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 2021 Form 10-K, filed on March 18, 2022, and any later filed periodic report, 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. 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 second quarter results, and I want to thank our associates for delivering another quarter of strong performance and for their dedication to serving our customers, communities, and each other. The quarter was highlighted by comp sales growth of 4.6%, a slight increase in customer traffic, accelerated growth in market share of highly consumable product sales, including in both dollars and units, and double digit growth in diluted EPS. Our Q2 performance was led by stronger than expected sales in our consumable category. This increase was partially offset by a decline in our combined non-consumable categories, which we believe reflects the evolving consumer demand during a period of inflation and economic uncertainty. During the quarter, and from a position of strength, we made targeted investments in both incremental labor hours and wages to further enhance the customer experience and build on our sales momentum. We believe these investments contributed to an improvement in our overall in-stock position and our strong sales results. And despite challenges from rising product cost inflation and ongoing supply chain pressures, our teams remain focused on controlling what we can control while continuing to deliver value for our customers, which we believe is seen even more important in the current environment. To that end, we remain committed to offering products at the $1 or less price point, and we're pleased with the strong performance of this program during Q2, especially in the latter part of the quarter. Importantly, we continue to feel very good about our price position relative to competitors and other classes of trade. And with more than 18,500 stores located within five miles, about 75% of the U.S. population, we believe we are well positioned to navigate the current environment while continuing to support our customers through our unique combination of value and convenience. Looking ahead, we remain focused on advancing our operating priorities and strategic initiatives as we look to strengthen our competitive position while further distancing and differentiating Dollar General from the rest of the retail landscape. Now let me recap some of the additional financial results for the second quarter. Net sales increased 9% to $9.4 billion, compared to net sales of $8.7 billion in Q2 of 2021. From a monthly cadence perspective, comp sales were lowest but positive in May, with July being our strongest month of performance, and I'm pleased with the momentum we see so far in Q3. In fact, as a result of our first half outperformance and strong start to Q3, as well as our expectations for the remainder of the year, we are increasing our sales outlook for fiscal 2022, which John will discuss in more detail shortly. Our Q2 results included an increase in average basket size, largely driven by inflation, as we would expect during a more challenging economic environment. Average units per basket were down, while, as I mentioned earlier, customer traffic increased slightly. As the quarter progressed, we saw additional signs of our core customers shopping more intentionally and closer to need, as well as an increase in trade down activity. For example, during Q2, customers appeared to be making trade-offs of some of their food choices, contributing to an increase in private brand penetration within our consumables business. We also saw growth in the number of higher income households shopping with us, which we believe reflects more consumers choosing Dollar General as they seek value. Collectively, we view our Q2 results as further validation that our strategic actions, which have transformed this company in recent years, positions us well for continued success while supporting long-term shareholder value creation. We continue to operate in one of the most attractive sectors in retail, and given our strong competitive position, further enhanced by our robust portfolio of short and long-term initiatives, I have never felt better about the underlying business model or our future growth potential. With that said, I'd like to take this opportunity to congratulate Jeff Owen, who will officially take over as CEO in November. No one understands and embodies our culture more than Jeff, and his contributions to our strategic direction over the years have been instrumental to our success. I've had the pleasure of working with Jeff for many years, and I'm confident he is the best and most capable person to lead the next phase of growth here at Dollar General. And finally, While Jeff will speak more to this later, I also want to congratulate John Garrett on his well-deserved promotion to president and CFO. With that, I will now turn the call over to John.

