Dollar General Corporation (DG) Earnings Call Transcript & Summary

Thank you, everyone, for joining us. It's my pleasure to introduce Dollar General and to moderate this fireside chat. Today, we have with us Todd Vasos, Chief Executive Officer; Emily Taylor, Chief Operating Officer; Donny Lau, Executive Vice President and Chief Financial Officer; and Kevin Walker, Vice President of Investor Relations. I'm going to turn it over to Kevin to read the harbor statements.

Yes. Thanks, Kate. So let me caution you that statements made during today's fireside chat will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, long-term financial framework, strategy, initiatives, plans, goals, priorities, opportunities, expectations or beliefs about future matters and other statements that are not limited to historical fact. 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 in our earnings release issued on August 27, under Risk Factors in our 2025 Form 10-K filed on March 20, and any later file periodic report and in the comments made during this event. You should not unduly rely on forward-looking statements, which speak only as of today's date, and Dollar General disclaims any obligation to update or revise any information discussed today unless required by law. Now it's my pleasure to turn it back over to Kate.

Thank you. So thanks so much for joining us today. Todd, I wondered if we could start with you. You've led Dollar General now for a combined 10 years and are now more than halfway through your final year as CEO. So just reflecting on the past few years, what have maybe been your biggest learnings? And what are the most important priorities you hope to accomplish before the transition?

Well, first, thanks, Kate. Thank you. First, I'll always bring Kevin for the filibuster, right, because -- that always takes a couple of minutes of time.

I didn't need as many questions today.

But no, but thank you. Yes. I would tell you, number one, I couldn't be more honored to have had the opportunity to lead Dollar General for as you said, in the past 10-plus years, but I've been with the company 18 years in total. And what I found is, this is a wonderful company and wonderful from the soul in to out. And what I mean by that is that this company lives the mission of serving others. And what better service than to serve the community that we serve, and that's that community that is disadvantaged in many ways, right? Not only economically in many instances, but also in just having facilities to be able to go to and shop because of the rural nature of our business and who we have. And the last thing I would say, Kate, is that I've always lived by the motto, you leave it better than you found it, right? And I want to say that we did that in '22, and definitely, we'll be leaving it much better than we found it here in '27 when I buy out in January.

Great. And if I could just maybe close the loop on that. If you could maybe talk a little bit about the CEO transition and how you're approaching us in order to get to the next chapter for the company?

Yes. We spent a lot of time, as you can imagine, the Board asked me to be directly involved as we chose my next successor in J.J Fleeman. We interviewed a tremendous amount of people. As you can imagine, there was a lot of interest, a great company, again, in Dollar General. And we landed on JJ for a few reasons. One, he knows the business. He's a student of the business. I don't want to take any thunder from him. I'm sure he'll introduce himself when the time is right, but grew up in the Ahold Delhaize scheme, if you will, but not only grew up in it, but from a bag person and worked his way up to be the CEO of the U.S. operation. Very steep in what we look for was somebody that was very steep in all parts of the operation, and we found that in JJ. I've spent a lot of time with him since not only during the interview process, but even post-acceptance as we work toward his [indiscernible] being finished, and he coming in, in January. I've committed to the Board that I would stay as a senior adviser and on the Board, at least until April -- 1st of April, and I will work directly with J.J. to make sure that his onboarding is very, very smooth. Last thing I'll also say is in the last couple of years, we've worked tremendously hard on shoring up our management team internally. And I would tell you in the 18 years I've been here, we've got the strongest senior management team that we've ever put on the field here at Dollar General and Emily Taylor and of course, Donny Lau being two of those folks that are sitting to my left.

Great. Maybe if we can start with the health of the consumer. Obviously, this whole conference was kind of predicated on assessing the health of the consumer. We've heard a lot in this last day and a half about the K-shape economy and how the lower income consumer is faring. And you have 21,000-plus stores in rural communities. So could you maybe talk a little bit about the changes you're seeing in shopping behavior as customers continue to navigate this inflationary environment we're in? And as you look to the second half, how are you thinking about the consumer and the broader demand environment?

