Dollar General Corporation

Q3 2021 Earnings Conference Call

12/2/2021

spk00: Thank you. 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 financial guidance, strategy, initiatives, plans, goals, priorities, opportunities, investments, expectations, or beliefs about future matters, and other statements that are not limited to historical fact. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include, but are not limited to, those identified on our earnings release issued this morning under risk factors in our 2020 Form 10-K filed on March 19, 2021, and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law. We will also reference certain non-GAAP financial measures. 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's my pleasure to turn the call over to Todd.
spk07: Thank you, Donnie, and welcome to everyone joining our call. We are pleased with our third quarter results, and I want to thank our associates for their unwavering commitment to meeting the needs of our customers, communities, and each other. Despite what continues to be a challenging operating environment, including elevated cost pressures and broad-based supply chain disruptions, our teams remain focused on controlling what we can control, and they are delivering for our customers. We are grateful for their efforts. Looking ahead, we believe we are well positioned to navigate the current environment. And although we've experienced higher than expected costs, both from a product and supply chain perspective, we're very confident in our price position. As our price indexes relative to our competitors and other classes of trade remain in line with our targeted and historical ranges. And because so many families depend on us for everyday essentials at the right price, we believe products at the $1 price point are important for our customers, and they will continue to have a significant presence in our assortment. In fact, approximately 20% of our overall assortment remains at $1 or less. And moving forward, we will continue to foster and grow this program where appropriate. As the largest retailer in the U.S. by store count, with over 18,000 stores located within five miles of about 75% of the U.S. population, we believe our presence in local communities across the country provides another distinct advantage and positions us well for continued success. Overall, we remain focused on advancing our operating priorities and strategic initiatives as we continue to strengthen our competitive position while further differentiating and distancing Dollar General from the rest of the discount retail landscape. To that end, I'm excited to share an update on some of our more recent plans. First, as you saw in our release, we expect to execute a total of nearly 3,000 real estate projects in 2022, including 1,100 new store openings, as we continue to lay and strengthen the foundation for future growth. Of note, these plans include the acceleration of our pop shelf concept as we expect to nearly triple our store count next year as compared to our fiscal 21 year end target of up to 50 locations. In addition, given the sustained performance of our pop shelf concept, which continues to exceed our expectations, we plan to further accelerate the pace of new store openings as we move ahead, targeting a total of about 1,000 pop shelf locations by fiscal year end 2025. Importantly, we anticipate these new pop-shelf locations will be incremental to our annual Dollar General store opening plans as we look to further capitalize on the significant growth opportunities we see for both brands. We are also now at the early stages of plans to extend our footprint into Mexico, which will represent our first store locations outside the continental United States. We believe Mexico represents a compelling expansion opportunity for Dollar General, given its demographics and proximity to the U.S., and we are confident that our unique value and convenience proposition will resonate with the Mexican consumer. While our initial entry into Mexico is focused on piloting a small number of stores in 2022, we expect the seeds we plant today will ultimately turn into additional growth opportunities in the future. Finally, as previously announced, we recently introduced our digital services by partnering with DoorDash to provide delivery in under an hour in over 10,000 locations. further enhancing our convenience proposition while broadening our reach with new customers. Jeff will discuss these updates in more detail later in the call. But first, let's recap some of the top line results for the third quarter. Net sales increased 3.9% to $8.5 billion, following a 17.3% increase in Q3 of 2020. Comp sales declined 0.6% to the prior year quarter, which translates to a robust 11.6% increase on a two-year stack basis. From a monthly cadence perspective, comp sales were lowest in September, with October being our strongest month of performance. And I'm pleased to report that Q4 sales to date are trending in line with our expectations. Our third quarter sales results include a year over year decline in customer traffic, which was largely offset by growth in average basket size, even as we lapped significant growth in average basket size last year. In addition, during the quarter, we saw an improvement in customer traffic as compared to Q2 of 2021, and we continue to be pleased with the retention of the new customers acquired in 2020. We're also pleased with the market share gains as measured by syndicated data in our frozen and refrigerated product categories. And even as our market share in total highly consumable product sales decreased slightly in Q3, we feel good about our overall share gains on a two-year stack basis. Collectively, our third quarter results reflect strong execution across many fronts and further validates our belief that that we are pursuing the right strategies to enable sustainable growth while supporting long-term shareholder value creation. We operate in one of the most attractive sectors in retail, and as a mature retailer in growth mode, we continue to lay the groundwork for future initiatives, which we believe will unlock additional growth opportunities as we move forward. Overall i've never felt better about the underlying business model, and we are excited about the significant growth opportunities we see ahead with that i'll now turn the call over to john.
