Dollar General Q1 2024 Earnings Call Transcript

Presentation

[Operator]

Good morning. My name is Donna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dollar General First Quarter 2024 Earnings Call. Today is Thursday, May 30th, 2024. [Operator Instructions] Today's call is being recorded. Instructions for listening to the replay of the call are available in the Company's earnings press release issued this morning.

I would now like to turn the conference over to Mr. Kevin Walker, Vice President of Investor Relations. Kevin, you may begin your conference.

[Kevin Walker, Vice President, Investor Relations at Dollar General]

Thank you, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; and Kelly Dilts, our CFO.

Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, 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 this morning under Risk Factors in our 2023 Form 10-K, filed on March 25th, 2024, and any later filed periodic report, and in the comments that are made on this call. 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 in this call unless required by law. At the end of our prepared remarks, we will open the call up for your questions. [Operator Instructions]

Now, it is my pleasure to turn the call over to Todd.

[Todd Vasos, Chief Executive Officer at Dollar General]

Thank you, Kevin, and welcome to everyone joining the call.

We are pleased with our start of the year, and I want to recognize the great work of our entire team, as they have fully embraced our plan to get back to the basics at Dollar General. On today's call, I will begin by recapping some of the highlights of our Q1 performance, as well as sharing an update on some of our plans for 2024. After that, Kelly will share the details of our Q1 financial performance as well as our current outlook for Q2 and the full year. And then, I will wrap up the call with an update on our work in getting back to the basics across the business.

Turning to our first quarter performance. Net sales increased 6.1% to $9.9 billion in Q1, compared to net sales of $9.3 billion in last year's first quarter. These results included accelerated market share growth in both dollars and units in highly consumable product sales, as well as market share growth in dollars in non-consumable product sales. We opened 197 new stores during the quarter, and are excited about our ability to continue to expand the number of communities we serve.

Same-store sales increased 2.4% during the quarter, which was above the top end of our Q1 guidance. We believe this result is a testament to the relevance of Dollar General in our communities and the ongoing positive impact of our Back to Basics work.

The comp sales increase was driven by strong growth in consumer traffic of more than 4%, and was partially offset by a decline in average transaction amount, primarily driven by fewer items per basket. The comp sales increase was driven entirely by strong growth in our consumable category by customers relied on us for the value of the items they need most often for their families. This growth was partially offset by declines in the home, seasonal and apparel categories.

From a cadence perspective, growth was strongest in March, including a benefit of Easter moving from April into March this year, and was relatively similar in the months of February and April. We believe the softness in sales in the discretionary category during Q1 is a reflection of the continued pressure our core customers feel on their spending. They continue to be very value-oriented in their shopping behavior, which we see manifested in accelerated share growth in private brand sales, as well as increased engagement with items at or below the $1 price point.

Importantly, we continue to do well with our core customers, while growing with middle- and higher-income trade-in customers from adjacent cohorts. We continue to feel very good about our pricing position relative to competitors and other classes of trade. And our value proposition presents significant opportunity for ongoing growth among a wide range of customers. Looking ahead, we expect value to continue to be the most important consideration for customers in multiple income ranges. We know that our customers need us even more when they face economic challenges, and we are well-positioned to help them stretch their dollar.

Before I turn the call over to Kelly, I want to provide a brief update on our shrink reduction efforts, including the changes to our self-checkout strategy that we announced in March. Shrink continues to be the most significant headwind in our business, and we are deploying an end-to-end approach to shrink reduction across the organization, including efforts in our supply chain, merchandising and within our stores. To help combat issues around shrink, our supply chain teams are primarily focused on ensuring deliveries are on-time and in full and our merchants on reducing the amount of inventory we carry.

Within our stores, we are focusing on delivering a more consistent front end presence, broadening the reach of our high shrink planograms, which include the removal of high shrink SKUs, and the elimination of self-checkout in the vast majority of stores. As we discussed on last quarter's call, we converted approximately 9,000 stores away from self-checkout during the quarter. Following the quick and successful conversion of these stores in Q1 and given the ongoing challenge from shrink, we converted approximately 3,000 additional stores away from self-checkout in May, bringing us to approximately 12,000 conversions completed in total. While this represents a significant change in our stores, we believe this is the right course of action to drive increased customer engagement, while also better positioning us to begin reducing shrink in the back half of '24 with a more material positive impact expected in 2025. Moving forward, we plan to have self-checkout options available in a limited number of stores, most of which are higher volume and low shrink locations.

