Dollar General Corporation (DG) Earnings Call Transcript & Summary

Good afternoon. Kind of still early morning, I guess, late morning. I'm Scot Ciccarelli with RBC, for anybody that does not know me. Welcome to the RBC Consumer and Retail Conference. And for this session, we have the senior management team of Dollar General, including CEO, Todd Vasos; and CFO, John Garratt; and the IR team with Kevin Walker and Donny Lau. Guys, first of all, thank you so much for joining us today. And apologies for the technical difficulties, but there's not a whole lot we can do about that. And before we get into the Q&A, Donny, I think you wanted to say a few words?

Yes. And I appreciate it, Scot. I'll try to be brief just in the interest of time. So 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, priorities, opportunities, investments, guidance, expectations or beliefs about future matters and other statements that are not limited to historical facts. These statements are subject to risks and uncertainties that could cause actual results 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 May 27, 2021, under Risk Factors in our 2020 Form 10-K filed on March 19, 2021, 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 discussed 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 May 27, 2021, which can be found at investor.dollargeneral (sic) [ investor.dollargeneral.com ] under News & Events. Now it's my pleasure to hand it back over to you, Scot.

All right. Thanks a lot, Donny. I appreciate it. Once again, welcome, guys. Surely appreciate the time. And look, Dollar General had a fabulous 2020. Congratulations on that. And the team has indicated you guys have gained a lot of market share over the past year, and that certainly makes sense based on the numbers that we've seen. I guess the main question I have to kind of start out with is, how are you thinking about your ability to retain that market share?

Yes, Scot, I'll start that out. This is Todd. Yes. First of all, let me say that even prior to the pandemic, for many years now, we've been gaining market share against all classes of trade. Obviously, drug being the largest shared owner to Dollar General, followed by grocery and then, of course, the mass areas of retail. But to your point, what we did see was, in 2020, an acceleration across the board into Dollar General. What we also saw was that through a lot of our initiatives around NCI, our non-consumable initiative, that especially discretionary share was starting to get picked up at Dollar General as well. And even up into including our earnings call, our first quarter earnings call, we continued to see that share shift. And a few reasons why we're bullish that we'll be able to keep a lot of it, one is we are very proactive starting last year. We put together a program very similar that we did back in '08, '09 coming out of that financial recession, Great Recession, if you will, but what we did was we digitized it to make it very much for today and for the consumer we were trying to reach. Because the consumer that we are trying to reach this time, that new cohort of consumer skews a little younger, kids in the family and more digitally savvy. And so we launched that back in September, and we have not let our foot off the accelerator. This isn't about item and price, this is about top-of-mind awareness, keeping Dollar General in the consideration set to these new consumers. And it's been working. And we'll continue to deploy that. And it's very targeted, by the way, Scot, as well, where we don't have to give everybody that same information. It's going right to these new consumers because we know who they are through their credit card data, and the majority of them use credit cards. So we're able to get right to the source, and it's been a big win for us.

So Todd, you talked about your non-consumable initiative. We have seen discretionary sales increase for a lot of different companies, like how do you guys try and figure out what's actually been you versus what's in kind of the industry? [ Laurie ], I think we're getting feedback.

Scot, I think that's a great question. And I would tell you that, first of all, I think evidenced by 12 consecutive quarters of same-store sales growth in our non-consumable categories is a real testament to our initiatives around NCI and around just our non-consumable business, in general, and that share-taking that we've seen accelerate into 2020. So while yes, I believe that COVID did give us some tailwind there, that train has left the station quite a few quarters prior to COVID. And the great thing is that we had a lot of quarters under our belt of good same-store sales growth and market share gains even coming into the pandemic in our discretionary categories, which that only helped us, right, because we were already ready for the business with all that work that we've done. And we are so bullish on that. We actually leaned in heavily midpart of the year so that we have a lot of goods on hand as we moved through the back half of 2020 and into the first half of 2021. And I think that's paying dividends right now. We are in a great position on inventory levels right now in our discretionary areas. And I believe that will also help us on our top line business as we move into the second quarter here and beyond.