spk12: Thank you Todd good morning everyone now that Todd is taking you through a few highlights of the quarter, 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 diluted earnings per share, and all years noted refer to the corresponding fiscal year. As Todd already discussed sales, I will start with gross profit. As a reminder, gross profit in Q3 2020 was positively impacted by a significant increase in sales, including net sales growth of 24% in our combined non-consumable categories. For Q3 2021, gross profit as a percentage of sales was 30.8%, a decrease of 57 basis points, but an increase of 121 basis points compared to Q3 2019. The decrease compared to Q3 2020 was primarily attributable to a higher LIFO provision, increased transportation costs, a greater proportion of sales coming from our consumables category, and an increase in inventory damages. These factors were partially offset by higher inventory markups and a reduction in shrink as a percentage of sales. SG&A as a percentage of sales was 22.9%, an increase of 105 basis points. This increase was driven by expenses that were greater as a percentage of sales in the current year period, the most significant of which were retail labor and store occupancy costs. The quarter also included $16 million of disaster related expenses attributable to Hurricane Ida. Moving down the income statement, operating profit for the third quarter decreased 13.9% to $665.6 million. As a percentage of sales, operating profit was 7.8%, a decrease of 162 basis points. And while the unusual and difficult prior year comparison created pressure on our operating margin rate, we're very pleased with the improvement of 78 basis points compared to Q3 2019. Our effective tax rate for the quarter was 22.2% and compares to 21.6% in the third quarter last year. Finally, EPS for Q3 decreased 10% to $2.08, which reflects a compound annual growth rate of 21% over a two-year period. Turning now to our balance sheet and cash flow, which remains strong and provide us the financial flexibility to continue investing for the long term while delivering significant returns to shareholders. Merchandise inventories were $5.3 billion at the end of the third quarter, an increase of 5.4% overall and a decrease of 0.1% on a per-store basis. And while we're not satisfied with our overall in-stock levels, we continue to make good progress and are focused on improving our in-stock position, particularly in our consumables business. Looking ahead, we are pleased with our inventory position for the holiday shopping season, and our teams continue to work closely with suppliers to ensure delivery of goods for the remainder of the year. Year-to-date through the third quarter, we generated significant cash flow from operations totaling $2.2 billion. Capital expenditures through the first three quarters were $779 million 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 1.6 million shares of our common stock for $360 million and paid a quarterly dividend of 42 cents per common share outstanding at a total cost of $97 million. At the end of Q3, the total remaining authorization for future repurchases was $619 million. We announced today that our board has increased this authorization by $2 billion. 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 an update on our financial outlook for fiscal 2021. We continue to operate in a time of uncertainty regarding the economic recovery from the COVID-19 pandemic, including any changes in consumer behavior and the corresponding impacts on our business. Despite continued uncertainty, including cost inflation and ongoing pressure throughout the supply chain, we are updating our sales and EPS guidance, which reflects our strong performance through the first three quarters, as well as our expectations for Q4. For 2021, we now expect the following. Net sales growth of approximately 1% to 1.5%, a same-store sales decline of approximately 3% to 2.5%, but which reflects growth of approximately 13% to 14% on a two-year stack basis, an EPS in the range of $9.90 to $10.20, which reflects a compound annual growth rate in the range of 22% to 24%, or approximately 21% to 23% compared to 2019 adjusted EPS over a two year period. Our EPS guidance now assumes an effective tax rate of approximately 22%. Finally, our expectations for capital spending, share purchases and real estate projects remain unchanged from what we stated in our earnings release on August 26, 2021. But we now provide some additional context as it relates to our outlook. In terms of sales, we remain cautious in our outlook over the next couple of months, given the continued uncertainties arising from the COVID-19 pandemic, including additional supply chain disruptions and the impact of the end of certain federal aid, such as additional unemployment benefits and stimulus payments. Turning to gross margin, please keep in mind we will continue to cycle strong gross margin performance from the prior year, where we benefited from a favorable sales mix and a reduction in markdowns, including the benefit of higher sell-through rates. Consistent with Q2 and Q3, we expect continued pressure on our gross margin rate in the fourth quarter due to a higher LIFO provision as a result of cost of goods increases, a less favorable sales mix compared to the prior year quarter, and an increase in markdown rates as we continue to cycle the abnormally low levels in 2020. We also anticipate higher supply chain costs in Q4 compared to the 2020 period. Like other retailers, our business continues to be impacted by higher costs due to transit and port delays, as well as elevated demand for services at third party carriers. However, despite these challenges, we're confident in our ability to continue navigating these transitory pressures. With regards to SG&A, we continue to expect about $70 million to $80 million in incremental year over year investments in our strategic initiatives. This amount includes $56 million in incremental investments made during the first three quarters of 2021. However, in aggregate, we continue to expect our strategic initiatives 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 SG&A expense. Finally, our updated guidance does not include any impact from the proposed federal vaccine and testing mandate, including potential disruptions to the business or labor market or any incremental expense. In closing, we are pleased with our third quarter results, which are a testament to the strong performance and execution by the team. 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. Thank you, John.
