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Earnings call transcript: Dollar General misses EPS forecast, stock drops

Published 12/05/2024, 11:30 PM
DG
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Dollar General Corporation (NYSE:DG) reported its third quarter earnings for 2024, revealing a slight miss on earnings per share (EPS) compared to forecasts. The company posted an EPS of $0.89, falling short of the expected $0.95. This news has led to a pre-market stock decline of 5.09%, with shares trading at $75.45, a notable drop from the previous close of $79.50. Despite the earnings miss, Dollar General reported a revenue increase to $10.2 billion, surpassing expectations of $10.14 billion.

Key Takeaways

  • Dollar General's EPS of $0.89 missed the forecast of $0.95.
  • Revenue rose to $10.2 billion, exceeding expectations.
  • Stock price fell by 5.09% in pre-market trading.
  • Same-store sales increased by 1.3%.
  • Operating profit decreased by 25.3%.

Company Performance

Dollar General demonstrated a mixed performance in the third quarter of 2024. While the company achieved a 5% increase in net sales, reaching $10.2 billion compared to $9.7 billion in the previous year, its operating profit saw a significant decline of 25.3%, amounting to $323.8 million. The growth in same-store sales by 1.3% was driven by a 1.1% increase in average transaction amounts, although customer traffic only rose by 0.3%. The gross profit margin decreased slightly, reflecting ongoing challenges.

Financial Highlights

  • Revenue: $10.2 billion, up from $9.7 billion YoY.
  • Earnings per share: $0.89, down 29.4% YoY.
  • Gross profit margin: 28.8%, down 18 basis points.
  • Operating profit: $323.8 million, down 25.3%.
  • Merchandise inventories: Decreased 3% YoY.

Earnings vs. Forecast

Dollar General's EPS of $0.89 fell short of the forecasted $0.95, marking a 6.32% miss. This deviation from expectations highlights challenges in cost management and operational efficiency. However, the revenue of $10.2 billion surpassed the forecast of $10.14 billion, indicating strong sales performance despite the earnings shortfall.

Market Reaction

Following the earnings release, Dollar General's stock experienced a 5.09% decline in pre-market trading, with shares priced at $75.45. This movement reflects investor concerns over the earnings miss and the decrease in operating profit. The stock's performance is in contrast to its 52-week range, where it has fluctuated between $72.12 and $168.07.

Company Outlook

Looking ahead, Dollar General forecasts fiscal 2024 net sales growth between 4.8% and 5.1%, with same-store sales expected to rise by 1.1% to 1.4%. The company has updated its EPS guidance to a range of $5.50 to $5.90. Strategic initiatives include the launch of 575 new stores and 4,885 real estate projects in 2025, emphasizing growth through expansion and remodeling.

Executive Commentary

CEO Todd Vasos emphasized the company's commitment to value, stating, "Value always wins." This reflects Dollar General's focus on maintaining competitive pricing. CFO Kelly Dilts reassured stakeholders, "We do think we can get back to that over the time," addressing concerns about profitability and margin recovery.

Q&A

During the earnings call, analysts inquired about the same-day delivery pilot and its potential impact on sales. Discussions also covered the Project Elevate remodeling strategy and challenges related to shrink and gross margin recovery. Insights into customer spending behavior and traffic trends were explored, highlighting the core customer's financial constraints.

Risks and Challenges

  • Supply chain disruptions: Potential delays could impact inventory levels and sales.
  • Market saturation: Expansion into new areas may face limitations.
  • Macroeconomic pressures: Inflation and consumer spending trends could affect sales.
  • Competitive pressures: Maintaining market share amidst growing retail competition.
  • Operational costs: Rising expenses may further compress profit margins.

Full transcript - Dollar General Corp (DG) Q3 2025:

Rob, Conference Operator: Good morning. My name is Rob, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Third Quarter 20 24 Earnings Call. Today is Thursday, December 5, 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 Mr. Kevin Walker, Vice President of Investor Relations. Kevin, you may begin your conference.

Kevin Walker, Vice President of Investor Relations, Dollar General: 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 ks filed on March 25, 2024, and any later filed periodic report

Rob, Conference Operator: and in the

Kevin Walker, Vice President of Investor Relations, Dollar General: 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, CEO, Dollar General: Thank you, Kevin, and welcome to everyone joining our call. We are pleased with our Q3 execution, particularly in light of significant impact of multiple hurricanes in the Southeast during the quarter. Before discussing our results, I want to express my appreciation for our team's tremendous efforts to serve our hometown communities following these storms. As an essential retailer and often the most convenient source of products our customers need, our teams work diligently to reopen the stores as soon as we could safely do so in the impacted areas. In addition, we have helped those in need through the donations to the American Red Cross, donating gift cards and through our own employee assistance foundation.

We further embrace the opportunity to help in recovery efforts by donating truckloads of products in these communities. Kelly will discuss the financial impact of these storms on our results later, but importantly, our thoughts remain with those impacted communities and we will continue to seek opportunities to partner with them in the months ahead. For today's call, I will begin by recapping our Q3 performance. After that, Kelly will share the details of our financial performance as well as our updated financial outlook for fiscal 2024. I will then wrap up the call with an update on our back to basics work before discussing our new same day delivery pilot and our real estate plans for 2025, including Project Elevate.

