Dollar General Corporation

around what we're seeing and hearing from our customers. The majority of them state that they feel worse off financially than they were six months ago, as higher prices, softer employment levels, and increased borrowing costs have negatively impacted low-income consumer sentiment. As a result, Our core customer, who contributes approximately 60% of our overall sales, comes predominantly from households earning less than $35,000 annually. Inflation has continued to negatively impact these households, with more than 60% claiming they have had the sacrifice on purchasing basic necessities due to the higher cost of those items, in addition to paying more for expenses such as rent, utilities, and healthcare. More of our customers report that they are now resorting to using credit cards for basic household needs, and approximately 30% have at least one credit card that has reached its limit. And in our latest survey, 25% of our customers surveyed noted they anticipated missing a bill payment in the next six months. While middle and higher income households are seeking value as well, they don't claim to feel the same level of pressure as low income households. As customers have felt more pressure on their spending, we have also seen corresponding elevation in the promotional environment beyond what we had anticipated coming into the year. Importantly, we continue to feel very good about our everyday low price position relative to competitors and other classes of trade. However, the increased promotional activity has pressured both sales and gross margin, and we anticipate this will likely continue for the duration of the year. That said, we remain committed to our Back to Basics strategy, which focuses on controlling the things that we can control, including a timely and accurate supply chain, in-store execution, and customer-centric merchandising. With this in mind, we have already begun taking decisive action to respond and strengthen our position over the back half of the year. I want to take the next few minutes to update you on our Back to Basics progress. which is foundational to our future. And then I will discuss the actions we are taking to build on that progress and deliver a stronger customer experience. I will start with our stores where everything begins and ends for our customer. Our efforts in the stores have centered around further enhancing the customer experience to deliver the value and convenience they expect in a clean and friendly shopping environment. We have increased the employee presence at the front end of our stores with our associates committed to providing friendly welcome and elevated level of engagement to our customers while also facilitating a positive checkout experience. We have also focused labor hours on perpetual inventory management in our stores in an effort to significantly improve our in stock levels and support our sales growth. These efforts have paid dividends as we continue to see year over year improvements in our in stock levels. Our supply chain and merchandising teams have also contributed to the in store progress by helping to simplify operations for our teams, which should enhance both the associate and customer experience in our stores. All of these improvements have continued to drive lower year-over-year turnover at all levels within our retail operations, including regional director, district manager, store manager, assistant store manager, and sales associates. We are proud of the progress in the stores and pleased to see our actions continue to resonate with our team in the field as well as with our customers. And we are working hard to continue to advance our progress and further elevate the experience within our stores. 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 focused efforts here have led to significantly higher OTIF levels compared to the same time last year, and we are pleased with what we have seen both in our traditional and fresh supply chain. We have also made good progress in optimizing our distribution capacity. As a reminder, we had previously announced plans to close 12 temporary facilities by the end of the year. We have already exited 11 of these buildings and now believe we can close at least two more by the end of this year. While closing the less efficient temporary facilities, we have built and opened two new permanent distribution centers in Arkansas and Colorado. We expect both to ramp up operations in the coming months and to ultimately contribute to a reduction in STEM miles and lower transportation costs over time. Finally, we are undertaking the first full-scale refresh of our sorting process within our distribution centers since the launch of our Fast Track initiative in 2017. As a reminder, the ultimate goal of this effort is to enable our store teams to stock shelves more quickly, which should drive greater on-shelf availability for our customers and ultimately support ongoing sales growth. We have made significant progress on this front, And as planned, we are on pace to complete this work by the end of the year. Overall, we remain focused on enhancing the agility of our supply chain, allowing us to meet changing demands and respond quickly to challenges, all while keeping costs low, driving greater efficiencies, and further improving the experience for our store teams and customers. Finally, I want to provide an update on getting back to the basics of merchandising. Providing a meaningful value to our customer continues to be a top priority. We have a multifaceted