spk04: Let me take the next few minutes to update you on our operating priorities and strategic initiatives. Our first operating priority is driving profitable sales growth. The team did a great job this quarter executing against a robust portfolio of growth initiatives. Let me highlight some of our more recent efforts. starting with our Non-Consumables Initiative, or NCI. The NCI offering was available in nearly 11,000 stores at the end of Q3, and we continue to be very pleased with the strong performance we are seeing across our NCI store base. Notably, this performance is contributing an incremental 2.5% total comp sales increase on average in NCI stores, along with a meaningful improvement in gross margin rate as compared to stores without the NCI offering. Overall, we now plan to expand this offering to a total of more than 11,500 stores by year end, including over 2,000 stores in our light version. and we expect to complete the rollout of NCI across nearly the entire chain by year end 2022. Moving to our PopShelf concept, which further builds on our success and learnings with NCI. PopShelf aims to engage customers by offering a fun, affordable, and differentiated treasure hunt experience delivered through continually refreshed merchandise, a unique in-store experience, An exceptional value with the vast majority of our items priced at $5 or less. During the quarter, we added 14 new pop shelf locations, bringing the total number of stores to 30. Opened our first 14 store within a store concepts and celebrated the one year anniversary of our first pop shelf store opening. For 2021, we remain on track to have a total of up to 50 pop shelf locations by year end. as well as up to an additional 25 store within a store concepts, which incorporates a smaller footprint pop shelf shop into one of our larger format dollar general market stores. Importantly, as Todd noted earlier, we continue to be very pleased with the performance of our pop shelf stores, which have far exceeded our expectations for both sales and gross margin. In fact, we anticipate year one annualized sales volumes for our current locations to be between $1.7 and $2 million per store and expect the initial average gross margin rate for these stores to exceed 40%. We believe this bodes well for the future as we move towards our goal of about 1,000 pop shelf locations by year end 2025. Turning now to DG Fresh. which is a strategic multi-phase shift to self-distribution of frozen and refrigerated goods. As a reminder, we completed the initial rollout of DG Fresh across the entire chain in Q2 and are now delivering to more than 18,000 stores from 12 facilities. The primary objective of DG Fresh is to reduce product costs on our frozen and refrigerated items. And we continue to be very pleased with the savings we are seeing as DG Fresh remains a meaningful contributor to our gross margin rate. Another goal of DG Fresh is to increase sales in these categories, and we are very happy with the performance on this front, as overall comp sales of our frozen and refrigerated goods outperformed all other product categories in Q3, even against the difficult prior year sales comparison. Going forward, We expect to realize additional benefits from DG fresh as we continue to optimize our network further leverage our scale deliver an even wider product selection and build on our multi year track record of growth in cooler doors and associated sales. With regards to our cooler expansion program during the first three quarters we added more than 52,000 cooler doors across our store base. In total, we expect to install approximately 65,000 additional cooler doors in 2021, the majority of which will be in high capacity coolers. Turning now to an update on our expanded health offering, which consists of about 30% more feet of selling space and nearly 400 additional items as compared to our standard offering. This offering was available in nearly 800 stores at the end of Q3, with plans to expand to approximately 1,000 stores by year end. Looking ahead, our plans include further expansion of our health offering with the goal of increasing access to basic health care products and ultimately services over time, particularly in rural America. In addition to the gross margin benefits associated with the initiatives I just discussed, We continue to pursue other opportunities to enhance gross margin, including improvements in private brand sales, global sourcing, supply chain efficiencies, and shrink. Our second priority is capturing growth opportunities. We recently celebrated a significant milestone with the opening of our 18,000 store. which reflects the fantastic work of our best in class real estate team as we continue to expand our footprint and further enhance our ability to serve additional customers. Through the first three quarters, we completed a total of 2,386 real estate projects, including 798 new stores, 1,506 remodels, and 82 relocations. For 2021, we remain on track to open 1,050 new stores, remodel 1,750 stores, and relocate 100 stores, representing 2,900 real estate projects in total. In addition, we now have produce in approximately 1,900 stores, with plans to expand this offering to a total of over 2,000 stores by year end. For 2022, we plan to execute 2,980 real estate projects in total, including 1,110 new stores, 1,750 remodels, and 120 store relocations. We also plan to add produce and approximately 1,000 additional stores next year, with the goal of ultimately expanding this offering to a total of up to 10,000 stores over time. Of note, We expect approximately 800 of our new stores in 2022 to be in our larger 8,500 square foot new store prototype, allowing for a more optimal assortment and room to accommodate future growth. Importantly, we continue to be very pleased with the sales productivity of this larger format as average sales per square foot continue to trend about 15% above an average traditional store. Our 2022 real estate plans also include opening approximately 100 additional pop shelf locations, bringing the total number of pop shelf stores to about 150 by year end, as well as up to an additional 25 store within a store concepts. As Todd noted, we are also very excited about our plans to expand our footprint internationally for the first time, with plans to open up to 10 stores in Mexico by year end 2022. as we look to extend our value and convenience offering to even more communities, while continuing to lay the foundation for future growth. Overall, our proven high-return, low-risk real estate model continues to be a core strength of our business, and the good news is we believe we still have a long runway for new unit growth ahead of us. In fact, across our Dollar General, Pop Shelf, and DGX format types, we estimate there are approximately 17,000 new store