The conference call operator welcomed everyone to Dollar General's Second Quarter 2023 Earnings Conference Call and introduced the host, Mr. Kevin Walker, Vice President of Investor Relations. Mr. Walker was joined by Jeff Owen, the CEO, and Kelly Dilts, the CFO. He cautioned the listeners that today's comments may include forward-looking statements which are subject to risks and uncertainties. At the end of the remarks, the call will be opened up for questions, with the request that each person limit themselves to one question and a related follow-up.

Jeffery Owen gives his condolences to the families and friends of those lost in the Jacksonville store, as well as to the local community. He then outlines the progress made in the second quarter, such as improved execution, lower prices and an improved shopping experience. He also outlines the plans for the coming months, such as rightsizing inventory levels and continuing to improve execution.

In the second quarter, the company accelerated their investment in labor and made targeted price reductions on key items. This resulted in an increase in net sales of 3.9%, growth in market share, and unit share growth. Customer satisfaction and store standards have also been positively impacted by these actions.

In Q2, the company experienced a slight decrease of 0.1% in same-store sales due to customers feeling financially constrained and a decrease in customer traffic. However, there was an increase in average ticket, and the sales trend improved in May and June before declining in July and August. The company is making changes such as expanding promotional markdowns to improve customer satisfaction, drive sales, and lower their cost to serve.

Walmart is investing in additional retail labor, inventory forecasting tools, and other areas to strengthen their position and restore strong execution. These investments align with their DG Forward strategy and will help them deliver on their value and convenience proposition for customers. The goal is to be a force for opportunity for customers, associates, communities, and shareholders.

In the second quarter, Dollar General reported a decrease in gross profit as a percentage of sales due to lower markups, increases in shrink, markdowns, and inventory damages, and a greater proportion of sales coming from the consumables category. SG&A as a percentage of sales increased due to retail labor, utilities, depreciation and amortization, and rent. Operating profit decreased 24.2% to $692 million and as a percentage of sales, operating profit decreased 262 basis points. Interest expense increased to $84 million due to higher average borrowings and higher interest rates. The effective tax rate for the quarter was 22.9%. EPS for the quarter decreased 28.5% to $2.13.

In the second quarter, merchandise inventories increased by 3.4% on a per store basis, lower than the 14.7% increase in the first quarter. Strategic actions taken to reduce inventory growth rates will result in $95 million in additional markdowns and associated costs, which will be a headwind to operating profit in the back half of the year. Year-to-date, cash flows from operations decreased by 23%, and total capital expenditures were $768 million. The company paid a quarterly dividend of $0.59 per common share and did not repurchase shares. Their capital allocation priorities focus on investments in the business, such as existing stores, new store expansion, and strategic initiatives.

The company is committed to returning cash to shareholders and targeting a leverage ratio of 3x adjusted debt to EBITDAR in order to maintain their investment-grade rating. They have updated their sales expectations for the year due to softer sales trends and a worsening shrink environment. As a result, they have updated their earnings per share guidance to a net sales growth range of 1.3-3.3%, same-store sales in the range of -1% to 1%, and EPS in the range of $7.10-$8.30, a decline of -34% to -22%. These changes include up to $170 million of actions and investments.

The company's updated guidance includes an 8 percentage point headwind from lapping last year's 53rd week and higher interest expense, a 22.5% effective tax rate, a capital spending range of $1.6-1.7 billion, and no share repurchase activity. The guidance does not include any significant impact from student loan repayments. The company expects a total incremental operating profit headwind of up to $170 million due to increased markdown activity, additional retail labor, and investments in other areas. They expect negative comp sales in Q3 but positive traffic in Q4, with a greater overall sales benefit and improved EPS in the fourth quarter. Gross margin will be pressured by increased markdowns, shrink, sales mix, and lower inventory markups in the back half of the year.

Dollar General is taking steps to improve their distribution center capacity, lower carrier rates, expand their private tractor fleet, and invest in their stores and strategic initiatives. These investments are expected to have a positive impact on their financial results in 2024 and beyond, while also driving profitable same-store sales growth, healthy new store returns, strong free cash flow, and long-term shareholder value. This is all part of their DG Forward strategy, which is designed to benefit their customers, associates, communities, and shareholders.

Dollar General is focused on driving profitable sales growth in rural areas, and has plans to execute 3,110 real estate projects in the US in 2023, including 990 new stores, 2,000 remodels and 120 relocations. Of the new stores, 80% will be in larger store formats, and 80% of the remodels will be in DGTP format, allowing for more cooler doors and fresh produce. During Q2, 19,000 cooler doors were added, and the company plans to install a total of 65,000 cooler doors in 2023.

Dollar General is continuing to invest in expanding their reach by investing in their digital front porch and partnering with DoorDash to reach more customers. They have seen a 20% increase in monthly active users and success with their DG Media Network, which is providing a more personalized experience while increasing returns on ad spend. They are also expanding their produce offering to more than 10,000 stores and are currently offering it in 4,400 stores, with plans to reach 5,000 stores by 2023.

Dollar General has implemented a digital strategy to provide customers with a convenient and personalized shopping experience, and has opened its first store in Monterrey, Mexico. Additionally, the pOpshelf format provides a stress-free shopping experience and 190 stores have been opened in 20 states. The company plans to open 230 stores by the end of 2023 and DG Well Being is also being used to extend the company's reach.

Dollar General is focusing on expanding their healthcare product assortment and partnering with a third-party payment platform to offer health plan supplemental benefits to customers in their stores. They are also investing in their supply chain, operating model, and IT foundation to improve their execution and fuel their growth. This includes adding capacity and increasing the productivity of their distribution centers, as well as introducing large-scale automation to replenish stores.

