Dollar General Corporation (NYSE:DG) Q2 2024 Earnings Call Transcript

Dollar General Corporation (NYSE:DG) Q2 2024 Earnings Call Transcript August 29, 2024

Dollar General Corporation misses on earnings expectations. Reported EPS is $1.7 EPS, expectations were $1.79.

Operator: Good morning. My name is Robert, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Second Quarter 2024 Earnings Conference Call. Today is Thursday, August 29, 2024. All lines have been placed on mute to prevent any background noise. This call is being recorded. Instructions for listening to the replay of the call are available in the Company’s earnings press release issued this morning. Now, I’d like to turn the conference over to your host, Mr. Kevin Walker, Vice President of Investor Relations. Kevin, you may begin.

Kevin Walker: Thank you, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; and Kelly Dilts, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com, under News and Events. Let me caution you that today’s comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, strategy, initiatives, plans, goals, priorities, opportunities, expectations or beliefs about future matters and other statements that are not limited to historical fact. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.

These factors include, but are not limited to, those identified in our earnings release issued this morning, under Risk Factors in our 2023 Form 10-K filed on March 25, 2024, and any later filed periodic report and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today’s date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law. At the end of our prepared remarks, we will open the call up for your questions. to allow us to address as many questions as possible in the queue, please limit yourself to one question. Now, it is my pleasure to turn the call over to Todd.

Todd Vasos: Thank you, Kevin, and welcome to everyone joining our call. I want to begin by thanking our team for their continued dedication to serving our customers while executing our back-to-basics plan across the organization. This dedication was on full display at our leadership meeting earlier this month as we had the opportunity to host more than 1,500 leaders of our organization here at Nashville. This event served as a powerful reminder of the passion and talent of this team and the mission of serving others that unites us. On today’s call, I will begin by recapping our Q2 performance, I will then share updates on our back-to-basics work as well as an update on our plans for the remainder of 2024. After that, Kelly will share the details of our Q2 financial performance as well as our updated financial outlook for the full year.

Turning to our second quarter performance. We continue to make important progress on our back-to-basics plan. However, we are not satisfied with our overall financial results. On the top line, net sales increased 4.2% and to $10.2 billion in Q2 compared to net sales of $9.8 billion in last year’s second quarter. Importantly, despite a weaker sales environment for our core customer than we had anticipated, we continue to grow market share in both dollars and units in highly consumable product sales. Same-store sales increased 0.5% during the quarter, which was below our expectations. The increase was driven by a 1% growth in customer traffic and was partially offset by a 0.5-point decline in average transaction amount, which was driven by lower average unit retail price per item.

The comp sales increase was driven entirely by the growth in our consumable category, as customers continue to focus their spending on the items, they need at most for their families. This growth was partially offset by declines in our seasonal home and apparel categories. From a monthly cadence perspective, same-store sales growth was strongest in June before turning negative in July. Notably, the three softest comp sales weeks of the quarter were the last week of each of the calendar months. This pattern suggests that our customers are less able to stretch their budgets through the end of the month. With that in mind, as well as our continued softness in discretionary sales in our own customer data and survey work, we believe the softer-than-anticipated sales performance in Q2 is at least partially attributable to a core customer that is less confident of their financial position.

I want to provide some additional context 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 to 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 health care. 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 the 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 chains. 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 5 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.

Kelly Dilts: 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 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% as a 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 $0.59 per 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 gross 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 customers’ 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 in 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 billion 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 3x adjusted debt to adjusted EBITDAR, 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. 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 actions 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.

Todd Vasos: 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 have 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.

Q&A Session

Operator: Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Michael Lasser with UBS. Please proceed with your question.

Michael Lasser: Todd, the market is saying that Dollar General and the small box value model is to simply structurally challenge either because there’s too many stores, it’s not as sufficiently exposed to the online channel or not attracting enough incremental customers perhaps due to competition. So why is that wrong? And as you are trying to invest in markdown and promotions to regain customers, how do you build back the margin over time? Is it simply a function of leveraging sales growth?

