Dollar General Corporation — 2022 Q3
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good morning. My name is Robert, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General Third Quarter 2023 Earnings Call. Today is Thursday, December 1, 2022, [Operator Instructions]. 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.
Thank you, and good morning, everyone. On the call with me today are Jeff Owen, our CEO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com, under News and Events.
Thank you, Kevin, and welcome to everyone joining our call. I want to begin by thanking our entire team for their ongoing commitment to serving our customers, communities and each other.
Thank you, Jeff, and good morning, everyone. Now that Jeff has taken you through a few highlights of the quarter, let me take you through some of its important financial details, beginning with gross profit.
Thank you, John. Let me take the next few minutes to update you on our operating priorities and strategic initiatives.
[Operator Instructions] Our first question comes from Matthew Boss with JPMorgan.
Great. So Jeff, maybe first, could you elaborate on what you think is driving the sequential acceleration in same-store sales? I think traffic has now sequentially improved for the second straight quarter. What are you seeing across the income cohort?
Thanks, Matt. We are very pleased with our 6.8% comp sales increase. And as you mentioned, seeing traffic accelerate again for the second consecutive quarter was very nice to see, and also continuing to grow market share. We grew market share in our consumables and our nonconsumable business.
That's great. And then maybe, John, on gross margin and just to break down some of the components.
Sure, Matt. I'll start with the question around the supply chain costs. And as we called out versus previous expectations, the supply chain costs were a significant headwind more than $40 million above our previous expectations for Q3. And we do see this as near-term. And we're making very good progress toward resolving our storage capacity constraints as more capacity comes online.
That's a great color. Best of luck.
You asked about markdowns as well. I didn't want to miss that question. As you look at markdown risk, while up from the unusually low levels last year, markdowns are still well below pre-pandemic levels. If you look at the majority of the inventory growth, it's really driven by inflation.
Our next question comes from Simeon Gutman with Morgan Stanley.
I think a follow-up, John, for you. So this year, you were going to grow earnings sort of in line with [indiscernible] excluding the 53rd week, and now it's going to be below and yet you're doing more sales.
Sure. So as you mentioned, we won't be giving specific guidance on this call. We'll certainly share that on the March call. But I'll just start by reiterating that we feel great about the fundamentals of the business, the sales momentum, coupled with the moderating cost pressures that I just articulated. And as you called out, it is a 1 less week next year that's important to bear in mind.
Okay. And maybe my follow-up, maybe sticking with you on fourth quarter gross margin. I guess, we're trying to build to the pieces, supply chain, mix, shrink. And we're having trouble getting to the entire magnitude. Are you willing to share a little more magnitude by item, by driver? Because it doesn't feel like the consumables mix goes up enough to justify the mix. So there seems like there's something like markdown in there as well.
So as you look at the drivers of the additional pressure on Q4, it's the same drivers as Q3, the order is a little bit different. As you look at what we anticipate as the key pressures on Q4 margins is still healthy flow-through, but less than previously expected.
Our next question comes from Corey Tarlowe with Jefferies.
Congrats on the continued top line momentum and share gains that you've witnessed.
Corey, this is Jeff. Thank you for your question. And I'll start with the customer.
That's great. And then thanks for laying out the new store plans for next year. I think that helps to really provide a little bit more color as to the predictability and stability that we should expect ahead. Could you talk a little bit more about the strong returns that you're continuing to see on those new stores? And what we should expect more so from a continued ROIC standpoint as it relates to some of these new stores as we look ahead?
Yes, Corey, I'll start and then I'll let John fill in on some of your questions around returns.
Yes. And just -- echoing Jeff's comments, we're very pleased with the results we're seeing. As he mentioned, we're above pro forma in sales, which puts us ahead of schedule in terms of the IRRs. Again, we target a 20% to 22% after-tax IRR based on the sales. And as we outperform in sales, that puts us a little ahead on the returns as well.
Our next question is from Michael Lasser with UBS.
John, I want to hopefully get some frame of reference on 2 factors that are impacting the gross margin. So, a, you mentioned $40 million of supply chain costs that are above and beyond what you expected, does that go to $30 million in the fourth quarter? And if that's in the right ballpark, you used the term of beat, which you can interpret a lot of different ways. I think what most of the market wants to know is, does abate mean you're going to incur $70 million this year that will go away because those are extraordinary costs next year?
No. No. Thank you, Michael. I'll try and tackle each of these. In terms of the carryover impact of the supply chain costs. We didn't give a specific number on that. It will be less, but still a meaningful impact to us.
Okay. My follow-up question will be less a bit picky. I'm sorry. The -- we've seen now some cost pressure at Dollar General. This follows a significant decline in profitability your largest competitor. Should we take these as onetime event? Or is there anything to say that just the overall profitability of the small box value convenience sector is permanently under pressure or long-lasting under pressure because of some of the competitive dynamics? Because of the shift to consumables and other factors? Or would you expect that this is not a trend that's going to be long lasting?
Yes. I'll just reiterate, we see most of the pressures as transitory. When you look at the LIFO, when you look at the supply chain, we see that as transitory. We still feel very good about our nonconsumable products, and see this more as a transitory macro pressure.
Our next question is from Paul Lejuez with Citi.
Curious on the storage capacity and supply chain inefficiencies. If there was a sales impact during the quarter as well as the cost impact that you talked about. Maybe if you could frame that, also, same question, if you expect there to be a sales impact in 4Q? And related to that, was the pressure any region in particular where you saw the cost and/or sales impact? And how much of a differential was there in terms of the performance of that region versus your others?
Yes. Thanks. I'll tell you, as we said before, the delays of our temporary storage facilities, certainly, that unexpected delay did impact the quarter from a profitability standpoint. But again, I reiterate how pleased we were with the strong sales performance we saw. And the nice thing is like it normally is at DG, it's pretty broad-based. And so I think, again, that goes to the consistency of our ability to serve a customer across, not only a broad swath of the United States, but also around the income levels I mentioned earlier.
Our last question will be from Rupesh Parikh with Oppenheimer.
So just going back to your commentary on shrink. I was curious if you can provide more color in terms of what's driving the higher shrink lately opportunities you guys see to reduce that going forward? If there's any way to quantify how you think about the headwind for Q4 or even what you saw in Q3?
Yes. So as we mentioned, we saw increased shrink later in Q3. We believe this is largely -- Rupesh, largely attributable to the inflationary environment, coupled with higher inventory levels. Overall, as you know, retail is seeing higher shrink in this environment. Now this can have a tail. So we did say we expect this to carry over into Q4. I think it's instructive as we listed out the gross margin drivers, I think that was the last on the list of drivers for Q3. But bear in mind, that was later in Q3.
Great. And then maybe just one quick follow-up question. So just on trade-in, I know your team expect to trade in to continue into Q3, and I believe Q4 as well. At this point, the trade-in that you're seeing, is that consistent with what you'd see in a recession? Or is it -- would you say it still below what you typically see in downturn?
Yes. Rupesh, as I said earlier, we're very pleased to be able to see that we're growing share in customers across all income levels. So that's encouraging. And really, again, I go back to the relevance of our brand of our box and our tremendous ability to listen and respond to what our customers are looking for.
We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Jeff Owen for closing comments.
Well, thank you for all the questions and your continued interest in Dollar General.
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.