Dollar General Corporation

higher income trading customers from adjacent cohorts. We continue to feel very good about our pricing position relative to competitors and other classes of trade. And our value proposition presents significant opportunity for ongoing growth among a wide range of customers. Looking ahead, we expect value to continue to be the most important consideration for customers in multiple income ranges. We know that our customers need us even more when they face economic challenges and we are well positioned to help them stretch their dollar. Before I turn the call over to Kelly, I want to provide a brief update on our shrink reduction efforts, including the changes to our self-checkout strategy that we announced in March. Shrink continues to be the most significant headwind in our business and we are deploying an end-to-end approach to shrink reduction across the organization including efforts in our supply chain merchandising and within our stores to help combat combat issues around shrink our supply chain teams are primarily focused on ensuring deliveries are on time and in full and our merchants on reducing the amount of inventory we carry within our stores we are focusing on delivering a more consistent front end presence, broadening the reach of our high-shrink planograms, which include the removal of high-shrink SKUs, and the elimination of self-checkout in the vast majority of stores. As we discussed on last quarter's call, we converted approximately 9,000 stores away from self-checkout during the quarter. Following the quick and successful conversion of these stores in Q1, and given the ongoing challenge from shrink, we converted approximately 3,000 additional stores away from self-checkout in May, bringing us to approximately 12,000 conversions completed in total. While this represents a significant change in our stores, we believe this is the right course of action to drive increased customer engagement, while also better positioning us to begin reducing shrink in the back half of 24 with a more material positive impact expected in 2025. Moving forward, we plan to have self-checkout options available in a limited number of stores, most of which are higher volume and low shrink locations. Overall, we are pleased with the results and progress across the business during the first quarter, which I will discuss in more detail later. We have a lot of opportunity ahead of us, and this team is excited about the work we are doing. We have a long history of serving customers in a variety of economic environments, thanks to our distinctive combination of value and convenience. I also want to note that we recently published our annual Serving Others report, which provides several important updates on our ongoing ESG efforts and goals. We recognize the great responsibility we have as an essential partner to the communities we call home and are excited about the many ways we are able to serve our customers, associates, communities, and shareholders. And with everyday low prices, in store locations within five miles of approximately 75% of the U.S. population, we are uniquely positioned to serve customers and communities across the country. We remain focused on getting back to the basics of Dollar General as we look to enhance the way we serve customers, further develop and support our associates, and create a long-term shareholder value. With that, I will 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, 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 Q1, gross profit as a percentage of sales was 30.2%, a decrease of 145 basis points. This decrease was primarily attributable to increases in shrink and markdowns, a greater consumable sales mix, and lower inventory markups. These were partially offset by a lower LIFO provision. Shrink continues to be our most significant headwind and was 59 basis points worse in the first quarter compared to prior year. As Todd noted, we are taking multiple actions aimed at reducing shrink, and I'll discuss our expectation for this headwind for the remainder of the year in just a bit. With regards to markdowns, we're seeing promotional levels more similar to 2019 levels as we anticipated coming into the year. As Todd noted, customers are seeking value, and we saw strong take rates on promotional items during the first quarter. Turning to SG&A, it was 24.7% as a percentage of sales, an increase of 97 basis points. This increase was primarily driven by retail labor, depreciation and amortization, incentive compensation, and repairs and maintenance. Moving down the income statement, operating profit for the first quarter decreased 26.3% to $546 million. As a percentage of sales, Operating profit was 5.5%, a decrease of 242 basis points. Net interest expense for the quarter decreased to $72 million compared to $83 million in last year's first quarter. Our effective tax rate for the quarter was 23.3% and compares to 21.8% in the first quarter last year. This higher rate is primarily due to the effect of certain rate-impacting items on lower earnings before taxes and expense recognition attributable to stock-based compensation. Finally, EPS for the quarter decreased 29.5% to $1.65, which exceeded the high end of our internal expectations. Turning now to the balance sheet and cash flow. Merchandise inventories were $6.9 billion at the end of Q1, a decrease of 5.5% compared to prior year and a decrease of 9.5% on a per-store basis. Notably, total non-consumable inventory decreased 19.1% compared to last year and decreased 22.5% on a per-store basis. The team continues to do great work reducing our overall inventory position while simultaneously optimizing our mix and driving higher-end stocks. We're pleased with the significant progress on this important goal, which not only frees up more cash in the business, but also helps to mitigate further shrink risk. And importantly, we continue to believe the quality of