approach to deliver that value, including a strong everyday low price on national and private brands, compelling promotions on sales events, and low opening price points, including approximately 2,000 items at or below $1 every day. We have also continued to make strong progress reducing total inventory this year, which Kelly will discuss in more detail in a moment. In 2024, we began working toward a net reduction of approximately 1,000 SKUs within our chain by the end of the year, and we are well on our way to meeting that goal. Finally, our merchants have done a fantastic job working with our operators to reduce activity and simplify work inside the stores. For example, we have reduced the number of floor stands by approximately 25% through the first half of the year, and we anticipate removing more than 50% by the end of the year. Additionally, we have reduced the number of times we rotate some of our displays, allowing our store teams to spend more time engaging with our customers. Collectively, these actions are designed to save time within our stores for our teams and ultimately result in an improved associate and customer experience. Overall, we are making nice progress, as you have heard, and we are executing on the goals we have set for our team. And importantly, we believe we will continue advancing these efforts as we move throughout the remainder of the year. Moving forward, we believe our back-to-basic actions will drive improvements in customer satisfaction, including on-shelf availability and convenience, further enhance the associate experience in stores, including improved employee engagement and retention, and ultimately drive improvements in financial results in 2025 and beyond. However, as I previously mentioned, we are not happy with our Q2 financial results. We know the retail landscape has continued to evolve in terms of the promotional environment and financial constraints felt by our customers, and we are taking immediate action to respond to serve them while also positioning the business for growth and value creation. With all of that in mind, we are increasing our investment in markdown activity in an effort to support our customers, further drive customer traffic, and improve sales. We are investing from a strong everyday price position to further support our customer and maintain a favorable competitive positioning. We believe this investment will work in conjunction with our back to basic efforts to further enhance our value and convenience proposition. In summary, I want to reiterate that we are pleased with the operational progress we're making and feel good about the actions we are taking to build on that momentum. We need to be at our best for our customers in times like this, and we are excited about the opportunity to serve them. We have a strong track record of delivering exceptional value, and we have seen that when we do so consistently, we build strong brand loyalty that contributes to healthy share gains over the long term. And With store locations within five miles of approximately 75% of the U.S. population, we are uniquely positioned to serve customers and communities with value and convenience. I am confident this team will continue to rise to the occasion and seize the opportunities in front of us to further enhance the way we serve our customers, improve our financial results, and create 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's taking 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 the second quarter, gross profit as a percentage of sales was 30%, a decrease of 112 basis points. This decrease was primarily attributable to increased markdowns, increased inventory damages, a greater proportion of sales coming from the consumables category, and increased shrink. These factors were partially offset by a lower LIFO provision. With regards to markdowns, we are now seeing promotional levels greater than we had anticipated coming into the year. As Todd noted, customers are increasingly seeking value in their purchasing behavior, in addition to an overall increased promotional environment. Shrink was a year-over-year headwind of 21 basis points in Q2, which was in line with our expectations coming into the quarter. And I want to note that while shrink continues to be a significant headwind, we are pleased with the progress we're making and believe our actions, including our self-checkout conversions, are having a positive impact. Turning to SG&A, it was 24.6% of the percentage of sales, an increase of 57 basis points. The primary expenses that were greater percentage of net sales in the current year period were retail labor, depreciation and amortization, store occupancy costs, and utilities. These factors were partially offset by a decrease in incentive compensation. Moving down the income statement, operating profit for the second quarter decreased 20.6% to $550 million. As a percentage of sales, operating profit was 5.4%, a decrease of 168 basis points. Net interest expense for the quarter decreased to $68 million compared to $84 million in last year's second quarter. Our effective tax rate for the quarter was 22.3% and compares to 22.9% in the second 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. Finally, EPS for the quarter decreased 20.2% to $1.70. Now turning to our balance sheet and cash flow. Merchandise inventories were $7 billion at the end of second quarter, a decrease of 7% compared to the prior year, and a decrease of 11% on a per store basis. Notably, total non-consumable inventory decreased 