That's fabulous. And so what are you hearing from your customers in terms of their financial health? I mean what we're hearing for the most part is the health -- the consumer is in pretty good shape. A lot of that does seem to be kind of subsidized, if you will, from the government, whether it's we have elevated SNAP and the unemployment, et cetera, creating employment issues for a lot of companies. But what are you hearing from that customer today? And then something we're getting increasing number of questions just as we're starting to see inflation creep into a lot of different places, like how do they start to net out? And so how do you want to take that?

Yes. I would tell you that the consumer is in pretty good financial shape right now. That -- the stimulus money that the government has put out there has really helped our core consumer. There's no doubt about that. Now our core consumer as well though has probably been working more through the pandemic than I believe a lot of folks gave her credit for. You got to think about who she is. She is that frontline worker. She's the retail worker. She's the health care worker, she works in nursing homes. So she was on the front lines, and that consumer has been very resilient through this pandemic. And we saw that in her ability to stock up early on in the pandemic in her buying habits. Normally, she wouldn't have money to stock up, but she did. And that just goes to show that she was in pretty good financial shape coming into the pandemic. And now to your point, on the back side of the pandemic, with the stimulus, I would tell you that she's in pretty good shape. Now the good thing about Dollar General is we're an all-weather brand, right? We do well when she has a little extra money to spend, especially through our initiatives like NCI that we talked about. It gives her more options to buy, and we're seeing her fill that basket with non-consumables, which is good to see. Now if things start to more normalize and/or go the other way, then we're in a great position as well because she needs us even more. And so again, we here at Dollar General like to say we are an all-weather brand, and we're there for the consumer on either side of that. So yes, we feel good about where she's at right now in her spending, but we're keeping a close eye because this consumer is always a little stretched.

Yes. That's more than fair. And Todd, you especially have been around this business for a really long time and going back to the recession. Kind of going into the Great Recession previously, we did have an inflationary environment. For the most part, haven't had inflation for the last, whatever that is, close to 15 years now. So can you remind us kind of the behavior you saw from that customer? And by the way, that's fully recognizing Dollar General is a different entity today than it was back then.

Right. Yes. Well, you preempted me because that's where I was going to start, but you're right. It -- Dollar General is a different company. That offering in that box, while we did a lot of work with the '08, '09, '10 time frame, it is a completely different shopping experience today. In saying that, I would tell you that a lot of the same factors come into play when you look at inflation, and that is that this consumer, again, is always stretched. And so we're always very cautious when inflation starts to creep in. And we do everything we can to protect that. And again, being a large and growing retailer, we have a lot of scale, and we're able to do a lot of different things. The other thing to keep in mind is we are a limited SKU retailer, right, 10,000 to 12,000 SKUs, so we're able to pick and choose SKUs for her that perhaps others may not be able to and have to take price increases on. And we can pick and choose for her, to be honest with you, and help her do a lot of her shopping for her in those kind of ways. Now in saying that, what we normally see is the consumer does slow down. It takes about a quarter. If heavy inflation starts to build in, now we're not there yet, we haven't seen that yet. We've seen some inflation, but not heavy. But what the consumer also does though is she consolidates trips when she has money, but she goes the other way when she doesn't. She comes more often to Dollar General, but spends less on each occasion because she doesn't know what the next week may hold. So she really conserves her money as she goes and comes to us more often during those times. So we'll watch and see, but that's been her normal mode of operation, if you will, during those times. And the great thing is, we're here for her either whether she has money or if she's struggling.

Yes. That's really helpful. And talking about -- and I know you've referenced kind of some of the share gains, whether it's against drug or grocery that you've had. We have been in a pretty benign competitive environment, promotional environment. But we started to hear, for example, Walmart talking about some price increases. Can you just kind of give the lay of the land on what you're seeing on that promotional or competitive side at this stage?

