as we're seeing great returns as expected from those. And that continues as planned and is on track. In addition, as we go forward, you know, health and safety of our employees and customers is our top priority. And so we will continue to invest some there as needed, making sure there's plenty of masks, gloves, hand sanitizer, thorough cleaning protocols. And of course, we just recently finished the installation of the plexiglass shield. So we'll do what's necessary and prudent to ensure their safety. Beyond those things, you know, there's nothing, you know, material changes that I see right now.

Okay. And then the follow-up, can you remind us the percentage of stores that are in rural areas versus, I guess, non-rural? And how did, I guess, the dispersion or range of performance is tracking? I think it was pretty wide at first. And is that continuing or you're seeing normalization as states begin to reopen?

Yeah, thank you for the question. Yeah, we're at right around 75% rural, very small town-based. So, again, you know, we pride ourselves on serving that underserved customer out there. You know, I would tell you that, you know, that footprint really serves us well, especially during this time and our customers well. Think about, you know, being close to home. We're within five miles of 75% of America. You think about that small box that we offer, that 72 to 7,400 square foot box. She can shop that with convenience and with confidence that there won't be crowds. And then lastly, you know, we want to make sure that as we make sure that new customers come in that we show her the best that we've got, and that's exactly what we've done through this. She's seen great products, and we've seen great comments from our current customers as well as our new customers. We feel that we're well positioned. Obviously, you know, we do very well both in our rural locations and our more metro settings. But, again, rural being the major driver, I would tell you, has seen a little larger increase in sales overall. But, again, I'm very proud of both sides of the equation, our rural and our city-type stores.

Thank you.

Our next question is from Michael Montani with Evercore ISI. Please proceed with your question.

Great. Good morning. Thanks for taking the question. I just wanted to ask if I could for a little bit of additional color on the traffic versus ticket trend in the quarter. Sorry if I had missed that. And then also on the geographic side, if there's anything you could call out in terms of different regions of the country and how those trends may have gone. Yeah.

Sure. This is Todd. I would tell you we're very proud that both traffic and ticket were positive in the quarter. And I think that's a real testament once again to the power of the box that we have out there and the ability for the consumer to shop both sides of that. So again, very proud of seeing that. Obviously, the ticket side was the larger driver. but I would tell you a very nice performance on the front side of that too, on the traffic side. As far as geographics, throughout the quarter, there were some puts and takes. It changed depending on the severity of COVID outbreaks. So think about areas like the Northeast, think about areas like the Midwest, Michigan, Wisconsin, those type of areas. You know, we saw, you know, big early surges, obviously, in the northeast. Things leveled out for a bit and then resurged again and continues to be elevated. So there was some give and take, but I would tell you when all of the dust settled, you know, all of the operating regions were very, very close together in their performance overall.

And just for the follow-up, if I could, was on multi-channel. Just curious about the pickup efforts that you all have in place, if there's any incremental color there, maybe in terms of the pace that you might lean into it, as well as the mobile app.

Yeah, you know, again, we're just getting going on our buy a line, pick up in the store efforts. But I would tell you, I'll give you a couple nuggets that we have seen early on. One is, you know, she's been very pleased with the with the transaction and her ability to get what she needs. The repeat was very, very heavy, meaning once she used it once, the repeat was very good on the other side. And again, very high scores even on our repeat. We know that the customer, as we start to move post-pandemic, and we all hope we get there sooner than later, that though retail is going to change a little bit, And I would tell you those that have a strong brick and mortar presence, as Dollar General has, but also have a very good presence of the digital side to include buy online, pick up in the store, to include areas like self-checkout where the customer can feel that if she doesn't want to interact or have contact with and or the actual payment terminals, that she can feel very confident to check out in our stores. I would tell you that I'm so proud of the team and their efforts over the last couple years because they have set us up for success during this time and will flourish as we go forward. So more to come as we aggressively roll out buy online, pick up in the store in the upcoming months and quarters ahead because we know that the customer is really looking for that option inside of a brick-and-mortar retailer.

Thank you.

Our next question is from Rupesh Purik with Oppenheimer. Please proceed with your question.

Good morning. Thanks for taking my questions, and also congrats on a nice quarter. So I guess I wanted to start with stored traffic. So it's very noticeable your commentary just about the meaningful increase in stored traffic, while many of your competitors actually had declining traffic during the quarter. Is there any more color you can provide in terms of what you think is driving that delta between you and some of your peers?

Yeah, when you look at it, again, it was pretty evenly based in the regions as you look out and backward now in hindsight. But I would tell you that our rural locations did outperform a little bit in that area. And I think that's a real testament, again, to the rural nature of our box and the ability for customers to stay close to home and shop with confidence in a small box that doesn't have a lot of a lot of customers in it at any given time. I also would tell you that I think once they got in for the first time, she repeated those purchases as she continued to restock her pantries throughout the quarter. So once she got in, I think she really liked what she saw. And I would tell you, I think we did some of the best, if not the best, in keeping in stock on many of the core items. We got a lot of customer complaints in on – not being in stock on some items but they were paled in comparison to the compliments that we got um in saying things like you know we found stuff that we haven't found in other other places um in in weeks and or months and it was great to hear so i think just the combination of that strong box and our rule location really helped propel those traffic numbers okay great and then maybe just one follow-up question just on

the supply chain out of stock. So your inventory was down, I think more than 5% on a on the same store basis. How long do you think or you know, when do you think your supply chain will be back to where it needs to be in terms of getting the stores fully stocked?

