Dollar General Corporation — 2022 Q4
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 would like to welcome everyone to Dollar General's Fourth Quarter 2022 Earnings Call. Today is Thursday, March 16, 2023. [Operator Instructions] This call is being recorded. [Operator Instructions] Now I'd like to turn the conference over to Mr. Kevin Walker, Vice President of Investor Relations. Kevin, you may begin your conference.
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 associates for their dedication to serving our customers and communities this year. I am inspired by this team's commitment to our mission of serving others and the passion they have for helping our customers save time and money every day.
Thank you, Jeff, and good morning, everyone. Now that Jeff has taken you through a few highlights of the quarter and full year, 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.
Thank you, John. Let me take a few minutes to update you on our operating priorities and strategic initiatives, which have transformed this company in recent years, resulting in strong growth and enhanced profitability.
[Operator Instructions] Our first question comes from Simeon Gutman with Morgan Stanley.
Sorry about the noise. Open-ended question for you. So the business has executed well over a long period of time. Last couple of quarters, we've had some missteps or things that haven't gone to plan. Not all of that I think is clear to us for the Street. And yet all these growth initiatives are still happening at the same time. So the open-ended question is have you debated or is the debate the balance of sort of the growth against investments that's focusing on the core?
Well, Simeon, thank you for the question. I first want to say, certainly, the last 2 quarters have been challenging. And I can tell you, we're disappointed in our results. This team takes great pride in delivering on our commitments and we've been doing that for the almost 30 years I've been here. And that is something that is not changing. And I can tell you, we have a tremendously deep and outstanding team that's laser focused on executing and innovating over the long term.
And the one follow-up to that is the $100 million in wages, I don't think it's a big surprise, but it was maybe in man hours and not rate. So can you talk about that trade-off or the balance between those two and where, I guess, you feel comfortable where you are on rates?
Yes. We absolutely do, Simeon, and that's one of the -- that's a great distinction. Here, at Dollar General, for the 85 years we've been around, the store has always been the company. And our ability to serve local communities is something that we do better than anybody and we take great pride in that.
Our next question is from Matthew Boss with JPMorgan.
So Jeff, could you speak to recent behavior that you're seeing from the low-income consumer? Or maybe any changes in the ranking of their priorities from those customer surveys that I know you run regularly?
Well, thanks, Matt. I'll start, and then I'll kick it over to John. As you think about the customer, one of the good things about Dollar General is we're an all-weather brand. And we've shown over the last 3 decades how we can serve that customer in any economic environment.
Yes. So in terms of the customer, as Jeff said, we're continuing to see an increasingly economically strained customer, and we're seeing shopping behaviors indicative of this environment.
Great. And then maybe just a follow-up, John, on the balance sheet. Could you just update us on free cash priorities? What is the multiyear debt leverage target? How best to think about CapEx as a percent of sales moving forward? And just share repurchase as a use of cash going forward?
Sure. I'll start by saying that our capital allocation priorities have not changed. Our first priority remains investing in the business. When you have high return growth opportunities like new store growth, remodels and our strategic initiatives, that's where we focus our capital.
Our next question is from Peter Keith with Piper Sandler.
You had commented just on one of the last questions around tax refunds and SNAP as potential headwinds. I was hoping you could also address the social security cost of living increase that kicked in at the beginning of the year. Has that been any tailwind to your business that you've noted so far?
Yes. I'll elaborate on SNAP a little bit, and then I can talk about tax refunds and then talk about COLA. In terms of SNAP, it's interesting. You had an increase -- a pretty good increase in the tender over the last few years since the pandemic, as states enacted the emergency allotment benefits. Over the last couple of years, we've seen about 18 states roll off -- some of our key states. And what we saw is with the elimination of this, we saw an offset in other tender methods. And we didn't see an overall impact to our sales.
Okay. And then I wanted to ask you a little bit about the LIFO impact. So $517 million in the full year is pretty meaningful headwind that you've experienced. I guess if the Fed's going to achieve their mission and moderate inflation here over the next year or 2, you should probably have less of a LIFO charge. Do you have any LIFO benefit or lower charge here factored in for 2023 at this point?
Yes. The way to think about this is very significant LIFO charge last year. We don't expect a deflationary environment this year, so we do expect a LIFO charge. But we are assuming a more moderate LIFO charge. So less of a headwind this year.
Our next question is from Scot Ciccarelli with Truist Securities.
