Dollar General Corporation

continued pressure on sales in discretionary categories, as well as accelerated share growth and penetration in private brand sales. Our commitment to providing customers with value and convenience is as important as ever. We continue to feel very good about our pricing position relative to our competitors and other classes of trade and are well positioned to help our customers stretch their dollar. As we look to further enhance the shopping experience for our customers in 2024, I want to provide a quick update on some of our plans. We executed more than 3,000 real estate projects in 2023, including 987 new stores, 129 relocations and 2007 remodels. We expect to build on this momentum in 2024 as we plan to execute approximately 2,385 projects, including 800 new store openings, 1,500 remodels, and 85 relocations. These store opening plans include 30 pop shelf stores and up to 15 stores in Mexico, where we recently celebrated the one-year anniversary of our first store opening. We recently began shipping from PopShelf only distribution facility in Georgia, which will allow us to drive greater efficiencies in our existing traditional distribution network and better serve our PopShelf stores. As a reminder, PopShelf is comprised of primarily non-consumable product categories and as such is more heavily impacted by a softer discretionary sales environment. As a result, we believe we are moving at an appropriate pace of openings for this year. We continue to believe that the pop-shelf concept provides an additional growth opportunity, but are cognizant of the near-term pressures impacting non-consumable sales. We continue to diligently apply our learnings and refine our strategy and scaling of the business to drive higher returns. Finally, we have always prioritized going where the customer wants us to go, and we continue to hear from many of them regarding more fresh food options. Thanks to years of great work by our teams to add cooler doors to our stores while enabling the self-distribution of these products, we now have nearly 30 doors per store on average, with ongoing opportunities to add cooler doors and frozen and refrigerated items through our fresh initiative. In addition, we have fresh produce in more than 5,400 stores at the end of the year, and are targeting up to 1,500 additional stores for produce in 2024. Overall, we are pleased with the progress we made in Q4, which I will discuss in more details later. And we are excited about our plans for 2024. As we embark on our 85th year in business and with store locations within five miles of approximately 75% of the US population, we are uniquely positioned as a growth company that is privileged to be here for what matters for millions of customers across the country. We take this responsibility seriously and are committed to serving our customers and communities while developing and supporting our associates and creating long-term shareholder value. With that, I'll now turn the call over to Kelly.