our inventory remains good. The business generated cash flows from operations of $664 million during the quarter, an increase of 247% as we improved our working capital primarily through inventory management. Total capital expenditures were $342 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 return cash to shareholders through a quarterly dividend of 59 cents per common share outstanding for a total payout of $130 million. Overall, we're pleased with our progress and proud of these results, including gains in customer traffic and market share, significantly lower inventory levels, and improved cash flow from operations. Moving to our financial outlook for fiscal 2024. While it's still early in the year, we believe our positive first quarter results reinforce the importance of our stores to the communities we serve, as well as the progress of our back to basics work. With that in mind, we're reiterating our financial guidance for 2024 and continue to expect 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 EPS in the range of $6.80 to $7.55. This guidance continues to assume an estimated negative impact to EPS of approximately 50 cents due to higher incentive compensation expense and an effective tax rate in the range of approximately 22.5 to 23.5%. We also continue to anticipate capital spending in the range of $1.3 billion to $1.4 billion as we invest to drive ongoing growth. We continually evaluate and seek to optimize the use of this capital. And as a result, we have updated our expectations for real estate projects in 2024. We now expect to remodel approximately 1,620 stores this year. compared to our previous expectation of 1,500 remodels. To facilitate this increase in remodels, we're reducing the number of planned new stores to 730 compared to our previous expectation of 800 new stores. We continue to expect to relocate 85 stores. In total, this increases our expected total real estate project count from 2,385 to approximately 2,435. We're excited about this increase in projects and the expanded investment in our mature stores, and we believe this is an appropriate reallocation of our capital. As a reminder, our capital allocation priorities are unchanged, and we believe they continue to serve us well. 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. Finally, although our leverage ratio is currently above our target of approximately three times adjusted debt to adjusted EBITDA, 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 BAA too. Now, let me provide some additional context as it relates to our outlook for 2024. Our customer continues to be very value driven, and we anticipate they will continue to be price sensitive as we move through the year. With this in mind, we expect sales mix pressure to be above our original expectation. And as I mentioned earlier, we have seen and continue to expect the promotional environment reversion to pre-pandemic levels as we move throughout 2024. As such, we expect our promotional markdown headwinds to gross margin will continue at least through the first half of the year. As Todd noted, shrink is currently trending worse than we initially expected coming into the year. And we now expect this headwind to be greater in 2024 than what was originally contemplated in the financial guidance we provided on our earnings call in March. We're taking aggressive and decisive action to mitigate this challenge. And we're expecting to see improvement later in the back half of 2024 than we had previously anticipated and more significantly into 2025. Turning to SG&A, Our expectations are relatively unchanged from what we previously provided on our Q4 call. We continue to anticipate a significant headwind this year from the normalization of incentive compensation in 2024, as well as an ongoing headwind from depreciation and amortization. While we don't typically provide quarterly guidance, Given the somewhat atypical cadence of this year and some of its specific headwinds, we're providing more detail on our expectations for the second quarter. To that end, we expect comp sales to increase in the low 2% range in the second quarter, with EPS in the range of approximately $1.70 to $1.85. We're pleased with the solid start to our year, including exceeding our top and bottom line expectations for first quarter. We believe our actions are resonating with our customers, strengthening our competitive position and reinforcing our foundation for future growth. We remain committed to maintaining our discipline and 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 continue to believe that this model is resilient and strong. We're excited about the long-term future of this business, including plans to drive profitable same-store sales and meaningful operating margin 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. Our focus continues to center on our four key 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. As we have discussed to advance these priorities in the near term, we have implemented a refreshed approach to getting back to the basics to enhance 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 supply chain, stores, and merchandising. I will start with our stores where everything begins and ends for our customers. As a reminder, we have prioritized increasing the employee presence at the front end of our stores to provide a friendly welcome and elevated level of engagement to our customers, while also facilitating a positive checkout experience. As we have continued to move away from self-checkout in the majority of our stores, we believe this focus is even more important in serving our customers and supporting our sales growth. We have additionally focused more of our labor hours on perpetual inventory management in our stores by adding specific inventory management shifts and specified and specialized inventory training in each store. Our customers are taking note of these efforts as we have seen