Dollar General Corporation — 2023 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's Third Quarter 2023 Earnings Conference Call. Today is Thursday, December 7, 2023. [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 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.
Thank you, Kevin, and welcome to everyone joining our call. Let me start by saying how excited I am to be back at Dollar General. I have a deep passion for this company and for the customers we are privileged to serve. I continue to believe in this model, our future growth prospects and our ability to deliver value and convenience for our customers, a positive experience for our employees, and long-term value for our shareholders.
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.
Thank you, Kelly. As we wrap up, let me just say again that we're laser-focused on getting back to the basics. As I mentioned in my earlier remarks, some of these actions will take a little bit more time to deliver the desired results. But we expect to demonstrate significant progress over the coming months and look forward to sharing more with you in the quarters ahead. .
[Operator Instructions] Our first question comes from Rupesh Parikh with Oppenheimer.
Welcome back, Todd. So I wanted to kick it off just with longer-term operating margins. Do you feel like you can sustain a 6%-plus operating margin level longer term? And do you think you can get back to 8%-plus, where you have historically operated? And then to get to that 8%-plus, where do you see potentially the bigger buckets of opportunity going forward?
Yes. Thanks for the question. I'll take the second part of that and then pass it over to Kelly. We hear a Dollar General have gone back to the basics. You heard that in my prepared remarks, and I have to say, it has truly energized this company at all different levels.
Thanks, Todd. And just so everybody knows, our goal is certainly to get back to the historic levels of operating margin and profit that we're used to. While we're not going to give guidance, obviously, for '24 today, I do want to give a little bit of color of '24 just around some near-term headwinds that we're seeing.
Our next question is from Simeon Gutman with Morgan Stanley.
Welcome back, Todd. When you rejoined, you talked about you having an opportunity to revisit the financial profile of the business. And if there was a time to look back and reset and invest deeper that you could take that opportunity. As the business looks to be forming a bottom in margin and thinking about getting to 7% or plus in a reasonable time frame, do you have any updated thoughts on that? Does it make sense to lean in so that when you start building back, it builds back sustainably, do you think the business needs a little more investment than you thought 1.5 months ago?
Yes. Thank you for the question. And you're 100% right. The first few weeks back on the deck here, I did take a holistic view across not only our operations, but as you heard, our supply chain, our merchandising areas, looked at everything holistically, and I'll just click off a few.
Our next question is from Matthew Boss with JPMorgan.
Maybe, Todd, at higher level. Could you just help elaborate on some of the recent changes in behavior that you're seeing from the low-end consumer? The traffic versus ticket trends that you cited, I think, are interesting. But maybe asked a different way, traffic is improving, what's constraining the comp through the third quarter? Did comps actually turn positive in November tied to some of these initiatives?
Okay, sure. As we look at our results as we move through the quarter, as we indicated, each of the periods were very similar, but we did see continued uptick in our traffic as we move through the quarter and then into November.
Yes. No, absolutely. And so an 18% return in this environment is fabulous, and Todd noted it, it's still a great use of capital. The new unit economics are still very strong as we move into '24. And it has a great payback period still of less than 2 years.
Our next question is from Seth Sigman with Barclays.
I wanted to talk about inventory a little bit. Just in terms of the progress rightsizing your inventory position. Can you just give us a little bit more perspective on where you sit today with consumables versus nonconsumables?
Yes. No, thanks for the question. And inventory reduction is absolutely a priority of ours this year, and it will be a priority as we move into next year. I think the good news for us is that the quality of our inventory is good, but we've talked a lot in the past about the benefits of inventory reduction and just what that does as you reduce the complexities in both the stores and the distribution centers.
Thanks, Kelly. And as you look at our results in Q3 and how that relates to any activity around clearing this inventory, I would tell you that I feel very good about the balance here. While there was some activity there, actually, some of the bigger activities is really slated for Q4, if needed.
Our next question is from Michael Lasser with UBS.
Welcome back, Todd. Given everything that outlined this morning, when is it realistic for us as outsiders to hold the team accountable to getting back to consistently producing a double-digit EPS growth algorithm like Dollar General has done in the past? And as part of that, Kelly pointed to a few factors that are going to weigh on Dollar General's profitability in 2024. Could you give more texture and timing around how large those factors are like incentive compensation and shrink?
Yes, thank you, Michael. As both Kelly and I have both said, I don't see anything that gets in the way longer term to getting back to some of our historical ways that we return to our shareholders and our customers. We feel that we're on the right track with our back to basics moves here, both in our labor investments, in our inventory investments as well as in our supply chain and merchandising.
Our next question comes from Kate McShane with Goldman Sachs.
We were wondering how you would frame the risk of deflation across your box into next year? And how do you think about the puts and takes across the P&L as a result?
Yes. That's a good question. And there's been a lot written up in certain areas on deflation. We've seen some deflationary pieces starting to show up, especially in our nonconsumable discretionary type areas. Nothing that alarms us at this point as we move into 2024. How we're looking at it is we see some real opportunity to reduce initial costs, especially in our import-related goods, not only from the factory, but also for the transportation side.
milk, dairy type areas, oils, wheat, we watch that very carefully. We have component pricing here at Dollar General for not only our national brands, but our private brands. We watch that very, very closely and we monitor that.
Our final question is from Chuck Grom with Gordon Haskett.
Welcome back, Todd as well. Can you talk a little bit about the out-of-stock issue and perhaps quantify the drag that it's been to comps over the past few quarters? I believe it's probably pretty sizable and the measures you're taking to improve that issue?
Yes, sure. I would tell you that the amount of out of stocks we have in our store are probably some of the largest that I've seen in the 15-plus years I've been here and saying that. There are so many work streams that are now underway, Chuck, that I feel good about where we're headed.
We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Todd Vasos for closing comments.
Thank you, and thanks for all the questions and your kind words for welcoming me back. As I said last year that serving this team at Dollar General has been the highlight of my professional career, and I feel the same sense of honor today.
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.