First, can you just clarify, John, like are you expecting earnings to actually be down in the first half or just lower?
Yes. So in terms of the cadence for the year, what we said is it really is a back-half story. You really are going to see the growth in the back half of the year. We're not anticipating a sizable drop in the first half. We're looking at it to be modestly up to flattish. But -- so then it's really a back-half story in terms of the earnings.
Our next question comes from Rupesh Parikh with Oppenheimer.
I also wanted to ask on CapEx. So historically, CapEx has been about 3% of sales. And last year and this year, it's about 4%. So just want to get a sense of where you think the normal level of spending could be in a normalized environment as a percent of sales or any other commentary?
Sure. Again, getting back to the capital, a big driver of that was the inflation as well as the stepped up real estate and the number of projects we're doing in terms of DCs, working on three DCs in one quarter. So again, feel great about the returns of these.
Great. And then maybe just one follow-up question. So DG Media, the commentary is very positive there in terms of what you're seeing with your vendors. As you think about the dollars there, how do you think about reinvesting the business versus flowing that through the bottom line?
Rupesh, you're right. We are very excited about what we're seeing on our DG Media Network. And quite frankly, our digital acceleration in general. One of the things that we've learned over the last couple of years when we started this journey was how digitally savvy our customer is and how much it helps her to be more connected and more loyal to Dollar General and it shows up in her ability to spend with us.
Our next question comes from Karen Short with Credit Suisse.
And John, sad to see you go. It's been great working with you. I just wanted to go back to the overall algorithm for DG. Obviously, there's noise in '23, and we all appreciate that. But can you just maybe give a little bit of an update on what you think the long-term algorithm should be as we get beyond '23?
Yes, it's Karen. I'll take the first part of that question, and then John, I'll kick it to you for the algorithm question. But Karen, we don't disclose our average hourly rate. But what I can tell you is, as I said earlier, is we have and we continue to pay very competitive wages. And I think the one nuance to Dollar General that I frankly believe is underappreciated is the ability to come into this company as a part-time sales associate and grow into a career. .
As you think of the algorithm and if you just step back and look over the last 3 years, while it's been up and down over the last 3 years in this environment, every element of that well in excess of the algorithm. If you look at sales comp, well in excess of the algorithm; expansion of gross margin and operating margin; operating income, EPS, well in excess of the algorithm. So we feel very good about the performance over this period of time, and we feel the model remains very strong and very resilient.
So is it fair to say or reasonable to think that, that's more of a '24 return? I mean I know you haven't given guidance, but just some...
I don't want to give specific guidance, but I would just say we feel very good about the future and the strength of the business.
Our final question is Corey Tarlowe with Jefferies.
And congrats, John, on your retirement announcement. It's been a pleasure to work with you. My first question for Jeff on market share. You talked in your prepared remarks about seeing customers trade in the Dollar General. You talked about higher income consumers trading down to Dollar General. So I think it's clear that Dollar General is gaining share across income cohorts and categories, and you talked about Value Valley as well, comping up over, I think it was 30%. So maybe could you talk a little bit more about where you think this market share is coming from? And where you see it likely to come from even more so as we look ahead?
Well, Corey, first of all, we are very pleased at the market share gains that we've been able to achieve, both on the consumable and on the nonconsumable segments of our business. And when you think about our customers as well, we're also incredibly pleased with the fact that we were able to increase our productivity with really all segments of our core customer.
Great. And then just a follow-up for John. So it sounds like there's a couple of moving parts in terms of the gross margin, specifically as you look out over this year, and I recognize it's a first half, second half story, but could you maybe stack rank the drivers that you anticipate from maybe most important to least important, to be affecting the gross margin line this year? I recognize mix shift is also a fairly prevailing factor in this. So how does that also factor into how you're thinking about the consumables mix shift as we look ahead for the next 12 months?
Yes. As you think of the headwinds and the tailwinds, I'll start with the headwinds, but then go to what we see as a pretty sizable tailwind -- tailwinds. The ones we talked about were one, sales mix, that pressure continuing. So we've assumed that. We've also assumed shrink and damages as we move through the first half, in particular. And then increased markdowns, and that's really just getting back to rates more in line with historical norms.
We have reached the end of the question-and-answer session. I'd now like to turn the call over to Jeff Owen for closing comments.
I'd like to thank you all for your questions and your interest in Dollar General. And while our operating environment is dynamic for our customer and business, we are staying focused on the things that we can control, which is continued innovation and execution in our business.
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.