13% compared to last year and decreased 17% on a per store basis. Importantly, we continue to believe that the quality of our inventory remains good. The team has done a nice job reducing our overall inventory position while simultaneously optimizing our mix and driving higher in stock levels. We will continue to focus on maintaining the appropriate balance of mix of inventory to drive sales while also mitigating shrink risk and improving our working capital. The business has generated cash flows from operations of $1.7 billion year to date, an increase of 127%, as we continue to improve our working capital position primarily through inventory management. Total capital expenditures for the 26-week period were $696 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 returned cash to shareholders through a quarterly dividend of 59 cents for common share outstanding for a total payout of $130 million. Now I want to provide an update on our financial outlook for fiscal 2024. On the top line, we've updated our guidance to reflect our second quarter results, as well as our expectations that the customer will continue to feel financial pressure for the duration of the year. And the promotional environment will remain elevated beyond what we had initially anticipated. With that in mind, we now expect net sales growth in the range of approximately 4.7% to 5.3%, and same-store sales growth in the range of approximately 1% to 1.6%. Turning to growth margin, we expect additional pressure as a result of the increased promotional markdown activity that Todd noted, as well as increased sales mix pressure due to the customer's need to prioritize their spending on the consumables category. With regard to damages, our guidance now assumes no improvement in the back half of the year, though we are focused on addressing this headwind through our continued emphasis on getting back to basics. And while we expect shrink to be a headwind for the full year, our results from the second quarter, as well as positive trends and other metrics that are highly correlative to shrink, including inventory reductions, supporting our belief that we are moving in the right direction to continue mitigating this headwind. Looking ahead, we are cautiously optimistic that we will see shrink begin to turn to a tailwind later in Q4 and then become a more material tailwind in 2025. Within SG&A, we are seeing an elevated rate of maintenance expense, particularly with HVAC units and coolers during the summer months. We're taking steps in the back half of the year to be more proactive in addressing these opportunities in order to provide a more consistent customer experience across our store footprint, while also supporting ongoing sales growth. As a result, we expect incremental pressure from the increased repairs and maintenance expense to continue within SG&A in the back half of the year. Finally, we are also seeing pressure from wage rate inflation closer to approximately 4% this year, which is higher than was contemplated in our initial guidance for the year. With all of this in mind, we are updating our EPS guidance and now expect to deliver EPS in the range of approximately $5.50 to $6.20. This guidance now assumes an effective tax rate of approximately 23%. We also continue to anticipate capital spending in the range of $1.3 to $1.4 billion as we invest to drive ongoing growth. This capital spending remains aligned with our capital allocation priorities, which 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. To that end, we remain on track to deliver on our plans of approximately 2,435 real estate projects this year. including 730 new stores, 1,620 remodels, and 85 relocations. Next in our capital allocation priorities, 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 remains 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. In summary, while we're not satisfied with the financial results for the second quarter, we are pleased with the continued progress in our back to basics work, and we believe we're taking the necessary action to build on this progress and drive the business forward. We remain committed to disciplined expense and capital management as a low cost operator with the goal of delivering consistent strong financial performance. While strategically investing for the long term and we continue to believe that this model is resilient and strong. I want to emphasize that we're confident and excited about the long term future of this business. including driving profitable same store sales and deliver meaningful operating margin expansion while generating healthy new store returns strong free cash flow and creating long-term shareholder value with that i'll turn the call back over to todd thank you kelly as we wrap up let me say again that 2024 is about executing on our foundational back to basics plan

and we are pleased to be on schedule and making great progress against the goals we had previously outlined. We are confident that the actions we are taking will strengthen our foundation for the long term. This team is energized and laser focused on our strategy to restore operational excellence while delivering value for our customers and shareholders alike. I want to close by thanking our more than 193,000 employees for their commitment to fulfilling our mission of serving others. It is a privilege to serve alongside them each and every day, and we are looking forward to all we can accomplish together in the back half of the year. With that, operator, we would now like to open the lines for questions.