Overall, we are pleased with the results and progress across the business during the first quarter, which I will discuss in more detail later. We have a lot of opportunity ahead of us, and this team is excited about the work we are doing. We have a long history of serving customers in a variety of economic environments, thanks to our distinctive combination of value and convenience. I also want to note that we recently published our annual Serving Others Report, which provides several important updates on our ongoing ESG efforts and goals. We recognize the great responsibility we have as an essential partner to the communities we call home and are excited about the many ways we are able to serve our customers, associates, communities and shareholders.

And with everyday low prices in store locations within five miles of approximately 75% of the U.S. population, we are uniquely positioned to serve customers and communities across the country. We remain focused on getting back to the basics of Dollar General as we look to enhance the way we serve customers, further develop and support our associates and create a long-term shareholder value.

With that, I will turn the call over to Kelly.

[Kelly Dilts, Executive Vice President and Chief Financial Officer at Dollar General]

Thank you, Todd, and good morning, everyone.

Now that Todd has taken you through a few highlights of the quarter, let me take you through some of the important financial details. Unless we specifically note otherwise, all comparisons are year-over-year, all references to EPS refer to diluted earnings per share, and all years noted refer to the corresponding fiscal year.

As Todd already discussed sales, I'll start with gross profit. For Q1, gross profit as a percentage of sales was 30.2%, a decrease of 145 basis points. This decrease was primarily attributable to increases in shrink and markdowns, a greater consumable sales mix, and lower inventory markups. These were partially offset by a lower LIFO provision. Shrink continues to be our most significant headwind, and with 59 basis points worse in the first quarter compared to prior year. As Todd noted, we are taking multiple actions aimed at reducing shrink, and I'll discuss our expectation for this headwind for the remainder of the year in just a bit.

With regards to markdowns, we're seeing promotional levels more similar to 2019 levels, as we anticipated coming into the year. As Todd noted, customers are seeking value, and we saw strong take rates on promotional items during the first quarter.

Turning to SG&A, it was 24.7% as a percentage of sales, an increase of 97 basis points. This increase was primarily driven by retail labor, depreciation and amortization, incentive compensation, and repairs and maintenance.

Moving down the income statement. Operating profit for the first quarter decreased 26.3% to $546 million. As a percentage of sales, operating profit was 5.5%, a decrease of 242 basis points. Net interest expense for the quarter decreased to $72 million, compared to $83 million in last year's first quarter. Our effective tax rate for the quarter was 23.3% and compares to 21.8% in the first quarter last year. This higher rate is primarily due to the effect of certain rate impacting items on lower earnings before taxes and expense recognition attributable to stock-based compensation. Finally, EPS for the quarter decreased 29.5% to $1.65, which exceeded the high end of our internal expectations.

Turning now to the balance sheet and cash flow. Merchandise inventories were $6.9 billion at the end of Q1, a decrease of 5.5% compared to prior year and a decrease of 9.5% on a per store basis. Notably, total non-consumable inventory decreased 19.1% compared to last year and decreased 22.5% on a per store basis. The team continues to do great work reducing our overall inventory position, while simultaneously optimizing our mix and driving higher end stocks. We're pleased with the significant progress on this important goal, which not only frees up more cash in the business, but also helps to mitigate further shrink risk. And importantly, we continue to believe the quality of our inventory remains good.

The business generated cash flows from operations of $664 million during the quarter, an increase of 247%, as we improved our working capital primarily through inventory management. Total capital expenditures were $342 million and included our planned investments in new stores, remodels and relocations, distribution and transportation projects, and spending related to our strategic initiatives. During the quarter, we returned cash to shareholders through quarterly dividend of $0.59 per common share outstanding for a total payout of $130 million. Overall, we're pleased with our progress and proud of these results, including gains in customer traffic and market share, significantly lower inventory levels and improved cash flow from operations.