Turning to our Q3 performance. On the top line, while our core customer remains financially constrained, our results came in near the high end of our expectations for the quarter. Specifically, net sales increased 5% to $10,200,000,000 in Q3 compared to net sales of $9,700,000,000 in last year's Q3. Importantly, we continue to grow market share in both dollars and units in highly consumable products sales during the quarter and also grew market share in non consumable product sales. Same store sales increased 1.3% during the quarter and was primarily driven by growth of 1.1% in average transaction amount, including increases in average items per basket and average unit retail price per item.

Customer traffic also increased 0.3 percent during the quarter. The comp sales increase was driven entirely by growth in our consumable category as customers continue to focus their spending on the items they need most for their families. This growth was partially offset by declines in the home, seasonal and apparel categories. From a monthly cadence perspective, same store sales growth was strongest in October and was positive in all three periods of the quarter. Notably, the last full calendar weeks of both August September were the weakest of the quarter, suggesting that our customers continue to face significant financial pressure as they are less able to stretch their budgets at the end of the month.

While we saw an uptick in pre hurricane sales in the areas forecasted to be impacted, we believe it was largely offset by periods of store closures following the storms. As a result, we believe the net impact of our top line results was immaterial. I mentioned our core customers continue to face significant financial pressure, which is having an impact on our shopping on their shopping behavior. We see this pressure in the timing of their shopping during the month as well as in the mix of products they're buying. We know that they need value and we are working hard to deliver for them every day.

We continue to feel very good about our everyday low price position relative to competitors and other classes of trade. However, the heightened promotional environment persisted throughout the Q3 and we anticipate that it will continue for at least the duration of the year. With that said, we continue to focus on enhancing our unique combination of value and convenience. We believe our results demonstrate that we have made significant progress in our back to basics work, which I will discuss in more detail in just a bit. Importantly, as we continue to improve our execution and enhance our value and convenient proposition, we believe over the longer term, we can capture even more incremental market share, improve our financial results and create long term shareholder value.

Before I discuss our plans to achieve these goals, I'll turn the call over to Kelly to share more on the financial details of our Q3 results.

Kelly Dilts, CFO, Dollar General: Thank you, Todd, and good morning, everyone. Now that Todd's taken you through a few of the top line highlights of the quarter, let me take you through some of the other 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. For Q3, gross profit as a percentage of sales was 28.8%, a decrease of 18 basis points. This decrease was primarily attributable to increased markdowns, increased inventory damages and a greater proportion of sales coming from the consumables category.

These factors were partially offset by higher inventory markups, lower shrink and decreased transportation costs. Shrink was a year over year tailwind of 29 basis points in Q3, which was better than our expectations coming into the quarter. While shrink rates as a percentage of sales continue to be higher than we would like to see in our stores, we are making progress as we work to get closer to pre pandemic levels and believe our actions are having a positive impact. Now turning to SG and A, as a percentage of sales, it was 25.7%, an increase of 111 basis points. The primary expenses that were greater percentage of net sales in the current year period were hurricane related cost, retail labor and depreciation and amortization, partially offset by a decrease in professional fees.

As Todd noted, our stores have been heavily impacted by multiple hurricanes in recent months. While we believe the net impact of these storms was immaterial to both sales and gross margin, they resulted in a negative impact to SG and A of $32,700,000 during Q3. Moving down the income statement, operating profit for the 3rd quarter decreased 25.3% to $323,800,000 As a percentage of sales, operating profit was 3.2%, a decrease of 129 basis points. Net interest expense for the quarter decreased to $68,000,000 compared to $82,000,000 in last year's Q3. Our effective tax rate for the quarter was 23.2% and compares to 21.3% in the Q3 last year.

This higher rate is primarily due to a decreased benefit from federal tax credits offset by the effect of certain rate impacting items on lower earnings before taxes. Finally, EPS for the quarter decreased 29.4 percent to $0.89 Turning now to our balance sheet and cash flow. Merchandise inventories were $7,100,000,000 at the end of Q3, a decrease of 3% compared to prior year and a decrease of 7% on a per store basis. Notably, total non consumable inventory decreased 6% compared to last year and decreased approximately 9% on a per store basis. In addition to the financial benefit to our balance sheet, the significant improvement in our inventory position is having a positive impact operationally in our DCs and is beginning to positively impact our stores as well.

We continue to focus on maintaining the appropriate mix and balance of inventory to improve in stock levels and drive sales, while also mitigating shrink risk and improving working capital. Importantly, we continue to believe the quality of our inventory remains good. The business has generated cash flows from operations of $2,200,000,000 through the end of the 3rd quarter, an increase of 52% as we continue to improve our working capital position, primarily through inventory management. In addition, we repaid our maturing $750,000,000 of notes with cash during the quarter. Total (EPA:TTEF) capital expenditures in the 39 week period were $1,000,000,000 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 $130,000,000 Now I want to provide an update on our financial outlook for fiscal 2024. Our updated guidance includes the negative impact of the hurricane related expenses of $32,700,000 in Q3, as well as an estimated Q4 negative impact of approximately $10,000,000 from expenses related to the 3rd quarter hurricanes as we continue to work through the necessary repairs. Hurricane related expenses are significantly greater than what was contemplated in the company's previous financial guidance. Our updated guidance includes expected net sales growth in the range of approximately 4.8% to 5.1% and same store sales growth in the range of approximately 1.1% to 1.4%. These updated amounts contemplate our start to Q4 as well as the expected impact of 5 fewer holiday shopping days between Thanksgiving and Christmas this year.