Thank you, Todd. Good morning, everyone. First, let me take a moment to thank Todd for his tremendous leadership and passion for our customers, our culture, and this company. He has been a wonderful mentor and friend, and we wish him all the very best as he prepares to begin this new chapter. And let me also add my congratulations to Jeff, who I have known and worked closely with for several years. He is a highly respected leader throughout the organization, and we look forward to his leadership in the years ahead. Given Todd has taken you through a few highlights of the quarter, let me now 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. For Q2, gross profit as a percentage of sales was 32.3%, an increase of 69 basis points. This increase was primarily attributable to higher inventory markups, partially offset by a higher LIFO provision, a greater proportion of sales coming from our consumables category, as well as increases in markdowns, transportation costs, distribution costs, and damages. Of note, product cost inflation was greater than anticipated, resulting in a LIFO provision of approximately $144 million during the quarter. SG&A as a percentage of sales was 22.6%, an increase of 82 basis points. This increase was driven by expenses that were greater as a percentage of sales, the most significant of which were retail labor, repairs and maintenance, utilities, and payroll taxes. Moving down the income statement, operating profit for the second quarter increased 7.5% to $913 million. As a percentage of sales, operating profit was 9.7%, a decrease of 13 basis points. Our effective tax rate for the quarter was 22.1% and compares to 21.4% in the second quarter last year. Finally, as Todd noted, EPS for the second quarter increased 10.8% to $2.98. 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 $6.9 billion at the end of the second quarter, an increase of 31.4% overall and 25.1% on a per store basis. Similar to Q1, this increase primarily reflects the impact of product cost inflation as well as a greater mix of higher value products, particularly in the home and seasonal categories as a result of the continued rollout of our non-consumables initiative. And importantly, we continue to believe the quality of our inventory is in good shape. As Todd noted, we're also pleased with the improvements we saw in our in-stock levels during the quarter and expect continued improvement as we move through 2022, underscoring our optimism that we are well positioned to better serve our customers in the back half of the year. Year-to-date through Q2, the business generated cash flows from operations totaling $948 million, a decrease of 28%. Total capital expenditures for the first half were $659 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 1.5 million shares of our common stock for $349 million and paid a quarterly dividend of 55 cents per common share outstanding for a total payout of $124 million. At the end of Q2, the remaining share repurchase authorization was $1 billion. We announced today that our board has increased this authorization by $2 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 and our strategic initiatives. We also remain committed to returning significant cash to shareholders through anticipated share repurchases in 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 2022. We continue to experience uncertainties with respect to product cost inflation, supply chain dynamics, the evolution of consumer spending throughout the year, and most recently, new store opening delays, which Jeff will discuss in more detail. Despite these challenges, we are confident in the business, and as Todd mentioned, we are increasing our sales outlook for 2022. For the full year, we now expect the following. net sales growth of approximately 11%, including an estimated benefit of approximately two percentage points from the 53rd week, and same-store sales growth of approximately 4% to 4.5%. Additionally, we are reiterating the remainder of our financial guidance for 2022, which includes EPS growth of approximately 12% to 14%, including an estimated benefit of approximately four percentage points from the 53rd week, share repurchases of approximately $2.75 billion, and capital spending in the range of $1.4 billion to $1.5 billion. Our EPS outlook also now assumes an effective tax rate in the range of 22% to 22.5%. Let me now provide some additional context as it relates to our outlook. In terms of the quarterly cadence, we anticipate comp sales to be fairly consistent between Q3 and Q4, but EPS growth to be much higher in the fourth quarter, which includes the anticipated benefit from the 53rd week. In addition, we expect share repurchases in Q3 to be slightly higher than the Q2 amount before increasing more substantially in Q4, partially as a result of the extra week in our fourth quarter. Finally, as a result of an increase in interest rates and additional borrowings, we expect interest expense will be higher in the second half of the year. Turning now to gross margin for 2022, we expect to continue realizing benefits from our initiatives, including DG Fresh and NCI throughout the year. In addition, we are optimistic that distribution and transportation efficiencies, including continued expansion of our private fleet, will drive additional benefits, despite anticipated and continued cost pressures in the near term. Offsetting some of these benefits is an expected continuation of sales mix pressure, as well as sales outperformance, as our sales outperformance has been predominantly driven by growth in our consumables category, which generally has a lower gross profit rate than other product categories. 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 continue to offset a portion of expected wage inflation. Finally, and consistent with Q2, our outlook includes continued investments to further enhance the customer experience, including incremental labor hours and wages to drive continued improvement in overall in-stock levels and customer service. In summary, we are proud of our team's hard work and commitment to execution, which has resulted in our strong second quarter 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.