Thank you, Todd, and good morning, everyone. Now that Todd has taken you through a few highlights of the quarter and full year, 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. As Todd already discussed sales, I'll start with gross profit. For Q4, gross profit as a percentage of sales was 29.5%, a decrease of 138 basis points. This decrease was primarily attributable to increases in shrink and markdowns, lower inventory markups, and a greater proportion of sales coming from the consumables category. These were partially offset by decreases in LIFO and transportation costs. Notably, year-over-year shrink headwinds continued to build during the year, increasing more than 100 basis points for both the fourth quarter and full year. We are taking multiple actions aimed at reducing shrink in 2024, which Todd will discuss in more detail later in the call. Turning to SG&A, it was 23.6% as a percentage of sales, an increase of 189 basis points. This increase was primarily driven by retail labor, including the remaining $50 million of our targeted labor investment, as well as store occupancy cost, depreciation and amortization, repairs and maintenance, and other services purchased, including debit and credit card transaction fees. These increased expenses were partially offset by a decrease in incentive compensation. Moving down the income statement, operating profit for the fourth quarter decreased 37.9% to $580 million. As a percentage of sales, operating profit was 5.9%, a decrease of 327 basis points. Interest expense for the quarter increased to $77 million compared to $75 million in last year's fourth quarter. Our effective tax rate for the quarter was 20% and compares to 23.2% in the fourth quarter last year. This lower rate is primarily due to the effect of certain rate impacting items such as federal tax credits on lower earnings before taxes as well as lower state effective rate resulting from increased recognition of state tax credits. Finally, EPS for the quarter decreased 38% to $1.83, which was at the higher end of our internal expectations. For the full year, EPS decreased 29% to $7.55, including an estimated negative impact of approximately four percentage points from lapping the 53rd week. and a negative impact of approximately four percentage points from higher interest expense. Turning now to our balance sheet and cash flow. Merchandise inventories were $7 billion at the end of the year, an increase of 3.5% compared to fiscal year 2022, and a decrease of 1.1% on a per store basis. Notably, total non-consumable inventory decreased approximately 17% compared to last year, and decreased 21% on a per store basis. I want to acknowledge the great work the team has done to reduce our inventory position this year. We've made significant progress optimizing our inventory mix and levels, and we continue to believe that the quality of our inventory remains good. As Todd will discuss in a few moments, we will continue to focus on inventory levels in 2024, including additional opportunities to reduce per store inventory. In 2023, the business generated cash flows from operations of $2.4 billion, an increase of 21% as we improved our working capital primarily through inventory management. Total capital expenditures were $1.7 billion in line with our expectations 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 returned cash to shareholders through a quarterly dividend of 59 cents per common share outstanding for a total payment of $130 million. Overall, we are pleased with the progress we are making, including gains in customer traffic and market share, lower inventory levels, and improving cash flow from operations. Moving to our financial outlook for fiscal 2024. While we continue to make progress in our back-to-basics work, the full benefits from these actions will not be realized in a single quarter, and we anticipate they will build as we move throughout the year. With that in mind, we expect the following for 2024. Net sales growth in the range of approximately 6 to 6.7%. Same-store sales growth in the range of 2 to 2.7%. and an EPS in the range of $6.80 to $7.55. We currently anticipate an estimated negative impact to EPS of approximately 50 cents due to higher incentive compensation expense. Our EPS guidance assumes an effective tax rate in the range of 22.5% to 23.5%. We expect a reduced level of capital spending as a percent of sales compared to prior year in the range of $1.3 to $1.4 billion, which we believe is appropriate to support our ongoing growth. Before I move on, I want to reiterate our capital allocation priorities, which we believe continue to serve us well and guide us today. Our first priority is investing in our business, including our existing store base, as well as high return organic growth opportunities, such as new store expansion and strategic initiatives. Next, we seek to return cash to shareholders through a quarterly dividend payment and over time and when appropriate share repurchases. With regard to shareholder returns this year, our board recently approved a quarterly cash dividend of 59 cents per share. Finally, support reducing our debt leverage ratio and maintaining our current investment grade credit ratings, we do not plan to repurchase common stock this year under our board authorized repurchase program. Although as I mentioned, share repurchases remain a part of our future capital allocation strategy. Although our leverage ratio is currently above our target of approximately three times adjusted debt to adjusted EBITR, We are focused on improving our debt metrics in support of our commitment to our current investment grade credit ratings, which, as a reminder, are BBB and BAA2. Cash generation is always important, and we are focused on further improving cash flow as we move through 2024. We believe these actions, which are aligned with our capital allocation priorities, will continue to strengthen our overall financial position for 2024 and beyond. Now let me provide some additional context as it relates to our outlook for 2024. As Todd noted, inflation continues to impact our customer as they make trade-offs in the aisle, and we anticipate the related sales mix headwind to gross margin will continue in 2024. In addition, after multiple years of fewer markdowns, we expect the overall promotional environment in 2024 to revert to pre-pandemic levels. We anticipate this will result in higher promotional markdowns, which will offset the lower clearance markdowns compared to last year and will keep overall markdowns as a percent of sales in 2024 at a similar level to 2023. In addition, we expect shrink to be an ongoing headwind to gross margin in the first part of the year before the anticipated positive impact of our mitigation efforts begin to manifest in the back half of the year. Turning to SG&A, as I mentioned earlier, we anticipate a significant headwind this year from the normalization of incentive compensation, as well as ongoing headwind from depreciation and amortization. Looking at the quarterly SG&A cadence, while we expect to deleverage each quarter, we also expect sequential quarterly improvement in the year-over-year basis point comparison as we move through the year. In addition, we expect pressure in Q1 as we annualize some of the headwinds from 2023, including shrink and our investment in retail labor, as well as pressure from markdowns, which we expect will have a different cadence than 2023, which was back half heavy. While we do not typically provide quarterly guidance, given the specific Q1 headwinds, we are providing more specific detail on our expectations for the first quarter. To that end, we expect a comp sales increase of 1.5 to 2% in the first quarter with EPS in the range of approximately $1.50 to $1.60. In summary, we are confident in the long-term strategy for this company and believe we are well positioned to drive top and bottom line growth in the years ahead. In the near term, we are taking actions to strengthen our position to support long-term growth with our back-to-basics efforts with a particular focus on driving comp sales, gaining market share, and reducing shrink. Over the long term, our underlying opportunities to grow operating margin are still in place, including shrink reduction, the DG Media Network, private brands, global sourcing, category management, and inventory optimization, distribution and transportation efficiencies, and our save-to-serve approach to controlling costs. We remain committed to maintaining our discipline in how we manage expenses and capital as a low-cost operator with the goal of delivering consistent, strong financial performance while strategically investing for the long term. We are pleased with our progress, and we are excited about our plans for 2024. as we continue to reinforce our foundation for future growth while driving 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 Todd.