Todd Vasos: Thank you, Michael, and I appreciate the question. Yes, I fundamentally — we fundamentally don’t believe at all that the model is structurally challenged. But there are challenges to the business as this quarter indicated. Let me first start by saying that our new store productivity as well as our strong returns in new stores continue to serve us well. We continue to gain market share with these new store openings. And cannibalization with these new stores continue to be very much in line to where it’s been historically. So, we don’t believe that by slowing down to any large degree new stores would be the answer here. What we do believe is that this quarter, in particular, with a 0.5 point of comp versus last quarters of a fairly strong 2.4% comp, as I look at what transpired here, I would tell you that it appears to us very strongly that, one, this lower end consumer continues to be very much financially strapped especially as it relates to her ability to feed our families and support her families.

As I look at our results throughout the quarter, I would tell you that, from our perspective, the last week of the calendar month of each of the calendar months was the weakest by far. When you couple that with private brand being as strong as it is for us, our value, value, which, as you probably recall, Michael, is our $1 or below offering inside of our store, which by the way, still 2,000 items, we’ve never walked away from that $1 price point. It is, by far, the strongest planogram that we have out there. And I would tell you that all those points would indicate that this is a cash strapped consumer right now, even more so than what we saw in Q1. Now what we also saw was that while we’re not losing share, we’re actually gaining share against all classes of trade in the consumable realm, what we did see in the quarter, which was different than last quarter, is the available share to take, if you will, out there from other cohorts.

We didn’t get our fair share of that. Now we didn’t lose, right? We’re not seeing any one competitor, mass or anywhere else, take our core customer. But what we did see was, at least in this quarter, the mass channel, especially those that are down south actually did a lot better in gaining the share that was available in the marketplace. We didn’t get our fair share of that. So, what are we going to do about it? Well, it’s exactly what we talked about in our prepared remarks. We go on the offense, and we’ve done that very successfully here over the years, Michael, as a merchant. And now as the CEO of this company, we know how to do this. And we’re ratcheting that up as we speak. We believe that the share that’s available out there, we have every right to get more than our fair share of that out there.

So, we’re working that really hard, and you heard that in our prepared remarks. So, I’d say that this box, this company and the small box in general is very much alive and well. We’re just going through a little bit of a transition period and a transformation, as you know. And it’s never usually a straight line to the top when you do these, right? And so, a few bumps in the road, but we feel that we know exactly how we can go about garnering that share that’s available out there. And Kelly, you may want to take the second part.

Kelly Dilts: Yes, absolutely. So yes, just how do we build that margin back over time? I think it’s important to call out, one, you nailed it. It’s a softer sales environment. So, with the top line, that does put pressure on our fixed cost leverage, specifically labor and rent and those type of things as you well know. But as Todd talked about, I think, in the near term, one is just going on the offense and taking the markdown investment that we need to take on a go-forward basis to drive sales and to be there for our customer. And to kind of put that in context, I would say that what we’re looking at in this back half is going to be markdown rate to what we saw last year in the back half as well. So more than we had anticipated, but absolutely the right decision and not necessarily one that we have to think about over the long term as that can come back in line when circumstances change.

The other piece of this, and we’ve talked a lot about it, obviously, is shrink and mix headwinds. And so, we’re certainly experiencing those. Although, I think we have a lot of good news here to report on the shrink side of things starting to see that trend bend. It just takes a while to flow that through the financial statements. And then, the damage piece of this as well is putting a little pressure on the second half. But again, all the things that we’re doing on a back-to-basics efforts are going to help to mitigate that as well as just having a focused team on that. So, I think those are kind of the near-term things that we’ll be dealing with that will get in line. And then over the long term, our underlying long-term drivers are still in place.

We still have a long runway for new store opportunities with high returns. We have higher returns with the opportunities that we have with our existing stores. And then you saw, this period, our cash from operations was up 127%. So, we are still generating a significant amount of cash flow, which gives us the ability to invest in the business. So, we feel good about the long-term potential of getting those margins back over time.