opportunities potentially available in the continental United States alone. Although these opportunities are available to all small box retailers, we expect to continue capturing a disproportionate share as we move forward. And while still early, we expect our entry into Mexico will ultimately unlock a significant number of additional new unit opportunities in the years to come. When taken together, our real estate pipeline remains robust and we are excited about the significant new store opportunities ahead. Next, our digital initiative. which is an important compliment to our physical store footprint as we continue to deploy and leverage technology to further enhance convenience and access for our customers. Our efforts remain centered around building engagement across our digital properties, including our mobile app. Of note, we ended Q3 with over 4.4 million monthly active users on the app, and expect this number to grow as we look to further enhance our digital offerings. As Todd noted, our partnership with DoorDash is another example of meeting the evolving needs of our customers by providing the savings offered by Dollar General combined with the convenience of same-day delivery in an hour or less. And while still early, we are pleased with the initial results, including better than expected customer trial, strong repurchase rates, high levels of sales incrementality, and a broadening of our customer base. Our DG Media Network, which we launched in 2018, is also seeing strong results, including significant growth in the number of campaigns on our platform. Overall, we remain very excited about the long-term growth potential of this business, and we look to better connect our brand partners with our customers in a way that is accretive to the customer experience. Going forward, our plans include providing more relevant, meaningful, and personalized offerings with the goal of driving even higher levels of customer engagement across our digital ecosystem. Our third operating priority is to leverage and reinforce our position as a low-cost operator. We have a clear and defined process to control spending, which continues to govern our disciplined approach to spending decisions. This zero-based budgeting approach, internally branded as safe to serve, keeps the customer at the center of all we do while reinforcing our cost control mindset. Our fast track initiative is a great example of this approach, where our goals include increasing labor productivity in our stores, enhancing customer convenience, and further improving on-shelf availability. The first phase of FastTrack consisted of both roll tainter and case pack optimization, which has led to the more efficient stocking of our stores. The second component of FastTrack is self-checkout, which provides customers with another flexible and convenient checkout solution, while also driving greater efficiencies for our store associates. Looking ahead, Our plans now include expanding this offering to over 6,000 stores by year end 2021, and to the majority of our store base by the end of 2022, as we look to further extend our position as an innovative leader in small box discount retail. 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 investing in our diverse teams through development, empowerment, and inclusion. As a growing retailer, we continue to create new jobs in the communities we serve. As evidenced in 2022, we plan to create more than 8,000 net new jobs. In addition, our growth fosters an environment where employees have opportunities to advance to roles with increasing levels of responsibility and meaningful wage growth. in a relatively short timeframe. In fact, over 75% of our store associates at or above the lead sales associate position were internally placed, and we continue to innovate on the development opportunities we offer our teams. Importantly, we believe these efforts continue to yield positive results across our store base, as evidenced by our robust promotion pipeline, healthy applicant flows, and staffing above traditional levels. We believe the opportunity to start and develop a career with a growing and purpose-driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent. We also recently completed our annual community giving campaign, where our employees came together to raise funds for a variety of important causes, And I was once again inspired by the generosity and compassion of our people. Our mission of serving others is deeply embedded in the daily culture of Dollar General. And I am so proud to be a part of such an incredible team. In closing, we are making great progress against our operating priorities and strategic initiatives. And with the actions and multi-year initiatives we have in place, We are confident in our plans to drive long-term sustainable growth and shareholder value creation. As we are in the midst of a truly unique and busy holiday season, I want to offer my sincere thanks to each of our more than 162,000 employees across the company for their hard work and dedication to fulfilling our mission of serving others. With that, operator, we would now like to open the lines for questions.
spk03: 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 Simeon Gutman with Morgan Stanley. Please proceed with your question.
spk06: Good morning. Hi, everyone. My first question, I'd like to put the spotlight on the low-income consumer. We have stimulus rolling off. We're going to be lapping massive stimulus in the first half of next year. And on the other side, you have jobs and wages starting to grow. Can you talk about your stance? Are you seeing any signs that the customer is getting stronger or weaker?
spk07: Hi, Simeon. It's Todd. I would tell you that our core consumer continues to be in pretty good shape. You're 100% right that a lot of the stimulus money has now dissipated. But I've always said, and our core customer has always said, as long as she is gainfully employed... That is probably the biggest driver of her confidence to spend. And there is no doubt that she is gainfully employed right now and can work as many hours as she may or may not want to. But as we look through the remainder of this year and into next, we believe that she'll continue to be gainfully employed. And with that, we'll have money to spend. And then the other thing to think about with this low-cost consumer, to your point, we continue to show great value, right? When you look at how we operate, our pricing is as good as ever against all classes of trade. And as we talked about on our prepared remarks, we're not walking away from a $1 price point. We believe that's so important to her as we continue to move forward. Not that we believe it. She tells us that each and every day. So I think that value and convenience message will continue to resonate with our core consumer.