Moving to our financial outlook for fiscal 2024. While it's still early in the year, we believe our positive first quarter results reinforce the importance of our stores to the communities we serve as well as the progress of our Back to Basics work. With that in mind, we're reiterating our financial guidance for 2024, and continue to expect net sales growth in the range of approximately 6.0% to 6.7%, same-store sales growth in the range of 2.0% to 2.7% and EPS in the range of $6.80 and $7.55. This guidance continues to assume an estimated negative impact to EPS of approximately $0.50 due to higher incentive compensation expense, and an effective tax rate in the range of approximately 22.5% to 23.5%.

We also continue to anticipate capital spending in the range of $1.3 billion to $1.4 billion, as we invest to drive ongoing growth. We continually evaluate and seek to optimize the use of this capital. And as a result, we have updated our expectations for real estate projects in 2024. We now expect to remodel approximately 1,620 stores this year compared to our previous expectation of 1,500 remodels. To facilitate this increase in remodels, we're reducing the number of planned new stores to 730 compared to our previous expectation of 800 new stores. We continue to expect to relocate 85 stores. In total, this increases our expected total real estate project count from 2,385 to approximately 2,435. We're excited about this increase in projects and the expanded investment in our mature stores, and we believe this is an appropriate reallocation of our capital.

As a reminder, our capital allocation priorities are unchanged, and we believe they continue to serve us well. Our first priority is investing in our business, including our existing store base as well as high return organic growth opportunities, such as new store expansion and strategic initiatives. Next, we seek to return cash to shareholders through a quarterly dividend payment, and over time and when appropriate, share repurchases. Finally, although our leverage ratio is currently above our target of approximately 3 times adjusted debt to adjusted EBITDAR, we are focused on improving our debt metrics in support of our commitment to our current investment-grade credit ratings, which, as a reminder, are BBB and Baa2.

Now, let me provide some additional context as it relates to our outlook for 2024. Our customer continues to be very value-driven, and we anticipate they will continue to be price-sensitive as we move through the year. With this in mind, we expect sales mix pressure to be above our original expectation. And as I mentioned earlier, we have seen and continue to expect the promotional environment reversion to pre-pandemic levels as we move throughout 2024. As such, we expect our promotional markdown headwinds to gross margin will continue at least through the first-half of the year. As Todd noted, shrink is currently trending worse than we initially expected coming into the year, and we now expect this headwind to be greater in 2024 than what was originally contemplated in the financial guidance we provided on our earnings call in March. We're taking aggressive and decisive action to mitigate this challenge, and we're expecting to see improvement later in the back-half of 2024 than we had previously anticipated, and more significantly into 2025.

Turning to SG&A, our expectations are relatively unchanged from what we previously provided on our Q4 call. We continue to anticipate a significant headwind this year from the normalization of incentive compensation in 2024, as well as an ongoing headwind from depreciation and amortization. While we don't typically provide quarterly guidance, given the somewhat atypical cadence of this year and some of its specific headwinds, we're providing more detail on our expectations for the second quarter. To that end, we expect comp sales to increase in the low-2% range in the second quarter, with EPS in the range of approximately $1.70 to $1.85.

In summary, we're pleased with the solid start to our year, including exceeding our top- and bottom-line expectations for first quarter. We believe our actions are resonating with our customers, strengthening our competitive position and reinforcing our foundation for future growth. We remain committed to maintaining our discipline in how we manage expenses and capital as a low-cost operator, with the goal of delivering consistent, strong financial performance, while strategically investing for the long-term. We continue to believe that this model is resilient and strong. We're excited about the long-term future of this business, including plans to drive profitable same-store sales and meaningful operating margin growth, healthy new store returns, strong free cash flow and long-term shareholder value.

With that, I'll turn the call back over to Todd.

[Todd Vasos, Chief Executive Officer at Dollar General]

Thank you, Kelly.

Our focus continues to center on our four key operating priorities of driving profitable sales growth, capturing growth opportunities, leveraging and reinforcing our position as a low-cost operator, and investing in our diverse teams through development, empowerment and inclusion. As we have discussed, to advance these priorities in the near-term, we have implemented a refreshed approach to getting back to the basics to enhance store standards and the associate and customer experience in our stores. I want to take the next few minutes to provide an update on these efforts in our supply chain, stores and merchandising.

