Release Date: May 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Net sales increased by 6.1% to $9.9 billion in Q1 2024.
- Same-store sales increased by 2.4%, surpassing the top end of Q1 guidance.
- Opened 197 new stores during the quarter, expanding community reach.
- Significant reduction in inventory levels, improving cash flow from operations by 247%.
- Positive customer feedback on the removal of self-checkout, enhancing customer engagement.
Negative Points
- Gross profit as a percentage of sales decreased by 145 basis points due to increased shrink and markdowns.
- Shrink continues to be a significant headwind, worse than initially expected.
- Promotional environment has intensified, potentially impacting margins.
- Operating profit decreased by 26.3% to $546 million.
- EPS for the quarter decreased by 29.5% to $1.65.
Q & A Highlights
Q: Why is shrink worse than you expected? And how have you been able to offset that while still maintaining your full-year EPS guidance? What risk does the more intense promotional environment create to your margins in the second half of the year?
A: Shrink has been a significant headwind, but we are seeing positive indicators from our predictive models, suggesting improvement in the back half of the year and into 2025. To offset shrink and promotional pressures, we are leveraging DG Media Network, private brands, global sourcing, category management, inventory optimization, and supply chain efficiencies. We believe our pricing strategy and category management will help mitigate margin risks from promotional activities.
Q: Could you elaborate on customer behaviors observed in Q1, particularly regarding consumables versus discretionary spending? How does the Back to Basics strategy stand today relative to the overall opportunity?
A: Customers remain cautious, prioritizing essential purchases due to inflationary pressures. However, during key periods like Easter, we saw strong discretionary spending. Our Back to Basics strategy is progressing well, with significant improvements in supply chain, merchandising, and store operations. We are confident in our approach and see positive customer responses, particularly in transaction growth.
Q: Why did you change the real estate plan to reduce new store openings and increase remodels? Is this a long-term shift in strategy?
A: We reallocated capital to increase the number of remodels, particularly in mature stores, while pushing some new store openings to 2025. This reallocation supports our Back to Basics work and enhances our existing store base. We believe this is the right move for now, but we will continue to evaluate our real estate strategy.
Q: Given the current environment, do you still believe in achieving long-term margin targets? How do you balance promotional activities with structural price investments?
A: We remain confident in our long-term margin targets and believe our Back to Basics actions will strengthen our foundation. We balance everyday value with promotional activities, leveraging our strong category management and private brand offerings. We continue to monitor the competitive landscape and adjust as needed to maintain our pricing position.
Q: What are your assumptions for non-consumable category comps for the rest of the year? How do you plan to manage the mix shift between consumables and discretionary items?
A: We expect non-consumable categories to improve as we layer in promotional activities and offer strong value. Our holiday lineup is promising, and we believe the discretionary side of the business will get healthier as we move through the year. We will continue to support our customers' needs while fostering growth in discretionary spending.
Q: What gives you confidence in driving a strong profit recovery in the second half of the year?
A: Our Back to Basics work is gaining momentum, and we expect it to fuel strong top-line and bottom-line growth in the second half. We are seeing positive indicators in customer traffic, market share, and inventory management, which support our confidence in achieving our full-year guidance.
Q: How confident are you that the investments to address shrink are fully baked in and won't require further increases?
A: We are confident in our current investments, including wage increases and additional district managers. These investments are already showing positive results, and we believe they are appropriate for addressing shrink and supporting our overall strategy. We will continue to monitor and adjust as needed.
Q: How do you balance the growth rates of consumables versus discretionary items to alleviate margin pressure from mix?
A: We believe the current shift towards consumables is temporary and driven by customer needs. We will continue to support our customers with essential items while fostering growth in discretionary categories through value offerings and promotional activities. We are prepared to adjust as customer spending patterns evolve.
Q: What are your plans for inventory management and supply chain optimization with the new distribution centers coming online?
A: Reducing inventory remains a high priority, and we are focusing on inventory optimization to improve in-stock levels and simplify operations. The new distribution centers in Arkansas and Colorado will enhance our supply chain efficiency and support optimal product flow. We are already seeing improvements in on-time and in-full delivery rates.
Q: Have you seen any initial positive results from removing self-checkout in the remodeled stores?
A: Customer feedback has been overwhelmingly positive, with appreciation for the increased interaction with associates at the front of the store. This change is expected to improve shrink results and enhance the overall customer experience. The positive response from the initial 9,000 stores gave us confidence to expand the initiative to an additional 3,000 stores.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
