Dollar General Corporation

Thank you, and 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 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 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 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 2020 Form 10-K, filed on March 19th, 2021, and any later filed periodic report, and 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 also will 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 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 fourth quarter and fiscal year results, and I want to thank our associates for their unwavering commitment to meeting the critical needs of our communities, particularly over the past two years of the COVID pandemic. Our fourth quarter performance was impacted by sustained and rising inflation, ongoing global supply chain pressure, and a surge in Omicron cases, which impacted staffing levels at our distribution centers, contributing to elevated out of stocks. Despite these challenging conditions, our teams continued to focus on controlling what we can control and being there for our customers. Because of their efforts and great execution over the past two years, we believe our underlying business is even stronger than before the pandemic, which positions us well to deliver solid sales and profit growth in 2022 and beyond. And while we expect this challenging environment to persist over the near term, which is reflected in our Q1 and fiscal 2022 outlook, we're confident we are taking the appropriate actions to manage through this period and deliver on our full year plan. In fact, I'm pleased to report our staffing levels are back to 2019 pre-COVID levels in both our stores and distribution centers. And we are seeing a meaningful improvement in our in-stock positions. Additionally, although we experience higher than expected product and supply chain costs in Q4, we are very confident in our price position as our price indexes relative to 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 to our customers, and they will continue to have a significant presence in our assortment. In fact, approximately 20% of our overall assortment is $1 or less. And moving forward, we expect to continue to foster and grow this program where appropriate. And with more than 18,000 stores located within five miles, about 75% of the US population, we believe we are well positioned to continue supporting our customers through our unique combination of value and convenience, even in a challenging economic environment. Looking ahead, we remain focused on advancing our operating priorities and strategic initiatives as we continue to strengthen our competitive position. while further differentiating Dollar General from the rest of the retail landscape. Turning now to our fourth quarter performance. Net sales increased 2.8% to $8.7 billion, following a 17.6% increase in Q4 of 2020. Comp sales declined 1.4%, compared to the prior year period, which translates into a robust 11.3% increase on a two-year stack basis. From a monthly cadence perspective, comp sales were lowest in January, with December being our strongest month of performance. Our fourth quarter sales results included a decline in customer traffic, which was largely offset by growth in average basket size. Notably, our average basket size at year end was approximately $16 and consisted of nearly six items. This compares to an average basket size of about $13 and five items at the end of 2019, which we believe reflects the growing impact of our strategic initiatives and a degree of inflation. In addition, We are pleased with the market share gains as measured by syndicated data in our frozen and refrigerated product categories, where we have placed a good deal of emphasis over the past years in an effort to provide customers with an even wider variety of options. And even as our market share in highly consumable product sales decreased slightly in Q4, we feel good about our share gains on a two-year basis. We are also pleased with retention rates of new customers acquired in 2020, which continues to exceed our initial expectations. For the full year, net sales increased 1.4% to $34.2 billion, which was on the high end of our full-year guidance, and on top of a robust 21.6% increase Comp sales for the year decreased 2.8%, which translates into a very healthy 13.5% increase on a two-year stack basis. In total, we completed more than 2,900 real estate projects during the year, including the opening of our $18,000 general store and 50 standalone pop shelf locations as we continue to build and strengthen the foundation for future growth. From a position of strength, we also made targeted investments in key areas, including the acceleration of our PopSelf concept, as well as our most recent initiatives focused on health and international expansion. As we continue to meet the evolving needs of our customers and further position Dollar General for long-term sustainable growth. Overall, we are proud of our fourth quarter and full year results. which further validate our belief that our strategic actions and targeted investments positions as well for continuous success while supporting long term shareholder value creation. We operate in one of the most attractive sectors in retail and while our mission and culture remain unchanged as the foundation for our success. With our robust portfolio of short and long-term initiatives, I believe Dollar General is a much different company and is in a much stronger competitive position than it was just a few short years ago. As a result, I've never felt better about the underlying business model, and we are excited about the enormous growth opportunities we see ahead. With that, I'll now turn the call over to John.

