Dollar General Corporation

Hey, everyone. On the call with me today are Todd Bezos, our CEO, Jeff Owen, our COO, and John Garrett, our CFO. Our earnings release issued 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, priorities, opportunities, investments, guidance, expectations, or beliefs about future matters and other statements that are not limited to historical fact. These statements are subject to risk and uncertainty that could cause actual results to differ materially from our expectations and projections, including but are not limited to those identified in our earnings release issued this morning under risk factors in our 2019 Form 10-K, filed on March 19, 2020, and in our Form 10-Q, filed on December 3, 2020, and in the comments that are made on this call. You should not unduly rely on forward-looking statements which speak only as to today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law. We also may reference certain financial measures that have not been derived in accordance with GAAP. Reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which, as I mentioned, is posted on investor.dollargeneral.com under News and Events. 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. We are pleased with our strong finish to fiscal 2020, and I thank all of our associates for their extraordinary efforts over the past year to support our customers, our communities, and each other. Despite the challenging operating environment, our team remains steadfast in their dedication to fulfilling our mission of serving others by providing affordable, convenient, and close-to-home access to everyday essentials. And I could not be more proud of their efforts. Throughout the pandemic, our priority has been the health and safety of our employees and customers while meeting the critical needs of the communities we serve as an essential retailer. In response to the COVID pandemic, we implemented several safety protocols, enhanced our benefits and leave policies, invested in personnel and personal protective equipment, dedicated certain store hours for the most vulnerable members of our communities, and most recently removed barriers for our frontline associates to receive the vaccine. In total, we invested approximately $248 million in response to the pandemic in 2020, including about 167 million in appreciation bonuses for eligible frontline employees to demonstrate our appreciation for their exceptional performance during an incredibly challenging year. At Dollar General, we remain committed to being part of the solution and believe we are uniquely positioned to continue supporting our customers through our network of more than 17,000 stores located within five miles of approximately 75% of the US population. At the same time, we remain focused on advancing our operating priorities and strategic initiatives as we continue to meet the evolving needs of our customers and further position Dollar General for long-term sustainable growth. To that end, we're excited to share an update on some of our plans for 2021. First, we plan to further the rollout of several value-creating initiatives, including our non-consumables initiative, Fast Track, and the completion of our initial rollout of DG Fresh. In addition, while still early, we are very pleased with the results of our pop-shelf stores, which have far exceeded our initial expectations for both sales and gross margin. As a result, we plan to accelerate our pace of new store openings for pop shelf in 2021 and expect to incorporate this concept into a number of our larger format Dollar General locations as we look to capitalize on the significant growth opportunity we see for this differentiated concept. We are also pleased to highlight key changes to our development strategy. including plans to build on the success of our Dollar General Plus store, or DGP, and the introduction of two new store formats, which we began testing in 2020. Similar to our larger footprint DGP concept, the first new format has selling space of approximately 8,500 square feet, which compares to about 7,300 square feet of selling space for our traditional store. Beginning later this year, this new format, along with our DGP concept, will become our base prototype for nearly all new stores, replacing both our traditional and higher cooler count DGTP formats, allowing for a more optimized assortment and room to accommodate future growth. Our second new format is even larger with approximately 9,500 square selling feet and will be deployed opportunistically across new store, relocation, and remodel opportunities. Notably, on average, our DGP and new store formats are outperforming the chain on a comp sales basis and have considerably higher sales volumes compared to both the traditional and DGTP store. which bodes well for the future as we look to increase their unit counts in the years ahead. Finally, we are pleased to provide an update on a number of our new small box store opportunities we see available in the continental United States, which represents an increase compared to our prior estimate. Jeff will discuss these updates in more detail later in the call. But first, let's recap some of the highlights for the fourth quarter and full year. The quarter was once again highlighted by strong growth on both the top and bottom lines. We're pleased that for the quarter, our three non-consumable categories once again delivered a combined comp sales increase well in excess of our consumable business. Of note, this represents our 11th consecutive quarter of year-over-year comp sales growth in our combined non-consumable categories, which we believe speaks to the strong and sustained momentum in these product categories. From a monthly cadence perspective, comp sales in December increased in the high single digit range, with similar mid-teens growth in both November and January. In total, fourth quarter net sales increased 17.6% to $8.4 billion, primarily driven by comp sales growth of 12.7%. These results include significant growth in average basket size and units in particular, partially offset by decline in customer traffic. And while customers continue to consolidate trips, on average, they are spending more with us compared to last year. Once again this quarter, we increased our market share in highly consumable product sales as measured by syndicated data, driven by a meaningful