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.

Thank you, Kelly. We have a clear vision for the future of this company, which is to be a force for opportunity for our customers, employees, communities, and shareholders. To bring this vision to life in the years ahead, we have developed a strategic framework to serve as our roadmap into the future. I want to briefly introduce this framework today, and we'll provide further detail and updates in the quarters ahead. We call this roadmap DG Forward. and it is focused on the powerful combination of execution and innovation. For us, our execution is driven by our operating priorities. While these priorities are not changing, we are going to sharpen our strategic focus in four key ways. First, we are going to focus even more on rural. by doubling down on serving and providing our rural customers with what they need when they need it. This company was founded to serve the underserved and today approximately 80% of our stores, many of which are in rural America, serve communities with fewer than 20,000 residents. Second, we are going to extend our reach. We will focus on expanding the DG universe by serving new customers through new formats or existing customers in new and differentiated ways. Third, we are going to fuel our growth by strengthening and modernizing three critical components to improve execution, our operating model, our supply chain, and our IT foundation. We will fuel our best in class growth by investing in resources to enable our team to execute at the highest levels to serve our customers. The fourth and most important area of focus with DG Ford is that it's all powered by our people. We believe Dollar General is truly powered by the best team in retail, and we are leaning into three specific areas to double down on this strategic advantage. investing in our people and creating opportunities for growth and development, amplifying our culture, and reinforcing Dollar General as a destination for starting, growing, and enjoying a meaningful career where the work we do every day makes a difference. This DG Forward framework is the lens through which we see the future of this company, and we are excited about what lies ahead. You will hear more from us in the quarters ahead about some of the innovation that is well underway, but I want to spend our last few minutes providing a quick update on how we are executing through our operating priorities. Our first operating priority is driving profitable sales growth. We continue to focus on providing value to customers in non-consumable categories through our NCI offering in Dollar General stores. as well as through the treasure hunt experience in our standalone pop shelf format. During the quarter, we opened 24 new pop shelf locations, bringing the total number of stores to 164 at the end of Q1, located in 16 states. While sales in this economic environment are softer than our earlier results, we continue to be pleased with the customer response. Looking ahead, We are taking a balanced approach to opening the right number of new pop shelf stores in the right locations in this environment and now expect to operate a total of approximately 230 stores by the end of 2023. As a result of our slower pace of openings, we are reevaluating our plans with regards to our timing of reaching 1000 stores by the end of 2025 and plan to provide an updated expectation at a later date. Importantly, we still believe PopShelf adds approximately 3,000 opportunities to our total addressable market over the long term, and we remain as excited as ever about the growth opportunity. Turning now to DG Fresh, which has delivered significant cost savings while enhancing the profitability of our perishables offering. Our current area of focus for DG Fresh is increasing sales in frozen and refrigerated categories through enhanced product offerings and building on our multi-year track record of growth in cooler doors and associated sales. During Q1, we added more than 18,000 cooler doors across our store base, and we plan to install a total of more than 65,000 incremental cooler doors in 2023. And while produce is not currently serviced by our internal supply chain, we continue to believe that DG Fresh provides a potential path forward to expanding our produce offering to more than 10,000 stores over time. To that end, at the end of Q1, we offered fresh produce in nearly 3,900 stores with plans to expand this offering to a total of more than 5,000 stores by the end of 2023. Importantly, despite the meaningful improvements we have made and savings that we have realized to date as a result of DG Fresh, we believe we still have an opportunity to drive significant additional returns with this initiative in the years ahead. Turning now to an update on our health initiative, branded as DG Wellbeing. Our expanded health assortment offering was available in nearly 5000 stores at the end of Q1 and we now plan to expand to a total of more than 7000 stores by the end of 2023. Looking ahead, our plans include further expansion of our health offering. and also of our partnership with a third-party payment platform to allow customers to use health plan supplemental benefits to purchase various health and wellness-related items in their local Dollar General stores. This health benefit option is now available in approximately 7,500 stores, with the goal of being available chain-wide by the end of the year as we continue to focus on increasing access to basic health care products and ultimately services over time, particularly in rural America. In addition to these initiatives, we continue to pursue other opportunities to enhance gross margin, including supply chain efficiencies, private brand enhancements, and improvements in global sourcing. Our second priority is capturing growth opportunities. As I mentioned earlier, Our high return, low risk real estate model continues to serve us well as a core strength of the business. In the first quarter, we completed more than 800 real estate projects, including 212 new stores, 582 remodels, and 22 relocations. For 2023, We are revising our real estate plans to reflect the reduced pace of pop shelf openings, we