Dollar General Corporation

Thank you and good morning, everyone. On the call with me today are our CEO, Jeff Owen, our President, John Garrett, and our CFO, Kelly Diltz. 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 vision initiatives plans goals priorities opportunities investments customers expectations or beliefs about future matters and other statements that are not limited to historical fact. The 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 2023 form 10 K filed on March 24th, 2023, 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 otherwise 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. In addition to our first quarter results and updated outlook for 2023, we'll spend our time this morning discussing the significant progress we have made on multiple fronts, including improving execution in our distribution centers and stores, an update on the rapidly changing macroeconomic environment and the important actions we are taking to support our customers. Despite a more challenging macroeconomic environment than previously anticipated, which has negatively impacted our sales and full-year EPS outlooks, we are confident in Dollar General's ability to deliver strong and sustainable growth in the years ahead. As a reminder, Dollar General is uniquely positioned at the intersection of value and convenience. Regarding value, although we continue to feel very good about our price position relative to competitors, as well as other classes of trade, we are always looking for ways to better serve our customers and provide them with the items they need at prices they can afford. And right now, we believe our customers need Dollar General more than ever. As it relates to convenience, With more than 19,000 stores located within five miles of approximately 75% of the U.S. population, we believe we are uniquely positioned to provide our customers with convenient access to everyday household essentials, particularly in rural America. We delivered progress across multiple fronts in Q1, including our supply chain recovery efforts as we ended the quarter with our best distribution center service levels in nearly two years. With our previously announced investment in incremental store labor hours, we continue to enhance the customer experience, including a material improvement in customer satisfaction scores since prior year end. And while we are pleased with our progress on these fronts, We are focusing even more structurally, strategically, and operationally on serving our core customer. I'll provide more details on these actions in a moment. But first, let me provide some details on our Q1 results. The quarter was highlighted by same-store sales growth of 4.3% in our consumables category. This increase was partially offset by decline of 8.5% and our combined non consumable categories as customers continue to shift more of their spending away from discretionary goods. Overall, we had softer than expected sales in the quarter, which we believe was primarily driven by deterioration in the macro economic environment. including headwinds from lower tax refunds than customers expected and reductions in SNAP benefits, as well as unfavorable weather during the months of March and April. Regarding tax refunds, we believe our customers were caught off guard by the reduced amounts, which exacerbated the inflationary pressures they were already experiencing. Our customers typically use these refunds to repay debt, purchase big ticket items, make repairs, build a safety net and savings, or a combination thereof. The changes this year are contributing to their financial insecurity, and many are using lower refunds to simply afford basic household essentials, while others are contracting their overall spending. Turning to SNAP. As we mentioned on our Q4 2022 call, we did not see a notable sales impact in states that eliminated the emergency allotment early. Instead, our data suggests that customers who use SNAP simply made up the difference in their basket with another form of tender. However, in the states where reductions occurred in March of this year, we have seen an impact to sales, as our customers appear to primarily have reduced the size of their basket instead of using other forms of tender to complete their purchases at the same level. Additionally, these and other customers appear to be shopping closer to payday. Finally, like other retailers, the cold and rainy weather also had a negative impact on our top-line performance, particularly in March and April, which created a slow start to the spring season. Now, let me recap some additional financial results for the first quarter. Net sales increased 6.8% to $9.3 billion, and same-store sales increased 1.6%. our same-store sales results were driven by increase in basket size partially offset by a decrease in customer traffic. While we gained market share in non-consumables again this quarter, our share in consumables was essentially flat, as we believe the macro headwinds have had a disproportionate impact on our core customer. From a monthly cadence perspective, same-store sales growth was strongest in February at 4.8%. and ahead of our expectations. We continued to see positive results for March at 2.2% growth, even though the back half of the month was impacted by the headwinds I mentioned earlier. This pressure continued into April, resulting in a same-store sales decline of 2% for the last month of the quarter. This pressure has continued into May. as we continue to see sales performance below the expectations contemplated in our initial financial guidance for the year. However, as our actions have begun to take hold, we have seen an encouraging uptick with positive comp sales through the first three weeks of the quarter, as well as gains in our most recent market share results. As a result of these headwinds and the impact on our top-line performance, as well as an increasingly challenging shrink environment, we are revising our outlook for the year, which Kelly will discuss in more detail shortly. Turning to our customer, who is under greater pressure than we have seen in quite some time. In addition to the ongoing mix shift I mentioned earlier, we continue to see signs of increasing financial strain on our customers as they seek affordable options. including increased reliance on private brands and items at or below