Turning to gross margin, we continue to expect pressure as a result of increased promotional markdown activity in the back half of the year, 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 assumes current rates will continue for the remainder of the year, though we remain focused on addressing this headwind through our continued emphasis on getting back to basics. With all of this in mind, we're updating our EPS guidance and now expect to deliver EPS in the range of approximately $5.50 to 5.90

Todd Vasos, CEO, Dollar General: $0.90 This guidance continues to assume

Kelly Dilts, CFO, Dollar General: an effective tax rate of approximately 23%. We also continue to anticipate capital spending in the range of $1,300,000,000 to $1,400,000,000 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 our plans of approximately 2,435 real estate projects this year, including 7 30 new stores, 16 20 remodels and 85 relocations.

Next (LON:NXT) 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 3 times 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, we're pleased with our progress in the quarter. However, we still have significant room for improvement in our financial performance and we're staying focused on continuing to advance our progress. To achieve our goals, 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.

We're confident in our business model and our ongoing long term financial priorities to drive profitable same store sales growth, meaningful operating margin expansion, healthy new store returns, strong free cash flow and long term shareholder value. With that, I'll turn the call back over to Todd.

Todd Vasos, CEO, Dollar General: Thank you, Kelly. I want to take the next few minutes to provide an update on our back to basic efforts in our stores, supply chain and merchandising. When I spoke with you 1 year ago and announced this plan, we noted that our customers rely on Dollar General to provide the products they need at great values in convenient, friendly and easy to shop stores. And when we step back and looked at our business through the eyes of the customer, we weren't meeting that goal consistently across our chain. We laid out several important goals for the team to address these concerns.

And I'm proud to note, we have made substantial progress executing on these objectives and improving the overall customer experience. With that in mind, I want to share a little about our progress in each area. I'll start with our stores where everything begins and ends for our customer. Our goal in our stores is to deliver value and convenience in a clean and friendly shopping environment. We have made significant progress on this front with a meaningful increase in the number of stores that we believe meet or exceed our expectations as well as those of our customers.

As we view our stores through the eyes of the customer, we have seen this notable improvement continue to develop in our own unannounced store visits. And more importantly, our customers are telling us as they have noted this improvement through our survey results at checkout. Notably, as of the end of Q3, customer satisfaction levels have increased by more than 900 basis points since Q1 when we first had these surveys available in the majority of our stores. This coincides with improving in stock levels, which increased approximately 180 basis points from Q3 of 2023 to the end of Q3 of 2024. These results are a testament to the hard work of the team as well as the focus on increasing the front of store employee presence and sharpening our perpetual inventory management in our stores.

Our supply chain and merchandising teams have made significant contributions to our efforts in the store by helping to simplify operations for our teams, which enhances both the associate and customer experience in our stores. All of these improvements have continued to help 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 associate. We still have work to do, but we're proud of the progress in the stores over the last year and we continue to be pleased with the associate and customer response to these efforts. As a result, we believe we are well positioned, continue to elevate the in store experience. 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 infill truck deliveries, which we refer to as OTIF. Our focused efforts here have led to significantly improved OTIF levels in Q3 compared to the same time last year. Notably, we have improved our on time deliveries by approximately 4 70 basis points and in full rates by approximately 900 basis points over that period. We continue to be pleased with what we have seen in both our traditional and fresh supply chain, but believe we have room for further improvement. As a reminder, as we drive our OTIF rates higher, we simplify the work inside of our stores, which ultimately results in a better overall experience for both our customers and associates.

In addition, we have continued making good progress in optimizing our distribution capacity and in fact have been able to accelerate our plans to exit temporary warehouse facilities. We exited 4 more facilities in Q3 for a total of 15 within the last 12 months. This will leave us with 3 remaining opportunities, all of which we plan to exit in 2025. By closing these temporary facilities, we are able to improve overall efficiency in our supply chain, while also reducing costs. Meanwhile, we've augmented our permanent DC footprint with 2 new facilities in Colorado and Arkansas, each of which is open and now shipping to stores.

By the end of this year, we anticipate these efforts will result in year over year reductions in stem miles of approximately 4% or greater in both our fresh and traditional supply chains. I also want to note that we implemented an automated system that utilizes advanced technology to store and retrieve products in our Arkansas DC. As a reminder, we added automation in a DC for the first time last year in South Carolina and have been pleased with the performance and results in that facility. Over time, we believe automation in these facilities can increase efficiency for our teams, optimize storage in the facility and drive even greater inventory and order accuracy to further enhance the way we serve our stores. Finally, earlier this year, we began the 1st full scale refresh of our sorting process within our distribution centers since 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 our merchandising efforts. As a reminder, our top priority is providing meaningful value to our customer.

We have a multifaceted approach to deliver that value, including strong everyday low prices on national and private brands, compelling promotions and sales events such as our DG Deal Days, which featured discounts on more than 6,000 items storewide during the holiday season, and a low opening price points including approximately 2,000 items at or below $1 To that end, comp sales in our Value Valley section of the store, which is comprised of a variety of items at the $1 price point outperformed the rest of the store in Q3 by more than 600 basis points. We have also continued our strong progress in total inventory reduction this year. As Kelly previously noted, with a 3% overall decrease and a 7% decrease on a per store basis, all while improving in stock levels and growing sales. Earlier this year, 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 with the vast majority of these items already out of the planograms.