Operator: Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question.

Simeon Gutman: I have two parts in one question. Todd, I want to ask if this transition period changes the way you think about reinvestment now going forward, thinking about all the levers of pricing and merchandising and labor, meaning that even if the business comes positive, that margins just stay subdued for an extended period of time while you get all the pieces in order. And then, the second part of it is, are there any cohorts of stores where it would make sense to rationalize them because they’re under comping and/or they’re margin dilutive to the overall chain?

Todd Vasos: Yes, Simon, thanks for the question. And as we continue to move through this transformation period, obviously, as we said, it’s never a straight line to the top. There’s bumps in the road. The margin is one of those. As we’ve indicated right from the start, the biggest opportunity we have in the margin that’s a differentiator than just a few years ago is in that shrink area. We believe we’ve got ample opportunity there to get our shrink back in line. As Kelly indicated in her prepared remarks, we’re starting to see some benefit from all the work that we’ve done around that. And we still very much believe that it will turn to a tailwind as we move into Q4 and then much more substantial of a tailwind into ’25. Now shrink is a constant battle, it’s work every day, but it’s that pick and showable work that we know how to do, and we know how to do very well here at Dollar General.

The other thing I do want to point out, Simeon, is that, as we continue to move, I would tell you our back-to-basics plan has started to really show some signs of life here. And when I say that, when I look at our operations, as an example, we’ve been using a football analogy for the last few quarters. And I would tell you that we, across the 50-yard line last quarter in Q1, I would tell you, we’re around the opponents 40-yard line at this point, which is good to see. We’re making progress. We’re making progress in a lot of fronts there, one being our staffing at the front ends, the reduction takeaway of the self-checkouts and moving those to assisted lanes, it was in full swing. Our customers are telling us they like it a lot more. Not surprising.

They like the interaction instead of having to check out themselves. And we like what we see on that front. And I believe that’s what’s starting to show up on our shrink results as well in a positive manner. The other thing that we’re working hard on, we’re starting to see that shrink traction, as I talked about. We’re also starting to see in-stocks better each and every quarter, really each and every period as we continue to move through. So, in-stocks are getting better. Our turnover inside of our stores at all levels of our operating group is getting better from our Regional Director, DM, Store Manager right down to the sales associates inside of our stores, which is usually a true testament that we’re doing the right things for our employees, which in turn is normally the right thing for our customers.

So, we believe that those are all green light. On our merchandising side, I’m very proud of the inventory reductions that took place on a same-store basis, especially 11% down in total inventory on a same-store basis, 16% down on a same-store basis in non-con and 7.6% decrease per store on a per store basis in consumables, all while driving greater share gains through our consumable categories. Where we’re working hard is to continue to engage that consumer now through this promotional lever. We have a very strong everyday price out there. This will just lever on top of that. This will just lever on top of that. The other thing that I do want to talk about as well is that we’ve reduced — in the process of reducing the 1,000 SKUs. That continues to do very well.

We’re well on track and we’ll hit our goal by the end of this fiscal year in reducing the 1,000 core SKUs. And we’re evaluating what that may look like in ’25 for additional opportunities to continue to reduce that inventory level and simplify work at the store level. Off-shelf displays are down by 25%, as you heard in our prepared remarks in the first half, going to be down over 50% in the back half. And of course, all the work simplification that we’ve done, I think, is going to be very important. And lastly, our supply chain continues to really do well. When I think about where we are in the football field, we are down around the 30-yard line at this point, getting ready to get into the red zone here. And that is a true testament to the hard work of our supply chain, but also a cross-functional work of our operators and our merchants.

Our on-time and in-full rates are exceeding our expectations into this coming quarter. And right now, what we’re working on hard is making sure that we are consistent, right? Because consistency here is going to be the key. If I can deliver on time to our stores consistently, it gives them a full leg up and be able to work that seven-day workflow that we know, when executed at the store level, is a real positive for our stores in serving the customer each and every day. So, a lot of great things are going on. Yes, a little pressure on certain lines. We believe that our guidance is very prudent based on where that consumer is right now, and our transformation progress as well as where we want to make sure that we continue to drive that traffic.