Thank you, Kelly. We remain committed to our four operating priorities of driving profitable sales growth, capturing growth opportunities, leveraging and reinforcing our position as a low-cost operator, and investing in our diverse teams through development, empowerment, and inclusion. To advance these priorities in the near term and following a period of evaluation of the challenges and opportunities in front of us, we have implemented a refreshed approach to getting back to the basics to improve store standards and the associate and customer experience in our stores. I want to take the next few minutes to provide an update on these efforts in our stores, supply chain, and merchandising. To better inform these efforts, the leadership team has spent a significant amount of time over the last couple of months directly engaging with our associates throughout the organization, including listening sessions in stores, distribution centers, and our store support center. We also hosted more than 400 field leaders in Nashville in February, and then several of us spent time on the road with more than 1,000 additional leaders across the country. These sessions allowed us to follow up on the feedback we've received, share our action plans and commitments, and align our expectations with our teams across the organization. We continue to prioritize this direct engagement with our associates and value the actual feedback we gain to continue enhancing the way we support our teams and serve our customers, all while strengthening the sense of pride and purpose we all share at Dollar General. I want to start with our stores where everything begins and ends with our customer. We completed the investment of $150 million in store labor during the fourth quarter with the additional hours primarily focused on the two areas we discussed on our last quarterly call. First, we significantly increased the employee presence at the front end of our stores. These team members are dedicated to providing a friendly, welcome, and positive checkout experience for our customers. Second, we dedicated more labor to perpetual inventory management in our stores by adding specific inventory management shifts and specialized inventory training in each store. This effort has been well received by our managers and their teams and has contributed to in-stock level improvements in our stores. As we enter 2024, we have also reduced the span of control for our district managers adding more than 140 new districts and district managers. This significant investment in our field teams reduces the number of stores assigned to each district manager by approximately 15% and is designed to increase both the opportunity for engagement with our store managers and their teams, as well as to drive consistency and execution across our store base. Finally, we've taken a fresh look at store-level tasks and activities and have taken significant action to make it easier to operate our stores. While we have made progress, we continue to focus on how we can enhance the overall customer and associate experience in our stores. With that in mind, we are making three changes to our self-checkout strategy this year. As a reminder, we currently have self checkout options available in more than 14,000 stores. Although adoption rates for self checkout have been high, we believe there is truly no substitute for an employee presence at the front end of the store to greet customers and provide excellent customer service, including at checkout. Importantly, when choosing our self checkout solution, We implemented a product that is convertible from self-checkout to associate assisted checkout. To that end, we have begun immediately converting some or all self-checkout registers to assisted checkout options in approximately 9,000 stores. This is intended to drive traffic first to our staff registers. with assisted checkout options available as second or third options to reduce lines during high volume times. Our second course of action will apply to all remaining stores with self-checkout where we have begun limiting self-checkout to transactions consisting of five items or less. And finally, over the first half of the year, we plan to completely remove self-checkout from more than 300 of our highest shrink stores. Collectively, we believe these steps are in line with where the customer wants us to be, which includes increasing personal engagement with them at the store. Additionally, we believe these actions have the potential to have a material and positive impact on shrink as we move into the back half of the year and into 2025. The 2024 portion of this benefit, as well as additional labor in these stores to devote to the checkout process is included in our guidance that Kelly provided earlier. Beyond our changes to self-checkout, we are also executing on a variety of other actions to reduce shrink this year, including inventory reduction efforts where we see additional opportunity in 2024, skew rationalization, which I'll discuss more momentarily, additional shrink incentive programs for our store managers to encourage and foster a greater sense of ownership, and the utilization of high-shrink planograms, whereby we will remove certain high-shrink items from high-shrink stores to target the greatest opportunity for improvement. While we anticipate a continuing headwind from shrink early this year, we believe our actions will have a significant mitigation impact in the back half