Finally, our merchants have continued working with our operators to reduce activity and simplify work inside of our stores. For example, we recently reached an important goal by completing the reduction of the number of floor stands by approximately 50% compared to Q3 of last year. As demonstrated by these results, back to basics has a significant positive impact on our business over the last year. While we still have room to improve, we have made substantial progress in each of our 3 priority areas and we believe we are well positioned to continue advancing this progress moving forward. I'm excited about the work we have done to solidify our foundation and position us to deliver even stronger customer experience in 2025 and beyond.

With that in mind, while we are committed to executing on these basics at even a higher level as we move forward, we are excited to progress our discussion beyond back to basics and focus on our initiatives and plans to drive growth and value for customers and shareholders. I'll share a couple of updates today on how we are enhancing the value and convenience proposition in new and exciting ways for our customers. And then we expect to share more of our plans for 2025 on our Q4 call in March. First, I'm excited to announce that we began a test of same day home delivery from our stores during the quarter. This pilot launched in September and we're currently partnering with a third party to offer delivery through our DG app from approximately 75 stores.

As a reminder, we have a highly successful and incremental delivery partnership with DoorDash (NASDAQ:DASH) in approximately 16,000 of our stores and the learnings from that initiative and our own customer work have provided the foundation from which to test our own delivery offering with our unique customer base. We believe this offering will even further enhance the convenience of our customers expect from Dollar General, while still providing the value they need. We are quickly learning and refining our process and over time we believe we can have delivery through the DG app available the same number of stores as our DoorDash offering, which we expect to continue expanding over time. We are excited about the opportunity for our customers. Our goal is to drive greater customer loyalty within the digital platform, while ultimately increasing market share and accelerating growth.

Next, as we look to extend and enhance the unique combination of value and convenience of Dollar General, I want to discuss our plans for real estate growth in 2025. With more than 20,000 stores across 48 states, Dollar General is located within 5 miles or less of approximately 75% of the U. S. Population. And with approximately 80% of these stores in towns of 20,000 or fewer people, we are uniquely positioned to serve an underserved customer in rural America.

As we look to leverage our real estate strength, we plan to increase the number of real estate projects next year. More specifically, we continue to see very strong returns in our remodel projects. We are expanding and enhancing our efforts to impact our mature stores. Accordingly, the growth in projects this year is focused on our remodels, while continuing to balance our portfolio and capture growth opportunities through a significant number of new stores as well. With that in mind, in fiscal 2025, we plan to execute approximately 4,885 projects, including 575 new store openings in the U.

S, 2,000 full remodels and an additional 2,250 project Elevate remodels and 45 relocations. And we plan to open up to 15 additional stores in Mexico. With regards to our remodels, we are revamping our approach to further improve the shopping experience and elevate our brand through our mature store base. In our full remodels, we are increasing the scope of work to include additional upgrades and refreshes to the physical store assets. We expect more than 80% next year to be in our DGTP format, which will continue to allow for incremental cooler counts to provide a fuller shopping trip for our customers.

We continue to expect average returns in our remodels that are consistent with what we have seen historically and are even greater than what we have seen from our new stores, driven by expected 1st year comp sales lifts in our full remodels of approximately 6% to 8% on average. We are also introducing a new remodel approach that is incremental to our full remodel program in order to expand the number of mature stores we impact each year. We are calling this incremental remodel initiative Project Elevate and our goal is to bolster performance in portions of the mature store base that are not yet old enough to be part of the full remodel pipeline. These projects will include nearly all of the same assortment updates as our full remodels other than cooler expansion and the addition of produce. Notably, they will include planogram optimizations and expansions across the store, updated adjacencies and physical asset refreshes in most prominent customer facing areas in the store.

Our investment in these stores will be less than our full remodels and in turn our goal is to drive 1st year comp sales lifts in the range of approximately 3% to 5% in these projects. We believe our customers will respond very favorably to these updates in their local stores and ultimately believe that this will enhance the associate and customers experience in our mature stores while also driving incremental sales growth. Turning to our new stores. As a reminder, we monitor the following 5 metrics of our portfolio, including performance against pro form a sales expectations, new store productivity compared to the mature store base, cannibalization, which overall has remained consistent and predictable, cash payback, which we continue to expect in approximately 2 years and new store returns, which we expect to be approximately 17% on average in 2025. I want to note that our expectations for new store returns, while still very strong, have been down modestly from our historic targets of 20% plus.

As we discussed, for our 2024 pipeline, this change is also driven by higher new store occupancy cost as well as by higher operating cost. We continue to work to mitigate some of these higher costs where possible and continue to see significant opportunities for growth with approximately 12,000 opportunities for Dollar General branded stores in the U. S. As we said before, for a variety of reasons, we will not capture each of these opportunities, but we are pleased that the overall number of opportunities remains high. We anticipate that more than 80% of our new stores next year will be in one of our 8,500 Square Foot Store formats and will predominantly be located in rural communities.

And nearly all of our relocations are planned for 1 of our 8,500 or 9,500 Square Foot stores. These stores continue to drive increased sales productivity per square foot as compared to our traditional 7,300 Square Foot Box and also provide additional opportunities to serve our customers, including expanded cooler offerings, more health and beauty products, and we anticipate adding fresh produce to approximately 300 new stores in 2025, bringing our expected total to approximately 7,000 by the end of next year. I also want to note that we do not plan to open any additional top shelf stores in 2025. We have continued to test and learn in our existing store base with new products and layouts, but in light of the current weaker customer shopping trends in discretionary categories, do not believe opening new stores in the coming year is in the best use of our capital. Collectively, we believe our planned real estate projects will further solidify Dollar General as an essential partner to communities in rural America while strengthening our foundation to drive long term sustainable growth.

