Dollar General Corporation

Good morning. My name is Robert and I'll be your conference operator today. At this time, I would like to welcome everyone to Dollar General's fourth quarter 2022 earnings call. Today is Thursday, March 16th, 2023. All lines have been placed on mute to prevent any background noise. This call is being recorded. Instructions for listening to the replay of the call are available in the company's earnings press release issued this morning. Now I'd like to turn the conference over to Mr. Kevin Walker, Vice President of Investor Relations. Kevin, you may begin your conference.

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 the 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 associates for their dedication to serving our customers and communities this year. I am inspired by this team's commitment to our mission of serving others. and the passion they have for helping our customers save time and money every day. Our fourth quarter performance was led by strong comp sales growth of 5.7%. And while this result was below our expectations, our performance included market share gains in both consumables and non-consumables and contributed to a net sales increase of 17.9% to $10.2 billion. Our Q4 comp sales were driven by an increase in average basket size, primarily attributable to inflation and partially offset by a slight decrease in customer traffic, primarily due to a decrease in customer traffic in late December. And similar to recent quarters, average units per basket were down. Notably, both November and January comp sales at 6.7% and 6.5% respectively were within our expected range of 6% to 7% for the quarter. However, our December sales performance was negatively impacted by winter storm Elliott, which had the most significant effect on our stores in the final days leading up to Christmas. The quarter was also impacted by greater than anticipated inventory damages, which contributed to diluted EPS results that were below our expectations. While the storm had some damages impact, we also incurred higher damages than expected as we worked through the residual impact of the storage capacity constraints and related store and distribution inefficiencies we experienced during the second half of the year. Although we expect some of these related impacts to be with us through the end of Q1, We are pleased to have the storage capacity constraints largely behind us, which we believe positions us well moving forward. Turning to a few highlights of the 2022 fiscal year. Net sales increased 10.6% to $37.8 billion and included a benefit of approximately two percentage points or $678 million in sales from the 53rd week. Comp sales for the year increased 4.3% driven by strong growth in basket size. Although a significant portion of the basket growth was attributable to inflation, we were pleased to see an average basket size at the end of the year of more than five items and nearly $17. The team accomplished a great deal in 2022 and we closed the year with significant progress on our strategic initiatives and operating priorities, while achieving several key milestones in Q4 and the weeks thereafter. We were particularly excited to celebrate the opening of our 19,000th store in Joplin, Missouri in January, as we continue to support our customers with our unique combination of value and convenience in their hometown communities. We also completed the initial rollout of our Non-Consumable Initiative, or NCI, with the offering now in nearly all of our stores across the chain. Finally, we made strong progress in our supply chain, reducing our storage capacity constraints and improving operations during the quarter. More specifically, and as we said we would do, we added significant capacity in Q4, bringing nearly 3 million square feet of distribution capacity online. These efforts culminated with the opening of our newest distribution center in Blair, Nebraska during the quarter. I also want to highlight that we have started 2023 with the opening of our first store in Mexico. And while the store has only been open a few short weeks, we are very encouraged by the early response from our new customers. These achievements are a testament to this team's hard work and continued focus on execution and innovation. as we continue to deliver on our mission of serving others. Turning now to an update on our customer. In addition to adjusting the mix of their baskets, we continue to see customers shift spending to more affordable options, including our private brands, which represent more than 20% of our total sales. Within consumables, private brand growth, both in absolute dollars and penetration, was the highest in the fourth quarter. We also increased our share of wallet and share of trips across all segments of our core customer in Q4, and we believe we will be increasingly important to them in the year ahead. With regard to trade-in behavior, customers in income brackets above our core customer are shopping with us at an increasing rate, underscoring our belief that our value and convenience proposition resonates with a broad spectrum of customers. We remain focused on our goal to be priced at relative parity with mass merchants and we continue to feel very good about our price position relative to competitors and all classes of trade. Furthermore, given the strong demand from customers, we remain committed to offering products at the $1 or less price point. Notably, during Q4, our comp sales were over 30% in our Value Valley set. which is comprised entirely of items at the $1 price point. Overall, we continue to be pleased with the strong performance of this program and the value it offers to our customers. In addition, we believe we are well positioned to continue serving both new and existing customers, and we are moving with great intentionality to build on our momentum. To this end, we are excited about our plans for 2023. Building on the investments we made in 2022 we plan to make a larger targeted incremental investment of approximately $100 million in our stores this year. This investment will primarily consist of incremental Labor hours to support our expectations regarding consistent store standards, while further enhancing the associate and customer experience. In turn, we believe this investment will position us to drive greater on-shelf availability and capture additional market share, while amplifying the potential of our initiatives and ensuring our readiness for our growing customer base. And with the progress we have made in the supply chain, the prior investments we have made in wages, and the growing customer engagement we are seeing, we believe we are well positioned to see a meaningful return on this investment. We operate in one of the most attractive sectors in retail, and we believe our innovation will continue to distance and differentiate Dollar General from the rest of the retail landscape. In summary, we are excited about our plans to deliver strong growth in 2023, while also making significant and deliberate investments in the business. We believe our customer and communities will need us even more as we move throughout 2023. And as a mature retailer in growth mode, we are well positioned to serve them, while also creating long-term value for our shareholders. With that, I will turn the call over to John.