Dollar General Corporation

Thank you and good morning, everyone. On the call with me today are Jeff Owen, our CEO, 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 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 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 Jeff.

Thank you, Kevin, and welcome to everyone joining our call. I want to begin by thanking our entire team for their ongoing commitment to serving our customers, communities, and each other. The quarter was highlighted by strong performance on the top line, led by comp sales growth of 6.8%. and included increases in traffic and in market share of both consumable and non-consumable product sales. During the quarter, we experienced significantly higher than anticipated cost pressures, including challenges within our internal supply chain, sales mix pressures, and higher inventory damages and shrink, all of which impacted gross margin. We will elaborate more on these cost pressures in a bit. But despite these challenges, we delivered a double-digit increase in diluted earnings per share, along with strong same-store sales growth. As the economic environment continued to evolve during the quarter, we remained focused on serving the needs of our core customer. We continued to see customer behaviors in Q3 that we believe indicate they are feeling increased financial pressure, including reductions in the number of items purchased per basket and in discretionary spending. which was softer than anticipated during the quarter. Customers also continued to shift spending to more affordable options, such as items that are dollar price point and private brands, while also shopping closer to payday at the first of the month. Importantly, we are growing more productive with our core customer, as well as seeing an increase in customers with annual household incomes up to $100,000. This growth underscores our belief that our value and convenience proposition resonates with a broad spectrum of customers and will continue to be important to all customers in this challenging economic environment. In turn, we remain focused on delivering value and convenience and continue to feel good about our pricing position relative to competitors and other classes of trades. Further, we remain committed to offering products at the $1 price point and we're pleased with the strong comp sales performance of these products during Q3 as they collectively outperform the chain average. With nearly 19,000 stores located within five miles of about 75% of the US population, we believe we are well positioned to support our customers even in a challenging economic environment. Building on this foundation, I'm excited to share our real estate growth plans for next year. In fiscal 2023, we plan to execute approximately 3,170 projects in the United States, including 1,050 new store openings as we continue to lay and strengthen the foundation for future growth. I'll share more details on these plans in just a few minutes, along with an update on our plans for our supply chain as we continue to support our significant growth. But first, let me recap some additional financial results for the third quarter. Our strong comp sales performance helped drive a net sales increase of 11.1% to $9.5 billion. From a monthly cadence perspective, the comp sales momentum we saw building in Q2 continued into all three months of Q3, with September being our strongest month of performance. And I'm pleased to note that Q4 sales are off to a strong start as well. Our Q3 comp sales were primarily driven by an increase in average transaction amount, largely driven by inflation. And as we would expect during a more challenging economic environment, average units per basket were down. As I mentioned earlier, we were excited to see a second consecutive quarter of increasing customer traffic contribute to the growth. With regards to the supply chain cost pressures I mentioned earlier, I want to touch on what happened in the actions we have taken to address these challenges. As a reminder, since the early days of the pandemic over two years ago, we have seen demand and sales grow at a robust pace. In addition, the overall mix of products we are shipping has evolved significantly with the growth of our non consumable initiative and pop shelf. As our distribution needs grew and evolved. We strategically designed permanent warehouse capacity solutions to support our growth, we plan for them to be operational starting in the back half of this year, while making greater use of temporary storage facilities in the near term. However, as we move through Q3 we experienced unexpected delays in opening additional temporary storage facilities, primarily due to external challenges such as permitting. At the same time, seasonal goods came in earlier than anticipated. The resulting constraints from these factors led to more than $40 million in additional supply chain costs in Q3 compared to what we had previously expected. These costs included detention fees incurred for delays in returning shipping containers, costs associated with inefficiencies in moving freight within our distribution centers, and higher transportation costs as a result of servicing stores from less than optimal distribution center alignments. While these issues have resulted in a gross margin headwind in the back half of this year, the team has worked hard to move past these delays with the opening of additional storage and warehouse facilities, which have already begun to relieve some of the capacity pressures. In fact, within the past few weeks, We increased capacity by more than 2 million square feet with the opening of two new permanent regional distribution hubs in Georgia and Texas, which will serve as intermediary facilities between import points and the rest of our distribution centers. With the opening of both the temporary and permanent facilities, we believe we are well positioned to drive continued improvement as we move ahead. as we better optimize store alignment with distribution centers, lower capacity utilization within our existing footprint, and improve the overall flow of goods. Of note, these regional hubs will be followed by the opening of our new combination distribution center in Nebraska, which is scheduled to begin shipping by the end of this fiscal year. In addition, Our previously announced facilities in Arkansas, Colorado, and Oregon are expected to come online over the next 18 months. Collectively, all of these new distribution centers will ultimately result in a more than 20% increase in total capacity and position us well to support continued growth in the years to come. Overall, while internal supply chain challenges have impacted our EPS outlook for 2022, we believe the significant growth in demand that contributed to these challenges is a testament to the growing relevance of Dollar General, and we are confident in our plans to support this growth going forward. Looking ahead, we remain focused on advancing our operating priorities and strategic initiatives from a position of strength. as we continue to distance and differentiate Dollar General from the rest of the retail landscape. We continue to operate in one of the most attractive sectors in retail, and as a mature retailer in growth mode, our transformational strategic actions have positioned us well for continued success while supporting long-term shareholder value creation.

