Dollar General Corporation — 2023 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'd like to welcome everyone to the Dollar General Fourth Quarter 2023 Earnings Conference Call. Today is Thursday, March 14, 2024. [Operator Instructions] This call is being recorded. [Operator Instructions]
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 & Events.
Thank you, Kevin, and welcome to everyone joining our call. I want to begin by thanking our associates for their commitment to serving our customers and their communities this year. I'm proud of the team's resilience and sense of purpose in fulfilling our mission of serving others. I was reminded again recently of the tremendous opportunity we have to serve as America's neighborhood general store as we celebrated the grand opening of our 20,000th store in Ellis, Texas. Our entire team takes great pride in serving the communities we call home with value and convenience every day.
Thank you, Todd, and good morning, everyone. Now that Todd 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.
net sales growth in the range of approximately 6% to 6.7%, same-store sales growth in the range of 2% to 2.7% and an EPS in the range of $6.80 to $7.55. We currently anticipate an estimated negative impact to EPS of approximately $0.50 due to higher incentive compensation expense. Our EPS guidance assumes an effective tax rate in the range of 22.5% to 23.5%.
Thank you, Kelly. We remain committed to our 4 operating priorities of driving profitable sales growth, capturing growth opportunities, leveraging and reinforcing our position as a low-cost operator and investing in our diverse teams through development, empowerment and inclusion.
[Operator Instructions] Our first question comes from Matthew Boss with JPMorgan.
Congrats on the improvement. So Todd, I think it would be helpful if you could maybe speak to the top line and traffic self-help improvement that you're seeing, just given the volatile macro backdrop. So as you break down your 2024 comp guide, could you elaborate on the Back to Basics strategy? What's working today that supports the first quarter comp guidance relative to maybe incremental opportunity that you see potentially building throughout the year, particularly in the back half?
Sure, Matt. Thanks for the question. We're pretty pleased with what we've seen in our short run here on getting back to the basics. You can see it in our comps in Q4, you can see it in our traffic numbers and we can see it in our customer data as well. So all good signs that we're on track to where we want to get to, to get back to the basics here at Dollar General.
Our next question is from Simeon Gutman with Morgan Stanley.
Todd, I wanted to ask you something that kind of puts together some of the comments you made as well as what Kelly said. I wanted to ask what's gone well since you joined, what's sort of taking longer. You mentioned some things need a little more attention. And as the construct of getting back to 7-plus margins, I think we talked about it theoretically by '25. Is that something that's still achievable? And listening to the finer points and some of what Kelly spoke about, like promotions being a little bit higher, it seems like shrink is about where you thought it would be. I don't know if you were trying to signal that it's a little worse that you're taking more action, but those type of puts and takes sort of what's gone well, what's not, and then something around the 7% in the future.
Yes, Simeon, thank you for the question. I'll start and then pass it over to Kelly for that second piece.
Yes. No, I think Todd told you all the reasons that we really believe that we're strengthening our foundation for long-term growth. And we really believe that this business is going to return to 10% to 10% plus EPS growth on an adjusted basis over the long term.
Our next question is from John Heinbockel with Guggenheim Partners.
Todd, I wonder if you can address the mini-market format, your thoughts on potential -- how many stores you think you could have if we're talking several thousands. And then remind us of the economics of that. I know it's relatively new. But when you think about whether it's sales per store, sales per foot, 4-wall margins, how that might look versus other formats that you use?
Sure. Thanks for the question, John. And you and I have been talking about fresh and about these type of stores for quite a while. And I would tell you, when we put into place here years ago, our ability to grow cooler count, to grow fresh produce, the way we have over the years very methodically to be profitable at it as well as then enabling all of that and soon to be produced in the near future into self-distribution, I would tell you that we feel very good about that.
That's right now and I think Todd hit on most of it. We really like the IRR. They're certainly at the upper end of what we expect from new stores and a payback of less than 2 years. We like the top line and the flow-through on the operating margin, and the 4-wall is strong. So we think it hits all cylinders. It's great for the business, but as Todd alluded to, it's also great for our customer.
Our next question comes from Rupesh Parikh with Oppenheimer.