I will start with our stores, where everything begins and ends for our customers. As a reminder, we have prioritized increasing the employee presence at the front end of our stores to provide a friendly welcome and elevated level of engagement to our customers, while also facilitating a positive checkout experience. As we have continued to move away from self-checkout in the majority of our stores, we believe this focus is even more important in serving our customers and supporting our sales growth. We have additionally focused more of our labor hours on perpetual inventory management in our stores by adding specific inventory management shifts and specified and specialized inventory training in each store. Our customers are taking note of these efforts, as we have seen a significant improvement in their perception of our in-stock levels, which we believe is contributing to our growth in customer traffic, market share and comp sales.

Finally, we have also taken a significant action to make it easier to operate our stores, while also enhancing the overall experience for associates and customers. Our supply chain and merchandising teams have made significant strides in serving our stores in addition to the work we have done in the field, such as reducing district managers' spans of control, simplifying and eliminating certain activities and reducing inventory. We continue to focus on reducing store manager turnover, which is correlated to sales and shrink results in our stores. Notably, while we still have work to do, we are seeing year-over-year reductions in turnover at all levels within our retail operations, including regional director, district manager, store manager, assistant store manager, and sales associate. We are proud of this progress and excited to see our actions resonating with our team in the field.

Overall, we believe the actions in our stores will drive improvements in customer satisfaction, including customer service and on-shelf availability and convenience, enhance the associate experience in the stores, including improved employee engagement and retention, and drive improvements in financial results, including sales and shrink.

Next, let me provide a quick update on our supply chain. Our top priority in this area continues to be improving our rates of on-time and in-full truck deliveries, which we refer to as OTIF. Our distribution and transportation teams have taken aggressive action to improve their service to our stores, and these efforts have led to significantly higher OTIF levels compared to the same time last year.

When we began our Back to Basics work last year, we identified an opportunity to exit 12 temporary warehouse facilities, which would lower cost and improve inventory flow throughout our supply chain. Since that time, we have exited seven of these buildings, and our in -- and on track to exit the remainder in 2024. In conjunction with these moves, we are making great progress on our permanent distribution centers in Arkansas and Colorado, both of which are scheduled to open later this year and which should contribute to a reduction in stem miles and lower transportation cost over time.

Finally, we have also begun the first full scale refresh of our sorting process within our distribution centers since the launch of our Fast Track initiative in 2017. Work has begun on all 18 of our dry facilities, with four already completed. We are making quick progress on the others and believe we will finish this work by the end of the year. Once we conclude, the re-sort process, we believe our store teams will be able to restock shelves more quickly, ultimately driving greater on-shelf availability for our customers and increased sales.

Ultimately, we believe these actions will enhance the agility of our supply chain, allowing us to meet changing demands and respond quickly to challenges, all while driving greater efficiencies and a further improved experience for our store teams and customers.

Finally, I want to provide an update on getting back to basics in merchandising. Our team's top priority is always delivering value to the customer, and we continue to innovate on ways to provide the products they want and need at affordable prices. These basics are important to our customer, which is why we remain committed to a strong private brand offering, affordable national brands and the $1 price point. Despite the inflationary pressures we have experienced over the last year, we continue to carry approximately 2,000 items at or below the $1 price point in the majority of our stores, as we help our customers stretch their dollar in our stores each and every day.

As Kelly noted, we also continue to focus on meaningfully reducing our inventory position and the team has done an outstanding job on this front over the past six months. In 2024, we committed to a net reduction of up to 1,000 SKUs within our chain by the end of this year, and we are well on our way to meeting that goal. We have already made good progress selling through the remaining inventory and resetting planograms to remove these items from our stores. Importantly, we expect a significant portion of the sales of these secondary and tertiary SKUs will transfer to primary SKUs, that will remain in our offering.

Finally, our merchants have been working with our operators to identify and execute on simplification opportunities, such as reducing the number of floor stands and monthly end-cap resets to reduce activities for our store teams. In conjunction with the work of our supply chain teams to optimize the sorting process, our merchants are also working to increase the number of products that can go straight to the shelf, eliminating the need for extra touches within the store. Collectively, these actions are designed to save time in our stores for our teams and ultimately result in an improved associate and customer experience.

As we wrap up this morning, I want to say again how proud I am of the team's great work and commitment to getting back to basics, as we fulfill our mission of serving others. We are moving with great urgency to implement our Back to Basics plan and execute on the things that matter most to our customers. And while we are pleased with the positive results stemming from many of these actions, we recognize that some of our efforts may take longer to deliver the intended benefit, and we'll continue to work to capitalize on these opportunities.