now plan to execute 3,110 real estate projects in total in the US, including 990 new stores 2000 remodels and 120 relocations. We continue to expect approximately 80% of our new stores and nearly all of our relocations will be in one of our larger store formats, which continue to drive increased sales productivity per square foot as compared to our traditional store. With regard to remodels, approximately 80% will be in our DGTP format, which provides the opportunity for a significant increase in cooler count. as well as the ability to add fresh produce in many stores. In addition to our planned Dollar General and Pop Shelf growth, we opened our first Mi Super Dollar General store in Monterey, Mexico in Q1. We have been very encouraged by the customer response and the early results, which includes sales results that are exceeding our pro forma expectations. Looking ahead, Our goal is to have up to 20 stores serving the underserved communities in northern Mexico by the end of 2023 as we look to leverage our brand awareness while extending our value and convenience proposition to a customer base that is similar to our core customer in the United States. Next, our digital initiative, which is an important complement to our physical footprint as we continue to deploy and leverage technology to further enhance convenience and access for customers. We are extending our reach in a variety of important ways, including driving customer engagement through our app and extending our partnership with DoorDash, which is now available in more than 14,800 stores. Our dg media network provides another important avenue of growth, as we seek to connect our unique rural based customer network with cpg companies and brands. To deliver a more personalized experience for our customers, a higher return on ad spend for our partners and profitable growth for our business. Overall. Our strategy consists of building a digital ecosystem. specifically tailored to provide our customers with an even more convenient, frictionless, and personalized shopping experience, and we are pleased with the growing engagement we are seeing across our digital properties. Our third operating priority is to leverage and reinforce our position as a low-cost operator. Kelly and her team are rigorously applying our save to serve lens to the business to guide our approach to keeping costs low for our customer. As she discussed, we will be particularly focused on managing expenses this year without compromising long term growth. We continue to focus on driving efficiencies in the organization, including through our fast track initiative. The current phase of this initiative is focused on self-checkout, which provides customers with even greater convenience in our stores. This offering was available in approximately 12,600 stores at the end of Q1, and we are on track to be in more than 14,000 stores by the end of 2023, as we look to further extend our position as an innovative leader in small box discount retail. We also continue to reduce costs through the expansion of our private tractor fleet, which consisted of more than 1700 tractors at the end of Q1 and accounted for approximately 45% of our outbound transportation needs. Looking ahead, we plan to have more than 2000 tractors in our private fleet by the end of 2023, which would account for more than 50% of our outbound transportation fleet. Overall, we are taking action to drive efficiencies and drive cost savings as our underlying principles are to keep the business simple, but move quickly to capture growth opportunities while controlling expenses and always seeking to be a low-cost operator. Our fourth operating priority is investing in our diverse teams through development, empowerment, and inclusion. As I mentioned within our DG Forward framework, everything we do at this company is powered by our people and we continue to focus on creating opportunities for personal and professional development and ultimately career advancement. Our internal promotion pipeline remains robust as evidenced by internal placement rates of more than 70% at or above the lead sales associate position. Additionally, More than 10% of our growing private fleet team began their careers with us in either a store or distribution center. We continue to have great success hiring the talent we need, and we are pleased with our staffing levels and applicant flow. Ultimately, We believe the opportunity to start and develop a career with a growing and purpose-driven company is what sets Dollar General apart from our competition and remains our greatest currency in attracting and retaining talent. Just recently, we added to the strength of our executive team with the promotion of Steve Deckard to Executive Vice President of Growth and Emerging Markets, where he will oversee our real estate, data science, PopShelf, Mexico, and DG Wellbeing Teams. This position will facilitate an even sharper organizational focus on driving execution in our core business while also innovating for the future. And there is no one better suited for this role than Steve, who has been a key strategic leader with Dollar General for 17 years, most recently leading our international expansion in Mexico. I look forward to his continued leadership and ongoing contributions to our success. In closing, we are focused on delivering our DG Forward strategy to be a force for opportunity for our customers, employees, communities, and shareholders. We believe our short-term adjustments position us well to serve our customers in this environment, and our execution on our initiatives and operating priorities positions us well to drive long-term growth. I want to thank our more than 175,000 employees for their diligence and dedication to fulfilling our mission of serving others every day. Our customers and communities need Dollar General right now, and we are poised and ready to serve when and where they need us most. With that, operator, we would now like to open the lines for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. As a reminder, we ask that you please limit to one question and one follow-up. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question.