DG Forward is a transformation of the retail operating model that is designed to improve the in-store experience for customers and associates, reduce complexity, and lower costs. It involves optimizing rolltainer delivery, rolling out self-checkout options, and adding automated functionality to more facilities. The company is also expanding its private tractor fleet to save on associated costs and plans to have more than 2,000 tractors by the end of 2023. All of these efforts are powered by the people of the company.

Dollar General recently hosted its Annual Leadership Meeting in Nashville, showcasing the strength of its people. The company is investing in its people and creating opportunities for growth and development. It has a robust internal promotion pipeline and a high internal placement rate. Additionally, many of its private fleet team began their careers in either a store or distribution center. Dollar General is committed to continuing to elevate the experience for its people and to serve its customers with the value and convenience they deserve.

Dollar General has taken their labor investment for the year from $100 million to $150 million and Jeffery Owen has stated that they feel good about the investment. The investment is meant to provide stability in the supply chain and in the store, and this will lead to long-term growth and shareholder value.

Dollar General has deployed a new tool, smart teams, in every district to help accelerate sales and improve store standards. The company has also invested in reducing inventory and investing in technology to optimize inventory and supply chain stability. These investments have led to increased stability in stores and also decreased store manager turnover. These investments are expected to help the company achieve excellence faster in the back half of 2023 and 2024.

Dollar General has done a lot of work to optimize their labor hours and inventory levels, resulting in an 8.5% decrease in inventory year-over-year and a 40% reduction in inventory receipts in the second quarter. They are looking to further reduce their non-consumable inventory and drive sales, and when asked if Dollar General can get back to their algorithm of mid-single-digit unit expansion, 2% to 4% comp growth, stable to growing margins and buying back 4% to 5% of the stock to get to double-digit EPS growth by 2024, Kelly Dilts answered yes.

Dollar General is focused on long-term results and delivering for their customers. They have a strong business model and are taking action to strengthen it. This includes opening new stores, driving a 2-4% comp, increasing gross margin rate, and lowering inventory and SG&A costs. They are also seeing success with their DG Media Network, private fleet, private brand opportunities, supply chain efficiencies, health initiative assortment, and lower shrink.

Jeffery Owen is pleased with the new store returns and the store format innovations that have allowed the business to cater to different communities. He believes that the operational excellence that the business is investing in will benefit not only the core, but also new store opportunities. He is optimistic about the future of store growth.

Charles Grom and Kelly Dilts are discussing the long-term prospects of their real estate model and how it will lead to consistent and excellent execution at store level. They are also discussing the change in the guide and how it is a result of slower transactions and higher expected shrink. They are expecting the customer to respond to their actions and their own financial situation in the back half of the year, which will affect the net sales and EPS range.

Jeff assesses the low-end backdrop in July and August as being weaker than three months ago, which is putting pressure on Q3 comp sales, gross margin, and EPS. The company is taking inventory actions and investments to improve the situation and may pull some of the investments forward into Q3 if it makes sense.

Jeffery Owen discusses how customers are still feeling the effects of gas prices increasing and the SNAP reduction and lack of tax refunds. Despite this, Dollar General has taken action to offer value to customers and is seeing initial signs of progress. They have also deployed smart teams to improve in-stock levels and store standards in order to better serve customers. Additionally, Dollar General has been able to compete well in the competitive landscape and has announced actions to further course correct.

Kelly Dilts explains that the current headwinds in sales performance are transitory and that they are well-positioned to improve supply chain efficiencies and gross margin with automation, DG Media Network, DG Fresh, and NCI. They are also investing in labor and looking at an end-to-end operating model to lower their cost to serve and inventory management to lower cost to serve over the next couple of years.

Jeffery Owen responds to a question from Simeon Gutman about the underperformance of the company's comps. He explains that the underlying traffic is okay and that the underperformance is due to lapping some tickets, as well as pricing, merchandising, and other related store issues. He suggests that these factors should be taken into consideration when diagnosing the underperformance.

The company believes that increasing in-stock levels in stores, deploying more labor, and improving their supply chain will help drive performance. Additionally, the company has seen success with their price increases, and they are planning to offer promotions around their NCI inventory for the holidays. All of this is expected to help with unit share gains, and eventually lead to increased traffic and comps.

Jeffery Owen explains that the company is focused on operational excellence and returning to it, as it is a successful model. The value proposition of a stable supply chain and consistency at store level generates tremendous operating profit, allowing them to invest back in the business. They are also pleased with the new stores and want to take advantage of the opportunity to be a first mover. They will continue to balance their investments and focus on returns and return on capital.

Jeffery Owen of Dollar General is confident about the company's ability to return to operational excellence and grow in the next two years. He believes the investments of $170 million, such as reducing inventory and investing in labor and demand forecasting tools, will accelerate progress and lead to more efficient working capital. He estimates that the investments will allow them to pull out $500 million or more in inventory over the next 12 to 18 months.

Dollar General's CEO Kelly Dilts and CFO Rupesh Parikh answered questions on the company's financial guidance for the year. The wider range is due to customer reaction to the actions Dollar General is taking, and they have a high confidence level that they will deliver within the range. Inflation in the consumables business is expected to be similar in the third and fourth quarters, and there is hope that the fourth quarter could be positive in terms of sales. The call ended with closing comments from Jeffery Owen.

Dollar General has faced some challenges in recent quarters, but is taking action to address them and make investments to accelerate progress in the back half of the year. They have a strong foundation and a bright future, and are committed to doing what they say they will do. Additionally, they are standing with the victims of the Jacksonville incident and supporting their employees and customers during this difficult time.

This summary was generated with AI and may contain some inaccuracies.