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.