Dollar General Corporation (DG) Earnings Call Transcript & Summary

Well, good morning, everybody. Welcome to our 2022 Annual Shareholder Meeting. Before we start, I'd like to take a moment and have a moment of silence for the tragedy that occurred yesterday in Texas. 19 children, 2 adults, 2 teachers were -- tragically lost their lives due to a gunman. So if we would, please have a moment of silence. Thank you. Well, good morning, and welcome to Dollar General Corporation's 2022 Annual Shareholder Meeting. I'm Todd Vasos, the CEO of Dollar General, and I serve as the Chairman of this meeting, which I now call to order. We are glad to welcome you back in person to the annual meeting here in Goodlettsville, and it does feel good to be back in person, doesn't it. Now let me turn to a few introductions. I want to first start with our Chairman, I'm sorry, with our Board members. First start with Warren Bryant, Pat Fili-Krushel, Tim McGuire; Bill Rhodes, Debra Sandler, and Ralph Santana. Unfortunately, Mike Calbert, our Chairman of the Board, is unable to be with us in person today due to unavoidable and unforeseen circumstances. However, he's participating via Microsoft Teams. Technology is great, isn't it. Our executive officers are also in attendance today. Jeff Owen, our Chief Operating Officer; John Garratt, our Executive Vice President and Chief Financial Officer; Kathy Reardon, our Executive Vice President and Chief People Officer; Steve Sunderland, Executive Vice President of Store Operations; Emily Taylor, Executive Vice President and Chief Merchandising Officer; Rhonda Taylor, Executive Vice President and General Counsel; Carman Wenkoff, Executive Vice President and Chief Information Officer; Tony Zuazo, Executive Vice President of Global Supply Chain; and Anita Elliott, our Senior Vice President and Chief Accounting Officer. I'd like to thank our Board of Directors and our executive officers for their continued dedication, teamwork and leadership at Dollar General. Finally, Josh Trusley is in attendance today on behalf of Ernst & Young, our independent registered accounting firm; and [ Ken Frank ] is attending on behalf of Broadridge, our Inspector of Elections. I'll now turn the meeting over to Christine Connolly, our Corporate Secretary, to review the meeting announcements.

Good morning. We are holding today's meeting pursuant to the notice provided to shareholders beginning on April 1, 2022. Please note that this meeting is being recorded. Shareholders at the close of business on March 16, 2022, may vote on the items of business at this meeting. For your convenience, additional copies of the meeting agenda and rules of conduct, along with the 2021 annual report, and the 2022 proxy materials, are available in the back of the auditorium as well as on proxyvote.com once past the log-in screen. In addition, a copy of the shareholders list as of the record date is available for inspection by confirmed shareholders or by their confirmed agents or attorneys. Our Board has appointed Broadridge to serve as the Inspector of Election. Broadridge has informed us that there are present today, in person or by proxy, the holders of not less than a majority of the shares issued and outstanding on the record date. Having a quorum, the polls are now open. If you've previously voted, you don't need to vote again. If you've not already voted or you want to change or revoke your vote, please see Mr. Frank in the back before the polls close. Mr. Frank, if you could stand, thank you. The polls will close at the end of discussion of today's last voting item. Please ensure that you see Mr. Frank before that time if you need a ballot. We will begin the meeting with a presentation of the voting items, followed by up to 15 minutes to address any written questions about the proposals that were submitted before or during the meeting in accordance with the rules of conduct. Mr. Vasos will present the management proposals and Ms. Kam Franklin will have 3 minutes to present the shareholder proposal on behalf of the shareholder proponent, Mr. John Chevedden. The polls will then close and we'll adjourn the formal business of the meeting, followed by a brief business update. After the business update, we'll take up to 15 minutes to answer general questions that were submitted before or during the meeting in accordance with the rules of conduct. Only confirmed shareholders may submit questions at this meeting. Each shareholder may submit up to 2 questions per voting item and up to 2 questions during the general Q&A session. Please submit pertinent questions, whether regarding voting items or for the general Q&A session, before the polls close. For your convenience, question cards are available in the back of the auditorium, and you may return them to Donny Lau, our Vice President of Investor Relations and Corporate Strategy in the back of the room. I'll now turn the meeting back over to Mr. Vasos to introduce the items of business.