I want to thank our more than 186,000 employees for their ongoing engagement and their passion for our customer. This team is energized and confident in our strategy, both near-term to restore operational excellence, and long-term to deliver value for our customers and shareholders alike. I look forward to all that we can accomplish together throughout 2024.

With that, operator, we will now open the lines for questions.

Questions and Answers

[Operator]

Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions]

Our first question today is coming from Michael Lasser of UBS. Please go ahead.

[Michael Lasser, Analyst at UBS Group]

Good morning. Thank you so much for taking my questions. It's a multi-part question. First, why is shrink worse than you expected? And how have you been able to offset that while still being able to maintain your full-year EPS guidance?

And similarly, you mentioned that the promotional environment has gotten more intense, that's not surprising, given all the announcements from competitors who've talked about price investments. What risk does that create to your margins in the second-half of the year, as you might have to respond to what's happening in the marketplace? Thank you so much.

[Todd Vasos, Chief Executive Officer at Dollar General]

Yeah, Michael, thank you for the question. So, on shrink, I just want to make sure, we reference back to last quarter, as we rolled out our Back to Basics program in earnest over the last few months, we talked about last quarter that some areas will take a little longer to manifest itself in a real positive manner. We called out shrink as being one of those, because shrink has the longest tail to it. And quite frankly, we have many levers on shrink that we watch and we look at each and every quarter.

In saying that, the great thing here is that, what we're seeing on the shrink front right now is what we thought we would, and that is of the shrink indicators that we watch, and by the way, we use a proprietary predictive model to look at this. We've had this for many years. And as you know, over the years, our shrink indicators will -- would have indicated, and have performed in a pretty good manner up until recently. And these predictive models are now flashing green or positive with the majority of the items that we look at for shrink.

So, in saying that, in a nutshell, we feel pretty good about what that would indicate for the back-half of the year and what that will indicate, hopefully, for '25 and beyond, just like we thought it would come together, a little softer in Q1, but, again, green shoots, which is really great to see, starting to perform.

And Kelly, you may want to just mention how it affects the margin overall.

[Kelly Dilts, Executive Vice President and Chief Financial Officer at Dollar General]

Yeah. No, absolutely. So, it takes a little while for some of that improvement to show up in our financial results, which is why we're calling it out. So, we do expect to see improvement in the second-half of the year, and even more meaningfully into 2025, as we work through that.

I think your other question was just what are we doing to work to offset any of those risks. And I'll tell you, we have a lot underway, as we typically do, where our goal is always to improve margins. And so, some of the underlying drivers that we still have in place as we work through the shrink piece include DG media network, so looking for some meaningful contribution there. We still have private brands, which generate better margins than some of the national brands, and it's certainly something that our consumer is looking for now. We've got global sourcing category management, which is just huge here at Dollar General, and certainly, a way to offset any of the risk that we see in the near term. And then, of course, inventory optimization, which the team has done just a fantastic job of focusing on. And finally, supply chain efficiencies. Certainly, we are continuing to look for those efficiencies as we move through this year, and frankly, as we move through each and every year.

So, I think, with all of those underlying drivers and just delivering on our Back to Basics actions on driving sales and lowering shrink, we feel good that we're strengthening that foundation for the long-term and into the back-half of the year.

[Todd Vasos, Chief Executive Officer at Dollar General]

And then, Michael, I know you had a second part question. And as it relates to the promotional activity and what we're seeing from that, as you may recall, we are probably one of the first ones to call out that, we believe that the promotional environment would rise in 2024. We made mention that we believe it's going to be more reminiscent to pre-COVID time, so, 2019 type levels. And quite frankly, in Q1, that's exactly what we saw. And we still see it the same way today as we move through Q2 and into the back-half of the year.

So, it's pretty much right on what we thought. And I would tell you that, for us, here at Dollar General, we've always done a very good job, as you know, of balancing that everyday value here on the shelf, meeting our everyday price and then seeding in that promotional activity to really show even more value to the consumer. We do that probably as good as anyone. And the great thing about Dollar General is that category management that Kelly just mentioned, where we are a large player with almost every CPG company in America, and with that, allows us the opportunity to continue to work with them very closely to help mitigate margin risks from that promotional activity.