So I have 2 related questions to gross margins. So Kelly, you commented on your expectation for the promotional backdrop to revert to pre-pandemic levels. Just curious if you're seeing any changes in the promotional backdrop today or whether that's just an expectation for the balance of the year. And then just on gross margins, we heard a lot about the headwinds. But just wanted any granularity in terms of whether you expect gross margins to be up or down as we think about '24.
Rupesh, let me start, and I'll pass it over to Kelly. Yes, as we look out into 2024, we do believe that the promotional environment will have an uptick here. We believe that it will revert closer to where pre-pandemic levels were. In 2023, we saw an increase as well. So this isn't an immediate left- or right-hand turn here. This is what we had anticipated, quite frankly, over the last couple of years that as we enter '24, we would probably start to see this. And by the way, I think our CPG partners, and I'm sure you've seen, have signaled this for quite a while now in that they need to move units and through that, encourage, if you will, some of that promotional activity to occur.
Yes. And just to kind of give you a cadence just off of exactly what Todd was talking about, as we think about moving through the year, Q1 is certainly our [indiscernible] from a sales perspective. But as Todd talked about on the markdown side of things, it's really -- it's a cadence thing more than just being impactful on gross margin overall for the year. And so last year, our markdown cadence, because it was more clearance related, was back half heavy. This year, because we're leaning into the promotional cadence, just getting back to more normal rates, you'll see that spread a little bit more evenly over the quarters.
Our next question comes from Kelly Bania with BMO Capital Markets.
Just wanted to talk a little bit more about inventory. I think the total inventory was up and with the decline in discretionary inventory, I think it means that the consumable inventory might have been up maybe 19% or 20%. So I was wondering if you could just talk about that, if that's related to SKU changes. And just in general, when do you expect to get into a normalized inventory position really across both categories?
Yes. No, I think the teams have done a lot of nice work on inventory, and you're absolutely right on what you're thinking about as far as trajectory. I think that they've done a really good job here threading the needle. And so we're seeing both sides of that. We're seeing the nonconsumable side inventory drop on a per store basis. And to your point, we're seeing the consumables increase. But that's us getting improvements in our in-stock, which is helping to drive sales. So they're doing a good job of balancing both of those things.
Our next question is from Chuck Grom with Gordon Haskett.
I just want to circle back a little bit on Simeon's question, but just looking at it from the margin angle. It looks like operating margins this year are going to finish in the high 5%, low 6%, if we back out the incentive accrual. So when you look back to pre-COVID, you guys were running in that, call it, high 7%, mid-8% range. Just curious when you look ahead, now that the business is starting to stabilize, how quickly you think you could get back to those levels? And when you look at the P&L, what are the key ingredients to get you there?
Yes. Chuck, thanks for the question. And I would tell you, what we feel good about right now is getting back to the basics here. All the work that we're doing, as I indicated, we're probably just crossing over that 35-yard line. And so a lot of moving parts yet, but I think you could tell by my voice, and I can tell you, if you were here in this building, you could see the enthusiasm and in our stores of what is starting to really start to take hold. And that is getting back to the fundamentals that have made this company successful over the years.
Our final question is from Corey Tarlowe with Jefferies.
Great. You've seen now positive traffic for 2 quarters in a row, I believe. I was curious to get your thoughts. And within your outlook, what's embedded for traffic and ticket within your guide? And then if you could also maybe just touch on what you're expecting ahead from a wage standpoint and what's embedded in your guide as well there?
Yes, sure. I'll start and pass it over to Kelly. Yes, the very back half of Q3, we started to see some good glimmers of positive traffic. And then as we move through Q4, we saw that sequentially increase. And not that we're giving Q1 guidance, but that's continued into Q1. And so we feel very good about what we're seeing on that traffic side. And we believe, again, by all these actions we're taking on getting back to the basics should manifest itself in a strong traffic growth as we continue to move into the quarters ahead. And that's why the comp guidance that we gave is so important because we believe that we can see that positive traffic.
Absolutely right. And then on the wage side of things, I'll tell you, we feel really good about our wages. We've increased wages almost 30% since 2019 and feel we're in a good position there. We're not seeing a lot of stress on the wage front. So a more normalized annual wage growth is what we're expecting. And then with all of the investments that we've made in the labor hours, we feel like we are well positioned on that front in 2024. And all of that's considered in the guidance that we gave. So feel good about that as well.
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.