Well, first of all, this is Jeff, I'm extremely proud of the way the team responded to the in stock challenges that all retailers faced. And you know, our merchant team was involved very, very early with our suppliers. in partnering with ways to get our fair share of product, but also thinking about creative ways to provide alternative pack sizes or substitute items for our stores. And then also we were able to stand up even new SKUs during this period of time. So merchant team did an outstanding job. And then the supply chain, obviously you can't do that without the supply chain. So they were able to flex up to our demand. And then also they were able to deliver the product to our stores on time. And And then finally, as Todd mentioned as well, Fast Track earlier was one of our initiatives that really paid off during this because the stores were able to get the product on the shelf. You know, as I think out and when it will end, you know, a lot of that depends on the customer and also depends on the way the economy in terms of the shelter in place. So as you know, many of the nation is opened up for business now, so we'll have to wait and see. But I can tell you this. Our supply chain is ready to deliver the product to the stores when it's available, and our store teams are ready to get it on the shelf. So we'll be in a great position for the customer once the products are available.

Great. Thank you.

Our next question is from Karen Short with Barclays. Please proceed with your question.

Hi. Thanks very much. I wanted to actually go back to a couple comments you made in terms of the fresh. You talked about a meaningful change. increase in fresh at the stores that you roll the fresh out to. So wondering if you could elaborate a little bit on that. My second question is just on the DG pickup. I don't know if there's any color you could provide on what the average ticket looks like. And then I had one other follow-up.

Sure, Karen. Yeah, on DG fresh, I would tell you that we saw a meaningful difference in our in-stock levels, but also, of course, our sales numbers in the stores that we self-distributed. That's exactly what we're going to see for the long term here. But it was even more amplified, obviously, during COVID-19 and when customers were out and still out looking to fill their pantries or refrigerators and freezers with goods instead of going out to eat. And so I believe that it's reacting exactly how we thought it would. But it was great to see it actually in person and in action as our customers needed it the most. So I would say that it gives us even greater confidence that as we continue to move over the next upcoming quarters and years ahead that this is really going to pay a big dividend for us.

And then in terms of the average ticket would pick up, is there any meaningful delta or anything to point to that? I know it's still early stage.

It is still early stage. But I would tell you that the average basket is not dissimilar to what we would normally see inside of a store, which we thought, right? So five to six items could be seven or eight, but let's call it five to eight in total, but closer to that six range with the basket size being a little larger from a dollar amount, but not meaningful. And again, it's doing exactly what we thought it would do. I don't believe our core customer is going to change her shopping behavior over the long term. I still fully believe that when she comes in, she comes in often and buys five to eight items with a ring of about $12 to $13 basket sizes. And we believe that buy online, pick up in the store. will be no different.

Okay. And then SNAP recently increased pretty meaningfully. I think it was about a 40% increase in monthly SNAP benefits. I guess the question is how sustainable – well, first of all, did you see that impact in terms of May on sales? And how sustainable do you think that will be in terms of a benefit to the comps? Because obviously this is similar to an 08-09 increase in terms of percentage.

Karen, this is John. We have seen a benefit from that. As you know, recent legislation has let states make it easier for families to continue participating, has provided emergency supplemental benefits. I think it's up to two months as it stands now. And then also, in lieu of the National School Lunch Program, is providing $28.50 per week per dependent. So the combination of those is helping our customer, and we are seeing enhanced purchasing power and increased EBT sales. So how long that persists depends on how long these benefits persist. But what I would tell you is we have been growing our share with these customers over time as we serve them well, growing EBT share. And we're focused on controlling what we can control, and that's taking care of them. And we'll see how it plays out in terms of the duration of the legislation. But we are seeing the benefit. Great.

Thanks. Our last question comes from Shawnee Luthra with Goldman Sachs. Please proceed with your question.

Yes, hi. Thank you for taking my question. Great quarter. Just wondering, you know, as we go forward, do you see potential to be more aggressive in certain initiatives like private labels and, you know, TG Fresh in this challenged environment? Is there an opportunity to do more produce in your stores? You mentioned, you know, meaningful investments in your initiatives. Just want to clarify, is this an acceleration in your investments versus when you last spoke about them during 4Q? And is there an opportunity to double down on some of these initiatives in this challenge backdrop? Thank you.

Thank you. That's a great question. The numbers that John alluded to, they weren't a very big acceleration, but I would tell you the one area that we have accelerated our thinking as well as our expenditure has been around buy online, pick up in the store. We thought it would be a more gradual rollout, but again, seeing what we have seen now through COVID-19 and what our customers are telling us about wanting an option if she wants to take advantage of it in that contactless world, I would tell you that buy online, pick up in the store has accelerated and our spending against it as well as the rollout into our stores will be vastly different than what we had thought. And our hope would be we would roll out to the majority of the chain by the end of this year as we roll forward. As you look at the other area that we would anticipate maybe expanding a little bit faster will be our self-checkout. It would be our goal eventually to have self-checkout in virtually all of our stores. It was going to be a few-year rollout. We believe we can accelerate that some as we continue to move forward in 2020, but also accelerate it in 21 for sure as, again, the consumer is looking for more of a contactless experience in some cases. So those are just a couple, but we're taking a look at DG Fresh as well. We have a very aggressive plan there, as you already know, But that produce side is a great question, and we continue to evaluate our stores to put produce in, and that very well could be an expansion as we move through later this year and into 21 as well.

Great. Thank you so much.

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