So, we feel good. Everything is contemplated in our guidance as we move forward. And we feel good about that promotional activity to show good value to the consumer. And it's been resonating. Take a look at our sales for the quarter and our transactions for the quarter. I think the balance is being struck very well here.

[Operator]

Thank you. The next question is coming from Matthew Boss of J.P. Morgan. Please go ahead.

[Matthew Boss, Analyst at J.P. Morgan]

Great. Thanks. So, Todd, maybe could you elaborate on customer behaviors that you saw as the first quarter progressed, as we think about consumables relative to discretionary. Maybe what comp trend have you seen so far in May relative to your low-2s second quarter guidance?

And then, just larger picture, where does the Back to Basics strategy stand today relative to the overall opportunity, thinking about near-term opportunities, and then, as you said, things that just may take a little bit longer?

[Todd Vasos, Chief Executive Officer at Dollar General]

Yeah. Sure. Well, Matt, what we're seeing from the consumer overall is, what we pretty well called out in March, and that is, it's a cautious consumer, I think is the best way to put it. She has definitely fleed [Phonetic] the value, especially in that lower income stratas [Phonetic]. But what we're seeing like we saw in Q4, what we're seeing is that the next cohort and the one above that, so let's call it, middle to upper middle income and then in some of the upper income stratas, we're seeing the trade down still come in. So, we feel good that we're getting new customers in. We can see it in our data, and that we're retaining at a high level those core customers of ours in that lower income strata.

She is definitely making trade-offs in the store and at the shelf, and feeding her family and taking care of her family is her number one priority. Inflation has and continues to be top of mind for her. While she does say in our recent work, as you know, we go out each quarter and talk to the consumer. In our recent work, she does indicate overall, year-over-year, the inflation has slowed down. But what she keeps pointing out is that the inflation that has happened to her over the last couple of years is still there. It hasn't gone away. So, it's in the base, if you will. And as we had pointed out a couple of quarters ago, we don't believe that, that is probably going to dissipate as we continue to move forward. So, our core consumer is still continuing to figure out her overall spending rates.

Now, the great thing, and as your second question asked was that consumable versus non-consumable mix. And what we saw in Q1 is, in those times when the consumer wants to spend more, let's talk about Easter for a moment. We saw Easter was very good for us, both on the consumable and the non-consumable side of that discretionary side of the equation. So, she has the ability to spend some, but she's very deliberate with that spend. And so, we need to continue to show her value, even in the discretionary areas. So, what that signals to us is that she continues to figure out her income levels, because she is spending on some of that discretionary. So, we'll continue to foster that as we move through Q2 and beyond. And we believe it's fully contemplated in our low-2s guidance that we gave in Q2.

And then, lastly on our Back to Basics work, thanks for asking that, because we're proud of what we've done so far. If you recall, we talked about starting at about our own 20-yard line, if I can revert back to my football analogy for a moment, I would tell you that, we're at or just crossing the 50-yard line now as we exited Q1. That's quite a move very quickly. I would tell you, and you asked, a few of the components are moving even quicker. So, I would tell you, in our supply chain, very happy with what we're seeing there, has moved well past the 50 and probably more on the 40-yard line on the other side of the field. So, feeling very good about that.

Our on-time and in-full rates have been very stable and top notch for many weeks now. And that stability is really the key, if you remember me saying that last time, that consistency is where the stores start to feel it and the customers feel it the most. And we're starting to see that materialize and have been for the last few weeks.

As it relates to our merchandising side, I would tell you, we're squarely across the 50 as well, with some of our biggest components yet to come in Q2 and into early Q3. All the pipe has been laid for that, and we are already starting to see some of that benefit as we worked in the Q2 here. And then, our operations, inside of our stores in our field, I'm very proud of what they've done so far, because everything we've done back a house is now starting to manifest itself at store level. And so, I would tell you that we're squarely on the 50-yard line there as well. And I know that the team is squarely focused on moving the ball down the field in Q2 there. And I believe that with the back of the house indicators that we see right now, I believe that, that's going to happen as we move forward.