spk06: Thanks. And maybe it's transitioning to the fourth quarter, more of a near-term financial question. It implies that the fourth quarter EBIT margin is going to be pretty below where it was two years ago, I think by about 80 bps. Even though year-to-date, you're up nicely versus two years ago, and even Q3 was as well. So besides the typical conservatism in the way you model, anything else? Can we speak to discrete incremental expense or investments?
spk12: No, nothing incremental in terms of investments. You know, we noted the $70 million, $80 million of investments in the strategic initiatives, which, again, are accretive overall. And then the other thing we pointed out is just on the gross margin aspect, You certainly have a continued pressure that we anticipate associated with supply chain, which again, we believe that's transitory in nature. It's a supply and demand issue, but we saw that increase as we went from Q2 to Q3, and we expect that to remain elevated year over year as we look at Q4. And then obviously, the other big piece here is inflation. We're seeing higher prices passed along from vendors, and that's showing up in terms of the LIFO provision, which we noted. But that's really the key drivers I would point to on a two-year basis. And then on a one-year basis, I would just point to the very difficult lap as we're lapping extremely high sales of non-consumable goods, which have a higher margin, as well as unusually low markdowns around clearance items, just given the extremely high sell-through last year.
spk06: Okay. Thanks, everyone. Happy holidays. Good luck. Take care. Thank you.
spk03: Our next question comes from Matthew Boss with JP Morgan. Please proceed with your question.
spk01: Great, thanks, and congrats on a nice quarter. Thank you. So, Todd, the high end of your full-year comp guidance implies a 12.7% stack in the fourth quarter. I think that's more than 100 basis points improvement from the third quarter. Any drivers behind the recent reacceleration in business? Is this value inconvenience? as you cited, in the face of rising costs of living for your core consumer? Or is this confidence based on what you've seen in November? Just any color on the fourth quarter so far.
spk07: Yeah, Matt, thanks for the question, Matt. You know, as you know, right, we put out a range. And, you know, we definitely see that the consumer is, you know, still shopping at a pretty good rate. But I would tell you there's a lot of quarter left. So let's, you know, let's make sure we temper that just a bit. But, you know, the great thing about Dollar General is that we have never taken our eye off the ball on what that consumer is looking for. And that gives us that confidence as we move through this year and into next on our ability to continue to service that consumer and if there is any trade down that tends to come in that that consumer will also enjoy those benefits. And then lastly, we still are very positive on the trade-down consumer that came in during the pandemic, or trade-in is probably a better term for it. And those numbers continue to exceed our expectation on retention rates. So we've got that moving through the fourth quarter and into next year as well. So with all that, you know, that high end of the guidance is very attainable, but on the other side, we've got a lot of quarter left, and that's why we give you that nice range.
spk01: Great. It's a perfect follow-up, I think, for my second question. If I use that same math, 12-7 two-year stack in the fourth quarter, again, high end of your guide exiting the year, It basically translates to a 6% to 7% one-year comp, and that's double your pre-pandemic three-year average. I think it was around 3% to 3.5%. So is this new customer acquisition? Is this market share gains? Is this a trade-down consumer? I guess the question being is how best do you think about your ability to hold some of these gains as we think about next year and beyond? Sure.
spk12: You're right, Matt. This is John. And you're right. As you look at the implied two-year stacks, it is a significant outperformance versus pre-pandemic levels. And I'd really point to two things. You mentioned and Todd mentioned the retention of the new customers that came into the brand. And the other piece I would point to is the larger baskets. growing our baskets on top of basket growth last year. And so I think both of these are really enabled by the strategic initiatives. The strategic initiatives have really increased the relevance of Dollar General, providing a fuller fill-in trip for bigger baskets. You can do more of your grocery shop. You can do more of your home shop on the non-consumable side, purchase services, as well as the broader appeal to these new customers. And I think also the initiatives really highlight and further enhance the unique combination of value and convenience that we bring to the consumer. That's what I see as the key drivers of that outperformance. Great.
spk01: Best of luck.
spk03: Our next question is from Michael Lasser with UBS. Please proceed with your question.
spk02: Good morning. Thanks a lot for taking my question. Recognizing that your multi-year stacks are much more difficult than other retailers, your one-year comps are trailing behind others, suggesting that you might be seeding some market share this year. Why do you think that is, and what actions do you need to take in order to reverse those market share trends?
spk07: Yeah, this is Todd. I would tell you that the way we've been looking at this all along this year has been on a two-year stack basis, right? Because some of our laps are pretty difficult, as you know, Michael. But we're happy with where our two-year stacks are right now. on market share, and quite frankly, in some of our key initiative categories like Fresh, it well outpaced where we thought it would be on a market share basis. We're confident as we go forward that we'll continue to pick up market share at the same rate, if not accelerated, as we move into 2022. and beyond with all of the initiatives that we have. And keep in mind, that value and convenient message resonates across not only our core customer, but many different customer bases. And that is being preserved at all costs. Our pricing continues to be as good as I've seen it over the last few quarters and over the last few years. And as we continue to look out, we don't see that changing either. Promotional environment has been pretty tame. So when you put all that together, we feel that our market share gains will continue to move forward. in a real positive manner with really the same classes of trade being those donors as we continue to move into 22.