increase in both units and dollars. Importantly, our data suggests an increase in new customers this quarter as compared to Q4 of 2019. These new customers continue to skew younger, higher income, and more ethnically diverse, underscoring the broadened appeal of our value and convenience proposition. We continue to be encouraged by the retention rates of new customers, and we are working to drive even higher levels of engagement with more personalized marketing and continued execution of our key initiatives. We're particularly pleased that we delivered significant operating margin expansion, which contributed to fourth quarter diluted EPS of $2.62, an increase of 24.8% over the prior year. For the full year, net sales increased 21.6% to $33.7 billion, including net sales growth of 28.1% in our combined non-consumable categories. Comp sales for the year increased 16.3%, representing our 31st consecutive year of same-store sales growth. In 2020, we celebrated the opening of our 17,000 store, and the launch of our newest store concept, Pop Shelf. In total, we completed a record 2,780 real estate projects during the year, exceeding our initial target of 2,580 projects, as we continue to build and strengthen the foundation for future growth. From a position of strength, we also made targeted investments in other key areas, including the acceleration of certain strategic initiatives to strengthen our competitive position and further differentiate and distance Dollar General from the rest of the discount retail landscape. Collectively, our fourth quarter and four-year results reflect strong and disciplined execution across many fronts and further validate our belief that we are pursuing the right strategies to enable sustainable growth while creating meaningful long-term shareholder value. As a mature retailer in growth mode, we are also laying the groundwork for future initiatives, which we believe will unlock additional growth opportunities as we move forward. We operate in one of the most attractive sectors in retail, and in an environment where customers continue to seek safe and convenient experiences, we believe our unique store footprint, further enhanced through our multi-year initiatives, provides a distinct competitive advantage, and positions us well for continued success. Overall, I am proud of our associates and all that we've achieved over the past year. We feel very good about the underlying business, and I'm excited about the opportunities that lie ahead. With that, I'll now turn the call over to John.

Thank you, Todd, and good morning, everyone. Dad at Todd is taking you through a few highlights of the quarter and full year. Let me take you through some of its important financial details. Unless we specifically note otherwise, all comparisons are year over year, all references to EPS refer to dilute earnings per share, and all years noted refer to the corresponding fiscal year. 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. Gross profit as a percentage of sales was 32.5% in the fourth quarter, an increase of 77 basis points, which represents our seventh consecutive quarter of year-over-year gross margin rate expansion. This increase was primarily attributable to a reduction in markdowns as a percentage of sales, higher initial markups on inventory purchases, a greater proportion of sales coming from non-consumable categories, and a reduction in shrink as a percentage of sales. These factors were partially offset by increased transportation and distribution costs, which were impacted by increased volume, some of which is attributable to the COVID-19 pandemic, as well as higher transportation rates and discretionary employee bonus expense for our distribution center and private fleet employees. SG&A as a percentage of sales was 22.2%, an increase of 48 basis points. This increase was primarily driven by incremental costs related to COVID-19, including appreciation bonuses paid to our frontline retail employees and health and safety-related expenses, as well as increased incentive compensation expense and hurricane-related expenses. These items were partially offset by certain expenses which were lower as a percentage of sales, including occupancy costs, retail labor, and depreciation and amortization. Moving down the income statement, operating profit for the fourth quarter increased 21% to $872 million. As a percent of sales, operating profit was 10.4%, an increase of 30 basis points. Operating profit in the fourth quarter was positively impacted by COVID-19, primarily through higher sales. The benefit from higher sales was partially offset by approximately $96 million, or 110 basis points of incremental investments that we made in response to the pandemic. including approximately $69 million in appreciation bonuses for eligible frontline employees and additional measures taken to further protect our employees and customers. Our effective tax rate for the quarter was 22.7% and compares to 23% in the fourth quarter last year. Finally, as Todd noted earlier, EPS for the fourth quarter increased 24.8% to $2.62, which contributed to full-year EPS of $10.62, an increase of 59.9%. Turning now to our balance sheet and cash flow, which remain strong and provide us the financial flexibility to further support our customers and employees during these unprecedented times while continuing to invest for the long term and provide meaningful returns to shareholders. Merchandise inventories were $5.2 billion at the end of the year, an increase of 12.2% overall and 6.3% on a per-store basis. While a lot of stocks remain higher than we would like for certain high-demand products, We continue to make good progress with improving our in-stock position and are pleased with our overall inventory levels. In 2020, we generated significant cash flow from operations totaling $3.9 billion, an increase of $1.6 billion, or 73.2%. Total capital expenditures for the year were $1 billion and included our planned investments in new stores, remodels and relocations, distribution and transportation projects, and spending related to our strategic initiatives. During the quarter, we repurchased 4.3 million shares of our common stock for $900 million and paid a quarterly dividend of $0.36 per common share outstanding at a total cost of $87 million. With today's announcement of an incremental share repurchase