Hey, guys. This is Michael Kessler on for Simeon. First question, so Dollar General has encountered some supply chain labor macro challenges in the midst of changes in management as well, and it does seem like issues are continuing to kind of creep in a bit. Jeff, as you look backwards at the last six to nine months, can you diagnose maybe if there is a root of these issues, if any of what I just mentioned is intertwined at all? And how do we and investors get comfortable that, I guess, the full extent of the challenges, I guess, are known today?

Yeah, Mike, thank you for the call, the question. I'd say, you know, when I think back on the supply chain, we mentioned in Q3 and Q4 we had challenges. We said we would get better in Q4, and we did exactly that. And we also said we'd improve in Q1. And quite frankly, our supply chain improved at a faster rate than even we expected. And you heard me in my prepared comments talk about we ended that quarter in the best position service level-wise in two years. On the store side, certainly we tested and learned, increasing our labor hour investment in the store. We liked what we saw last year. We said we would continue that in 2023, primarily through labor hours, and we liked what we saw in Q1 as well. Our customer is telling us they're seeing the improvement, and as a result of that, we're going to do more. And when you think about how we came into 2023 and started the year, we started strong. In February, our comp was actually 4.8%, as we mentioned, and was ahead of our expectations. And in mid-March, as we mentioned on our call, we're watching two significant events that disproportionately, we believe, impact our customer, tax refunds and SNAPs. And unfortunately, that impacted her even more than we expected, and quite frankly, more than she expected. And so in March, she simply pulled back. And back half of March, we saw her pull back and really pull out of spending. The good news is in April, she started to return, and she continues to return in May as well. Now, as you know, at Dollar General, we know our customer, we believe, better than anybody. And she certainly is telling us she's under pressure. And we have always said this, and we will continue to do this, that we will be there for her when she needs us most. And so the team is taking action. And I'm pleased to see the actions our team has taken in the short term and really from a position of strength. We're going to be there for affordability, primarily through the items that matter most to her. And so we're going to get even sharper, even though we're pleased with our pricing position overall and have been for quite some time. We think there's an opportunity to be there for her even more. And so the team has already taken action. on pricing on the items that matter most. We're doing it surgically like we always do and very pleased with where we're seeing the customer resonate, but certainly that'll take time to drive traffic as it typically will do. The other action we're taking is we like what we saw with the labor and we're going to do more of it. So we're pulling forward our labor investment into the second quarter. And quite honestly, we're pulling it forward because we like what we saw and our supply chain is improving at a faster rate. So it allows us to do that and get the returns we're looking for and quite frankly, make improvements in the store that we need to do and we'll continue to do. So these actions certainly on the short term will help, but also they're going to help us emerge stronger as we look to the balance of this year and into 2024. And also, I'm continued to be pleased on the progress we're making on our strategic initiatives. We continue to make strong progress in the first quarter. And as I mentioned, we've made further investments in the structure of this to allow us to make even more progress on our innovation front. but also with the addition of our new executive and Steve Deckard, it will also provide us the ability to enhance our focus on the execution of the core DG business, which I'm seeing already and am pleased to see as we move forward. So bottom line, we're making improvements. The macroeconomic environment certainly shifted on us in the back half of March. We're seeing her return to us. We're liking what we see and we're positioned well for the long term. Thank you, Jeff.