spk02: Understood. And speaking of 22, you were helpful to provide a piece of the formula and the algorithm that you typically target. For next year, would you expect the same store sales element to be in line with your typical 2% to 4% comp growth that's part of your long-term algorithm, or given the stimulus roll-off, along with some of the other uncertainties out there, would you expect another year of below 2% to 4% before returning to that in 2023? Thank you.
spk12: Hi Michael, this is John. I'll take the question. What I'll say is it's early to provide specific 2022 guidance. We'll do that on the next call. But as you think about next year, I would tell you, as we said in our prepared comments, we've never felt better about the business model. We feel great about the fundamentals and the initiatives as well as the performance of the real estate, including the new formats that further boost sales. As you think about headwinds and tailwinds for next year, and as you think about the cadence of the year, I would point to As you noted in the first half, Q1 in particular, it's a very difficult lap with stimulus. Certainly that'll be a tough lap, but again, I think we're well-positioned with the initiatives and the value and convenience we bring to consumers when they need it most. And then also, as you think about next year in general, we come into the year with elevated inflationary pressures. We have, as we said... expectations that the supply chain costs will continue to be elevated through Q4 and they won't magically drop right out of the gate in Q1 as well as the product cost pressures. But we do think there's reasons to think that this is supply and demand calculation here and over time it will moderate and so that could flip as you move through the year into a tailwind. So more to come on the specifics but as you think about next year I would tell you the fundamentals are fantastic but the beginning of the year will be more pressured than the latter part of the year.
spk02: Thank you very much and have a good holiday. Thank you.
spk03: Our next question is from Karen Short with Barclays. Please proceed with your question.
spk10: Hi, thanks very much. I want to try the EBIT growth question a little differently. So for 4Q implied, that is versus 2019. So with a range of basically up 1% to up 14%, maybe just a little more color there. Because even if I back out your LIFO charge, you had a range of kind of 48% to 77% EBIT growth in 1Q, 2Q, 3Q, depending on the quarter. So is this, how much of this is an expectation on LIFO for 4Q versus supply chain versus maybe not passing on cost increases? And then I had a bigger picture question.
spk12: I'll take that. Karen, as you look at, obviously there's a lot of year left, and it's a pretty dynamic environment. Certainly there's uncertainties that creates, that we thought it's prudent to keep the range wide, although narrowing it in half and taking the top half of our earnings and sales guidance. But as we look at the key pressures and unknowns in Q4. Certainly supply chain remains elevated and we expect that to remain elevated and it's unclear as the pandemic continues to evolve what that's gonna mean specifically in terms of supply chain costs but we do believe that's gonna remain elevated as well as with the LIFO provision that it also is a pressure. What we have done is accrued year to date based on our projections of full-year inflationary costs passed along to us by vendors, but certainly that could change as well, although the team, I think, is doing a very good job of mitigating both, and I think compared to some of our peers, we've done quite well in terms of delivering year-to-date the operating margin expansion. So it's really reflective of those key inflationary pressures, which, again, we believe are transitory in nature, but could still be volatile in the near term.
spk10: Okay. And then just maybe switching gears to unit opportunity, I guess maybe a little more color on why Mexico, maybe what makes the market attractive, any color you could give on where your first stores will be and how the supply chain will work. And I guess I ask it also in the context of the fact that, as you point out, there's so much growth opportunity domestically. Do you really need to go into another country, I guess?
spk07: Hey, Karen, this is Todd. You know, we're really excited about that potential opportunity. As you stated, we do have a lot of opportunity right here in the continental United States, and you know us pretty well. We won't take our eye off the ball on that. We are squarely committed seeing 17,000 opportunities in the continental United States to put a store between Pop Shelf and Dollar General. That hasn't changed, and nor has our focused on that. I think as you look at Mexico, the intriguing piece is there's a couple things. Number one, as you know, Going into another country, it's a little bit more complex than going into your 47 state as an example. So we started working on this well over a year ago. And it takes many years to cultivate this initiative. And as we indicated, up to 10 stores next year is fairly aggressive, but it'll take us many years to build out Mexico, right? And with that thought, even though we've got so many opportunities here, why not start now was more our kind of thinking, because it'll take many years. We don't wanna wait till we're down the road and need to move faster. We do everything pretty methodically here. And we feel that for sure the right thing to do was to start working on it now with the intent to put many locations down in Mexico. So where will we start? Well, we'll definitely start closer to home, if you will, that northern Mexico feels right. So it'll be probably more in that area. But it'll open up as we continue to look at different opportunities as we go. And then distribution-wise, stay tuned. We're not quite ready to talk about all that. But as you can imagine, before you start putting a lot of distribution centers in Mexico, we'll need some more critical mass. So we're working that plan as we speak as well. We've got a lot of folks on board already. The team's done a great job using a term that we've been incorporated, if you will, in the country of Mexico. So we're now hiring and able to transact in Mexico. I think that's very important. And that's what we're doing right now and starting to look at how we build out that assortment and what it looks like. And stay tuned. You know, we're excited, as you can probably tell in my voice. This is a real opportunity for us to continue to grow the brand and continue to move forward with Dollar General in different locations other than just the continental United States.