Shrink is still, as we indicated, the -- probably the laggard there. We knew it would be the laggard. This is not a surprise, a little worse than we thought in Q1, but overall, not a surprise that it's going to tail everything else. But again, those green shoots I mentioned earlier really give us the confidence to reiterate our guidance for full-year, because we're starting to see some of that occur. And of course, those positive sales and transactions, I don't want to minimize that. I -- you have to take a look at that and be very positive, because the consumer is seeing the difference inside of our stores, a big difference in turn over the last couple of quarters. So, stay tuned. We feel pretty good. You could probably tell by my enthusiasm in the voice that we're seeing some real positives from all the work that we're doing, Matt.

[Operator]

Thank you. The next question is coming from Kate McShane of Goldman Sachs. Please go ahead.

[Kate McShane, Analyst at The Goldman Sachs Group]

Hi. Good morning. Thanks for taking our question. Excuse me. The change in the real estate plan. Just wondering if you could talk through why you're changing it at this point in time? And longer-term, is this something maybe we should expect in terms of breakdown for real estate priorities between refreshes, remodels and new store growth?

[Kelly Dilts, Executive Vice President and Chief Financial Officer at Dollar General]

Yeah. Thanks for the question, Kate. And just to level set everyone, so we are reducing the number of new stores this year, it's by about 70 stores. And what we're going to do is move them into 2025. So, we feel really good about the locations that we have identified. We're just pushing them out into 2025.

And what that does is free up capital in order to increase the number of remodels and the total real estate project count that we have. So, I have to tell you, we're really excited about this increase in projects, with the expanded investment, particularly in our mature stores. And we think this is absolutely the appropriate reallocation of capital, especially with our Back to Basics work. And so, stay tuned for 2025. But for right now, we feel really good about this reallocation.

[Operator]

Thank you. The next question is coming from Simeon Gutman of Morgan Stanley. Please go ahead.

[Simeon Gutman, Analyst at Morgan Stanley]

Hey, good morning, Todd. Good morning, Kelly. My question is on longer-term margins. And Todd, we've talked about getting back north of 7% over time. You've gotten now six months of reflecting on the business, and it -- there's some things that are -- there are puts and takes at the margin, maybe some things that are a little bit worse on margin, shrink and promos. Do you think that level, now that you have six months of seeing how the business and the environment looks, those levels of margin are appropriate given what you are reinvesting?

And then, just a -- maybe a slightly different second part of the question. The consumers that you mentioned are buying more in promotion. How does that foot now with retailers actually investing in price? I'm sure you're watching it closely. But how do you think about that in the need to not just promote, but actually make structural and priced investments? Thanks.

[Todd Vasos, Chief Executive Officer at Dollar General]

Yeah. Thank you for the question. Simeon, let me actually answer the second one first, and then I'll turn it over to Kelly for your first question.

So, yeah, again, the promotional environment is nearly exactly what we thought it would be, a little higher in Q1, but I would tell you that, we knew this is the way the consumer was going to react. And we knew and we said this in Q4, the way CPG would react, because they're looking to move units as well. So, I would tell you that this is probably both the CPG and a customer push into some of this promotional activity.

Now, in saying that, we feel great about our everyday price. As I indicated on the prepared remarks, we are right in line with everyday price against all classes of trade. So, we feel good about that. We continually invest in price and value at the shelf.

And then, the other thing to keep in mind is, our expansive and growing private brand business has been very stable and solid and growing, quite frankly, in Q1. And that important and magic $1 price point continues to be one of our best performers in the quarter. So, we're showing value at all different spots for the consumer, and it's resonating. I mean, when you look at that transaction growth across Q1, I think, one would say it's resonating heavily with the consumer at this point. So, we feel good about all of our pricing across the board. But we continue to watch it. We'll continue to watch all classes of trade. We will make adjustments if need be as we move through Q2 and beyond. But right now, the customer is reacting exactly like we thought she would. We know how to do this. We've been doing this for a long time.

And this category management team that we have here, built in 2008, continues to be strong and continues to be working all the levers that we know how to do here at Dollar General.

[Kelly Dilts, Executive Vice President and Chief Financial Officer at Dollar General]

Yeah. And just taking a look at the longer term, and we talked about this just a minute ago. We're certainly doing everything with our Back to Basics actions to strengthen that foundation for our longer term growth with driving sales and working on lowering shrink. We still feel great about the fundamentals of this business. We're growing share, we're growing traffic. We had good, healthy comps. And we're generating a lot of cash. So, the model is absolutely intact.