Our next question is from Matthew Boss with JP Morgan. Please proceed with your question.

Great, thanks. So, Jeff, on the rapidly changing backdrop that you cited, could you maybe speak to the changes in customer behavior that you're seeing today relative more so to three months ago if we broke it down with traffic versus tickets? And then can you elaborate on some of the drivers of the May comp improvement and just where exactly do you stand today relative to that 1% to 2% updated full-year comp guide?

Thanks, Matt. If you recall back to the Q4 call, we talked about our customer, and we talked about the fact that her financial situation was getting worse. and quite honestly, what we do in our survey work and talking to our customers as we do and our first-party data that we have really tells us that our customer is even under more pressure as we have progressed into 2023, and quite honestly, it's some of the most pressure we've seen in quite some time. The good news is she's still employed. That's That's always an important factor in her health. So that's a good thing to see. But quite honestly, our customer, some of the detail, you know, food inflation continues to persist. And even though it's moderated somewhat, if you think about the two-year stack, it's almost 20%. And our customer certainly is seeing that pressure. And then quite honestly, when you think about the child tax credit and the removal of that and how that impacted her tax refunds, That's an incredible buffer for her that, quite frankly, surprised her on the level of refunds she did not receive. And in some cases, some of our customers are saying that they're even having to pay taxes this year, which is something that they typically don't have to do. So when you think about that, they're saying to us, you look at those two shocks to her, also with the SNAP benefit and the $95 reduction per household basis. Last year and last time this happened, we saw through our first-party data, they were able to shift to other types of tender. But quite frankly, in this environment, and we have the luxury of having first-party data, we're seeing they're not able to do that. And not only are the states where the SNAP benefits were reduced having an impact, but also the states that happened last year, they're also seeing pullback as well. And unfortunately, our customers are saying they're having to rely more on food banks, savings, Credit cards, as we all know, credit card rates are an all-time high. So saying all that, what we're seeing her do is really rely more in the shopping behavior. We're seeing her buy fewer items per basket. We're seeing her really utilize that dollar price point, and we're very pleased that we still offer that. And then we're also seeing her by closer to payday in the first of the month. But what we are seeing through the actions we've taken, we're seeing that our customers continuing to return to shopping. We're pleased to see our share gains increasing. in the month of April and May returning. So we're excited about that. And quite frankly, when you step back and think about share, we grew share in February. Our customer pulled back in March and really pulled out of the spending. She returned in April. And even though we had a negative comp, we still gained share. And then we gained share in May as well. So we're pleased to see that not only our customer is leaning more on Dollar General as we expected she would, but the actions that we're taking are beginning to take hold. So we feel good. We're positioned to serve a customer in times like this. And with primarily, you know, 80% of our stores and communities is $20,000 or less, we're uniquely positioned to be there for her.

Great. And then maybe, Kelly, as a follow-up, so just in light of this backdrop, how do you feel about your pricing position today? What actions might you take? And then could you just overall walk through the puts and takes that you've embedded in your gross margin forecast for the second quarter or the back half of the year relative to the expansion that we saw in the first quarter?

