The conference call for Dollar General's Third Quarter 2023 Earnings is being held, with Robert as the operator and Kevin Walker, the Vice President of Investor Relations, as the speaker. Forward-looking statements and risks and uncertainties are mentioned, and the call will end with a Q&A session.

Todd Vasos, CEO of Dollar General, expresses his excitement for being back at the company and his belief in its growth and ability to serve customers. He acknowledges the challenges customers are facing and the company's commitment to providing value and convenience. He also mentions their focus on refocusing efforts in stores, supply chain, and merchandising to improve the customer experience.

The company is investing $150 million in store labor hours this year, but they have decided to redeploy some of those hours away from smart teams and towards front-end activities and store level inventory management. They plan to increase employee presence at the front end of stores and reemphasize the role of store teams in inventory management. This includes allocating more labor to front-end activities, reducing the span of control for district managers, and focusing on getting products on shelves more quickly.

The company is taking actions to improve retention at the store manager level, which will benefit the entire store and team and lead to a better customer experience and improved sales and shrink results. They also plan to focus on their supply chain, with a goal of on-time and in-full deliveries to simplify work for store teams and improve the overall experience for customers and associates. This includes optimizing inventory and implementing productivity improvement initiatives.

The company is working to improve productivity rates by standardizing systems and optimizing product layout in their facilities. They are also reducing the use of temporary outside warehouse facilities and transitioning to new permanent facilities. These actions should result in lower distribution and transportation costs, better OTIF rates, and improved customer experience. The company is also focused on offering great value to customers, as they prioritize value in their shopping decisions. The company is currently in a good position with their everyday pricing and price gaps with competitors and other classes of trade.

Dollar General is looking for ways to provide value to their customers in a tough economic climate by promoting private brands and finding opportunities for savings. They are also focusing on simplification by reducing SKUs and improving inventory management. The company is determined to increase traffic and market share and believes that their actions will lead to long-term success. They are committed to executing the fundamentals that have been key to their success in the past and believe this will improve the customer experience and drive higher sales and profitability.

The company saw a 2.4% increase in net sales in the third quarter, with growth in market share for consumable and non-consumable products. Same-store sales decreased as a result of lower average transaction amounts, but customer traffic improved. The company's customer continues to face financial pressure, and the company plans to focus on expanding their offerings to more communities in 2024.

The company is pleased with the performance of its real estate projects, monitoring five metrics including sales expectations, productivity, cannibalization, cash payback, and returns. The expected returns for new stores have decreased slightly due to higher costs, but the company continues to see strong performance from remodel stores. In fiscal 2024, the company plans to execute 2,385 projects, including new openings, remodels, and relocations, but the number is smaller than previous years due to a focus on getting back to basics and increased capital requirements. Nonresidential construction costs have also increased significantly since pre-COVID.

The company is working to reduce costs and mitigate the impact of inflation. They have a robust pipeline of opportunities for new Dollar General stores in the United States, with a focus on rural areas and larger store formats. Additionally, they are planning to open new pop shelf locations and expand into Mexico with Mi Súper Dollar General stores. The majority of remodels will be in the DGTP format, which will allow for more coolers and potentially fresh produce in some stores.

In the third quarter, the company saw a decrease in gross profit as a percentage of sales due to factors such as shrink and increased markdowns. SG&A also increased, driven by labor costs and other expenses. Operating profit decreased by 41.1%, with a decrease in operating profit as a percentage of sales as well.

The company's interest expense for the quarter increased due to higher borrowings and interest rates. The effective tax rate for the quarter decreased due to federal employment tax credits and lower earnings before taxes. The company's EPS decreased by 45.9%. Merchandise inventories increased by 3% compared to last year, but non-consumable inventory decreased. The company is working to optimize and reduce inventory levels. Cash flows from operations increased by 15.5% and total capital expenditures were $1.2 billion. The company paid a quarterly dividend of $0.59 per share.

The company did not repurchase shares this quarter and provided an update on their financial outlook for fiscal year 2023. They expect a net sales growth of 1.5% to 2.5%, same-store sales decline of approximately negative 1% to flat, and EPS decline of negative 34% to negative 29%. The company is prepared to serve customers in a challenging economic environment and expects pressure on sales and gross margin, but also benefits from distribution center capacity, lower carrier rates, and other initiatives.

The company plans to invest $50 million in labor for their stores in Q4, with a total planned labor investment of $150 million. They also plan to invest up to $270 million in retail labor markdowns and other areas in 2023. Their capital allocation priorities include investing in their business, paying dividends to shareholders, and potentially share repurchases. They are focused on maintaining strong cash flow and improving their debt metrics. Overall, the company remains committed to their business model and financial priorities to drive growth and create long-term shareholder value.

The speaker emphasizes their focus on getting back to basics and mentions that some actions may take time to show results. They express confidence in their team and their efforts to drive operational excellence and create long-term value. The speaker thanks their employees and invites questions from analysts. The first question is about the company's ability to sustain and improve operating margins, to which the speaker responds by emphasizing the importance of the customer and their efforts to analyze every aspect of the business from the customer's perspective.

