Release Date: August 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Net sales increased by 4.2% to $10.2 billion in Q2.
- Dollar General Corp (DG, Financial) continues to grow market share in highly consumable product sales.
- Increased employee presence and improved in-stock levels in stores.
- Significant progress in optimizing distribution capacity and improving on-time and in-full truck deliveries.
- Reduction in total inventory by 7% compared to the prior year, with a focus on maintaining quality.
Negative Points
- Same-store sales increased only by 0.5%, below expectations.
- Gross profit as a percentage of sales decreased by 112 basis points due to increased markdowns and inventory damages.
- Increased promotional activity has pressured both sales and gross margin.
- Shrink continues to be a significant headwind, impacting financial results.
- Elevated rate of maintenance expenses and higher-than-expected wage rate inflation.
Q & A Highlights
Q: Todd, the market is saying that Dollar General and the small box value model is simply structurally challenged either because there's too many stores, it's not as sufficiently exposed to the online channel or not attracting enough incremental customers perhaps due to competition. So why is that wrong? And as you are trying to invest in markdown and promotions to regain customers, how do you build back the margin over time? Is it simply a function of leveraging sales growth?
A: (Todd Vasos, CEO) We fundamentally don't believe that the model is structurally challenged. Our new store productivity and strong returns continue to serve us well. The lower-end consumer is financially strapped, impacting their ability to support their families. We are not losing market share but did not get our fair share of available market share in Q2. We are going on the offense with promotional activities to regain that share. (Kelly Dilts, CFO) Building back margin over time involves leveraging sales growth, addressing shrink and mix headwinds, and focusing on back-to-basics efforts.
Q: Todd, I want to ask if this transition period changes the way you think about reinvestment now going forward, thinking about all the levers of pricing and merchandising and labor, meaning that even if the business comes positive, that margins just stay subdued for an extended period of time while you get all the pieces in order. And then the second part of it is, are there any cohorts of stores where it would make sense to rationalize them because they're under comping and or they're margin dilutive to the overall chain?
A: (Todd Vasos, CEO) The biggest opportunity we have in margin is in the Shrink area, and we are starting to see some benefits from our efforts. Our back-to-basics plan is showing progress, with improvements in staffing, in-stocks, and turnover rates. We are also reducing inventory and simplifying work at the store level. We believe these actions will help us regain momentum and improve financial results.
Q: Could you elaborate on underlying traffic versus ticket as the quarter progressed? Any concerns that are now more top of mind today relative to, call it, three months ago from your survey work on the low-income consumer? And have you seen any improvement in August comps?
A: (Todd Vasos, CEO) We saw a step down in transactions mid-quarter, with June being the strongest month and July turning negative. The last week of each calendar month was the weakest, indicating that our core customer is running out of money. Our survey work shows that our core customer feels worse off financially than six months ago. We are playing offense to drive sales and provide value to our customers.
Q: Is there any more conservatism than normal with this particular guide? And then, second, as you look at the promotional offers that you've done, I guess, in Q2 and then what you plan to do in the back half of the year, how is the consumer response versus your expectations versus what you typically see when you run these increased promotions and markdowns?
A: (Kelly Dilts, CFO) The guidance reflects softer sales trends and the impacts associated with those sales, including sales mix-related margin and markdowns. The guidance assumes a macro neutral to slight softening of the consumer. (Todd Vasos, CEO) We ramped up our promotional cadence in July, and the consumer response has been positive. We are seeing engagement from our core customer, and we believe the promotional activities will continue to drive traffic and sales.
Q: Todd, in the past, you've always talked about how in tough times your customers need you even more, and certainly, this is a tough time with inflation and your core customers are suffering a bit. How come you don't think you're seeing the normal share gains or spending behavior from your customers like you have in the past?
A: (Todd Vasos, CEO) The trade-in from middle and upper-middle-income customers has been slower than anticipated, likely due to a still decent job market and lower unemployment. More online activity from this cohort may also be impacting the trade-in rate. We are ready to serve our customers when they need us, and we are looking at ways to offset this trend.
Q: Can you talk about how your competitive price gaps have evolved through this year, however you look at that? And maybe just elaborate more on the actions that you're taking? How much of the assortment are you looking to mark down here, maybe the categories that you're focused on? And I guess just the last piece of that as we try to bridge the guidance, how much of that guidance change reflects those price investments?
A: (Todd Vasos, CEO) We feel very good about our everyday price position, which remains competitive. Our promotional activities will focus on categories that drive traffic and help bridge the gap for our core customer, such as food, cleaning, and paper products. (Kelly Dilts, CFO) The markdown investment for the back half of the year will be similar to last year, and we expect the promotional rate to be in line with 2019 levels.
Q: Todd, maybe how do you think about ROI of promotions? And I know a couple of years ago, you did promotions in the fourth quarter to jump start you going into the year the following year. And I think that lifted comps by a couple of hundred basis points. How do you think about this environment versus that? And then lastly, when I think about, right, your the comp that you need to leverage expenses. I think it's still in the mid-3s. Is there an unlock a rolltainer type unlock out there that can move that down materially, or we're kind of stuck with that 3% plus number?
A: (Todd Vasos, CEO) We believe the ROI of promotions is strong, as it drives traffic and creates a stickier consumer. We are using rationalization tools to ensure the best use of our spend. On the labor side, while labor rates are up, we feel good about the hours available to our stores. We are working on initiatives like rolltainer sort to ensure enough labor to satisfy the customer and provide the best shopping experience.
Q: I just wanted to ask on inventory. Inventories are down, yet in-stock levels are up, and seemingly markdown should also be increasing, so unit velocity should increase. So I'm curious how you think about that dynamic? And then secondarily, consumable sales have continued to increase, but seasonal sales were only down slightly close to flat. I'm curious if you saw anything to call out in that category as well?
A: (Todd Vasos, CEO) We saw a deceleration in consumable sales, indicating that our core consumer is very price sensitive. We are stepping up promotional activity to reengage the consumable side of the business. (Kelly Dilts,
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