Yeah, I'll start with the pricing. We feel great about our pricing position. And just like Jeff said, we're investing in a targeted everyday low price investment. And in this environment, we feel like it's really important to do so on those key items that are important to our customer. And What I would say is that is embedded in our gross margin guidance. Just stepping back on guidance, just taking a look at it from a high level for the full year, our revised guidance is really a function of the macroeconomic environment, and it's putting pressure on two things, and that's sales and shrink. And as Jeff alluded to, we're taking actions to address both, as well as actively managing the rest of the P&L, our working capital and our capital investments. We're not going to sacrifice long-term growth as we do that either. So we do expect this customer to remain under pressure for the foreseeable future. The depth and the duration of that's really difficult to predict, but, you know, as history always tells us, they'll ultimately recover and get their budgets back in line. So when we think about that and think about then the cadence of the year, really I want to focus on Q2, and that's where we're going to see the most pronounced headwinds. and probably the highest decrease in EPS. And to your point on gross margin, Q2 is going to be the toughest year-over-year lap on a gross margin rate. And then we've got some other pressures this year to consider. So one is shrink, and it's going to be the most difficult comparison on a year-over-year basis. And then the other one is that targeted pricing investment will put some pressure on gross margin. So with that, we're expecting the gross margin rate for the second quarter to be around or somewhat lower than the gross margin rate for the first quarter. Adding to a little bit more pressure in Q2 is also just interest expense. We're going to add the most pressure to Q2 versus the remaining quarter just as the cadence of the interest works through. And then finally, you know, the pull forward of the labor investment with over $40 million being spent in Q2 will also pressure Q2. That said, you know, like we talked about, we really like the trends that we're seeing around that investment. It gives us a lot of confidence that it's the right thing to do for our customers and for our business, and we're expecting sustained benefits from that investment. And you know it well, so everything we do is centered around the customer and we're going to continue to execute on that. And while we do like the momentum that we're building with these actions on price and labor investment, we think that sets us up for the back half of the year because there could just be a little bit of a lag to the full benefit of those investments. And then finally, just importantly, I think it's always good to ground ourselves in history. And history also suggests that we tend to come out of these types of environments even better positioned. And that's as a result of a more productive core customer as well as a trade-in customer. And that's why we really believe that Q4 will have the best comp of the year. And then as we move into 2024, we'll do so in an even stronger position.

Great. Thanks for the color. Best of luck.

Thanks. Our next question is from Michael Lazar with UBS. Please proceed with your question.

Good morning. Thanks a lot for taking my question. Jeff, the market has long measured Dollar General's market share against some of its large publicly traded competitors like Walmart, Family Dollar, and others. And on that metric, Dollar General has been a share gainer for a long time. Now it's arguably having to work its P&L harder to generate sales growth or not experience share gains. Why is that the case? Is it that Dollar General now has 19,000 stores, invigorated competitors, and it's just much more difficult to gain share or more expensive? And as a result, Dollar General is going to have structurally lower margins moving forward?

Well, thank you, Michael. You know, When you think about the quarter, and certainly you're right, Dollar General has historically been a share gainer, and we will continue to be a share gainer. When you think about this quarter and the highly consumables area being flat overall, it really was, again, I'll go back to the comp cadence in a second, but we were flat overall in the highly consumables, but we did grow share on the non-consumable business. So I want to be clear that I share that with you. But as you walk through the comp cadence of the quarter, it really is a story. And when you think about that macro pressure and the fact that we believe our core customer was disproportionately impacted by that, we started to see our share. Actually, when you start the year in February, we actually had a very healthy comp and healthy share gains. And as we went into March, March is when she simply pulled out of the market and had to adjust. And she came back in April, as I mentioned earlier, where we saw share gains resume. And we continue to see share gains resume in May. And quite honestly, as we think about being there for the customer, the majority of the actions we've taken as it relates to our ability to pull forward the labor investment, the supply chain improvements we've made, and getting even sharper on the prices, That really didn't happen until late in the quarter. So when you think about the share gains and the returns, what we're seeing is our customers coming back to Dollar General as we expect they would, and we believe that the actions we're taking will only make it a more compelling offering for our customer. We're there for her in affordability and value, and we'll provide her with the consistency and the shopping experience that she's grown to be accustomed to at Dollar General. We'll make that even better as we move forward. And so as we think about that, we feel real good about our ability to continue to grow share and and also provide healthy operating margins. And as you know, we've made tremendous investments over the years to enable us to structurally be able to do that. When you think about the comp and the composition of our sales mix and the highly consumable sales mix that we're seeing today, It's pretty impressive that Dollar General's structural profitability has allowed us to continue to be much more profitable, even in an environment like that. And we continue to see areas that we can grow margin and provide us with the ability to not only serve this customer sustainably, grow share, but also provide healthy returns. And that's something that we are very excited about the ability to do that as we move through this year and then also as we move even stronger into 2024 and beyond.