Thank you, Christine. There are 3 management proposals and 1 shareholder proposal being voted on today, as described in the meeting notice and in the proxy materials. The first item is the election of 8 directors listed in the proxy statement to hold office until the next annual meeting and until their successors are duly elected and qualified. Our Board recommends that you vote for these directors. The second item of business is the advisory vote to approve the compensation of Dollar General's named executive officers as set forth in the proxy statement. Our Board recommends that you vote for that proposal. The third item of business is the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for fiscal 2022. Our Board recommends that you vote for this proposal. Our fourth item of business is a shareholder proposal requesting political spending disclosure. Ms. Franklin will present this proposal on behalf of Mr. Chevedden. Operator, please open the line for the shareholder proponent.

Good morning. Can you hear me okay?

Yes, we can hear you?

Okay, here we go. Proposal 4, political spending disclosure sponsored by John Chevedden. Shareholders request that the company provide a report, updated semi-annually, disclosing the company's, #1 policies and procedures for making contributions to participate in any campaign on behalf of any candidate for public office or influence the general public with respect to an election. Two, cash contributions used in the manner described in Section 1 above, including, the identity of the recipient as well as the amount paid to each, and the titles of the persons in the company responsible for decision making. The report shall be presented to the Board of Directors or relevant Board committee and posted on the company's website within 12 months from the date of the annual meeting. This proposal does not encompass lobbying spending. Long-term shareholders of Dollar General support transparency and accountability in corporate electoral spending. This includes any activity considered intervention in a political campaign, under the Internal Revenue Code such as direct and indirect contributions to political candidates, parties or organizations, and independent expenditures or electioneering communications on behalf of federal state or local candidates. A company's reputation, value and bottom line can be adversely impacted by spending that is conducted blindly. The risk is especially serious when given to trade association, Super PACs, 527 committees and social welfare organization, groups that routinely pass money to or spend on behalf of candidates and political causes that a company might not otherwise wish to support. The Conference Board's 2021, "Under a Microscope" report details these risks, recommends the process suggested in this proposal and warns a new era of stakeholder scrutiny, social media and political polarization has propelled corporate political activity, and the risks that come with it into the spotlight. Political activity can pose increasingly significant risk for companies, including the perception that political contributions and other forms of activity are at odds with core company value. This proposal asks Dollar General to disclose all of its electoral spending, including payments to trade associations, and other tax-exempt organizations, which may be used for electoral purposes and are otherwise undisclosed. This would bring our company in line with a growing number of leading companies, including Yum! Brands, Kohl's and Lowe's, which present this information on their website. Without knowing the recipients of our company's political dollars, the Dollar General directors and shareholders cannot sufficiently assess whether our company's election related spending is aligns or conflicts with its policies on climate change and sustainability. In response to this proposal, Dollar General has fortunately promised to increase political spending disclosure. Please vote for this proposal or management may change its mind on increasing political spending disclosure. Political spending disclosure, proposal #4. Thank you very much.

Thank you, Ms. Franklin. Our Board recommends that shareholders vote against this proposal, which is Item 4 on the ballot. No other business was submitted pursuant to our bylaws for consideration at this meeting. Before we address any questions about these voting items, let me remind shareholders that this is the final opportunity to submit or change your vote as the polls will close immediately following this discussion. This is also the final opportunity to submit questions about the voting items for the general Q&A session and will follow my business report. Christine, have any questions been submitted?

No questions have been submitted regarding the voting items.

Since no questions have been submitted relating to the voting items, we will continue to the preliminary voting results. [Voting]

The votes -- the polls are now closed. Following the announcement of the preliminary voting results, the business of the meeting is adjourned. Christine, will you please announce the preliminary voting results?