of the year and into 2025. Overall, we believe these actions in our stores will drive improvements in customer satisfaction, including customer service and on-shelf availability and convenience, enhance the associate experience in our stores, including improved employee engagement and retention, and drive improvements in financial results, including sales and shrink. Next, let me provide a quick update on our supply chain. As a reminder, our top priority this year is to improve our rates of on-time and in-full truck deliveries, which we refer to as OTIF. Our distribution and transportation teams are laser focused on serving stores as their most direct customers and are pursuing several opportunities to drive higher OTIF levels. Since Q3, we have seen significant improvements in our on-time deliveries as well as customer service levels. In 2024, we will continue to pursue improvements by undertaking our first full-scale refresh of our sorting process and distribution centers since the launch of our fast-track sortation initiative in 2017. With the growth and evolution we have seen since that time, we are further updating the sorting process to improve our distribution flow while enabling our store teams to unload the truck and restock shelves more quickly, ultimately driving greater on-shelf availability for our customers and increased sales. In addition to improving OTIF rates, we have also been successful reducing inventory and optimizing the flow within our supply chain. As we said we would last quarter, we have reduced the number of temporary warehouse facilities exiting five buildings in 2023 with plans to exit seven more in 2024. We will continue to maintain a few of these temporary facilities That are more complimentary to some of our smaller permanent distribution centers but by reducing the number of outside warehouses, we can lower costs and continue to improve inventory flow throughout our supply chain. As I mentioned earlier, we opened a pop shelf only distribution facility earlier this year to improve efficiencies. and we expect to open Dollar General distribution centers in Arkansas and Colorado later this year as we continue to support our ongoing growth. As a result of our reduced inventory levels and optimization of existing distribution centers, we now expect to open the planned facility in Oregon at a date beyond 2024. We are pleased with the progress we've made in our supply chain and are confident in our ability to continue progressing toward our goals. Ultimately, these actions should enhance our ability to meet challenging demands and respond to the challenges within the supply chain, as well as drive greater efficiencies and further improve experience for our store teams and customers. Finally, I want to provide an update on getting back to the basics of merchandising. Our team continues to prioritize delivering value to our customers while simplifying the work for our store teams and driving profitable sales growth. I want to echo Kelly in acknowledging the great work the team has done on inventory optimization and reduction. This has lowered our carrying costs driven efficiencies across the supply chain and store base and positioned us to better serve our customers. Importantly, We have been able to lower average inventory per store while improving our in stock rates and driving higher comp sales growth. We expect to continue driving improvement in 2024 with several efforts already underway. We have begun actively reducing the number of SKUs we carry in our stores through our planogram reset process, and we expect net reduction of up to 1,000 SKUs in our stores by the end of 2024. Notably, we have already turned off the majority of these SKUs, which will allow us to sell through the remaining inventory while seeking to minimize the amount of related clearance markdowns, which are contemplated in our 2024 guidance. Finally, our merchant teams have focused on reducing activity for store teams by reducing the number of floor stands and monthly end cap resets and increasing the number of products that go straight to the shelf, all which saves time in our stores and enhances the customer experience. As we wrap up this morning, I want to reiterate that we are laser focused on getting back to the basics of Dollar General and fulfilling our mission of serving others. I'm proud of the team's efforts over the last few months to identify gaps and opportunities, implement plans of action, and deliver on our commitments that we make. We are moving with a sense of urgency and have made a lot of progress in a short amount of time. And while we are already seeing positive results from some of our actions, other efforts may take longer to deliver the intended benefit. With all that in mind, we are excited about the future of this business. We are working hard to capitalize on the opportunities in front of us to drive meaningful operational improvement in the near term and to deliver sustainable growth and value over the long term. I want to thank our approximately 185,000 employees for their engagement and for their dedication to serving others every day. This team is energized and committed to our back-to-basics plan, and I'm excited about all that we can accomplish together in the year ahead. With that, operator, I'd 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. 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 Matthew Boss with J.P. Morgan. Please proceed with your question.