The speaker discusses the importance of reminding the organization about the basics and properly utilizing the additional labor in stores. They also emphasize the importance of having someone at the front end of the store to meet, greet, and ring up customers, as well as the negative impact of relying too heavily on self-checkout. Additionally, the speaker mentions the importance of improving supply chain efficiency and honing in on merchandising efforts.

The speaker discusses the need for SKU rationalization at Dollar General in order to move forward and improve the bottom line. They plan to eliminate SKUs that are not essential and may even simplify the shopping experience for customers. The goal is to increase profitability and return to historic levels of operating margin and profit. The speaker also mentions near-term headwinds, such as lapping reduced incentive and stock-based compensation.

In the near term, the company is expecting headwinds in 2024, including a higher effective tax rate and significant shrink. However, they are taking steps to mitigate these challenges and remain confident in the strength of their business model in the long term. They will provide more details and a holistic view in March, but believe they will eventually return to their historic levels of success.

During a conference call, Simeon Gutman from Morgan Stanley asked Todd Vasos about the financial profile of the business and if it needed more investment to reach a 7% margin. Vasos stated that he had taken a holistic view of the business and did not see a need for additional investments beyond the $100-150 million already made. He believes the current investments are being used effectively to serve customers and improve store operations.

The speaker believes that by removing the smart teams and reallocating that labor to the front end of stores and inventory management, Dollar General will see benefits. They also feel confident about their pricing and are monitoring promotional activity. They will take quick action to maintain their pricing strategy.

The speaker discusses the company's current investments and their plans for the future. They mention that they may reinvest money if necessary, but for now, they are focused on executing their current plans. They have already seen some positive results in November, but it is still early in the quarter. They also mention changes in consumer behavior and a shift in mindset for new stores.

The speaker discusses the company's results for the quarter and notes an increase in traffic and a change in trajectory for their comp. They attribute this to their back to basic work and improved in-stock rates. They also acknowledge the impact of the macro environment but believe they can overcome it by focusing on what they can control in the store. They feel they are on the right track but still have work to do.

The company has taken a step back in opening new stores this year in order to scrutinize every aspect of the business and make prudent decisions. The increased cost of building a store and internal changes have led to this decision, but the company plans to increase new store openings in the future.

The speaker discusses Dollar General's plans to expand to 12,000 locations and their success in being quick to market. They also mention an 18% return and a high success rate in real estate. The next question addresses the progress of inventory rightsizing and the influence of markdowns and clearance on improving trends.

The company has made inventory reduction a priority for this year and the next. Their progress is on track, with a 3% increase in total inventory but a 1.8% decrease on a per store basis. They have seen a significant decrease in import receipts and are confident in their inventory levels for the end of the year. They have work streams in place for continued inventory reduction and optimization. The CEO feels good about the balance between inventory reduction and sales in Q3, with more activity planned for Q4 if needed.

The company is closely monitoring holiday sales and early results show they are in line with expectations or even better. The inventory is in good shape and mostly consists of everyday items. The company is confident in their back to basics strategy and expects to see growth in the back half of the year and in 2024. The next question asks about when the company can be held accountable for consistently producing double-digit EPS growth, and for more details on factors that may impact profitability in 2024 such as incentive compensation and shrink.

The speaker is confident that the company will be able to return to its previous success in terms of shareholder and customer satisfaction. They have taken necessary actions and are continuously monitoring progress. While there may be some near-term challenges, the company is focused on achieving historical returns and will provide guidance for 2024 in the future. They are also taking action now to address any gaps within their control. Some one-time challenges in 2024 may arise, but they will be addressed at the appropriate time.

During a conference call, Kate McShane from Goldman Sachs asked about the risk of deflation in the coming year and how it would affect the company's profit and loss. CEO Todd Vasos responded by saying that while there has been some deflation in non-consumable discretionary items, it is not a major concern. The company plans to reduce initial costs and pass on some savings to consumers, especially in commodity areas. They closely monitor prices for both national and private brands. So far, there has been little deflation in center store items, but there has been some in dairy, meat, and produce.

Todd Vasos, the CEO of Dollar General, reassures investors that there is nothing alarming that will affect the company's top line in the future. He also discusses the issue of out-of-stocks in stores and the measures being taken to improve it, including a recent significant decrease in out-of-stocks. He also mentions the ongoing work streams and expects further improvements in availability for customers in the coming months.

Dollar General is making efforts to improve their inventory accuracy by training specialists and regularly reviewing their SKUs. They are also considering factors such as shrink and profitability when deciding which SKUs to keep or drop.

The speaker discusses their plans to refresh their product portfolio with the consumer and profitability in mind. They promise to provide more details in the future and assure listeners that the changes will have a significant impact on store simplification. The speaker expresses their gratitude for the opportunity to work at Dollar General and mentions the hard work ahead, but expresses excitement for the future. The conference call ends with a thank you to participants.

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