Based on the preliminary report of the Inspector of Election, each of the 8 nominees standing for election has received a majority of the votes cast in favor of his or her election. The compensation of Dollar General's named executive officers has been approved on an advisory basis. The appointment of Ernst & Young as the company's independent registered public accounting firm for fiscal 2022 has been ratified. And the shareholder proposal has been approved. The final certified voting results will be reported in a Form 8-K within 4 business days of the meeting. Before we turn to the business report, we would like to caution you that today's comments may contain forward-looking statements within the meaning of the federal securities laws regarding our strategy plans, intentions, expectations or beliefs about future occurrences or results, including but not limited to, statements regarding our future potential, key operating priorities and initiatives, opportunities, strategies and business as well as planned investments in potential job creation. Actual results might differ materially from those projected in the forward-looking statements as a result of a variety of important factors, including, but not limited to, those described in the Risk Factors section of our Form 10-K filed with the SEC on March 18, 2022, and other factors that may be discussed today. We caution against undue reliance on these forward-looking statements, which speak only as of today's date. The company disclaims any obligation to publicly update or revise these statements, except as may be required by law.

Thank you all for being here today. I'm excited and honored to address you today at our 2022 Annual Meeting of Shareholders. And again, it is great to see some of you in person. Our long-standing mission of serving others remains at the center of everything we do at Dollar General, including every decision we make in how to continue to support our employees and our customers. To that end, we have made some key transformational changes to the business in recent years, allowing us to further leverage our unique real estate footprint to offer even greater value and convenience in communities across the country. Simultaneously, we have also made important strategic improvements to drive greater efficiencies for our employees, allowing them to focus on their most important task, serving our customers. In 2021, we made significant progress advancing many of these key initiatives, which continue to differentiate and distance us from the rest of the discount retail landscape. During fiscal 2021, we completed more than 2,900 real estate projects, including the opening of our 18,000 store as well as the opening of 50 Popshelf locations. In addition, we also launched our new health initiative and hired our first Chief Medical Officer with the goal of increasing access to affordable healthcare products and over time, particularly in the rural America, we will also offer services. As the largest retailer in the U.S. by store count, we are operating from a position of strength as we continue to serve our customers and our communities with unique value and convenient proposition helping them save time and money every day. Our vision for the future of Dollar General remains clear: to further strengthen our business and continue on a path to sustainable, profitable growth, while keeping our customers at the center of everything we do. We continue to focus on our 4 key operating priorities. Our first operating priority is driving profitable sales growth. We have a robust portfolio of sales driving and margin-enhancing initiatives, which we are providing our customers with even more value and convenience, while driving strong results and strengthening the foundation for future growth. In 2021, in addition to the Popshelf growth, I mentioned earlier, we also doubled the number of stores with our nonconsumable initiative, which consists of a new and expanded product offering in key nonconsumable categories. Importantly, we also completed the initial rollout of our DG Fresh initiative to facilitate self-distribution of frozen and refrigerated goods to more than 18,000 stores from 12 distribution facilities. Both of these initiatives have resulted in significant sales and gross margin improvements. Looking ahead, we expect to expand upon these initiatives and other opportunities in 2022, including cooler door expansion, private brand enhancements, global sourcing efforts, and distribution and transportation efficiencies. Our second operating priority is capturing growth opportunities. Our proven high-return, low-risk real estate model has served us well for many years. And coupled with our ongoing format innovation continues to be a core strength of our business. Our digital initiative complements our unique and expansive brick-and-mortar footprint as we seek to deploy and leverage technology to further enhance the convenient proposition for our customers, while also offering a more personalized shopping experience. In 2021, in addition to driving growth through our digital app, we also initiated a third-party partnership to offer same-day delivery in 1 hour or less at more than 10,000 of our stores. Our third operating priority is enhancing our position as a low-cost operator. Our established save-to-serve approach keeps the customer at the center of everything we do and reinforces our cost control mindset across the organization. During 2021, we expanded self-checkout to a total of more than 6,100 stores as part of our Fast Track initiative, which is primarily focused on increasing labor productivity in our stores as well as enhancing customer convenience. Looking ahead, we plan to significantly expand our self-checkout offering in 2022, while also expanding our private transportation fleet, providing us greater optionality and control over our supply chain while further optimizing our cost to serve. Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion. We continue to focus on attracting, developing and retaining talented employees. We have made significant investments in wages, benefits and training opportunities, which we believe are resonating with our team, as we drive improvements across the organization, that better position our associates for future success. Importantly, we continue to prioritize direct engagement with our teams to learn how we can continue to enhance our position as an employer of choice. Ultimately, we believe the opportunity to build a long-term career with a growing retailer is our most important currency to attract and retain talent. Now let me share with you some of the financial highlights for fiscal 2021, including net sales of $34.2 billion, same-store sales increase of 2.8% -- decrease, excuse me, of 2.8% compared to fiscal 2020, which resulted in a robust increase of 13.5% on a 2-year stack basis compared to fiscal 2019. Operating profit of $3.2 billion, net income of $2.4 billion and diluted earnings per share of $10.17. And cash flow from operations of $2.9 billion. We also invested $1.1 billion in capital expenditures to grow and improve our operations. In fiscal 2021, we opened 1,050 new stores. We also remodeled 1,752 stores and relocated 120 stores, for a total of 2,902 real estate projects. We are operating a total of 28 distribution facilities at the end of fiscal 2021 to support our ongoing growth. Moving forward, we expect the majority of our new stores to be in one of our larger 8,500 square foot formats, as we look to continue to not only expand the number of communities we serve, but also the ways in which we are able to serve them. We are very proud of our growth in 2021 and excited about the growth opportunities ahead of us in 2022 and beyond. During 2021, we made significant enhancements in our value and convenience offering as we continue investing from a position of strength. We are continuing to prioritize new store expansion and other real estate projects, including the infrastructure needed to support future growth. Beyond real estate, we are executing on multiple strategic initiatives that we believe will enhance our competitive position and drive long-term shareholder value. The investments we have made in recent years has transformed this company as we further enhance our competitive position in the market and our customer offering in our communities. As always, our customers remain at the center of everything we do. We are passionate about delivering our hallmark value and convenience proposition by providing everyday low prices at the right products in nearby locations. Our greatest strength of Dollar General is our people. We are committed to providing opportunities for their growth and development, while fostering an inclusive and enriching culture. We continue to make investments to enhance the employee experience across the organization. At the end of 2021, approximately 163,000 talented and dedicated Dollar General employees were serving customers in their communities across the United States. As I reflect on the year, I could not be more proud of our team and their efforts to embody our mission of serving others. As we continue to grow in 2022, we expect to create more than 10,000 net new jobs across the organization. We also continue to innovate on development opportunities for our associates. To that end, we recently began offering access to 100% employer-paid college degree programs for all of our full-time employees. In addition, all Dollar General employees and their immediate family members now have access to online, on-demand, self-paced learning platform that provides college level general education courses at 0 cost to them, which is intended to help initiate or further their education journey and development. This program is in addition to several other existing development programs including our private fleet driver training program as well as the ability to earn undergraduate credits through the American Council on Education, upon completion of our Store Manager Training Program. In 2021, we invested more than 3.7 million training hours in our employees to promote their education and development. And within our retail operation, more than 75% of our store associates at or above the lead associate level were internally placed. Our investment in our people continues to pay dividends across the organization, as our internal promotion pipeline remains robust, and our people continue to see tremendous growth opportunities. My most sincere appreciation and thanks go out to the entire Dollar General team as we continue to fulfill our mission of serving others each and every day. Dollar General's culture remains firmly rooted in our mission of serving others. We are deeply connected to the communities we call home. And we continue to be intentional about investing in these communities to nourish the mind, body and the planet. During 2021, Dollar General and its foundations donated more than $23 million to charitable causes with the primary focus on uplifting and empowering individuals of all ages through literacy and basic education. Since its inception in 1993, the Dollar General Literacy Foundation has awarded more than $200 million in grants to nonprofit organizations and more than 12 million individuals have received assistance. I encourage everyone to take a look at our Serving Others Report available on our website, if you would like more detail on how we are prioritizing serving our employees, customers and communities. We are excited about these efforts, and we're proud to partner with these various organizations and foundations to extend hope and opportunity to individuals throughout these communities. In closing, I want to reiterate how proud I am of the team at Dollar General. We had a strong year in 2021, as we work together to serve our customers. In addition to driving strong results, we are moving forward with great speed and focused execution to continue capturing growth opportunities while further distancing and differentiating Dollar General from the rest of the discount retail landscape. I'm very excited about the future of this business and are confident that our unique business model, combined with our strategic vision, and strong track record of execution, will allow us to continue to deliver everyday value and convenience to our customers and create long-term value for our stakeholders. Thank you for your investment and your interest in Dollar General. We appreciate your continued support. At this time, we will answer any pertinent questions that were submitted before or during the meeting prior to the closing of the polls. Christine, have any questions been submitted?