a significant improvement in their perception of our in-stock levels, which we believe is contributing to our growth in customer traffic, market share, and comp sales. Finally, we have also taken a significant action to make it easier to operate our stores while also enhancing the overall experience for associates and customers. Our supply chain and merchandising teams have made significant strides in serving our stores in addition to the work we have done in the field, such as reducing district manager spans of control, simplifying and eliminating certain activities, and reducing inventory. we continue to focus on reducing store manager turnover, which is correlated to sales and shrink results in our stores. Notably, while we still have work to do, we are seeing year-over-year reductions in turnover at all levels within our retail operations, including regional director, district manager, store manager, assistant store manager, and sales associate. We are proud of this progress and excited to see our actions resonating with our team in the field. Overall, we believe the actions in our stores will drive improvements in customer satisfaction, including customer service and on-shelf availability and convenience, enhance the associate experience in the 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. Our top priority in this area continues to be improving our rates of on-time and in-full truck deliveries, which we refer to as OTIF. Our distribution and transportation teams have taken aggressive action to improve their service to our stores, and these efforts have led to significantly higher OTIF levels compared to the same time last year. When we began our back to basics work last year, we identified an opportunity to exit 12 temporary warehouse facilities, which would lower cost and improve inventory flow throughout our supply chain. Since that time, We have exited seven of these buildings and are in and on track to exit the remainder in 2024. In conjunction with these moves, we are making great progress on our permanent distribution centers in Arkansas and Colorado, both of which are scheduled to open later this year and which should contribute to a reduction in STEM miles and lower transportation costs over time. Finally, we have also begun the first full-scale refresh of our sorting process within our distribution centers since the launch of our fast track initiative in 2017. Work has begun on all 18 of our dry facilities with four already completed. We are making quick progress on the others and believe we will finish this work by the end of the year. Once we conclude the restore process, we believe our store teams will be able to restock shelves more quickly, ultimately driving greater on-shelf availability for our customers and increased sales. Ultimately, we believe these actions will enhance the agility of our supply chain, allowing us to meet changing demands and respond quickly to challenges, all while driving greater efficiencies and a further improved experience for our store teams and customers. Finally, I want to provide an update on getting back to basics and merchandising. Our team's top priority is always delivering value to the customer, and we continue to innovate on ways to provide the products they want and need at affordable prices. These basics are important to our customer, which is why we remain committed to a strong private brand offering, affordable national brands, and the $1 price point. Despite the inflationary pressures we have experienced over the last year, we continue to carry approximately 2,000 items at or below the one dollar price point in the majority of our stores as we help our customers stretch their dollar in our stores each and every day. As Kelly noted, we also continue to focus on meaningfully reducing our inventory position and the team has done an outstanding job on this front over the past six months. In 2024, We committed to a net reduction of up to 1,000 SKUs within our chain by the end of this year and we are well on our way to meeting that goal. We have already made good progress selling through the remaining inventory and resetting planograms to remove these items from our stores. Importantly, we expect a significant portion of the sales of these secondary and tertiary SKUs will transfer to primary SKUs that will remain in our offering. Finally, our merchants have been working with our operators to identify and execute on simplification opportunities, such as reducing the number of floor stands and monthly end cap resets to reduce activities for our store teams. In conjunction with the work of our supply chain teams to optimize the sorting process, our merchants are also working to increase the number of products that can go straight to the shelf, eliminating the need for extra touches within the store. Collectively, these actions are designed to save time in our stores for our teams and ultimately result in an improved associate and customer experience. As we wrap up this morning, I want to say again how proud I am of the team's great work and commitment to getting Back to Basics as we fulfill our mission of serving others. We are moving with great urgency to implement our Back to Basics plan and execute on the things that matter most to our customers. And while we are pleased with the positive results stemming from many of these actions, We recognize that some of our efforts may take longer to deliver the intended benefit, and we'll continue to work to capitalize on these opportunities. I want to thank our more than 186,000 employees for their ongoing engagement and their passion for our customer. This team is energized and confident in our strategy, both near term to restore operational excellence, and long-term to deliver value for our customers and shareholders alike. I look forward to all that we can accomplish together throughout 2024. With that, operator, we will now open the lines for questions.