Thank you. And my follow-up question is, Jeff, your discussion around price investment come on the heels of one of your large competitors making price investments last year. And so this is part of the narrative within the investment community that there's just going to be a race to the bottom and a never-ending price war within the small box value retail sector. How do you present that and And recognizing you're not going to provide guidance for 2024 as of yet, can you still make these types of investments and get back to your double-digit EPS growth algorithm within a reasonable timeframe?

Yeah, Michael, first of all, you know, as we've said historically and continue to say, our price position relative to competition continues to be strong. And quite honestly, Our philosophy on price has not changed. You know, our pricing goal continues to be to be a parity with mass. Plus or minus, call it 2%, 3%. And we're well within that targeted range, and we feel good about that position. But we believe our customer, and we've said this for many years, that we reserve the right to be there for the customer when she needs us most. And we believe this is a time for that. And we think there's an opportunity to get even sharper on certain items that matter most. And so we believe, again, this is a very targeted structural approach, excuse me, targeted and surgical approach to being able to be there for this customer. And we've done this over the last few weeks. We're pleased with the response we're seeing. But again, our philosophy and our goal has not changed. We still have the same pricing gap targets that we've had for quite some time. And the actions we've taken are in the guidance that we contemplated. And I'll turn the back half of the question over to Kelly.

Yeah, you're absolutely right, Jeff. So the guidance does contemplate that. And really the guidance range is a function of the flow-through of the sales scenarios with that additional shrink risk largely being offset by the costings. that we're taking in SG&A, and so we're getting a benefit from that as well. I think as we move into the year with all of the actions that we're taking, you know, I'm confident in delivering this EPS guidance, and I think with the impact of those actions that Jeff talked about, that we continue to see Dollar General as a 10% EPS grower over the long term.

Thank you.

Our next question is from Karen Short with Credit Suisse. Please proceed with your question.

Hi, thanks very much. I appreciate it. So actually, just following on that line of thinking, you know, you've basically grown sales per square foot by 15% since 2019, and you're looking at EBIT margins that are below where they were in 2019. So I guess the question is, what do you think a sustainable EBIT margin actually is? And then I guess what I'm still confused by is, you know, you were pretty adamant in March that you weren't seeing impacts from SNAP reductions. And I understand that other things kind of came into play. But, you know, that obviously changed during the first quarter. So why? What visibility did you not have in March? And then I guess, sorry, my third question would be, you've obviously always outperformed in a week or macro with a trade down into your format. So do you still feel confident that that's doable? Yeah.

Okay, Karen, I'll try. There are several questions in there. So I'll start with the – let me try to start with the SNAP question first, and then we'll talk about the macro, and then I'll toss it over to Kelly to talk about the EBIT margin question. So when you think about the SNAP, you know, when we sat here in Q4, what we talked about was there are two pending changes that we're watching. And at that point in time, you're right, we had not seen the impact of SNAP. What we did say was we trended it off our first-party data and what states that had pulled back previously and how that customer responded. But we also mentioned and we continue to feel it's in a much different spot for this customer when that actually took place. So our customer today is certainly in a much worse off position than she was a year ago when those changes happened in those previous states. And so since then, what... really happened was certainly we saw the customer pull back really a combination of two things. I think the tax refund component is the other one we talked about that we had not seen, quite frankly, any impact from that. And as you looked at our comp cadency, it pretty much matches the tax refund reductions, and it's a very high correlation there. So those are the two things that, quite frankly, we saw that changed in the back half of March and persisted into April. I think the good news is, and you're right, we believe this model is built for all seasons, and it's proven that it can deliver to our customer in any economic environment. We continue to believe that. But we also see opportunities, which we see right now, for the ability to serve our customer even better than we've served her in the past. And that's what we're doing and that's what we're squarely focused on is responding to the macro environment, taking care of our customer, but also positioning Dollar General long-term to be able to continue to serve this customer. And when you think about it, 80% of our stores are serving communities at 20,000 or less. So we're uniquely positioned to be able to do that, and we're squarely focused on delivering on that.