Yes. We've had 2 questions about compensation and then a few questions about other matters, and I'll go ahead and read the 2 questions on compensation, and we'll start with those. Please clarify the reasoning behind the pay ratio difference between the average employee and the CEO. The average employee is taking home $17,773 annually, while the CEO is taking home nearly $17 million. Question two, Pew Research indicates that Americans are growing increasingly concerned with income inequality and that trust in our economic system is eroding. This concern hits home when Dollar General's CEO shows up on the list of 100 most overpaid CEOs by industry Watch Dog. As you saw, while many of its employees make minimum wage, how does Dollar General consider the growing concern over economic inequality when setting pay for its highest and lowest paid employees.

Well, thank you for your question. I will take the second part of that, and I will ask our -- Pat Fili-Krushel, our Head of our Compensation Committee to answer the second part. So just to level set, I want to make sure everyone understands our ongoing goal is to pay competitive wages, market by market, position by position, just as we've always done. Additionally, our employees have access to robust range of benefits to meet their individual needs. They also can take advantage of a variety of training and development opportunities, including tuition assistance that I talked about earlier, to build their skills, pursue their education and advance their careers. We also recently announced new education benefits that expand our employees' family members as well. We believe Dollar General offers a great opportunity to turn a job into a career. On average, individuals who join Dollar General in our entry-level positions of sales associate position or above, can become and have become lead sales associates in a very quick order in just months and assistant managers within a year. And the last thing, I'll say is that over 12,000 of our existing store managers were promoted from within those positions, so from within the company, we're very proud of that. Pat?

So thank you for that question. Let me just level set for a moment, the CEO ratio. That ratio is based on the CEO's compensation as compared to our entry-level part-time associates. That ratio does not take into consideration any of the nonquantifiable benefits that Todd just mentioned, like our education, college -- tuition-free college benefits. And just to dimensionalize what Todd said about our investment in our people, 12,000 of our 18,000 store managers were internal promotes. Our Executive Committee, 50% of them were internal promotes and our very own COO, Jeff Owen, started as a store manager. So you can see that, that investment in people does pay off. As to the second question about the magnitude of our CEO's compensation. The compensation is structured, overseen by the Compensation Committee. There are 3 independent members. We oversee the structure as well as the total compensation. We look at it on an annual basis, and it's targeted against the median pay for CEOs. So thank you for that.

Okay. Our next question is with respect to produce and hosting local farmers markets. Given the amount of stores that are located in food deserts or rural areas that have limitations to fresh produce, is there a business model that's been discussed, which would allow stores to connect and work with local farmers and gardeners to sell their small crops or produce on property similar to a farmer's market? This would bring customers on property and provide a location and market for these small crop farmers. It could also provide healthy and fresh homegrown foods to its customers, and create and anticipate scheduled of high-traffic opportunities to push or promote other products.