Very nice to see a positive 1% traffic gain still for the quarter. We’re not happy with just the 1%, we’re going to drive for more. But we know how to do this, Simeon. We’ve done it. We’ve proven that once we continue to back that consumer through tough times, she is there when the better times come and she is very sticky. And that’s exactly how we’re approaching it this time around.

Operator: Our next question comes from Matthew Boss with JPMorgan Chase. Please proceed with your question.

Matthew Boss: Great. So, Todd, just to take the cadence of comps, maybe a step further, could you elaborate on underlying traffic versus ticket as the quarter progressed? Any concerns that are now more top of mind today relative to, call it, three months ago from your survey work on the low-income consumer? And have you seen any improvement in August comps?

Todd Vasos: Yes. I don’t want to talk too much about August, but I would tell you that what we’ve seen in — so far in this quarter is in our guidance and feel that we’re on track there. So very much I believe in that guidance that we put out there. Now I would tell you that while we’re happy with the 1% that we gained on traffic. We believe there’s more to gain there. And as I indicated in my first question answer there, I would tell you, Matt, that what we saw is the guys down in Bentonville are doing a pretty nice job in garnering the available traffic that’s out there from other retailers. We haven’t seen a deterioration on our side. But what we saw in Q1 was a greater pickup from the available share maybe from other classes of trade, grocery and drug.

While we got some of it, we didn’t get our fair share, at least what I would consider to be our fair share. And that’s why we’re attacking this and going on the offense. We believe that as we continue to be there for our customer in this regard will help us gain momentum into the back half of the year and hopefully a springboard into 2025. And Kelly, you may want to elaborate a little bit on the other side.

Kelly Dilts: Yes. No, absolutely. So yes, taking a look at second quarter comps on a cadence basis, so June was our strongest month and then it started to turn negative in July. And so, what we really saw kind of in that mid-quarter time frame just a general step down, and it was all around the transaction side of things to Todd’s point. So, when we think about what we are contemplating as we went into Q2, I would tell you that on the basket side, we were pretty much in line with our expectations. It was on the transaction side, which is what the teams are going to run hard after driving sales and making sure that we get the customers the value that they need right now. So that’s really the cadence. The other thing I think that’s really important to point out is the of each of the calendar months were the softest comp weeks of the quarter.

And for us, that really indicates that she started to run out of money by the end of the month. And what we saw in some of our survey work is just that our core customer says that they’re feeling worse off financially than they did six months ago. And so, again, it just goes back to the point of in this back half, making sure that we’re playing offense on driving sales and taking the markdown investment that we need to do.

Operator: Next question comes from Rupesh Parikh with Oppenheimer. Please proceed with your question.

Rupesh Parikh: I have two quick ones. So first, on the guidance, is there any more conservatism than normal with this particular guide? And then, second, as you look at the promotional offers that you’ve done, I guess, in Q2 and then what you plan to do in the back half of the year, how is the consumer response versus your expectations versus what you typically see when you run these increased promotions and markdowns?

Kelly Dilts: Thanks, Rupesh. Yes, no, to give a little bit color on the guidance, let me walk through a couple of things. I’ll tell you that, in the back half, it was primarily of obviously the softer sales trends that we saw in Q2, but also the impacts associated with those sales. So that sales mix-related margin and then the markdowns that we’ve been talking about. There’s a lot of other puts and takes that we talked about in our prepared remarks, but those are really the primary drivers. So, to that, just to give you a little bit of color on the sales side, what I’ll tell you, while we’re doing all the right things to strengthen our foundation through our back to basics and the markdowns that we’re looking ahead for our core customer is obviously struggling.

