Todd Vasos
Chief Executive Officer at Dollar General
Thank you, Kevin, and welcome to everyone joining our call. Let me start by saying how excited I am to be back at Dollar General. I have a deep passion for this company and for the customers we are privileged to serve. I continue to believe in this model, our future growth prospects and our ability to deliver value and convenience for our customers, a positive experience for our employees and long-term value for our shareholders. We take our mission of serving others seriously, and know that our customer is facing financial constraints, and communities are looking for strong partners in a tough macroeconomic environment. Historically, we've met those challenges head on and delivered for our customer, and we believe that we are well positioned to do so now.
In retail, one of the best ways to diagnose the state of the business is by looking at it through the eyes of the customer. And we know that our customers rely on Dollar General to provide the products they need, at great values, in convenient, friendly and easy to shop stores. We have spent the last several weeks taking a fresh look at all areas of our business as well as the challenges and opportunities in front of us.
We believe that we have a good understanding of what we need to do to address those challenges and opportunities, and we're already taking action. To be clear, this is not about rebuilding a team or organization, but about refocusing efforts already underway. This is where I want to spend the majority of our time today.
I won't share all the details this morning, but I want to provide an overview to highlight our focus on getting back to the basics in our stores, in our supply chain and within our merchandising. After that, Kelly and I will review our third quarter performance.
I want to start with our stores where everything begins and ends for our customer as we drive improvement across our store footprint, we are doing so through the lens of our customer. As we have previously announced, we are investing approximately $150 million in store labor hours this year. After review, we continue to believe this level investment is appropriate, but as we do with every dollar we invest, we must ensure we are spending it to drive the greatest return, which means we are directly helping our store teams support our customers. With that in mind, we have made the decision to redeploy labor hours away from smart teams and instead more directly to our store teams, and a greater emphasis on customer service and store level inventory management activities.
To that end, I want to highlight two areas of focus we believe will drive the greatest improvement in our stores. First, we plan to increase the employee presence at the front end of our stores and in particular the checkout area. While self-checkout has contributed to the convenient proposition for our customers in certain stores, it does not reduce the importance of a friendly, helpful employee who is there to greet customers and assist while the checkout process is happening.
We have already begun by allocating more labor to front-end activities and clearly communicating our expectations around the visible presence of an associate at the front of our stores. Second, we are reemphasizing the role played by our store teams in our perpetual Inventory Management process, which we believe will positively impact our on-shelf availability as well as our customers convenience perception in our sales.
To do this, we are reallocating some of our labor investments toward store level inventory management processes, including an even greater focus on getting product onto our shelves more quickly. We are also reducing the span of control for our district managers, which will provide more opportunity for engagement with our store managers and their teams, and more consistency in execution across the store base.
As we take these actions and focus on the basics in our stores, we believe we will see improved retention at the store manager level, where our turnover is currently higher than we'd like. And we know from experience that when we stabilize the store manager position, the entire store and team benefit, which ultimately drives a more positive experience for our customers as well as improve sales and shrink results.
Overall, we believe these actions will drive improvements in customer satisfaction, including customer service, on-shelf availability and convenience as well as sales, while our focus on the front end should also reduce shrink. These efforts also should help us improve employee engagement and retention.
Next, I want to talk about our supply chain. We have made significant progress recovering from the distribution capacity constraints that we had discussed late last year. However, through the lens of the customer, we see additional opportunity for improvement, particularly when it comes to serving our stores. As we focus on getting back to the basics, the goal within our supply chain is for our truck deliveries to be on time and in full or OTIF. As we continue to drive our OTIF rates higher, we simplify the work for our store teams, which again results in a better overall experience for both our customers and associates, as well as an expectation of higher sales.
I want to briefly highlight three areas of focus within our supply chain. First, we plan to better optimize the inventory within our distribution centers. As I will discuss in a moment, we are taking steps to reduce inventory, including SKU rationalization, which will allow for the more efficient movement of product for our distribution teams.
Second, we are implementing productivity improvement initiatives within our distribution centers. While productivity rates have been impacted by both internal and external factors, we are working to mitigate or eliminate productivity impediments for our teams and control the things we can control. These efforts include standardizing system configurations and optimizing the product layout in our facilities, while providing clear communication on performance standards and expectations.
And third, now that we're past the capacity constraints we experienced last year, we are reducing the number of temporary outside warehouse facilities being used to store product as inventory flows more effectively to and through our existing distribution centers. By better leveraging these existing distribution centers and taking advantage of the new permanent facilities we have opened over the last year, and those we will open next year, we believe we can significantly reduce the amount of temporary warehouse space needed.
As we've done historically. We likely will continue to maintain a few of these temporary facilities; however, we expect to transition out of many of them in Q4 and into next year. All of these actions within our supply chain should translate to lower distribution and transportation cost, better OTIF rates and better customer experience, and all while improving sales results.
Finally, I want to speak to our focus on fundamentals in merchandising. Once again, we reflected on our approach through the eyes of our customer. For our merchants, there is no greater priority than offering great value of the products our customers want and need. Our customers are offering live-in paycheck to paycheck, and continually tell us that value is the most important factor in their shopping decisions.
I am pleased to note that we are in good shape when it comes to our everyday pricing, and we are right where we want to be in our price gaps with our competitors and classes of trade. With that said, we are taking a hard look at what else we can do to drive value for our customers in this challenging economic environment, including highlighting private brands and other opportunities for savings, as well as maximizing the effectiveness of any promotional activity to drive traffic and share growth.
Beyond these opportunities for our customers, we have also challenged our merchants to consider how they can drive simplification for our stores and supply chain as well, with meaningful SKU rationalization as one of the most immediate areas of focus. To that end, we have identified several opportunities to eliminate certain SKUs that have become less productive, first by moving them out of our DCs and then ultimately to our stores to sell through.