We are -- we spend a lot of time, Kate, obviously, watching our core consumer, but watching all segments, including higher income consumers. And what we've seen in this economy, and again, not a surprise probably to anybody in this room is we've seen a customer across all cohorts of income levels, being somewhat distressed, especially in sustained inflation outside gas prices for a minute, just basics. And then couple gas prices, and we've always said here at Dollar General for our core customer, that any time that gas price gets anywhere close to $4 and then crest $4 a gallon, the customer changes their shopping behavior. Stays closer to home, normally shops more often, but buys less on each occasion. And that's exactly how that core customer is faring. But the interesting thing with this economy because of the other sustained headwinds of inflation over the years that have passed, even that middle to upper middle is at the more like a lower income shopper these days, and they hit that same characteristic. And then high income for us is that $100,000-plus crowd. And I would tell you, we're hearing more and more from them is I don't feel like I'm higher income at $100,000 any longer, right, because of all of the headwinds that I just mentioned. So we believe at Dollar General, we're in a really good position to service all of the different demographics of what we have. But even more so, all the work that we've done over the last few years to set ourselves up to be in a really good, strong position to not only service that consumer, but also be able to retain that consumer when -- and I'm sure everything goes in cycles, when the economy gets better for certain classes of consumer. The last thing I'll mention is, and I'm sure you've asked this question is the consumer is very resilient, though, still through all this -- and the biggest reason why it's no surprise, is she is gainfully employed still. And as long as that holds, I think -- especially our core consumer figures it out, and I think other consumers do, but they need help. And that's exactly what Dollar General provides.

Great. And I know we didn't really talk about gas price in the context of what you just spoke about. But do you think higher gas prices play any kind of role in the traffic you're seeing right now in the stores? Do you think you gained share at times when gas prices are higher given your vicinity to the consumer? And if so, this time around, how are you looking maybe to retain whatever new customers you are seeing?

Yes, I'll start, and then Emily, I'll have you talk about the retention piece. I would say, no doubt, there is some tailwind from those gas prices, not only due to not wanting to drive as far, but just what it costs to put fuel in the tank, but also food on the table. And between those, it has pinched the core consumer, those who came $40,000, $45,000 and under. And again, as I indicated, even though making up to $100,000. And so when you think about that and then crossing that $4 mark and now being sustained at that higher level, we are seeing that core customer come in more often buy less on each occasion. And that's a little bit counterintuitive, come in more often, but we're very convenient, right? We're close -- we're within 5 miles of 75% of the U.S. population. Many of our customers ride a bike to our stores or walk to our stores. That's how close they are. And those that drive obviously can drive a shorter distance. But what she does is she doesn't know right now because of all of the other sustained pressure, what that next week is going to hold. So maybe instead of shopping twice a month, she's shopping 4, 5, 6 times a month with Dollar General because she can't go and shop on the come, if you will, right? She's in week 2. I'm not going to shop for part of week 3. I'm going to come back in week 3, because who knows what's going to happen. And I don't have a lot of money put aside for even a flat tire at this point. So I've got to make sure, I shop closer to need and be very discerning in that shop.

Yes. And then in terms of retention, what I'd say is we do -- we have been in similar, of course, economic times historically. And if you look at our track record of retaining the trade-in customer, we've done pretty well. So I'd point 2008, 2009, 2013, 2020 was a little different in terms of the dynamic at play, but still very high retention rates. And I think that ultimately comes from the fact that customers who may not be as familiar with Dollar General, are surprised when they shop us in terms of the value, they're surprised when they shop us in terms of the breadth of assortment that we have available. And those things stick long after maybe the economic cycle changes. I'd say that we've paired that even to a greater extent than we have historically with some of the new tactics and capabilities we have in marketing. So when we see those customers inside our store, we're able to target them with offers that aren't just generically good but specific to what we've been doing from a purchase pattern, and that's even stickier. So I really like our opportunity to keep these customers as our customers moving forward.