spk10: Great. Thanks so much. That was really helpful. Have a great holiday, everyone.
spk03: Our next question is from Kate McShane with Goldman Sachs. Please proceed with your question.
spk09: Hi, good morning. Thanks for taking our question. Our first question was just on traffic. I know you mentioned to the prepared comments that it was sequentially better but still down. We're wondering, you know, your thoughts on that. Is it something that got better throughout the quarter? And have you seen any meaningful change in traffic in the last few weeks given the latest variant news?
spk07: Yeah, this is Todd. Yeah, the traffic number continues to be a little bit soft. But I would tell you that, you know, it definitely has been, it's sequentially better than it was, you know, when you look, you know, from Q2 to Q3. And, you know, as you continue to think about our core consumer, and this is what's so important to continue always to keep in mind, When times are good for her and she has more money, she tends to come less often and spend more. Well, you've seen our basket continue to be pretty strong throughout. And so that always happens with our core customer in better times economically for her. And that's what she's seen. And then as things switch, if they start to switch, then you'll see her come more often and spend less. So those smaller baskets tend to then grow and that traffic number tends to pick up. We're squarely focused on it. We're definitely not happy with traffic overall because we love to see positive, but we understand the drivers and the reasons. And we'll make sure that as... things continue to progress that we're squarely focused on driving traffic and price and convenience is our big mantra and we'll continue to make sure that both of those are well intact for our core consumer.
spk09: Okay, thank you. And I just want to ask one question on pop shelf. You had mentioned several times it's exceeding expectations. We were just wondering if there were certain merchandise categories that have been stronger than expected and just what what the quarter look like for this concept given the majority of what you're selling is discretionary?
spk04: Thanks, Kate. This is Jeff. And you're right. We are excited about pop shelf. And we continue to be very, very pleased with our customers responding really to the entire box. And very excited that we're going to triple the store count in 2022 and lay in the groundwork for 1,000 stores by 2025. So I think you can tell by our bullish news and our excitement that just how excited we are with what the customer is telling us. When you think about the store in general, there's many areas that she is gravitating towards and responding well. And quite frankly, there's more than we have time to talk about. But I would tell you right now, you know, certainly we love what she's seeing around the toys that we've offered. We've got great in the home area. She's really finding ways to When you think about it, the majority, over 90% of our items are less than $5. She's really finding ways that she can treat herself and has a lot of fun in the shopping environment. And so the team continues. We're just getting started here. We'll get better and better and better. But right now, that concept is really, really performing great, and we're really excited about how it's going to complement the traditional Dollar General network as we move forward. Thank you.
spk03: Our next question comes from Rupesh Parikh with Oppenheimer. Please proceed with your question.
spk05: Good morning. Thanks for taking my question. I also had a few questions on the pop shelf concept. So first, if you look at the pop shelf acceleration, how does that impact your longer-term algorithm? And then secondly, as you look at the pop shelf in-store concept, just curious how you guys think about that in the coming years.
spk12: I'll take the first part of that question, Rupesh. I think it's important to note, and Todd touched on this as prepared comments, that as we look at pop shelf, we see this as additive to our Dollar General banner growth plans. The other thing we've noted is we see over time as many as 3,000 additional store opportunities from this incremental to the 13,000 DG banner opportunities. We're accelerating it rapidly, effectively tripling the number of stores next year as we add 100 on top of 50 and then look to have 1,000 by the end of 2025. So as you think of the algorithm going forward, I don't want to give any specific long-term guidance at this point, But I think it's important to note that it is additive. As you look at next year, the 100 is additive on top of the 1,000 DG stores, and that's the way we look at that going forward. While in the near term, you know, you do have startup costs that offset the near-term benefits, but when you look at the fantastic unit-level economics of these stores, and we've talked about these, you know, $1.7 million to $2 million sales per You know, margins that we see is, you know, 40% and growing over time. It's just fantastic unit level economics that we anticipate and fully expect to be increasingly accretive to operating profit long term as we scale it.
spk04: And Rupesh, I'll talk about the store within a store concept that you mentioned. Like PopShelf, we're very excited about what we're seeing here as well. This is obviously very new here, just been in stores just a few months, but very pleased with what we're seeing, again, from the customer. When you think about this store within a store concept, really what it is able to do is it takes about 70 to 80% of the pop shelf assortment and right inside this Dollar General market. And so this store within a store, as you look forward, will continue, as we mentioned earlier, to expand that. But as we think about the long term here, we recently announced a larger square foot store format, which we've talked about, pleased with that productivity, but again, Things like that give us the opportunity to create enough theater to perhaps bring some of that merchandise into the broader assortment of the Dollar General network. So we'll have to wait and see long term as we look forward, but the team is continuing to refine and look at ways that we can continue to learn from this store within a store, just like we learned from NCI and how it really was the genesis for PopShelf to begin. More to come, but very pleased with the store within a store concept and our ability to grow that over time.