As our store teams have fewer SKUs to manage, we can lower our cost to serve while driving higher inventory turns and higher sales of products that are most important to our customers. We believe these actions will help further reduce inventory and shrink while simplifying operations in both DCs and stores to drive greater efficiencies over the longer term.
We all know that driving traffic and market share are essential to long-term retail success, and while our results have been improving in these areas, we are still not satisfied with our current position. We believe we have identified actions that will pay dividends over both the short and long term, as we remain focused on driving profitable sales growth.
In summary, we are getting back to the basics here at Dollar General across all levels of the organization. Our desired results will not materialize overnight, but we believe we will see some early wins and continue to make progress towards executing on the fundamentals that have been foundational to our success over the past 85 years. As a result, we believe we will significantly enhance the customer experience while driving higher sales and increased profitability in our business.
Now, before I turn the call over to Kelly, I want to briefly discuss some of our top line results for Q3, as well as our 2024 real estate plans, which we announced earlier this morning. Net sales in the third quarter increased 2.4% to $9.7 billion, compared to net sales of $9.5 billion last year's third quarter. Within our net sales growth, we again grew market share in both dollars and units, in highly consumable product sales as well as in overall non-consumable product sales. Same-store sales decreased 1.3% in Q3 which was in line with our expectations. The decrease was driven by a decline in average transaction amount, primarily driven by units, and included declines in all four product categories.
From an overall monthly cadence perspective, same-store sales growth was very similar in all three months of the quarter. However, I'm pleased to note that customer traffic was positive in Q3. After starting the quarter slightly negative, traffic turned positive in the middle period and improved sequentially each period of the quarter. Notably, customer traffic and same-store sales continue to improve in November, which, although early in the quarter, we believe reflects early traction from our work on getting back to the basics here at Dollar General.
Turning to a quick update on our customer. During our most recent survey work, our customer continues to tell us they are feeling significant pressure on their spending, which is supported by what we see in their behavior. Based on these trends and what we see in the macroeconomic environment, we anticipate customer spending may continue to be constrained as we head into 2024, especially in discretionary categories. This further reinforces the importance of the work we're doing today, and we believe our unique value and convenience proposition is as relevant as ever in this marketplace.
To that end, I want to discuss our plans for real estate growth next year as we look to extend our offering to many more communities. Real Estate continues to be one of our core competencies, and we remain pleased with the performance of our real estate projects. As a reminder, we monitor the following five metrics of our new store portfolio, including performance against pro forma sales expectations, new store productivity compared to the mature store base, cannibalization which overall has remained consistent and predictable, cash payback which we continue to expect in two years or less and new store returns which we expect to be approximately 18% on average in 2024.
I want to note that our expectations for new store returns, while still very strong, are down modestly from our historical target of 20% plus. This change is being driven partially by higher new store openings and occupancy cost, which I will discuss in more detail in a moment. We also continue to see strong performance from our Remodel stores, which drive comp sales lifts between 8% and 11% for our DG PTP format, and average returns which continue to be greater than what we see from our new stores. With this consistently strong performance, we continue to see real estate projects as one of our best uses of capital.
In fiscal 2024, we plan to execute approximately 2,385 projects, including 800 new openings, 1,500 remodels and 85 relocations. While this is a significant number of projects, I want to acknowledge it is a smaller number than we have opened in the recent years due primarily to a couple of considerations. First, we want to ensure that our teams across the company are focused on getting back to the basics, and the efforts I discussed a few moments ago. And second, the capital required to execute these projects has increased significantly. For example, the initial opening of our 8,500 square foot store has increased more than 30% since we began rolling out the larger format in 2022.
Additionally, non-residential construction costs have increased significantly since pre-COVID. Our team has a number of efforts underway to reduce these costs, including engineering costs out of the projects, and we believe over time we will be able to mitigate some of the impact we have seen from inflation.
With that said, our pipeline remains robust. We continue to see more than 12,000 opportunities for Dollar General bannered stores in the United States, and as we said before, for a variety of reasons, we will not capture each of these opportunities, but we are pleased that the overall number of opportunities remains high.
We continue to innovate on store formats as an important element of our real estate strategy, and I want to take a moment to provide some additional color on our plans for 2024. We are placing a heavier emphasis on rural stores in 2024 with more than 80% of our new stores planned in rural communities where we believe we can have the most significant and positive impact for our customers.
In addition, more than 90% of our new stores and relocations will be in one of our larger store formats, which continues to drive increased sales productivity per square foot as compared to our traditional 7,300 square foot box. These larger stores also provide additional opportunities to serve our customers, including expanded cooler offerings to help them build meals to feed their families, more health and beauty products and fresh produce in many stores.
Also included within our store plans are approximately 30 new pOpShelf locations as we continue to move at a measured pace with this concept in a softer discretionary sales environment. Finally, we've been very pleased with our initial entry into Mexico, and our new store plans for 2024 also include approximately 15 new Mi Super Dollar General stores in Mexico.
Turning to remodels, nearly 70% are planned to be in our DGTP format, which will provide the opportunity for significant increase in cooler count as well as the potential to add fresh produce in many of these stores. We are excited about our real estate plans for 2024 as we continue to grow the number of communities we are serving, particularly in rural America.
In closing, we have tremendous growth opportunities in front of us which we are uniquely well positioned to capture. We are working diligently on getting back to the basics, and we are laser focused on serving our customers while providing meaningful opportunity for our employees and creating long-term value for our shareholders.
With that, I now would like to turn the call over to Kelly.