the $1 price point. Being there for our customer is our most important calling at Dollar General. And while past experience suggests our customers will adjust their budgets after a couple of quarters, we are taking action now to better support them both in the near and longer term. First and foremost, we are taking action to provide even more affordable solutions and lower prices for our customers. We are doing this in a targeted fashion on the items that matter most, as we believe we can be even sharper within our established target range. Next, we are leaning into our save to serve approach as we evaluate opportunities to take costs out of the business. while pursuing efficiencies in our cost structure that will allow us to reduce spending without impacting the customer experience. We are also refining our inventory management process, including making some structural reporting realignments within our team to allow us to move more nimbly to respond to customer demand and the needs of the business. Finally, We are prioritizing and optimizing our capital expenditures to maintain flexibility and enhance our focus on the core business. Included in these plans, we have made the decision to moderate our rollout of PopShelf in 2023 as we now plan to open approximately 90 stores compared to our original expectation of approximately 150 openings. We believe this is a prudent reduction based on the current environment. And as other retailers navigate what this environment means for their businesses, we believe there may be more favorable real estate opportunities to come. While we are operating in a different and more challenging environment than previously anticipated, we believe we are taking the right actions to serve our customers and communities. And we know that taking care of our customer is not only the right decision for the near term, but that it will prove to be the right answer for the long term as well. Despite the near-term headwinds, this business model, which has proven to be successful in a variety of economic environments, remains very strong. And we have multiple strategic initiatives in place to drive future growth. while also distancing and differentiating our model from others in the discount retail space. We have a clear vision to be a force for opportunity, which I will discuss in greater detail in a few minutes. And most importantly, our mission of serving others is unchanged and is our North Star regardless of the external environment. I also want to highlight that we recently published our fifth annual Serving Others report, which provides several updates on our ongoing ESG efforts. Finally, I want to take this opportunity to congratulate John Garrett on his retirement. John is with us in the room today, and I just want to publicly thank him for his service to our customers, employees, and shareholders. He has been a wonderful business partner, and we will certainly miss him. With that said, I also want to congratulate Kelly Diltz on her promotion to Chief Financial Officer. Kelly has provided meaningful leadership since joining our team in 2019 and has worked closely with John and myself during this transition process. I am confident. She will continue to elevate our team while driving the strong financial discipline we are committed to at Dollar General. With that, I will now turn the call over to Kelly.

Thank you, Jeff, and good morning, everyone. I also want to thank John for his outstanding leadership during his time at Dollar General, as well as for his mentorship as I step into this role. It's a tremendous honor to serve as CFO of this great company and work with this incredible team to serve our customers. I'm excited about the opportunity we have in front of us as we drive growth and create long-term shareholder value. Now that Jeff has taken you through a few highlights of the quarter, let me take you through some of the 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. Jeff has already discussed sales, so I'll start with gross profit. For Q1, gross profit as a percentage of sales was 31.6%, an increase of 34 basis points. This was primarily attributable to higher inventory markups, decreased transportation costs, and a decreased LIFO provision. These were partially offset by increases in shrink, markdowns, and inventory damages, as well as a greater proportion of sales coming from the consumables category. SG&A as a percentage of sales was 23.7%, an increase of 94 basis points. This increase was driven by certain expenses that were a greater percentage of sales in the current year period, the most significant of which were retail labor, including a $27 million targeted incremental labor hour investment as well as repairs and maintenance and depreciation and amortization. These were partially offset by a decrease in incentive compensation. Moving down the income statement, operating profit for the first quarter decreased 0.7% to $741 million. As a percentage of sales, operating profit was 7.9%, a decrease of 60 basis points. Interest expense increased to $83 million in Q1 compared to $40 million in first quarter of 22, primarily driven by higher average borrowings and higher interest rates. Our effective tax rate for both this quarter and the first quarter of 22 was 21.8%. The effective income tax rate was flat due to a lower state effective tax rate offset by a reduced benefit from stock-based compensation compared to the first quarter of 22. Finally, EPS for the quarter decreased 2.9% to $2.34. Turning now to our balance sheet and cash flow. Merchandise inventories were $7.3 billion at the end of the quarter, an increase of 14.7% on a per store basis. This increase continues to reflect the impact of product cost inflation. While inventory growth is still elevated, the pace has moderated from its peak last year. Looking ahead, we plan to further sharpen our focus on inventory as we adjust to an evolving customer demand and we continue to anticipate more normalized growth rates as we move through the back half of the year. Importantly, we continue to believe The quality of our inventory is in good shape. During Q1, the business generated cash flows from operations of $191 million, a decrease of 57%, which was primarily attributable to higher inventory levels. Total capital expenditures were $363 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 also paid a quarterly dividend of 59 cents per common share outstanding for a total payment of $129 million. As planned, we did not repurchase any shares this quarter. 