In closing, I want to reiterate that we are pleased with the tremendous progress the team has delivered through our back to basics plan and we are poised to continue building on that progress through the remainder of this year and into 2025 as we continue to strengthen the foundation for more meaningful growth in the future. With that in mind, I'm looking forward to sharing more about our plans and goals for 2025 and beyond in the months ahead. We are confident in this business and the actions we are taking to deliver value for our associates, customers and shareholders. As we move through our busy holiday season, I want to again thank our more than 195,000 employees for their commitment and dedication to fulfilling our mission of serving others. With that, operator, we would now like to open the lines for questions.

Rob, Conference Operator: Thank you. We'll now be conducting a question and answer session. Thank you. And our first question is from the line of Simeon Gutman with Morgan Stanley (NYSE:MS). Please proceed with your question.

Simeon Gutman, Analyst, Morgan Stanley: Hey, good morning, Todd and Kelly. My question is on the good morning. The comp algorithm, how does it move now that you're mixing to a higher level of remodels versus store growth? It sounds like you could get almost a point of remodel lift assuming they continue to grow at the rate you expect over the next few years. Where does the comp algorithm land?

And then consequently, if it's a little lower than what DG is used to, does how much does the cost structure need to evolve? It sounds like you're making progress in a lot of areas. Some of the supply chain may take a little bit longer, but can you match that cost structure so that you can deliver some of the former earnings growth, prior to the last couple of years?

Kelly Dilts, CFO, Dollar General: Thanks, Simeon, for the question. I think as we go forward, especially with the introduction of Project Elevate, that we feel good that we can get back to the contribution that our real estate programs have given us on a comparable sales line. But with that, I'd also say you're absolutely right on the cost structure, and that's something we're focused on as we go forward into 2025 and beyond. Certainly, around shrink and damages, we've got a lot of focus on what that can do. Do.

Depreciation, that will play out over time and same will retail salaries as we move through the year. So I would say we're going to focus on all those components, both top line and cost structure, as we work to get back to our long term double digit EPS growth target.

Rob, Conference Operator: Thank you. The next question is from the line of Michael Lasser with UBS. Please proceed with your question.

Michael Lasser, Analyst, UBS: Good morning. Thank you so much for taking my question. Have you seen enough progress with improved execution as well as the mitigation in shrink for you to see line of sight to restoring double digit EPS growth in 2025 despite having some incentive comp returning next year?

Todd Vasos, CEO, Dollar General: Yes, Michael, this is Todd. Just real quickly, I do want to say that we're really pleased with the progress we have made on back to basics, really excited about Project Elevate as well as other initiatives that we've either announced like home delivery or others that we're working on that we'll talk a little further about when we have our call in March. But in saying that, when you look in totality, we feel really good about be able to deliver on a lot of different aspects and lines. I'm very happy with the merch side as well as our operators and our DC pieces of the back to basics work because it is laying that strong foundation for the future and getting back to where Kelly indicated over the long term those double digit EPS algorithm growth models that we've traditionally have had. Now in saying that, we have still more work to do.

We're never happy here at Dollar General, right? We want to capture as much growth as we possibly can. So we'll continue to work hard not only on back to basics, but all the initiatives as we go forward.

Rob, Conference Operator: Thank you. The next question is from the line of Matthew Boss with JPMorgan. Please proceed with your question.

Matthew Boss, Analyst, JPMorgan: Great, thanks. So Todd, have you seen any notable change in consumer spending or behavior between consumables and discretionary from your low income customer. Maybe could you talk to top line trends that you've seen in November, maybe relative to same store sales in the Q3? And then, Kelly, just with the heightened promotional backdrop, I think you cited now expected at least through year end, how best to think about gross margin puts and takes in the Q4, maybe notably markdown?

Todd Vasos, CEO, Dollar General: Yes, I'll start, Matt. Thanks for the question. I'll pass it over to Kelly. From the consumer perspective, I would tell you very similar consumer behavior as we exited Q2 as we did now exiting Q3. So very similar, buying very close to need, being very selective at the shelf as a couple of examples of our discretionary side as well as our non discretionary side of the business.

If you think about the core consumer, what we saw in Q3, private brand continues to do very well. Also our Value Valley area, which is that $1 offering up to 24 to 36 feet of product depending on the size store. Matter of fact, value value that $1 offering was our best performing category for the quarter as much as 600 basis points above the nearest category. So it really goes to show that the consumer is seeking value, trying to make ends meet. And then in our prepared remarks, we did talk about being the last week of the month being some of our weakest, right?

And again, that just really proves that that consumer is trying to make ends meet. Now some glimmers of hope. We did talk about some in Q2 and a little bit now in Q3. She is buying the discretionary side. It's just she's being very selective when she does and she's buying it very close to need.

As an example, we were pretty pleased with our Halloween offering as well as the takeaway from the consumer on the discretionary side of Halloween. So not the candy side while that was good as well, but the other side of that equation. So there is a lot of hope there. Our offering is solid for holiday. And while there's a lot of selling left and unfortunately 5 less selling days between Thanksgiving and Christmas, we're optimistic on what that consumer will start to spend as we get a little closer in.