authorization, we have remaining authorization of approximately $2.4 billion under the repurchase program. Our capital allocation priorities continue to service well and 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 and quarterly dividend payments, all while maintaining our current investment grade credit rating and managing to a leverage ratio of approximately three times adjusted debt to EBITDA. Moving to our financial outlook for 2021. We continue to operate in a time of uncertainty regarding the severity and duration of the COVID-19 pandemic, including its impact on the economy, consumer behavior, and our business. Despite continued uncertainty, we are providing select annual guidance in an effort to provide the best view we reasonably can based on what we currently know. That said, there could be a number of potential headwinds and tailwinds this year which are not incorporated into our guidance as the timing, degree, and potential impacts on our business are currently unclear, including but not limited to the recently approved government stimulus package, other unknown external factors related to the ongoing health crisis, including its impact on consumer behavior, and additional changes to minimum wage rates. With this in mind, we currently expect the following for 2021. Net sales in the range of a 2% decline to flat, a same-store sales decline of 4% to 6%, but which reflects a growth of approximately 10% to 12% on a two-year stacked basis, an EPS in the range of $8.80 to $9.50, which reflects a compound annual growth rate between 15% and 20%, or between 14% and 19% on an adjusted basis, over a two-year period, which is well above our long-term goal of delivering at least 10% annual EPS growth on an adjusted basis. Our EPS guidance assumes an effective tax rate in the range of 22% to 23%. Capital spending is expected to be in the range of $1.05 billion to $1.15 billion as we continue to invest in our strategic initiatives and core business to support and drive future growth. With regards to shareholder returns, as outlined in today's press release, our Board of Directors recently approved a quarterly dividend payment of 42 cents per share, which represents an increase of 16.7%. We also plan to repurchase a total of approximately $1.8 billion of our common stock this year, reflecting our strong liquidity position and confidence about the long-term growth opportunity for our business. Finally, as noted in today's press release, our outlook for 2021 real estate projects remains unchanged from what we stated in our Q3 earnings release on December 3, 2020. Let me now provide some additional context as it relates to our expectations. Given the unusual situation, I will elaborate on our comp sales trends thus far in Q1. Despite approximately 8,400 lost store operating days as a result of closures due to winter weather across the country, same-store sales for the month of February increased 5.7%, reflecting a healthy comp sales increase of 11.2% on a two-year stacked basis. From the end of February through March 16th, comp sales decreased approximately 16% as we are in the midst of lapping our most difficult monthly comp sales comparison of the year. As a reminder, comp sales growth for the month of March in 2020 was 34.5%. Looking ahead, we remain cautious in our 2021 sales outlook given the continued significant uncertainty that still exists as well as the unique comparisons against last year. That said, as you think about the sales cadence of 2021, Our performance is expected to be stronger in the second half, given a more difficult sales comparison in the first half, and particularly in Q1. Turning to gross margin, in 2020, gross margins benefited from a greater proportion of sales coming from our higher margin non-consumable categories, driven by a full year net sales percentage increase of these categories, well in excess of our consumables business. We expect our sales mix will ultimately shift towards our consumables categories in 2021, resulting in pressure on our rate. However, the timing of when this dynamic may occur and its corresponding impact to gross margin are currently uncertain. Gross margins in 2020 also benefited from a reduction in markdowns, including the benefit of higher sell-through rates as a result of significant customer demand in seasonal and other clearance-sensitive non-consumable categories. In 2021, we expect our markdown rates will increase somewhat from the abnormally low levels we saw in 2020, which likely will create some gross margin pressure compared to last year. In addition, while we continue to see the effects of higher carrier rates and fuel costs, our ongoing efforts to improve efficiencies and reduce expenses, including further expansion of our private fleet, are expected to help partially mitigate these cost pressures in 2021. Also, please keep in mind that the second and third quarters represent the most challenging lapse of the year from a gross profit rate perspective, following improvements of 167 basis points in Q2 2020 and 178 basis points in Q3 2020. In terms of SG&A, while we expect to incur ongoing expenses related to the pandemic in 2021, overall, we anticipate a meaningful reduction in COVID-19-related costs compared to last year. However, the leverage from these reduced costs is expected to be offset by deleverage associated with lower comp sales and approximately $60 million to $70 million in incremental year-over-year investments related to our strategic initiatives as we further their rollouts. With regard to our strategic initiatives, in aggregate, we anticipate they will positively contribute to operating profit and margin in 2021, driven by NCI and DG Fresh, as we expect the benefits to gross margin from our initiatives will more than offset the associated expense. Finally, we estimate operating profit will be negatively impacted by approximately $35 million to $40 million in Q1 as a result of lost sales from store closures and expenses related to the widespread winter weather that we experienced in February. In closing, we are very proud of the team's execution and performance, which resulted in exceptional fourth quarter and full year results. 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. 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, and long-term shareholder value. With that, I will turn the call over to Jeff.