Yes. I'll start, Scot, by saying, we are in the best pricing position here at Dollar General against all classes of trade than we've been in the nearly 13 years that I've been here. We took 2020, and quietly did so, got even in a better position to get us to where we are today. So we're in a fabulous place right now against all classes of trade. And I would tell you that our algorithm on pricing is alive and well, and that is we're at parity with mass; 20% or greater less expensive to grocery every day; and 40-plus percent less expensive or cheaper than drug every day. And that has only expanded, to be honest, in the last year or so. Now in saying that, we're continuing to watch this core consumer. And we continue to watch what inflation may or may not bring. But we're in a great position either way, if some inflation does creep in, to be able to hold serve with our consumers the best we can. We'll pass on where we believe that the consumer can take a price increase, and we'll help around. As I indicated earlier, we may even trade items in and out of the store to ensure that she has the right price for the item that she can afford and needs. So we have a lot of levers at our disposal to make sure we can help mitigate any type of heavy inflation, but also any promotional environment that may exist. And I would tell you, today, we really haven't seen a very heavy promotional environment. It's been very tame for the better part of a couple of years, and it still is tame. And we'll continue to watch it though. And the great thing, again, about Dollar General, is we have a lot of dry powder to do whatever we have to do to drive market share and footsteps and traffic here at Dollar General.

So how hard is it or how long does it take to switch out a whole brand? Like you're getting price pressure from one of your big CPG companies, you're getting less from another, maybe you can make that switch because you're helping out that consumer. Like how complex of a shift is that? And how often do you do something like that?

Well, we do it every quarter, to be honest with you. But during this time, I would tell you that it takes a better part of a quarter to 3 months to make the decision, move it into our distribution network and then out to our stores and get it set in the planograms themselves. That may sound like a long time, but it's not. It happens very quickly. And usually, for a core consumer, right, it takes about a quarter for her to start seeing a lot of price pressure anyway, so it gives you a little time to make those decisions and get them done. But we move very quickly because we do that in normal course of business here. It just accelerates somewhat during times when you may see price pressure. So -- I mean that's exactly how we operate here at Dollar General. I'll give you just one quick example, and that is our core consumer just can't afford, as much as she would like to have, fresh fruits and vegetables every day on her table. She relies on canned vegetables with us as an example. And we carry one private brand and one national brand, where other retailers will carry a myriad of different national brands. So we, during times like this, will leverage up the brand we have and/or entertain new brands to be that national brand provider for us. And we'll switch brands if we need to, to keep that price down for the consumer.

That's great. And then one of the questions, I've been asked this quite a bit, is, where are these new customers coming from? I mean you kind of talked about the price gaps you have with the grocery and drug. But I guess the question is, who are these customers? And where were they shopping before? And what -- I mean obviously, they migrate to Dollar General, but just trying to figure out what's the demographics of that person? And they were shopping -- this is a person who always went to X and now they're shopping at DG.

Yes. That's a great question. Well, the great thing about this consumer is that they are adjacent to our core consumer. And I'll give you an example, $40,000 or less household income is our core consumer. This new trade-down consumer is in that $60,000 to $75,000 type of a range. Now we do see a group that goes up to $100,000 as well, but the vast majority of them are the adjacent consumer. So they are very familiar with the brand. They just may have been absent for a while from the brand, may only shop us once or twice a year, where now, we're starting to see her on a monthly basis, which is great. And she tends to skew younger than our core consumer, tends to skew family at home, so kids in the household, a little bit more than our core consumer. And of course, because she's younger, she also tends to be more digitally savvy. And that's really how we're reaching her. We're reaching her through those digital means. And again, as I mentioned, it's more about top-of-mind awareness, keeping Dollar General in the consideration set and making sure that we keep her sticky at Dollar General. And what we've seen up to the time of our first quarter announcement is that she has been even stickier than we thought she would be through this. So I think she loved what she saw and she continues to come in. And again, the largest donors, as I mentioned earlier, drug, grocery, but also specialty retail, right? So that non-consumable business, we've seen through NPD data that we're picking up share from specialty retail as well, and that continues to be sticky. So we're happy with what we're seeing.