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. Next, we remain committed to returning cash to shareholders through quarterly dividend payments and over time, and when appropriate, share repurchases, all while targeting a leverage ratio of approximately three times adjusted debt to EBITDA in order to maintain our current investment grade credit rating. Moving to an update on our financial outlook for the fiscal 2023 year, as Jeff noted, we're seeing a much more challenging macroeconomic environment than we anticipated. And this is having a significant impact on our customer spending levels and behaviors. We're taking swift and decisive action to adjust to this environment while maintaining our ability to save our customers both time and money. We remain confident in the business and our long-term growth prospects. In the near term, we are revising our outlook for 2023 to reflect those headwinds, and we now expect the following. First, net sales growth in the range of approximately 3.5% to 5% compared to our previous expectation of 5.5% to 6%. Both of these include an anticipated negative impact of approximately two percentage points due to lapping 2022's 53rd week. Next, same store sales growth is expected to be in the range of approximately 1% to approximately 2%. This compares to our previous expectation of 3% to 3.5%. Finally, EPS is expected to be in the range of an approximate 8% decline to flat. This compares to our previous expectation of growth in the range of approximately 4% to 6%. Both of these ranges include an estimated negative impact of approximately 4 percentage points due to lapping 2022's 53rd week. The updated diluted EPS guidance also includes an anticipated negative impact of approximately four percentage points due to higher interest expense in fiscal 2023. This compares to the anticipated negative impact of approximately three percentage points included in the prior EPS guidance. Our EPS guidance assumes an effective tax rate of approximately 22.5%. This compares to our previous assumption in the range of 22 and a half to 23%. We now expect capital spending to be in the range of 1.6 billion to 1.7 billion compared to our previous expectation of 1.8 to 1.9 billion. All of which include the impact of significant inflation in the cost of certain building materials, construction of new distribution centers, and continued investment in our strategic initiatives and core business to support and drive future growth. We will continue to evaluate our capital expenditures. Our current expectations do reflect reductions in spending that we believe are prudent, while we continue to prioritize meeting the needs of the business and supporting our ongoing growth. Finally, In order to maintain financial flexibility and stay in line with our goal to maintain our investment grade credit ratings and our associated debt leverage ratio target, we do not plan to repurchase shares in 2023. This compares to our previous expectation to repurchase a total of approximately $500 million of our common stock. Let me now provide some additional context as it relates to our outlook. In terms of quarterly cadence, we anticipate the EPS decline to be the most significant in second quarter as a result of continued financial strain on our customer, as well as lapping our strongest quarterly gross margin performance from 2022. We are also pulling forward a larger portion of our labor investment and anticipate more than $40 million of the investment will be made in the second quarter. Looking ahead, we expect the fourth quarter to be our strongest quarter from both a comp sales and EPS growth perspective, as we anticipate a benefit from lapping the significant supply chain costs and winter storm impacts, as well as generating momentum from the actions we're taking this year as we head into 2024. Our sales guidance assumes our customer will remain under pressure for the remainder of the year. While we believe they will ultimately adjust their budgets and recover, the depth and the duration of the current pressure is difficult to predict. Additionally, while we have attracted and retained a significant number of customers in higher income brackets in recent years, our guidance does not assume a significant trade-in benefit for this year. Turning now to gross margin for 2023. In addition to the material benefit from lapping the increased supply chain expenses in the second half of 22, We expect benefits from greater distribution center capacity and performance, lower carrier rates, expansion of our private tractor fleet, and other distribution and transportation efficiencies. We also expect to continue realizing benefits from our initiatives, including DG Fresh. Furthermore, we continue to anticipate a significant contribution from our DG Media Network. Partially offsetting some of these expected benefits are increased inventory shrink as well as pressure from sales mix and higher markdowns throughout the remainder of the year. Regarding SG&A, we expect continued investments in our strategic initiatives as we further their rollouts. However, in the aggregate, we continue to expect they will positively contribute to operating profit and margin in 2023 as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense. And we plan to continue making the remainder of the planned total incremental investment of approximately $100 million in our stores, primarily through additional labor hours. And as I just noted, we expect this investment to be more heavily weighted towards the first half of the year. While this investment will pressure SG&A in 2023, We believe it's the right thing to do for the business and it will drive stronger in-store execution, positioning us well to serve our customer even better. Finally, we also expect a headwind from higher interest expense over the next couple of quarters. In closing, we are grateful for the team's hard work as we strive to deliver for our customers. We're sharpening our focus and continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance while strategically investing in the long term. Finally, we're 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'll turn the call back over to Jeff.