Dollar General Corporation

Good morning. My name is Robert, and I will be your conference operator today. At this time, I'd like to welcome everyone to Dollar General's second quarter 2023 earnings conference call. Today is Thursday, August 31st, 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 your host, Mr. Kevin Walker, Vice President of Investor Relations. Kevin, you may now begin your conference.

Thank you, and good morning, everyone. On the call with me today are Jeff Owen, our CEO, and Kelly Diltz, 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, 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 2023 Form 10-K filed on March 24, 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 required by law. At the end of our remarks, we will open the call up for your questions. Please limit your questions to one and one related 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. Before we discuss the quarter, I want to address the tragic event of last Saturday. On August 26th, we lost one member of the DG family. and two customers to a senseless and hate-filled act of violence in our store in Jacksonville, Florida. We extend our deepest sympathies to their families and friends as well as to the greater Jacksonville community. It is in times of tragedy when community matters more than ever. Right now, we are focused on providing support, counseling, and resources to our teens and their loved ones. We are evaluating how we can best support the local community during this difficult time, and we stand with our team in Jacksonville and across the organization who are leading with empathy and courage. We are appreciative of local law enforcement's quick response in Jacksonville and their continued support in protecting our associates, customers, and communities every day across this country. Thank you. And with that, we'll now begin today's call. We made significant progress in the second quarter, advancing several important goals. I'd like to give you an update on the actions we have taken to improve execution and better serve our customers. While we are pleased with our progress, we are not satisfied with our overall financial results. So I also would like to walk you through how we plan to do even more in pursuit of these goals in the coming months and how we plan to get there more quickly. We are continuing to improve execution in our distribution centers and stores, providing our customers with even lower prices and an improved shopping experience and working towards right-sizing our inventory levels. Within our supply chain, we are pleased to note that our service levels, in-stock levels, and on-time delivery rates from our distribution centers have all returned to the levels we saw before our capacity challenges began last year. This improvement has benefited our overall supply chain costs and has also been an important factor in positioning our stores to better serve our customers. As a result of that progress, and as we had previously announced, We accelerated our investment and incremental retail labor during the second quarter. While the investment in labor hours was initially allocated across the store base, we also strategically deployed additional hours to a set of focus stores based on the areas of greatest need and opportunity, and also through high performing teams in each district that could assist in stores where they were needed the most. While early, we are pleased with the impact of these labor investments, including the positive impact on overall customer satisfaction and store standards. Finally, I also want to highlight the pricing actions we completed in the second quarter, as we made targeted price reductions on key items that matter most to our customers to provide them with even more affordable solutions. We have been pleased with the customer response, both in terms of basket size and composition when the basket includes one of these items. These actions have further solidified our strong pricing position relative to competitors and other classes of trade, and we feel great about our strong value proposition. With all that in mind, I want to recap some of our Q2 top line results. Net sales increased 3.9% to $9.8 billion, compared to net sales of $9.4 billion in Q2 2022. Importantly, the quarter was highlighted by growth in market share of both highly consumable and non-consumable product sales, as well as accelerating unit share growth, all of which we believe is a testament to the improvements and actions I mentioned earlier. With that said, our core customers continue to tell us they feel financially constrained, which we believe contributed to a slight decrease of 0.1% in same-store sales in Q2. While customer traffic was negative during the quarter, it did improve sequentially each period. The decrease in traffic was essentially offset by an increase in average ticket, which was primarily driven by the impact of inflation. From a monthly cadence perspective, same-store sales growth was strongest and positive in May before declining in June and July. We have seen this trend continue into August with negative comp sales through the first half of the month. This decline has been driven primarily by lower average ticket as we lap the more significant price increases from 2022. While we are not satisfied with the comp sales, we are encouraged by the improvements we saw in overall market share gains and customer traffic during the second quarter, which further support our belief that our actions are resonating with customers. However, we expect continued pressure in the sales line for the duration of this year, particularly in discretionary sales, as our customer focuses more on buying for need. With sales and shrink not where we want them to be, we have evolved how we are thinking about the rest of 2023. Our improved execution is driving increased customer satisfaction, and we want to accelerate this progress to serve our customers even better as we head into the holiday season, as well into 2024 and beyond. As a result, we have made some important changes and have additional plans to more quickly return to the position of strength from which we are accustomed to operating, which are collectively focused on driving sales and lowering our cost to serve. First, we are strategically accelerating the right sizing of our inventory position by expanding promotional markdowns primarily in our non-consumable products. While we expect this to result in an operating profit headwind of approximately $95 million in the back half of the year, we believe it will drive traffic and also more quickly reduce excess inventory. We believe this right sizing supports our operating priority of enhancing our position as a low-cost operator. and that it will accelerate improvement in a number of areas, including store and supply chain efficiencies, as well as shrink damages and cash flow. Next, we are increasing our planned investment in incremental retail labor from approximately $100 million this year to approximately $150 million. We like the returns we have seen on this investment to date and believe that this additional investment will support acceleration of our progress and allow us to continue driving in-store improvements through the back half of the year and to begin next year in an even stronger position. Finally, with our strong and growing store base of nearly 20,000 stores, we also plan to invest up to $25 million in other areas, such as an improved inventory demand forecasting tool to better support our stores and distribution centers while lowering our cost to serve. Collectively, we believe these investments and actions will further strengthen our position and more quickly restore the strong execution that allows us to deliver on our unique value and convenience proposition for our customers. Importantly, All of these actions align with and support our DG Forward strategy. We are managing this business for the long term, and our mission of serving others is unchanged. Our vision for the future is clear as we seek to be a force for opportunity for our customers, associates, communities, and shareholders. and we will focus relentlessly on delivering the value and convenience our customers expect and returning to the position of operational excellence that we expect of ourselves. We operate in one of the most attractive sectors in retail, and this model is resilient and strong. We have a multitude of strategic initiatives to drive future growth, which I will discuss in more detail shortly. Now, I'd like to turn the call over to Callie.