Kelly Dilts, CFO, Dollar General: Yes. And just to give you a little bit more color on Q4. So what we're seeing as we move into November, obviously, the calendar shifts are pretty significant and that makes 2019 the best comparison. And we did talk about that a little bit on the last call that it's probably if you take sales on a 2019 CAGR basis, that may be the best way to look at it. On a little color for November, we did come in slightly above the midpoint of our sales expectations for November.

So certainly contemplated in our guidance and there is a lot of selling season left, which is why we slightly narrowed our expectations of our previous guidance to make sure that we're capturing that. I'll tell you on the high end, what we're expecting is just kind of a macro neutral environment. And then on the lower end, it does provide for some softening of that. The other primary driver really of the guidance is around the hurricane related expenses. And so you heard us talk about $33,000,000 of pressure in the Q3.

And then we're expecting another $10,000,000 of pressure from those same hurricanes in Q4. And that's really as we work to finish all of the repairs that we need to do on the stores that were impacted. To your question on the margin piece of that, the promo backdrop, it is a little bit elevated, but it's not anything outside of our expectations. So that didn't really change much and neither did the other expectations around shrink or damages. So shrink is still considered to be a tailwind in Q4.

Rob, Conference Operator: Our next question is from the line of Kelly Bania with BMO Capital Markets. Please proceed with your question.

Kelly Bania, Analyst, BMO Capital Markets: Hi, good morning. Thanks for taking our questions. Todd and Kelly, I was wondering if you could talk a little bit more about the same day delivery pilot. What have you learned so far from there? How much does that cost your consumer if they would like the added convenience of that program?

And how are you thinking about the margin implications either passing on the cost of that to the consumer or absorbing those? And just kind of big picture thoughts about what that could add to the DG kind of growth profile going forward?

Todd Vasos, CEO, Dollar General: Yes. Yes. Thank you for the question. We're excited about the pilot. We soft launched it very tail end of Q2 and now through Q3, we've got up to 75 stores up and running.

I would tell you that we're testing, we're learning, we're refining both the native app and of course our website to make sure the experience is just right. But so far the customer is gravitating toward it. It is something we do everything through the eyes of the customer here, Kelly. And I would tell you that as we launch this, the customer is saying to us, 1, we want convenience 2, we want an opportunity to always save money and then 3rd, believe it or not, they want that personalized experience. They don't want to stay anonymous.

They want that and because they know with that comes specialized offering. So we're able to also offer that through this delivery means. The great thing about the delivery piece, a few anecdotes as we just start here is that it is something that's a little bit different than what you see in other offerings in that we are using the 3rd party. So no labor expanded or expelled by our own folks. It's being done through a 3rd party.

Eventually, I believe it could it'll be thousands of stores. It could marry very, very closely due to this 3rd party, our DoorDash kind of offering that we have today, which we've been very happy with so far. So there's a lot of good news there and not a lot of burden on our stores. And as it relates to cost, again, we'll continue to refine that as well. But we've always said here, we're going to do delivery our way when it's time.

We believe it's time. We believe that we are doing it our way, meaning the DG way and the way that our Dollar General customer wants it. And with that comes low cost to both our customer and to Dollar General. And there's always ways to offset some of those costs that will be inherent in the delivery piece with the vendor community and others. So we feel good about the start of this.

It will also the last thing I do want to mention, while the top line will benefit greatly eventually with this offering, we're also excited about the margin potential this has beyond just the product margin that we'll enjoy from it, but also our media network. And we've got a very robust media network today that we started to build years ago. And the one area that was lacking for us to really put it into hyperdrive, if you will, was the delivery piece. And now with that starting to emerge, we'll be able to leverage that media network to even greater heights. And so stay tuned.

We're excited about what delivery in totality from a top line and bottom line perspective will produce for Dollar General.

Rob, Conference Operator: Our next question is from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question.

Rupesh Parikh, Analyst, Oppenheimer: Good morning and thanks for taking my question. So I just want to go towards FY20 25. Any initial puts and takes you can provide? I know your incentive comp could normalize, there could be some hurricane expense benefits. And including that, any initial thoughts on CapEx spend, just given the significant increase in real estate projects anticipated next year?

Thank you.

Kelly Dilts, CFO, Dollar General: Yes, Rupesh, thanks for the question. I think, obviously, we're not ready to give 2025 guidance yet, but I can absolutely give you a few of the puts and takes that we are taking a look at. So, one of those pressures that's going to be going into 2025 is going to be incentive compensation. We'll give you a better idea of what that looks like when we have our conversations in March, but that will put pressure on 2025. The other two pieces are pieces that you've seen put pressure on this year as well, which would be around retail salaries.

So we're seeing, and we talked about this a little bit last quarter, some wage rate pressure. And so that continued into Q3 and will continue into Q4. We expect it could continue into 2025 or at least, it would our exit rate would continue into 2025. And then of course, depreciation and amortization, which has put pressure on over the last couple of years. On the CapEx, I think we've done a really nice job of considering our capital allocation.

I'm really excited about what we're doing around our remodels and being able to invest in our mature store base and the capital allocation that's associated with that. So with that and the new stores, what we're expecting right now is a CapEx that would be similar to this year's CapEx as a percentage of sales and making sure that we're investing in those high return projects.

Rob, Conference Operator: Our next question is from the line of Zihan Ma with Bernstein. Please proceed with your question.

Kate McShane, Analyst, Goldman Sachs: Hi, Todd and Kelly.