Great, thanks, and congrats on the improvement.

Thank you.

So, Todd, I think it would be helpful if you could maybe speak to the top line and traffic self-help improvement that you're seeing, just given the volatile macro backdrop. So, as you break down your 2024 comp guide, could you elaborate on the back-to-basics strategy? What's working today that supports the first quarter comp guidance relative to maybe incremental opportunity that you see potentially building throughout the year, particularly in the back half?

Sure, Matt. Thanks for the question. We're pretty pleased with what we've seen in our short run here on getting back to the basics. You can see it in our comps in Q4. You can see it in our traffic numbers. And we can see it in our customer data as well. So all good signs that we're on track to where we want to get to to get back to the basics here at Dollar General. In saying that, you saw the comp guide for Q1 at 1.5% to 2%. Obviously, that is a more robust comp than we've seen here for the better part of a year. And I think that really goes to a couple things. One is our commitment and as well as our confidence in the back to basics work that's being done. Let me just quickly recap a couple of those so that you all can have confidence as I do and the team does here on why we believe. One is we have done a lot of work in ensuring we've got the right amount of labor inside of our stores, $150 million in labor investments in 2023. I think most notably here as well is in Q4, the reallocation of that labor to areas that mean the most to our stores and to our customers. And so ensuring that we've got somebody at the front register to ring out 100% of the time, check. We're actually doing that, I believe, at a very high level now. Second of all, ensuring that we put labor in to keep our on-hand and perpetual inventory counts more accurate. We, through Q4, have implemented that program, including extensive training to make sure that we feel confident long-term that it will be sticky in our stores. And so I would tell you that our stores and our store employees have applauded that labor investment, and we're already starting to see some of the early benefits from that on the shelf, meaning more product on time and in the shelf. So really great to see. Also, another big reason on the self-help side, as you indicated, that we feel confident in is that we worked hard in Q4. We've gone back in, peeled the onion completely back on transportation and DC accuracy, so in our whole supply chain, and then put it back together, believe it or not, in Q4. What we've seen by doing that is that we've seen our on-time rates tick up greatly. Matter of fact, in the last four to five weeks, we've seen a very, very consistent level just shy of our goals. And last week, for the first time, hit our goals on both our fresh distribution as well as our traditional D.C. distribution so great to see and how that manifests itself at our store is anytime we can be on time and more in full in our stores it gives our store the ability to be able to work what we call that seven-day workflow which when they're able to do that things run very very smoothly inside of our stores so more to come while we're not a hundred percent there we're getting there on our on our transportation and our distribution pieces and then The other pieces that really come into play here is in our merchandising areas. As you heard in our prepared remarks, we've already turned off 1,000 SKUs. We've got those turned off and already starting to burn down at store level. So we hope that we see our markdowns be somewhat limited there, while we've got some markdowns obviously planned in 2024 to move through that product. This is really going to help the stores. 1,000 less SKUs that they have to deal with. And then at the same time, reducing the amount of floor stands coming up and other products that don't go right to the shelf. And by the way, it's going to be a substantial decrease. The stores haven't seen that yet. That's coming later in Q1 and into Q2. And by the way, it's over a 50% to 60% decrease over last year in those floor stands and those alternate items coming in. So, again, a lot less work at the store. And then lastly, as it relates to, and I alluded to it in my prepared remarks, the roll tainter sort, we haven't done that since 2017. If you remember back in 2017 when we did do that, it makes the putting of the product onto the shelf easier. from the delivery 15 to 20% more, it does it faster. So we're able to execute it faster at store level. And what that does and how that manifests itself at store is bottom line is it gets product to the shelf faster, that increases sales. and it increases the productivity of our stockers inside that store. So more to come there. That's why we feel so bullish about what we've got coming and what we've already done. So we've done this before, Matt. We know how to do it, and we're getting at it, as you could tell, with a lot of enthusiasm and a lot of conviction here.

Our next question is from Simeon Gutman with Morgan Stanley. Please proceed with your question.

Hi, everyone. Hey, Todd, I wanted to ask you something that kind of puts together some of the comments you made as well as what Kelly said. I wanted to ask what's gone well since you joined? What's sort of taking longer? You mentioned some things need a little more attention and is the construct of getting back to seven plus margins. I think we talked about it theoretically by 25. Is that something that's still achievable? And listening to the finer points in some of what Kelly spoke about, like promotions being a little bit higher, it seems like shrink is about where you thought it would be. I don't know if you were trying to signal that it's a little worse, that you're taking more action. But those type of puts and takes, sort of what's gone well, what's not, and then something around the 7% in the future. Thanks.

Yeah, Simeon, thank you for the question. I'll start it and then pass it over to Kelly for that second piece. You know, so I just covered a few of those what went well, but again, we feel good about those sales driving activities and customer satisfaction activities that we've taken in our back to basics work. I believe that if you look at outside of shrink, and I'll get to that in a moment, Here's how I would characterize where we are in getting back to the basics. I think this is a fundamental way to think about it. When we started this journey in middle October of last year, I'd say, unfortunately, we were on about our own 10-yard line, if you think about a football analogy. I'd say that as we exited Q4 and now entering Q1, we're just crossing the 35-yard line, our own 35-yard line. I feel that we are on the right track to cross over the 50-yard line as we move through Q1 and into Q2 and start to really look at how we drive further into 24 and into 25 and get into our own red zone, if you will. So that's how I'm looking at this. So some things are manifesting themselves and happening in real time very quickly at the store and through our customer's lens. Some will take a little longer. Now, one of those things is shrink that's going to take a little longer. As you know, we take fiscal inventories once a year in our store. So anything we started to do as of October of last year will take a year to manifest itself within the financials. And by the way, a little longer in some instances as things take hold. Some quicker on the shrink side, some take a little longer. The great thing on the shrink side is that we know how to control this. We've done this before. Matter of fact, the individual that is in charge of operations now, store operations, Steve Deckard, Steve ran our shrink program for years here at Dollar General years ago and got it down to some of the lowest levels, historical lowest levels that we've seen at Dollar General pre-pandemic. We are squarely focused as we move through 25 and into 26 to get back to those pre-pandemic levels of shrink here at Dollar General. It's just going to take us a little time. But I tell you, when you look at what were the actions we're taking, and I would say decisive actions, especially around self-checkout, you know, taking self-checkout, if you will, the ability of self-checkout out of 9,000 of our stores immediately and turning them to assisted check stands is really going to benefit us. You know, we spent a little bit of money in Q4, and we looked at, an AI solution. We brought a team in. The team was called Eversine, and it's an AI solution that monitors thousands, hundreds of thousands of our self-checkout transactions. And we were able to see through AI what has transpired over the course of many months of transaction data at self-checkout. And what we were able to see was how much shrink, true shrink we've had Both purpose shrink, unfortunately, and inadvertent shrink by items not being scanned properly or thinking they scanned it and didn't. Long story here to say we've made decisions based on that AI activity to pull out in 9,000 stores and go to that assisted check stand. That should immediately do a lot for us. Putting somebody at the front end of the store, we did in October, immediate will help our shrink. And then lastly, inventory control is going to help our shrink tremendously. I'm an old operator going way back into the 80s as a system manager, store manager, district manager, VP of operations. And I would tell you that any time you have too much inventory in the store, you've got too much shrink and damages. And damages, by the way, is just known shrink. You know, more to come. I believe we're getting our arms around everything and feel very confident about where we're going. And Kelly?