spk05: Great. Thank you.
spk03: Our next question comes from Paul Lejouet with Citi. Please proceed with your question.
spk11: hey thanks guys um can you talk about what you tend to see when a drug store closes in your in your trade area any quantification of of any lift uh that a nearby uh dg store uh might might get and then second just just one follow-up on pop shelf curious about the the geographic rollout is that going to be kind of concentrated as you think about next year's openings or more spread throughout the country thanks
spk07: Yeah, this is Todd. I'll take that. If you think about the drugstore business, the drug business has been our biggest donor share over the many years we've been We've been very vocal about that. And with our health initiatives, we continue to gain more and more share from consumers around health and beauty in general. And so when any competitor, as you can imagine, goes out in the marketplace, it does give us an opportunity to garner more share in that area. Drugstores tend to exist, if you will, in areas that have multiple competitors in them, and that normally spreads out across many competitors, but we're squarely focused on any time just gaining share and any opportunity, so we'll continue to watch that very, very carefully. We believe we're in great position just overall to continue to capitalize on health and beauty in general. And then on the pop shop question, we'll continue to look, call it southern Midwest to that southeast is really where we're focused on right now, early on. Mid-Atlantic to a degree, too, if you think about Mid-Atlantic being you know, that Virginia-type area down into the Carolinas. Those are the areas right now we're focused on. But over time, you know, we see this across the United States as an opportunity, so we won't be limited to certain areas geographical areas, but as we always do, we're very methodical in our rollout. We want to make sure that we're able to supply the goods we need timely, and warehousing is important. The great thing about how we've set our warehousing up with this is it's integrated with Dollar General. So we strip all the cost out of that. And we use the mothership as we talk about the Dollar General mothership, the brand, not only in distribution but in so many different back of the house areas where we can make this very, very accretive as John talked about over the years as we grow the pop shelf brand.
spk11: Thank you. Good luck.
spk03: Our next question comes from Christina Katai with Deutsche Bank. Please proceed with your question.
spk08: Hi, good morning and thanks for taking the question. I was just wondering if there were any notable patterns or anything that you could point out to as it relates to performance of rural stores versus some of your urban stores in the quarter. And then also I guess with the implied two-year stack in the fourth quarter pointing to a potential re-acceleration. where do you see the greatest opportunity to start to take back market share?
spk04: I'll take the first part. This is Jeff. And when you talk about the the geographic footprint of our stores first of all um we're pleased with the balance in terms of our sales performance and that's one of the real beautiful things about this company is is just how evenly distributed and how well the company uh is performing across all geographic when you think about the rural you know earlier in the pandemic we did see um outsized performance in our rural stores, but it's beginning to normalize where it traditionally has performed, where we continue to perform better in rural, but not to the same degree from a disparity standpoint that we saw early in the pandemic. So as things open up, we're seeing performance open up just like we would expect across all of our store base. So generally speaking, we're very pleased with really the performance across all of our geographic regions and the demographic regions. So real pleased with what we're seeing there.
spk07: And on the second part of the question, we anticipate as things start to level out in 2022, as John indicated, Q1, we've still got a pretty big lap with stimulus and other things, the pandemics. still in swing in 2021 as we move into 22 early. But as things start to level out as we get into 22 and into the back end of 22, We believe that the market share gains will probably continue to come from those same areas that were there prior to the pandemic. And so when you think about it, it's almost against all classes of trade, but definitely drug being one of the larger share donors over time. And again, as I indicated earlier, that won't change. We believe that will continue and will probably accelerate as we continue our initiatives around health and beauty and our health initiatives in general, services and such in the years to come. So we feel good about being lined up nicely for market share gains, but we're squarely focused right now on ending Q4 on a high note and moving into 2022.
spk08: That's great. Thank you for the caller and happy holidays.
spk07: Thank you.
spk03: We have reached the end of the question and answer session. I'd now like to turn the call back over to Todd Vassels for closing comments.
spk07: Thank you for all the questions and thanks for your interest in Dollar General. I'll wrap up things by saying we're very pleased with the third quarter results, which I think speaks to our strategy, our culture, and the great execution by our team, even in a constantly evolving environment. As we look forward, I'm very optimistic about our robust set of initiatives, including today's announcements to accelerate the pace of new unit growth at PopShelf and expand internationally for the first time. As I said earlier, I never have felt better about the underlying business model, and in fact, I believe this is a much different company than it was just a few years ago and that we are very well positioned to capitalize on the enormous growth opportunities we see in front of us. Thank you for listening. Have a great day and a happy holiday.
Disclaimer

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Q3DG 2021

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