With that, I will turn the call over to John. Thank you, Jeff, and good morning, everyone. Now that Jeff has taken you through a few highlights of the quarter, let me take you through some of its important financial details, beginning with gross profit. 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. For Q3, gross profit as a percentage of sales was 30.5%, a decrease of 27 basis points. This decrease was primarily attributable to a higher LIFO provision, a greater proportion of sales coming from the consumable category, as well as increases in distribution costs, markdowns, inventory shrink and damages, partially offset by higher inventory markups. Of note, product cost inflation was greater than anticipated, resulting in a LIFO provision of approximately $148 million during the quarter. And while we believe cost increases are beginning to moderate, we anticipate LIFO will continue to pressure Q4 as well. SG&A as a percentage of sales was 22.7%, a decrease of 23 basis points. This decrease was driven by expenses that were lower as a percentage of sales, the most significant of which were retail labor, incentive compensation, hurricane-related disaster expenses, and occupancy costs. These were partially offset by expenses that were greater as a percentage of sales, including utilities, repairs and maintenance, and travel and training costs. Moving down the income statement, operating profit for the third quarter increased 10.5% to $736 million. As a percentage of sales, operating profit was 7.8%, a decrease of four basis points. Our effective tax rate for the quarter was 22.8% and compares to 22.2% in the third quarter last year. Finally, EPS for the third quarter increased 12% to $2.33. 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 $7.1 billion at the end of the third quarter, an increase of 34.8% overall and 28.4% on a per store basis. Similar to the first half of the year, this increase primarily reflects The impact of product cost inflation, a greater mix of higher value products, particularly in the home and seasonal categories, primarily due to the continued rollout of our non-consumables initiative, and the early receipt of seasonal goods. Importantly, we continue to believe the quality of our inventory is in good shape, and we anticipate that we will begin to see lower levels of inventory growth beginning in Q4. Moving down the balance sheet, we issued $2.3 billion of senior notes during Q3, and we now expect to incur total interest expense of approximately $210 million for the full year, an increase of approximately $53 million over the prior year. Turning to cash flow, year-to-date for Q3, the business generated cash flows from operations totaling $1.2 billion, a decrease of 44%, primarily due to higher inventory purchases. Total capital expenditures through Q3 were $1.1 billion and included our plan investments in new stores, remodels and relocations, distribution and transportation projects, and spending related to the strategic initiatives. During the quarter, we repurchased 2.3 million shares of our common stock for $546 million and paid a quarterly cash dividend of 55 cents per common share outstanding for a total payout of $123 million. At the end of Q3, the remaining share repurchase authorization was $2.5 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 to 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 2022. As a result of our strong year-to-date sales performance and our expectations for the remainder of Q4, we are reiterating our fiscal 2022 full year expectations for net sales growth of approximately 11%, including an estimated benefit of approximately two percentage points from the 53rd week. And we are updating our expectation for same-store sales growth for Q4, which we expect same-store sales growth in the range of 6% to 7%, which would result in growth toward the upper end of our previous range of approximately 4% to 4.5%. Turning to gross margin, we've experienced many challenges over the course of this year, including those related to product cost inflation, supply chain dynamics, and the evolution of consumer spending. Since our last update, and like many retailers, We have seen an increased headwind from lower margin consumables sales mix as customers face growing financial pressure. We expect this headwind to grow in Q4 as our guidance assumes customers continue to feel financial pressures and shift more of their spending to consumable items. And while we are making good progress toward resolving our storage capacity constraints, we expect some of the cost pressures we have experienced as a result of the delays will carry over into Q4 but will be largely resolved by Q1 of next year. Finally, we are seeing a greater headwind from inventory shrink and damages than we anticipated for the back half of this year. Overall, while we are confident in the actions we are taking to address our supply chain challenges, we anticipate the total headwind to gross margin in Q4 from all of these factors will be higher than what we previously contemplated within our financial guidance. With all this in mind, we are updating our EPS guidance. For the fourth quarter, we now expect to deliver EPS in the range of $3.15 to $3.30, which would result in a growth for the full year of approximately 7% to 8%. This is compared to our previous expectation of 12% to 14% EPS for the full year. Both the current and previous ranges include an estimated benefit of approximately 4 percentage points from the 53rd week And our EPS outlook now assumes an effective tax rate toward the upper end of the previously provided range of 22% to 22.5%. We now expect capital spending for 2022 to be approximately $1.5 billion, which is at the top end of our previously stated range. Finally, our expectations for share repurchases remain unchanged from what we stated in our Q2 earnings release on August 25, 2022. Overall, despite the near-term challenges, we are confident in the business and our outlook for the remainder of the year. While we plan to share 2023 guidance on the Q4 call, we feel good about the sales momentum going into next year, coupled with moderating cost pressures. And we provide some additional context as it relates to our Q4 outlook. As a reminder, we expect to continue realizing benefits from our initiatives, including DG Fresh and NCI, through the remainder of the year. In addition, we expect the significant expansion of our private fleet will drive additional benefits going forward, despite anticipated continued internal supply chain pressures in the near term. 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 these initiatives will positively contribute to operating profit margin in 2022, as we expect their benefits to gross margin will more than offset the associated SG&A expense. Consistent with Q2 and Q3, our outlook includes continued investments to further enhance the customer experience, primarily toward incremental labor hours to drive continued improvement in overall in-stock levels and customer experience. Finally, we also continue to pursue efficiencies and savings through our Save to Serve program, including fast track and are seeing savings in 2022 offsetting a portion of wage inflation. 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're working hard to address the near-term challenges, most of which we believe will be behind us as we enter 2023. Importantly, 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 back over to Jeff. Thank you, John.