Thank you, Todd, and good morning, everyone. Now that Todd is taking you through a few highlights of the quarter in the 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 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 Q4 2020 and fiscal year 2020 were both positively impacted by a significant increase in sales, including net sales growth of 24% and 28% respectively in our combined non-consumables categories. For Q4 2021, gross profit as a percentage of sales was 31.2%, a decrease of 131 basis points. The decrease compared to Q4 2020 was primarily attributable to a higher LIFO provision increased transportation distribution costs, and a greater proportion of sales coming from our consumables category. Of note, while we expect some relief as we move through 2022, our Q4 supply chain expenses were significantly higher compared to Q4 2020, resulting in a headwind to gross margin of approximately $100 million. These factors were partially offset by a reduction in markdowns as a percentage of sales in higher inventory markups. SG&A as a percentage of sales was 22% in the quarter, a decrease of 16 basis points. This decrease was primarily driven by lower incremental costs related to COVID-19, lower hurricane related expenses, and a reduction in incentive compensation. These items were partially offset by certain expenses that were higher as a percentage of sales, including retail labor, occupancy costs, and depreciation and amortization. Moving down the income statement, operating profit for the fourth quarter decreased 8.7% to $797 million, As a percentage of sales, operating profit was 9.2%, a decrease of 116 basis points. Our effective tax rate for the quarter was 21.2% and compares to 22.7% in the fourth quarter last year. Finally, EPS for the fourth quarter decreased 1.9% to $2.57, which reflects a compound annual growth rate of 10.6% over a two-year period. Turning now to our balance sheet and cash flow, which remain strong and provide us the financial flexibility to continue investing for the long term while delivering significant returns to shareholders. Merchandise inventories were $5.6 billion at the end of the year, an increase of 7% overall and 1.4% on a per-store basis. Importantly, as Todd noted, we have begun to see a meaningful improvement in our in-stock level since the end of the year and expect continued improvement as we move through 2022, underscoring our optimism that we are well-positioned to serve our customers with the products they want and need. In 2021, we generated significant cash flow from operations totaling $2.9 billion. Total capital expenditures for the year were $1.1 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 2.2 million shares of our common stock for $490 million and paid a quarterly dividend of 42 cents per common share outstanding at a total cost of $97 million. At the end of the year, the remaining share repurchase authorization was $2.1 billion. Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high return growth opportunities, including new store expansion in our strategic initiatives. We also remain committed to returning significant cash to shareholders to anticipated share purchases 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 fiscal 2022. First, I want to remind everyone that our fiscal year 2022 includes the 53rd week, which will occur during the last period of the fourth quarter. We also continue to operate in the time of uncertainty regarding, among other things, the impacts on the business arising from the current geopolitical conflict and the recovery from the global COVID pandemic, including recovery of the US economy, changes in consumer behavior, labor markets, and government stimulus and assistance programs. Despite these uncertainties, including cost inflation, ongoing pressure in the supply chain, and rising fuel costs, we are pleased to provide annual guidance that reflects our confidence in the business. With that in mind, we expect the following for 2022. Net sales growth of approximately 10%, including an estimated benefit of approximately two percentage points from the 53rd week. same-store sales growth of approximately 2.5%, and EPS growth of approximately 12 to 14%, including an estimated benefit of approximately four percentage points from the 53rd week. Our EPS guidance assumes an effective tax rate range of 22.5% to 23%. We also expect capital spending to be in the range of $1.4 billion to $1.5 billion, which includes the impact of increases in the cost of certain building materials as well as continued investment in our strategic initiatives and core business to support and drive future growth. With regards to shareholder returns, our Board of Directors recently approved a quarterly dividend payment of 55 cents per share, which represents an increase of 31%. We also plan to repurchase a total of approximately $2.75 billion of our common stock this year, reflecting our continued strong liquidity position, the benefit from the 53rd week, and our confidence in the long-term growth opportunity for our business. But we now provide some additional context as it relates to our outlook. In terms of quarterly cadence, we anticipate both comp sales and EPS growth to be much stronger in the second half of the year than the first half. As a reminder, we are lapping a significant stimulus benefit from Q1 2021, including gross margin expansion of 208 basis points. We also anticipate ongoing cost inflation, including elevated supply chain and fuel costs. While we do not typically provide quarterly guidance, given the unusual lap in the significant inflationary environment in Q1, we are providing more specific detail on our expectations for the first quarter. To that end, we expect a comp sales decline of one to 2% in Q1 with an EPS in the range of approximately $2.25 to $2.35. Turning now to gross margin for 2022, we expect to continue realizing benefits from our initiatives, including DG Fresh and NCI. In addition, we are optimistic that distribution and transportation efficiencies, including significant expansion of our private fleet, can drive additional benefits over the year, despite continued cost pressures in the near term. Partially offsetting some of these benefits are rising fuel costs, as well as an expected return to recent historical rates of markdowns and shrink, all of which are expected to be headwinds in 2022. With regards to SG&A, we expect continued investments in our strategic initiatives as we further their rollouts. However, in aggregate, we continue to expect they will positively contribute to operating profit and margin in 2022, as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense. We also continue to pursue efficiencies and savings through our Save to Serve program, including Fast Track, and we believe these savings in 2022 will offset a portion of an expected increase in wage inflation. In summary, we are proud of our fourth quarter and full year results in 2021, which are a testament to the perseverance and execution by the team. Looking ahead, we are excited about our plans for 2022, including our outlook for sales and EPS growth, as well as our plan significant returns to shareholders via an increased dividend payout and increased share purchases. 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 in our business and employees 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.