Kevin Walker, Vice President of Investor Relations, Dollar General0: Thank you for taking my question. I wanted to circle back on the remodeling side of things. Maybe a 2 part question. One, I believe you historically mentioned that the DGTP remodels had 8% to 11% comp sales lift that compares to the 6% to 8% you're mentioning today. So has there been any update on that front?

And secondly, in terms of the mix of remodels versus new stores going forward, is 2025 a good model for the next couple of years as we think about the medium to longer term? Thank you.

Kelly Dilts, CFO, Dollar General: Yes, absolutely. Thanks for the question. And so, yes, we are expecting a comp lift of around 6% to 8%. You're right, we had quoted 8% to 11% last year. What it is, is really a function of what is occurring in the remodels.

So as the base has a higher cooler count, when we go to remodel those stores, we are not including as many cooler counts. And so that impacts the top line. What I will say though is that the IRRs are still better than the new store returns, so we're really pleased with where those are landing. And then now that we've got Project Elevate, we're looking to add an additional comp lift of 3% to 5%, again with a great IRR in those projects as well, higher than our new store returns. So anytime you can touch that many stores, you always get a big positive and so we're pleased to do both with those lifts.

Kevin Walker, Vice President of Investor Relations, Dollar General: Yes. And I think I would

Todd Vasos, CEO, Dollar General: also add on that, Kelly, that while we're not here to talk about the years ahead, but as you think about Project Elevate and our mature store base and making sure that we're offering the customer exactly what she needs in the mature store base. We're excited about the opportunity that additional remodels every year could offer. If you think about it and you move in the next 3 to 5 years, you could essentially touch 80% to 90% of your store base, right, over time, on a much quicker basis, less than half the time, quite frankly, that we would have done so in the past. So more to come. We're just starting the journey.

But the great thing about Project Elevate is and I just want to get you in the ballgame is from a customer perspective, they see everything in Project Elevate that they would see in a normal remodel, less the additional coolers and produce. Everything else, the experience they see in a remodel, which they love today, they'll see in this project elevate. So excited about it. We'll talk, I'm sure, a lot more about it as we move through 2025.

Rob, Conference Operator: Our next question is from the line of Kate McShane with Goldman Sachs. Please proceed with your question.

Kate McShane, Analyst, Goldman Sachs: Hi, good morning. Thanks for taking our question. Todd, you had mentioned last quarter that of the share gain that was up for grabs at the time that you didn't quite get your fair share. I know there's still been quite

Kelly Dilts, CFO, Dollar General: a few door closures in Q3 and we were wondering if

Kate McShane, Analyst, Goldman Sachs: you've seen any change with what you've seen with those opportunities this quarter.

Todd Vasos, CEO, Dollar General: Interestingly, what we've seen is a little bit of a rebound of that. Matter of fact, our mid to high end consumer, we gained share once again in Q3. So happy to see that start to bounce back. So it's interesting how the consumer is reacting. She's being a little finicky, but at the end of the day, value always wins, it appears.

And so she's starting to seek more and more value. So good to see that customer that's available out there in the marketplace that we were able to capture more of our fair share this quarter than we did last. And we've got our sights set on that very same type of dynamic as we move through Q4 here and into early 2025.

Rob, Conference Operator: Thank you. The next question is from the line of Karen Short with Melius Research. Please proceed with your question.

Kevin Walker, Vice President of Investor Relations, Dollar General1: Hey, thanks very much. Good to talk to you. Wondering if you could just give a little bit more color on the actual dollars going into the standard remodels versus Project Elevate and also what the return profile actual return is as you calculate it? I know it's probably a little early on Project Elevate, but curious if

Kate McShane, Analyst, Goldman Sachs: you could give color on both of those.

Kelly Dilts, CFO, Dollar General: Yes. So for our traditional remodels, we're expecting a similar investment on the capital expenditure side. And I would tell you on Project Elevate, it is significantly less than that. So that's why it fits really nicely into our capital allocation structure. On the returns, we will you're right.

On Project Elevate, a little early, but I will tell you that what we are contemplating are IRRs that are significantly higher than our new store IRRs and are relatively in line with the traditional remodels.

Rob, Conference Operator: Our next question comes from the line of Seth Sigman with Barclays (LON:BARC). Please proceed with your question.

Kevin Walker, Vice President of Investor Relations, Dollar General2: Hey, good morning, everyone. I wanted to focus on the gross margin. The trend is improving down less this quarter than prior quarters. As you think about some of the tailwinds such as shrink, on paper that should build into the Q4 and into next year. Can you speak about that and how you're thinking about gross margin expansion year over year starting in the Q4?

And maybe just in general, how you think about the recoverability of the gross margin from here? Thanks so much.

Kelly Dilts, CFO, Dollar General: Yes. I think shrink is probably our biggest opportunity. And so as we think about what the Q4 looks like, it should certainly add some benefit to the gross margin line. We have a we still have a lot of work to do, I would say, on shrink, while we have made a ton of progress. And we think it'll be a tailwind as we move into 2025 as well.

So certainly pleased with the progress that we're making, but just want to call out that the shrink is really a continuous improvement journey. Just as a reminder, because of the long tail, it does take a full year for us to get the full impact of any actions that we take to show up in the financial statements, just because as we take inventories through the year, that's when we'll get the benefit of that. And so that could be a little bit longer journey, but certainly should be a tailwind to 2025. Our goal is still to hit those pre pandemic shrink levels, and we feel like we have a path to get there.