And so, this guidance really as more of a macro neutral to a slight softening of that consumer. And so, the low end of the guidance takes that into consideration. So, we are looking at it a little-different ways than what we may have historically. I think that’s important to call out as well. So, on that lower end range, we’re looking at a comp similar to the comp that we had in the second quarter, whereas the higher end of the range would assume that there’s some acceleration. But I think it’s important to unpack that a little bit. In analyzing where we’re heading in the second half, the one- and two-year trends have a lot of noise in them just given the volatility that we had last year and then the recent step change that we had in the middle of the second quarter.

So, if you take a step back, we think really looking at the CAGR from 2019 is probably a more relevant view. And that’s for a couple of reasons. One is, it’s a similar holiday schedule to 2024, which is important. It eliminates that noise of the pandemic and the stimulus as well as inflation as we’ve seen inflation steady a little bit this year. So, we’re really using that kind of as a basis of what we’re looking for. So, with that, on the high end of our ’24 guide, what we’re assuming now is that a stable CAGR rate to 2019 very close to what it was in Q2. So just continue kind of where we are and that the consumer and the environment don’t necessarily get much worse from here. And then on the low-end side of things, it provides for some further softening on our core customers’ ability to spend.

And so that’s how we’re thinking about the potential outcomes of what we’re seeing today.

Todd Vasos: Rupesh, on the other part of the question, as Kelly indicated, we started to see that softening. It was really evident in the month of July. And so, with that being the last period of the quarter, we really started to ramp up our promotional cadence middle of that month, as you would imagine. It takes a little time to get moving, but not as long as it used to because we used our digital tools, which we’ve done a very nice job over the last many years in enhancing those. And so, we were able to go out fairly quickly with some promotional activity, which now has ramped up even further as we moved into August and will continue to ramp up as we move into the third — end of the third quarter and in the fourth quarter of this year.

And I would tell you, just like we anticipated, we’re seeing the response from the consumer. It was almost immediate. She continues to engage, especially with those digital tools. And I would tell you that we’re really good at doing this. We’ve done it many times. We always said we reserve the right to invest in price, and, for us because of our great everyday low price and continue to be in a very great shape there, it’s really that promotional lever that that we reserve the right. And so, we know exactly what the consumer wants and needs. We talk to her each and every quarter, and that’s exactly what we’re offering her right now, and we’ll continue to do so. So, we believe that those promotional cadences will continue to garner more and more customers and more and more transactions as we move through this quarter and into next.

Operator: Our next question comes from Peter Keith with Piper Sandler. Please proceed with your question.

Peter Keith: Todd, in the past, you’ve always talked about how in tough times your customers need you even more, and certainly, this is a tough time with inflation and your core customers are suffering a bit. How come you don’t think you’re seeing the normal share gains or spending behavior from your customers like you have in the past?

Todd Vasos: That’s a great question, Peter. I would tell you a couple of things that we’re noticing. First of all, what we normally say, right, is that during any step change, which we saw in Q2, to Kelly’s point toward the end of Q2, especially, it takes her a few quarters to come out of that, meaning our core customer. What we also see is it takes a quarter or more for the trade-in to come in at a higher rate. Now in saying that what we’ve noticed is the trade-in has been slower to come in to the channel than what we had anticipated and/or have seen in the past. I believe that’s — there’s a couple of reasons why. I think the main reason, and I believe this is true because it appears in every piece of data that we have is that the job market is still pretty decent, right?

It’s not as robust as it was, but also unemployment hasn’t spiked greatly, if you will, in the last quarter or so. Normally, it takes that jolt to get the trade-in to come in at a heavier clip, if you will. Now the middle and the upper middle income are still looking for value. So, I don’t want you to believe that they’re not. But usually, to get them to trade-in at a higher rate, usually takes something a little bit more substantial than we’ve even seen to occur. I’m not suggesting I want to see that happen to customer, but we stand ready and willing to serve her when that happens. The other thing that we’ve noticed is more and more online activity comes from that cohort. Our core customer continues her online journey pretty much the way she was.