I'd say we're squarely focused on delivering operating margin expansion as well. And I think if you look back to 2019, you'll see that we're expecting to continue that expansion as we move into 2024 and get through this macro environment. We have a lot of initiatives in place to drive that operating margin profit, and we are making sure that we invest in those even during these times. So we feel good about that on a go-forward basis.

So just to follow up on that then, what do you think your structural margin could EBIT margin should be? Like say not 23, obviously, but 24 or 25?

Yeah, I don't want to comment on that year right now, but I would just say that everything that we're doing right now sets us up for a successful 24. Okay, thanks so much. Thank you.

Our final question is from Rupesh Parikh with Oppenheimer. Please proceed with your question.

Good morning, and thanks for taking my question. So I just want to go back to the comp shortfall that you saw in the quarter and your updated expectations for the full year. Just curious why you believe it's more – the comp weakness is more driven by macro weather versus changes in competitive dynamics.

Yeah, I'll start that, Rupesh, and I'll turn it over to Kelly, too, to add any color. But, again, I think it goes back to the comp cadence. I mean – A couple things. First, as I said earlier, our February started out extremely strong. And as you look throughout the quarter, March and April, we saw the pullback in March. We saw April continue. And then we've seen it respond nicely in May. So that's why we, when you look at the macroeconomic shocks to our customer, primarily in the two areas I talked about, combined with a really cold and wet spring in We're seeing our customer continue to respond, and we're liking what we see as we enter into the second quarter as it relates to her ability to rebound and spend with us. And also, again, I go back to the operational improvements. I mean, our supply chain hasn't been this good since two years ago. Our store conditions continue to improve. Our customers are seeing it. They're telling us And we haven't seen that movement, quite frankly, in quite some time. Our movement from Q4 to Q1 was significant, and we're excited about that. We're also excited about how we're seeing the ability to accelerate that in the second quarter because of our supply chain improvements. And then also we believe that value is always incredibly important to our customer. And we've been able to show value for many, many years. But we believe now with the ability for us to be there for her and be even sharper on the things that matter most to her will drive traffic into the store, will allow us to serve her better and gain share as we've talked about historically doing, and we will continue to do here at Dollar General.

Great. And then one follow-up question. So your inventory balance was up, I think, 20% year over year. Just curious how you feel about the health of the inventory position and opportunities you see to improve from here.

Yeah, we continue to feel good about the quality of the inventory. But I will say, you know, inventory management remains a focus for us. So inventory growth was relatively consistent with Q4, although we had hoped that it would come in somewhat lower this quarter. The good news here is what I would say is we made some progress on working down the non-consumable inventory. It was offset, though, by improved consumable in-stock levels. And as Jeff noted, with the supply chain health, that's where we we got those in-stock levels from. So just a couple of facts for you. You know, we reacted pretty quickly to the current environment by reducing non-consumable receipts. And frankly, I'd say we acted historically as well because some of those receipts were pulled back almost a year ago in reaction to the discretionary spend trends that we were seeing. So in Q1, our non-consumable receipts were actually down over 30%, and we expect that trend to continue into Q2. And with that, what we saw was a 3% reduction in non-consumable inventory per store from Q4, so nice movement there. And we do expect it to get more normalized levels in the back half of the year. Again, at the same time, our supply chain service levels improved faster than we expected, and that drove some consumable product to the store, which was one of the main contributors as you look on either a year-over-year basis or a quarter-over-quarter basis. So I just end with, you know, we know that inventory remains an opportunity for us, and we're going to continue working on reducing those levels with the goal to remain in line with sales, and we believe that the new structure we put in place will make sure that we get that done.

Thank you for all the color.

Thank you.

We have reached the end of the question and answer session. I would now like to turn the call back over to Jeff Owen.

closing comments thank you for all the questions and thanks for your interest in Dollar General if I can summarize our discussion today let me leave you with these three things first Dollar General is built for times like this and we have a keen focus on enhancing our ability to serve our customer we are investing and adapting structurally strategically and operationally to serve our customers even better in this environment which we believe will drive momentum and later in the year and into 2024, and we have a clear vision and a powerful growth strategy for the future. Thank you for listening and have a great day.