Yeah, no, I think Todd told you all the reasons that we really believe that we're strengthening our foundation for long-term growth. And we really believe that this business is going to return to 10% to 10% plus EPS growth on an adjusted basis over long-term. As we move past some of those significant headwinds that Todd just talked about and getting back to all the mitigating actions that we're doing to to combat those headwinds. You know, we still have a lot of really good fundamentals in this business, even with where we are, and they're only going to get better. We're seeing momentum and growing share. We're growing traffic. We're starting to see healthy comps again. All the while, we've been generating a lot of cash flow. So this model is absolutely intact. And when we think about it, you know, we've still got a long runway for growth. We think 700 to 900 stores. are certainly still in our future. We've got a lot of remodel progress that we have. on our plates as well, and that, as you know, contributes 150 to 200 basis points of comp contributions, so it's still really solid there. And we've got a lot of long-term drivers, some new, which Todd just talked about, making sure that we're reducing shrink. The inventory optimization gives us a lot of efficiencies, both in the store and in the distribution centers. But then we have those long-term drivers that we've had in place for a while and continue to benefit us, the DG Media Network, private brands, global sourcing, category management, all of those things that we've had for a while are certainly still in place. And with that, we expect to continue to generate cash and are looking forward to being able to return that cash back to shareholders, not only through the dividend, which we're doing now, but also through share repurchases over the long term. So lots of reasons to believe back in that 10% to 10% EPS growth, and we feel good about the future.

Our next question is from John Heinbacher with Guggenheim Partners. Please proceed with your question.

Hey, Todd, I wonder if you can address the mini market format, you know, your thoughts on potential, you know, how many stores do you think you could have? You know, we're talking several thousand. And then remind us of the economics of that. I know it's relatively new, but when you think about whether it's sales per store, sales per foot, four wall margins, how that might look versus other formats that you use.

Sure. Thanks for the question, John. And, you know, you and I have been talking about fresh and about, you know, these type of stores for quite a while. And I would tell you, you know, when we put into place here years ago our ability to grow cooler count, to grow fresh produce the way we have over the years very methodically to be profitable at it, as well as then, you know, enabling all of that and soon to be produced in the near future into self-distribution, I would tell you that we feel very good about that. Then as you think about municipalities across this country that are in food deserts and or looking for help in more fresh options, that mini market, as you indicated, our DG market is really a lifesaver for those areas. and a true lifeline for those areas where the grocer had left years ago and were there and can be there to help them. So we believe in that concept greatly. And as you look at the economics, and I'll pass it over to Kelly to add a little bit more color to it, but I would tell you that we like the sales economics there. We do like the four-wall economy. profitability is thrown off by that. As we continue to look at balancing it, I would tell you there are thousands of opportunities for that box across the U.S. Kelly?

That's right. And I think Todd hit on most of it. We really like the IRR. They're certainly at the upper end of what we expect from new stores and a payback of less than two years. We like the top line and the flow through on the operating margin and the floor wall is strong. So we think it hits all cylinders. It's great for the business, but as Todd alluded to, it's also great for our customer.

Our next question comes from Rupesh Parikh with Oppenheimer. Please proceed with your question.

