Dollar General Corporation (DG) Earnings Call Transcript & Summary

Good morning, everyone. My name is Karen Short, and I'm the staples and hardline retail analyst at Barclays. Today, we're very pleased to once again welcome Dollar General to the Barclays Staples Conference. With us today, we have Todd [ Vasos ], CEO; John Garratt, DG's CFO; and Jeff Owen, COO. I'm not sure if Dollar General could move the camera fast enough. We also have Donny Lau, VP Investor Relations and Corporate Strategy, [ on the call ]. Also listening to this [indiscernible] and Todd. So I just wanted to just give a [ introduction ] for Jeff. Jeff first joined the company [indiscernible] in 1992. He remained with the company for 20 years and then returned to DG in [ 2015 ] as an Executive Vice President of Store Operations. He was promoted to COO in August of 2019. So I believe I'll hand it over to Donny to read what is supposedly a slightly shorter safe harbor statement.

Thanks, Karen. Today's comments will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 which can be identified because they are not limited to statements of historical fact. Such statements include, but are not limited to, statements about our strategy, plans, initiatives, goals, financial outlook or beliefs about future matters, including, but not limited to, beliefs about COVID-19's future impact on the economy, our business and our customers. These statements are subject to risk and uncertainties that could cause actual results or events to differ materially from our expectations and projections. These factors include, but are not limited to, those identified under forward-looking statements in our earnings release issued August 27, 2020, under Risk Factors in our 2019 Form 10-K filed on March 19, 2020, and in our Form 10-Q filed on March 27, 2020, and in the comments that are made during this event. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information to discuss today, unless required by law. We may also reference certain financial measures that have not been derived in accordance with GAAP. Reconciliations to the most comparable GAAP measures are included in our earnings release issued on August 27, 2020, which can be found at investor.dollargeneral.com under News & Events. Now it's my pleasure to turn the event back over to you, Karen, and Todd, Jeff and John.

Thank you very much. So the format for this will be fireside-only with just me asking questions. Unfortunately, no Q&A given the format. So with that, I just will launch in. Obviously, with 17,000 stores, you're a dominant force, not only in the discount space, but in all retail. And so I wanted to start a little bit with the fact that I think some investors have been questioning whether or not there really is any more share for you to gain from a demographic perspective, not new store geography perspective, but a demographic perspective because you did gain so much share in the '08, '09 recession. So I wanted to get a little bit of your thoughts on this. And I think it's even more remarkable because what you're seeing on comps is not a function of price sensitivity with the consumer particularly. They're just not -- don't appear to be particularly price sensitive. So any color on that to open up would be great.

Yes, Karen, this is Todd. Thanks for the question. Yes, I would tell you that we're really pleased with our positioning right now and where we sit as we move through COVID. But even prior to COVID and you start to think about who our core consumer is and then also those consumers that we've seen trade down into the brand. Even before COVID, our fastest-growing segment by a percentage basis was really a higher-income consumer. So we were already getting, if you will, a trade down. But it was really not a trade down before COVID, I would characterize it more in that it was trial, right? We've done so much work to the box over the last couple of years with our cooler initiatives, with our NCI programs, with our digital programs. Our digital programs are reaching a whole new customer base that we knew was out there, but we, quite frankly, weren't tapping into them through the old analog way that we went to market through advertising and brand awareness. Now with digital, we're able to tap into that, and we're seeing her come into the store and we're seeing multiple purchases. If you look at COVID now, what we've seen is an acceleration of that little higher-income, more digitally savvy consumer. And what we're seeing there is not only did she come in looking for goods because she really needed it, what we're finding is that she continues to do and repeat business with us over the last few months. And that really is a testament to that box. And she's finding what she needs, she loves the prices. To your point, we're delivering a pretty strong top line in a pretty flat, inflation type of an environment that we're living in. But again, I think when you think of '08, '09, and you start to think about the back end of COVID, and where the economy is moving right now with a lot of people out of work. We are positioned well. We're a retailer that does very well in good times, and we do well in bad times. When -- in bad times, our consumers just need us more and an even broader selection and cross-section of consumers need us more.

And you mentioned in one of the group meetings that -- obviously, we know you're gaining share because of fresh and the NCI, and I think your execution is pretty widely understood that your execution is extremely strong. But you also mentioned drug. So I was wondering if you could just [ iron on ] that a little bit because I think it does seem to be somewhere [ ready ] to have a pretty meaningful price gap advantage?