Thank you for that question. We carry produce in more than 2,100 stores, very proud to say that, by the end of 2021. And our plan is to carry produce in more than 3,000 stores by the end of this fiscal year of 2022. We believe DG Fresh provides the potential path forward to expanding produce offering to more than 10,000 locations over time. We also continue to engage with a variety of partners, including local suppliers, in our communities to explore -- to also explore efficient ways to carry produce where we can. In the last year, we have added 20% more regional relevant suppliers, allowing us to serve our customers better. Dollar General partners with these suppliers to carry locally grown fruits and vegetables, when they are available throughout the year, and we'll continue to do so.

We also have a question on product expansion. The question is, do you plan to expand to other nonprivate label products?

That's a great question, and thank you for that. We always say we'll go where the customer, who wants us to go. And the private brand for us is a great way for our consumer to get a great value. We have many different private label brands that we go out under. Clover Valley in our food area. Rexall in our health area, as an example, is our private brand and we have many, many others throughout the store. So yes, we'll continue to always look at ways to expand our private brand offering and to give more and more value to our consumer over time.

Okay. We have a statement with respect to our chemicals policy and a question on pesticides. So I'll read the statement first. It's an appreciation. Thank you for the progress on chemicals policy and for joining the Chemicals Footprint Project. And then we also have a question, will Dollar General join other major retailers and making public commitments to encourage suppliers to reduce or eliminate use of toxic pesticides, including, bear with me, neonicotinoids, phosphates and glucosates?

I'm glad you had to say that, Christine. Thank you for the question. Dollar General is committed to selling safe, effective and affordable products that meet or exceed our company's quality and performance standards, as well as legal and regulatory requirements. We have several measures in place, including our product safety testing program to provide assurance that the company's products either meet or exceed federal and state regulations. We are committed to sourcing products from vendors and manufacturers, who adhere to the law, treat their workers fairly, and maintain a healthy and safe working environment. Also working with our vendors and on track to reduce or eliminate 8 intentionally added chemicals from certain categories of products by December of 2022, as we previously stated. Now we plan to remove 19 additional intentionally added chemicals from our formulated private brand items in select categories by the end of fiscal 2023. And then lastly, I just want to say, we do plan to become a signature of the responder of the chemical footprint project by the end of 2022. So I think we've made a lot of great strides. There's still work to do, and we'll continue to work to ensure that the products we sell are safe for all consumers.

And we have another question similar to the first. But what progress has Dollar General made in investigating the partnership with local farmers in Albuquerque since the last visit in 2019?

Well, I know we've gone out and talked to the folks in Albuquerque and we've met with them. I would tell you, we want to work with everyone, not just our friends in Albuquerque, but with everyone that we can be able to buy product and sell it to our consumers. Again, especially the produce items and locally sourced items are important. And in Albuquerque, I know that there's locally sourced products that are available. I know we talked before the meeting even. There's maybe even some now baby food products that we'll take a look at, that's a little bit new. So you have our commitment that we will continue to keep that dialogue moving and where appropriate, be able to bring those products into our stores.

And the last question is, will Dollar General join other major retailers and making public commitments to local procurement of sustainability grown fresh produce starting with the community farmers of agricultural network in Albuquerque?

Thank you again for that question. And as I stated earlier, we are proud of our expansion of produce. From a company that really didn't sell produce in their stores just a few short years ago to now we'll have over 2,000 stores by the end of this year, and on our journey to 10,000. We're proud of that. Because what that does is it really helps these small communities, where they don't have easy access to healthy food opportunities and options. And that will also include locally grown, where it's available, and where it does make sense for us. So we'll continue the dialogue, continue to work and bring those products in where it makes sense.

That's all the questions we have.

All right. Thank you for your attendance today. And again, thank you for your investment in Dollar General. Thank you.