Good morning, and thanks for taking my question. So I have two related questions to gross margins. So, Kelly, you commented on your expectation for the promotional backdrop to revert to pre-pandemic levels. Just curious if you're seeing any changes in the promotional backdrop today or whether that's just an expectation for the balance of the year. And then just on gross margins, we heard a lot about the headwinds. But just one, any granular in terms of whether you expect gross margins to be up or down as we think about 24?

Yeah, Rupesh, let me start, and I'll pass it over to Kelly. As we look out into 2024, we do believe that the promotional environment will have an uptick here. We believe that it'll revert closer to where pre-pandemic levels were. In 2023, we saw an increase as well. So this isn't an immediate left or right-hand turn here. This is what we had anticipated, quite frankly, over the last couple years that as we enter 24, we would probably start to see this. And by the way, I think our CPG partners, and I'm sure you've seen, have signaled this for quite a while now in that they need to move units and through that encourage, if you will, some of that promotional activity to occur. The great thing about Dollar General, you know, we talked about the levels of markdown, The great thing about Dollar General is that with our size and scale, we're able to get a tremendous amount of CPG help when it relates to this higher level of activity. And so our margins usually tend to be okay, if you will, as we move through these higher markdowns, promotional markdowns. But what it also does right now, Rupesh, I believe, is it just gives that customer that's looking for more and more value right now. And by the way, this customer is getting healthier and healthier every day. We're seeing it. She's figuring out her expenses. I think you probably remember I talk about this quite often. It takes her a few quarters to figure out when she gets a shock to the system. And unfortunately, this inflationary environment we've lived in for the last couple years has been a shock and maybe even a double shock. to her but she's starting to figure it out you can see it through the transaction data You can see it on the unit side, and you can see it even on the mixed side. She's starting to pick up a little bit more of that non-consumable type items, that discretionary item, a little bit more each and every passing week that we see. So there's a lot of reason to believe that this markdown activity will actually help encourage her to get out and spend more Dollar General at a time when she needs this most.

And just to kind of give you a cadence just off of exactly what Todd was talking about, you know, as we think about moving through the year, Q1 is certainly our toughest lap from a sales perspective. But as Todd talked about on the markdown side of things, it's really a cadence thing more than just being impactful on gross margin overall for the year. You know, last year our markdown cadence, because it was more clearance-related, was back half heavy. This year, because we're leaning into the promotional cadence, just getting back to more normal rates, you'll see that spread a little bit more evenly over the quarters. The other thing that we're looking at is just annualizing the retail labor hour investment, and so that's going to put some pressure on Q1. And then, you know, we talked about shrink being 100 basis points. or more above in year over year in Q4. And so with that exit rate, you're going to see some pressure in the front half of the year as well. I think importantly, as we think about the cadence overall, the momentum of the actions that we are taking, you know, we're certainly pleased with what we're seeing now, but that's going to continue to build. And we're going to see top line improve as we move through the quarters and a strong bottom line growth as we move into the back half of the year. If we think through just the components, back to your original question just on the gross margin piece, from a headwinds perspective, you've heard us talk a lot about shrink, but we do think with all of the actions that we're taking that we're going to be able to bend that trend as we move into the back half of the year and certainly start to see some benefits there, but really as we move into 2025, we're going to see sales mix headwind probably all year as they make trade off in the aisles, but As Todd alluded to, it's nice to see that we are starting to move that discretionary items as well. And then on the tailwind side, lots of work done in supply chain. You've heard us talk about the efficiencies there and just structural improvement on that. The inventory reductions are going to help, again, with shrink, but also with damages. DG Media Network continues to grow. We continue to like what we see there, as well as private brands. So those are kind of the components as we think about them on margin. And then just a couple things on SG&A. Obviously, retail labor has played into our baseline, but a little bit Q1 impact there just based off of the annualization. And then the incentive compensation will pressure us throughout all of the quarters, and we call that out as a 50-cent headwind. that we're estimating for the current, for the 2024 year. And then depreciation cost increases over the prior year. So those are really the puts and takes as we think about the flow and just the different components of both gross margin and SG&A.

Our next question comes from Kelly Banya with BMO Capital Markets. Please proceed with your question.

Hi. Good morning. Just wanted to talk a little bit more about inventory. I think the total inventory was up and with the decline in discretionary inventory, I think it means that the consumable inventory might have been up maybe 19 or 20%. So I was wondering if you could just talk about that, if that's related to the skew changes And just in general, when do you expect to get into a normalized inventory position really across both categories?