I'm sorry, I missed the...

Just price gap.

Price gap? Yes. So you're cutting out, I'm sorry, Karen. So the price gaps, if you take a look at it, we are well positioned. We're a as well positioned as we've been as an organization in the 12 years nearly that I've been here and we continue to be at parity with mass, 20% or so cheaper than grocery every day and 40% to 44% cheaper than drug every day. And I would tell you that many of our outside share gains that we've seen really over the last few years and continues in 2020 is really coming from the drug side of the business, and that's really where we're seeing a pretty strong trade into the brand. And that's for a lot of reasons, but the main reason being the work that we've done to that box to make it relevant. And then you couple that with our pricing, she is really starting to resonate with that and making those trips to Dollar General for her every day over-the-counter needs as well as her everyday basics and nonconsumable needs for that matter.

And then maybe actually, in terms of the trade down that you did comment on, on the conference call, I think that was picked up by a lot of media outlets, and I wanted to see if you could just elaborate a little bit on that. And then along those lines, you talked about the survey that you do fairly frequently with the customer base. What is -- how is she responding today with the survey, what is that [ like ]?

Yes. So if you take a look at where the customer is today, let's start there, and then we'll talk about that trade down and what we're seeing. If you take a look at it, if you dial the clock back to March and April, we, as many consumable retailers, saw a surge in business. And obviously that business was directly attributable to COVID-19. And it really was the consumer trying to find and fill her pantry with everyday household needs, whether it be paper cleaning, food products, whatever it may be. What we're starting to see now over the last, call it, 2 months or so has been this, while she is no longer doing the full pantry fill in her home, what she is doing is not letting her stock actually go down inside of her store. And she's replenishing, if you will, her stock. So if she consumes it during the week, she's rebuying it to keep stock levels high. So we're seeing that phenomenon actually happen right now. You couple that for Dollar General with the trade down we're seeing, and here is what we're seeing through our credit card data as well as our consumer work that you mentioned, Karen, is that we're seeing a little higher-income consumer come into the brand. We're seeing through our credit card data and what she's telling us is that she's made multiple trips over the last few months into the brand to buy her needs. She likes what she sees and she's continuing to shop us. That gives us great confidence as we think post-COVID, whenever that will be, that we've got a consumer that is engaged in the brand, and it will be up to us here at Dollar General to make sure that we continue to engage here and keep Dollar General top of mind to that consumer. That's really the work that we did in '08 and '09. We've got the playbook for that. What we've actually done is we've digitized, if you will, that playbook. It was pretty analog back in those days, and we're ready to pull the trigger on that when we believe the time is right. We just don't believe the time is quite right yet. She is still completely in a COVID phase right now. But as we get to the back end of this and hopefully sooner than later, we'll be able to start to put those pieces out there to keep Dollar General top of mind.

Okay. That's helpful. And then when you think about -- I mean, obviously, you're very much in control of your destiny, and you laid out all the various initiatives that will continue to drive sales for quarters to come. When you think of the various initiatives, maybe could you just rank order what you think will be the biggest drivers? And then I also wanted to kind of pivot on to gross margin with the same question in terms of what drivers were and then the sustainability?

Sure. I'll start with the drivers and then turn it over to you, John, for the margin drivers. Karen, to your point, we've done so much work in that box pre-COVID, and we have not slowed down even during these few months we've been dealing with the COVID-19 pandemic that's been out there. So proud of the team. And quite frankly, when you start to look at the ranking, our cooler initiative, by far, continues to be the biggest sales driving initiative that we have. And I would tell you because of DG Fresh and because of all the expansion that we've done with higher-capacity coolers as well as cooler doors, we've actually turned the clock back. If you think about it, we said we were in the sixth and seventh inning of a baseball game, if you will, before we started to do a lot of the work and especially before DG fresh. We're actually -- we have turned the clock back. We're actually now only in the fourth inning. We see a tremendous runway ahead of us there. That's why we're confident that it is and will continue to be our #1 sales driving initiative as we go forward. NCI or the nonconsumable initiative would be second. I would tell you that, that is a great initiative. It's been working fabulous so far. And the great thing is we've been able to take the learnings from those thousands of stores that we've already done and applying back into the mother ship, if you will, or our nearly 17,000 stores. So many items in many of the planograms. And I believe that is one of the reasons why we've had 9 consecutive quarters of nonconsumable same-store sales growth. So we've been on the positive side of that, even before COVID. And now with COVID, we're showing the consumer a lot there. We've got a tremendous amount of other initiatives, but BOPUS should be and our digital initiatives should also drive sales into the future as well as some of the Better For You initiatives and our over-the-counter, OTC initiatives continue to gain momentum and strength. John?