Thank you. It's an interesting environment. Again, it's been very inflationary, yet I think since the spring, we've heard a lot more about price investment, whether it be as a result of what's happening across the space in grocery or with tariff refunds or the like. And I think in the second quarter, you did note that you've run promotional and you utilize targeted offers around holiday events. How should we think about Dollar General in the context of this very noisy pricing environment. How are you managing price gaps? How do you view the price gaps? And what do you think about the promotional environment going into the second half?

Yes. I'll start. As you know, Kate, we watch price very carefully. Obviously, our core consumer relies on Dollar General, not only from that convenience factor that talked I about being closer to the home, but also that value equation. And those of you that have heard me over the years, I always talk about pricing is a fine balance between art and science. Those that maybe have leaned way too much on the science and forget about the art, and I won't name certain sectors, not even companies that have done that. Things don't fare well. So we've always taken that approach of -- between science and art, right, art and science and pricing. And the reason I bring that up is that we have a great everyday price that we put out in front of the consumer, our price gaps to mass are unchanged over the many years, to drug and into grocery, right? And so really, when you think about it, we're the most competitive against drug, grocery within about 20 points. And what I normally say is we're between 2% to 4% of mass, one way or the other, by the way, sometimes better, sometimes a few percentage points worse. The consumer usually tells the difference around 5 to 6 percentage points, depending on the item. That's part of that science piece. But not only at a great everyday price, but also the consumer looks for a good promotional cadence and price as well. So we offer that to the consumer. And also, the one thing that sets Dollar General apart and now more than ever is that $1 price point. Having 2,000 items at or below $1 is very meaningful for the consumer always has but especially in this environment. And not only are we cultivating that, but we're growing that. more in what we call we affectionately call Value Valley, but we've got an aisle that's dedicated to $1 price point. But we have price points at $1 throughout mixing our planograms throughout the store, and Emily and her team rolled out a $1 Frozen Door, a whole door of frozen goods recently at $1. We like that so much, and the consumer has. We're actually going to put more of that in as we move through the back half of this year. So pricing again, art and science, every day, great everyday price with the gaps being traditionally where they've been, a good promotional cadence, rational but a good cadence and a great $1 offering to bridge those monthly pieces where that customer needs to be able to feed her family or give her family something she needs.

The comps at that dollar price point have been extremely strong in the last several quarters. Do you anticipate much of a mix shift maybe more towards that dollar price point?

Yes. What's great is we're seeing growth in all areas, several areas of the business, which I'm sure we'll get into in more detail. But to your point, we quoted the Value Valley comp in Q2 at 16%. So just outstanding growth. Todd mentioned the over 2,000 items at $1. So our Dollar business is larger than even what we quote from a Value Valley perspective. The team has been actively increasing that. Todd mentioned our Frozen Door expansion plans, which we're really excited about. But we've also expanded the number of items inside that Value Valley section, and that's just merchants doing a great job of making sure that we continue to expand that option for our shoppers and really feed into the growth. We've also added off-shelf display inside our store to capture more of that and present that to our customer in a way that shouts value that's very meaningful to them. And so we continue to look for areas. And then our Seasonal business, which we don't talk about as much, but we increased our seasonal $1 assortment for the back half of the year by 40% compared to a year ago. So really great work, just making sure that we're driving at affordability and then continuing to make sure that the broader offering represents other price points as well that just support that growth.

Great. I wondered if we could focus on the cost side for a little bit. Obviously, there are quite a few headwinds right now in the context of fuel and freight. So I wanted to make sure we touched on that in your view on that going into the back half and how you're managing that. But I think also what we wanted to talk about too was labor. I think for a little while. Anyway, Todd, especially when you came back, there was some concern that maybe there would need to be a lot more labor investment in the store. And you have made the investment in labor hours, I believe it hasn't necessarily been much more labor in the store. So maybe can you talk about the labor investment over the next couple of years. Do you feel like the business is approaching a more normalized level of staffing? Or do you still see more opportunities for incremental investment?