Yeah, no, I think the teams have done a lot of nice work on inventory, and you're absolutely right on what you're thinking about as far as trajectory. I think that they've done a really good job here threading the needle, and so we're seeing both sides of that. We're seeing the non-consumable side inventory drop on a per-store basis, and to your point, we're seeing the consumables increase, but that's us getting improvements in our in-stock, which is helping to drive sales. So they're doing a good job of balancing both of those things. As we move into 2024, inventory continues to be a high priority for us. We see opportunity to reduce our inventory on a per-store basis as we move through. And then, as you know, as we do that, the benefits just continue for us. It lowers our carrier costs. It continues to drive efficiencies both in the stores and in the distribution centers. It takes pressure off of both shrink and damages, and frankly, with the improved in-stocks, it just positions us better to serve our customers.

Our next question is from Chuck Grom with Gordon Haskett. Please proceed with your question.

Hey, thanks for all the color, Todd. I just want to circle back a little bit on Simeon's question, but just look at it from the margin angle. It looks like operating margins this year are going to finish and the high 5%, low 6% if we back out the incentive and cruel. So when you look back to pre-COVID, you guys were running in that, you know, call it high 7, mid 8% range. Just curious, when you look ahead, now that the business is starting to stabilize, how quickly you think you could get back to those levels? And when you look at the P&L, what are the key ingredients to get you there?

Yeah, Chuck, thanks for the question. And I would tell you what we feel really good about right now is getting back to the basics here. All the work that we're doing, as I indicated, we're probably just crossing over that 35-yard line. And so a lot of moving parts yet, but I think you could tell by my voice, and I can tell you if you were here in this building, you could see the enthusiasm in our stores of what is starting to really start to take hold, and that is getting back to the fundamentals that have made this company successful over the years. And a lot of it, the majority of it, is not recreating the wheel, as I've said last quarter. It's taking tried and true items as well as processes and procedures and ensuring compliance. It's that simple in many instances. Now, some of these, though, unfortunately, that had gone awry in the last 12 to 18 months, we really need to take some time to get those back in line. So, you know, those and some of those are margin related and those components of that. But as those start to heal, shrink being the largest one of those, I believe that we'll be in a really good position, as Kelly indicated, especially to start delivering on that EPS growth of 10% plus. that is really some of the good health of the business that would start to show up. I feel good about that long-term algorithm. I feel good about this business, as good as I ever felt. And quite frankly, I believe we have more drivers at our disposal today on driving that top line than we've ever had in the past, especially around the fresh network that we've got, the fresh food, as well as all the work that we've done on NCI over the years. and non-consumables. That is just waiting for the customer to come back in. And as I indicated earlier, we're starting to see glimmers of her starting to come back in to that discretionary side. And we stand ready, willing, able with inventory, fresh inventory to get that done. So stay tuned. You know me, we're not going to stand still. We're going to push hard and get this thing moving as fast as we can.

And we're off to a great start already here.

Our final question is from Corey Tarlow with Jefferies. Please proceed with your question. Great.

Thank you and good morning. You've seen now positive traffic for two quarters in a row, I believe. I was curious to get your thoughts and within your outlook what's embedded for traffic and ticket within your guide. And then if you could also maybe just touch on what you're expecting ahead from a wage standpoint and what's embedded in your guide as well there. Thank you so much.

Yeah, sure. I'll start and pass it over to Kelly. Yeah, the very back half of Q3, we started to see some good glimmers of positive traffic. And then as we moved through Q4, we saw that sequentially increase. And not that we're given Q1 guidance, but that's continued in the Q1. And so we feel very good about what we're seeing on that traffic side. And we believe, again, by all these actions we're taking on getting back to the basics should manifest itself in strong traffic growth as we continue to move into the quarters ahead. And that's why the comp guidance that we gave is so important because we believe that we can see that positive traffic. Not only that, but all the work that we're doing to get back to basics here, get in stock, not only helps that traffic, but what we're starting to see is and gives us confidence is that for the first time in many quarters, we're starting to see that trade down come back in. And we hadn't seen that for a few quarters. And quite frankly, it's been across every cohort of customer that we track. So not only that higher income, all the way down to the lower income, we're seeing share gain. So great to see that. That means the work that we're doing is resonating and should also mean and manifest itself into long-term growth on that top line.

Absolutely right. And then on the wage side of things, I'll tell you, we feel really good about our wages. We've increased wages almost 30% since 2019 and feel we're in a good position there. We're not seeing a lot of stress on the wage front, so a more normalized annual wage growth is what we're expecting. And then with all of the investments that we've made in the labor hours, we feel like we are well positioned on that front in 2024. And all of that's considered in the guidance that we gave, so feel good about that as well.

This concludes today's conference.

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