And on the gross margin, very pleased with the performance there, up 167 basis points this quarter coupled with 5 consecutive quarters of growth in our gross margin. And you really can see the initiatives contributing. DG Fresh, NCI, as Todd mentioned, when you look at the key drivers for this quarter, number one is initial markups. And when you look at what's driving the initial markups, it is DG Fresh. DG Fresh is having a significant impact on taking the cost out we expected it to. And that benefit will only grow as we scale it and get the efficiencies of serving more stores from the existing DCs as well as the sales benefit it drives. Number two was mix. And when you look at mix, NCI, as Todd mentioned, is having a big impact there. Not only in the NCI stores, but as Todd mentioned, as we spread the best of the best across the chain, it's really making that piece of the box very relevant. So while we certainly benefited from stimulus checks as well as just a shift of wallet as people were stuck in their homes, looking to fix up the house, do something to the yard, buy toys for the kids, what we've done to that box with the rotation of goods, they -- just dramatic value and the more aspirational products really made that relevant to get a big share of that business as it came in. Can't expect that kind of shift every quarter. But I think what we've done with that box really makes it relevant and sustainable to continue to drive strong growth in the nonconsumables, as Todd mentioned, evidenced by 9 consecutive quarters there. The other thing within mix is you also have mix within the mix. So within consumables, you have higher-margin goods like health and beauty that have margins more like nonconsumables, higher margins that have been doing particularly well there. As we noted, given the -- not only the convenience, but the significant price advantage we offer in those categories. And then number three is lower promotional markdowns. That's something we've been talking about for a number of quarters, and we continue to be very targeted on our promotional activity, really leveraging the tools we've put in place. We know what really drives the incremental traffic, the incremental sales, what drives profitable sales growth. And so we've gotten very refined on the playbook for different situations on what promotional activity to do. In this environment, as we're priced right where we want to be in terms of the indexes, haven't needed to be as promotional. And so that's been the key 3 drivers. And as you look ahead, as these initiatives scale, that's the gift that keeps on giving and we obviously have a lot of other levers we've talked about between private label expansion, foreign sourcing expansion, shrink with the completion of the EAS units in the 40% increased tagging and then all the work the team is doing to drive supply chain efficiencies. Feel very good about the impact of initiatives and the levers positioning us to continue over the long term, continue to put us in a position to expand gross margin while driving the topline, too.

That's helpful. And then thinking about the holiday, I guess, I'm curious on your views. On one hand, I could argue that it could be very promotional, just no real Black Friday and Prime Day while we're heading [ towards 4Q ]. On the other hand, I could argue that the consumer will do anything and everything she can to make her home custom. So how are you thinking about that just from a merchandising perspective? And I guess also, I'd ask the same thing from an inventory perspective? Because your inventories were remarkably good, I guess, this last quarter compared to some of the other retailers we've seen report.

Yes. I'll take the top line. And Jeff, I'll kick it over to you for the inventory discussion. If you take a look at it, we're fairly bullish on holiday. And here's why, if you think about the Dollar General consumer and even this trade down consumer that we've talked about, for us, it is more about Christmas in your home. It always has been, right? So when you think of our seasonal offering, it's about decorating your home, some small gifts for the kids or relatives. We're not the big gift-giving type of a retailer that's out there. For -- and those retailers, we don't know yet, but I think it will be a different holiday. But for those that are really geared toward, like Dollar General, for making sure that your home is festive and you have something for the kids to look forward to even in the middle of a pandemic, I think we'll do pretty well. And that's why we're pretty bullish on our offering. And we, for sure, didn't cut any inventory, and I'll turn it over to Jeff, but we've actually went out and actually bought additional inventory, especially in the closeout realm. Jeff, you may want to just talk inventory.