Rob, Conference Operator: The next question is from the line of Scot Ciccarelli with Truist Securities. Please proceed with your question.

Matthew Boss, Analyst, JPMorgan: Hey, guys. So historically, when your core customers are pressured, it's usually resulted in higher traffic, but lower ticket as folks buy less, but come in more frequently. Today, we're seeing the opposite happen with traffic dropping in the last few quarters. Todd, why do you think that is playing out that way? And would you expect that to change at some point?

Todd Vasos, CEO, Dollar General: Yes. We are squarely focused as always on driving traffic. So that's 1st and foremost, I think is important. But as you start to think about the traffic number, this was the Q1 that we actually lapped a positive traffic number from LY. So we anticipated it softening as we move through this quarter from a year over year perspective, obviously.

But we were happy with the traffic gains that we did see in the quarter, but we're never satisfied with where we are. We're always pushing for more. Now the dynamic that you also indicated that the ticket being up is something to watch. The good thing is that a lot of that ticket that we saw was really came from some of the discretionary areas of the store. And so it is good to see that she's shopping that side as well.

So more to come there. I believe, as I indicated earlier, that she has the money to spend, but she's being very, very frugal with that spend and when she spends it. So we'll continue to watch that, but working hard to drive traffic through the back half of this year, which is or the back quarter of this year here in Q4, but also, to start off the year on the right foot here in Q1.

Rob, Conference Operator: Our next question is coming from the line of Paul Lejuez with Citi. Please proceed with your question.

Todd Vasos, CEO, Dollar General: Hey, thanks guys. Curious when you do a remodel, how much of that expected comp lift is traffic versus conversion versus ticket? And then second, on that shrink opportunity on the gross margin line, I'm curious if there's an offset on the SG and A line. And then, Kelly, maybe just high level, how you're thinking about SG and A leverage point for next year? Yes.

I'll start, Kelly, and I'll pass it over to you. Yes. As we look at that remodel program, what we normally see in remodels is that, normally it your uptick happens from the offering itself, so more on the ticket side of the equation. And then as time goes, the traffic starts to pick up as well. So just like any remodel that we've done, we believe Project Elevate will probably fall into that same category because what will happen is word-of-mouth will get out that we've remodeled the store and then traffic normally builds.

So it's usually ticket first and then traffic to come as we move through the months beyond those remodels.

Kelly Dilts, CFO, Dollar General: And then on the shrink side on 2025, I think it could be a big contributor to gross margin as we move into next year. On the SG and A leverage point, I think it still stays the same as where it's been historically. A 2% to 4% comp helps us get to that leverage point, and that's what we'd be looking for and that's what we would want comps to build to over the longer term.

Rob, Conference Operator: Thank you. Our final question is from the line of Chuck Krum with Gordon Haskett. Please proceed with your question.

Kevin Walker, Vice President of Investor Relations, Dollar General3: Thanks. Good morning. Good progress. Todd, just how are you thinking about the company's operating margin structure over time? It looks like if we back out the hurricane costs, you're going to exit this year a little bit around 5%.

Can you improve on that over the next couple of years? Or do you feel like the business needs to see some investments both from labor and maybe price before you build from there?

Todd Vasos, CEO, Dollar General: Yes. Thanks for the question, Chuck. Let me start and I want Kelly to jump in as well. I would tell you that we're pleased where we came out here in Q3. As you look at our business, there is expense headwind that's there.

We've got a lot of levers to be able to pull though as well into the future. While we're not here yet to talk about 2025 and beyond, I would tell you that we are squarely focused on achieving a better rate than where we are today that you mentioned. But we've got some work to do. Now I would also tell you, we feel good about the labor line from the respect of how many hours the stores have. We don't believe a big investment is still needed at this point.

I do feel good about the hours we have and the ability of the stores to be able to produce from that. So we don't believe a big uptick and we don't see any huge upticks in other expense lines other than obviously incentive pay and some of the other things that Kelly already mentioned that will come back at us in 2025. Kelly?

Kelly Dilts, CFO, Dollar General: Yes, absolutely. And as you can hear, we're really managing this business for the long term and focusing on double digit EPS growth. And we do think we can get back to that over the time. We've got still underlying long term drivers in place, and that includes a long runway for new store opportunities with high returns. And so that hasn't changed.

We've got other long term margin drivers. We think we've got a path to the shrink reduction. We have a path, we believe, to stabilizing the sales mix. And then we have DG Media Network, which we're really excited about and continue to be excited about, and delivery could certainly play a big role in that. You've got private brands and global sourcing opportunities, our category management.

I'm really excited about the potential of inventory optimization as we look in the future, both on the sales line and as well as what it gives us on working capital, supply chain efficiencies with some of the automation that we talked about today, and then, of course, our save to serve approach of controlling costs and always being that low cost operator. And then the other thing I would just point out is that we have been generating a significant amount of cash flow, which does allow us to invest in the business. And you saw that today with our real estate announcement and being able to invest even more in our existing stores at a rapid pace with Project Elevate. So with all of those things in mind, we really do believe we've got a long term opportunity to drive higher sales and margins that would support that double digit EPS growth. So while we're not ready to commit to a timeline or, of course, the guidance beyond 2024 at this time, we do think that that double digit EPS growth remains our long term target, and we believe it's possible to achieve it.

Rob, Conference Operator: Thank you. At this time, this will conclude our question and answer session and also conclude today's conference. We thank you for your participation. You may now disconnect your lines at this time and have a wonderful day.

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