It’s pretty static, if you will. But we’ve noticed that middle to upper middle continues to rely on online a little bit more. And so, as that occurs, I believe the trade-in slows a little bit on that side. So, it’s incumbent upon us to take a look at how we offset that piece as well. And I would tell you on that, just stay tuned.

Operator: Our next question comes from Seth Sigman with Barclays. Please proceed with your question.

Seth Sigman: I wanted to follow up on pricing just given the price investments and the comments about the promotional environment being worse than expected. Can you talk about how your competitive price gaps have evolved through this year; however, you look at that? And maybe just elaborate more on the actions that you’re taking? How much of the assortment are you looking to mark down here, maybe the categories that you’re focused on? And I guess just the last piece of that as we try to bridge the guidance, how much of that guidance change reflects those price investments? If I recall, last year, you had about $95 million of markdown impact. It sounds like you’re saying something similar to that, so I just want to clarify, is that another $95 million?

Todd Vasos: I’ll start, Kelly, and I’ll turn it over to you. I would tell you that we feel very good about our everyday price position. As a matter of fact, we track it, and we graph it, as you would imagine, every which way. And it’s fairly flat to where we’ve been over the last many quarters against all classes of trade. So, our everyday retails are in good shape. If you recall, when I came back in, in October last year, I did call that out as one of our shining stars that I found coming back is that our everyday low price was very competitive and continues to be even to today. So that gives us great confidence and a very good springboard to launch this promotional activity that we know exactly how to do, and we’ve done it many times in my time here in the last 16 years to stimulate that customer and to build a bridge the end of the month for our core customer because she’s running out of money.

And while I’m not going to give you the exact playbook because that wouldn’t be too smart, right? But I would tell you that it will be in categories mainly that really drive that traffic for us, but more so, what that customer was looking for to bridge that time. So, if you think about things like the food categories, things like cleaning and paper where she really needs us, again, to bridge her family’s gap at the end of the month, those are those areas that are best suited for this type of activity. And that’s exactly how we’ve approached it in the past and have so far approached it, and we’ll continue to approach it as we move through the back half of the year.

Kelly Dilts: Yes. No. And then just on the markdown investment as we’re thinking about it in the back half. I’ll tell you, it’s not a certain dollar amount that we’re considering. It’s just overall level of promotion and markdowns that we need to take. So similar to kind of what I said before. What we’re expecting is in that second half that the rate would be similar to last year. And then as we think about it more on a full year basis, what that does is get us back into kind of that markdown our promotional range that’s very similar to where it was in 2019. And certainly, from a front half, back half perspective, the back half now would be heavier than the front half of the year.

Operator: Our next question comes from John Heinbockel with Guggenheim Partners. Please proceed with your question.

John Heinbockel: Two quick things. Todd, maybe how do you think about ROI of promotions? And I know a couple of years ago, you did promotions in the fourth quarter to jump start you going into the year — the following year. And I think that lifted comps by a couple of hundred basis points. How do you think about this environment versus that? And then lastly, when I think about, right, your, — the comp that you need to leverage expenses. I think it’s still in the mid-3s. Is there an unlock — a rolltainer-type unlock out there that can move that down materially, or we’re kind of stuck with that 3% plus number?

Todd Vasos: Yes, John, thanks for the question — the two-part question. So, I’ll take the first one, and I will tell you that, yes, for us, as we continue to look at that promotional lever, we always look at what that return would be. And at this point, we believe that it’s our best use of our gross margin because, to your point, what we’ve seen in the past when we’ve done this, and you alluded to one of the times in the past, but there’s been multiple times in, again, the 16 years that I’ve been here. And each of those times came out of that a stickier consumer, right? And so, the return is normally very much intact as we pull out of the heavier promotional activity when the time is right. Now a few years ago as well, as you know, we rationalized how we promote, and so we’re a lot smarter today.

So, utilizing that rationalization approach and tools that we have embedded now in our process, I believe, will help us in this activity to ensure, one, it’s driving the most traffic that we can drive, but also secondly, it is the best use of our spend. Because what we want to be able to do is utilize us to lift all boats as well, meaning not only the promotional pieces, but within those areas that we are promoting, again, food, paper, cleaning, pet, those areas that I talked about earlier, that we see overall lifts in those categories. And that’s what this rationalization of our markdowns in the past have provided for us. So, we’ve got a great book to follow there. And then as it relates to the labor side, labor rates are up a little higher than we anticipated this year.

The hours that we’re providing is right on what we thought. We still feel very good about the hours that are available to our stores to get the job done. But the labor rates were up a little bit more than we had anticipated coming into this year. In saying that, we are in the process right now of our rolltainer sort that you mentioned. The last time we actually did that was in 2017. And you’re right, there was a small step change there in labor. I’m not suggesting that it would be as large as that by any means. But what I am suggesting is that while we feel good about the amount of labor hours we’re using today, I want to continue to feel good about that. And I want our operators to continue to feel good about that. So, utilizing rolltainer store and other things that we’re taking work out of the stores is not to strip more labor out of the stores, but to ensure that they have enough labor to satisfy the customer, give them the best shopping experience possible because we believe right now that is the best use of the labor hours that we have available is to further our back-to-basics work.

So, stay tuned. There’s always ways that we can look at the SG&A lever because it is a lot larger as you would imagine than just the labor side, while labor is a big component of it. So, stay tuned. We’ve got other things that we’re working on that we believe can help modify a little bit of that expense as we move through the back half of the year and into next year.

Operator: Our final question comes from Corey Tarlowe with Jefferies. Please proceed with your question.

Corey Tarlowe: I just wanted to ask on inventory. Inventories are down, yet in-stock levels are up, and seemingly markdown should also be increasing, so unit velocity should increase. So, I’m curious how you think about that dynamic? And then secondarily, consumable sales have continued to increase, but seasonal sales were only down slightly close to flat. I’m curious if you saw anything to call out in that category as well?

Todd Vasos: So why don’t I start, Kelly, and I’ll turn it over to you. Yes. So let me take the second part of that question. As we exited Q2, while we weren’t happy with either side of consumables or our non-consumable business, but to your point, what we saw was a flattish non-consumable business quarter-over-quarter, but a deceleration of the consumable side of the business. And what that really showed was once again that core consumer is very, very price sensitive at this point and looking for value anywhere she can find it. That’s another reason why we’re stepping up that promotional activity to reengage even further that consumable side of the business, which we believe, and we’ve already have started this venture at the end of Q2 and now into Q3, we very much believe and are seeing that engagement start to come back in.

So, as we continue to ensure that we’re there for the consumer, I believe that transition into a little bit more of a promotional environment will continue, but will also continue to pay off for Dollar General. And then as it relates to a little bit of the inventory, before I pass it to Kelly, is I feel very good about the inventory that we’re reducing versus having to restock based on sales. As you saw, we continue to reduce, at the highest level, our consumables business, and that’s usually the slowest turn business as well. And the good thing, as we continue to look forward is, these goods are fresh, they’re clean, and they’re very sellable and, as you can see, are selling. So, it’s good to see that, but I believe it’s also good that we’re seeing some of the reductions to make a little bit more room inside the stores for our customers to be able to enjoy that shopping experience.

Kelly Dilts: Yes. And Todd is absolutely right. So, we feel really good about the quality of our inventory. And I think, and we called it out in the prepared remarks, this team has just done a remarkable job of reducing inventory while improving in-stock that is not easy to do. So, they’re really focused on optimization, and you heard us talk about some investments last year that we put in place in order to help with that. And so, we’re certainly rightsizing what we’re bringing into our distribution centers and then out into the stores. And we have, I would tell you that the biggest unit decrease has been in our chain, which certainly helps with efficiencies and has driven some of the progress that we’ve made down that football field. And now we’re starting to see it in stores as well. And so that’s good to see. So, I would say that this is a real bright spot in the quarter.

Operator: This concludes today’s conference. You may disconnect your lines at this time, and we thank you for your participation.