As we look forward, we still have a nice long runway for growth, and that's new stores and our remodel program, so feel good about that. We feel good about generating a significant amount of cash flow and the investments that we're making in our business now as we look forward to how that will return in the future. And then, of course, soon as we reach the target of our debt leverage, we'll be returning cash back to shareholders when appropriate in the form of share repurchases.

And so, given all of that, I would say that where we're at right now from an operating margin perspective, we know we have a lot of opportunity and we are always looking to improve our operating margin. You heard me talk about a lot of the longer-term levers that we have, and some in the shorter-term around the gross margin side of things, but we also have our save to serve approach to controlling costs, which is also a huge benefit to drive operating margin as well. So, we certainly feel like we can do that from here. And I would tell you that we believe this business is going to return to a 10% to 10%-plus EPS growth on an adjusted basis over the longer term.

[Operator]

Thank you. The next question is coming from Paul Lejuez of Citi. Please go ahead.

[Paul Lejuez, Analyst at Citi Research]

Hey, thanks, guys. Can you talk about the comps that you assume in the non-consumable categories for the rest of the year? And how those assumptions have changed? I think you said the business mix is a little bit worse of a drag than you thought. I thought you said the same for shrink and also maybe for promos. So, just curious what the offsets are there as well to help keep your guidance. Thanks.

[Todd Vasos, Chief Executive Officer at Dollar General]

Yeah. I would tell you that our non-consumable discretionary business, as I mentioned earlier, it's still alive and well. It's just the consumer is making those trade-offs in the store and at the shelf. But I would tell you, again, during those important times when discretionary is important to her family, she has the ability to spend. So, that shows you that -- and gives us confidence that we have the right products for the consumer at the right value and price.

And as we can see, the move through Q2 and beyond, we believe layering in some promotional activity and discretionary like we are in our core, or non-consumable -- or consumable area, excuse me, is probably the right thing to do. So, we believe a nice balance of both will help the consumer stay engaged in the discretionary side of the business.

I have seen -- looked at scene, and I am very pleased with the holiday line-up we've got coming up. I know it's a little premature, but it never is when you'd start talking about holiday, because it has such a long lead time coming in. And the lineup we have this year is very strong for the back-half of the year as well. So, more to come. I believe we've got all the right building blocks in place for the discretionary side of the business to continue to get healthier and healthier as we move through the back-half of the year.

[Operator]

Thank you. The next question is coming from Rupesh Parikh of Oppenheimer. Please go ahead.

[Rupesh Parikh, Analyst at Oppenheimer & Company]

Good morning, and thanks for taking my question. So, just going back to the commentary on the full year guidance, so it applies a pretty strong second-half profit recovery. So, I just want to get a sense of the confidence in driving the acceleration in the key drivers as you guys look out to the back-half of the year?

[Kelly Dilts, Executive Vice President and Chief Financial Officer at Dollar General]

Yeah. Thanks, Rupesh. I would say, we are certainly pleased to be able to reiterate our guidance that we gave. And to your point, it does indicate a stronger back-half. And we really see the momentum of our actions on all of our Back to Basics work will fuel that back-half and looking forward to strong top-line and bottom-line growth in the back-half.

[Operator]

Thank you. The next question is coming from Seth Sigman of Barclays. Please go ahead.

[Seth Sigman, Analyst at Barclays]

Hey, good morning, everyone. Despite the comment about shrink being worse than expected, it sounds like answer to prior question is that it was only a little bit worse. And then, there was also another comment about your internal models flashing green. So, I'm trying to reconcile all of that.

But I guess my real question is around the level of investment required to address shrink, which has been a concern in the market, just cost of doing business going higher. So, how confident are you that the investments you're making and -- including what you've done from a payroll perspective is really fully baked in here and is not going to have to step up again? Thanks so much.

[Todd Vasos, Chief Executive Officer at Dollar General]

Yeah. Thank you. That's a great question. And, yeah, I just want to reiterate, shrink was worse than we thought it would have been in Q1. But we are seeing those green shoots, which gives us confidence to reiterate our guidance long term. So, I just want to make sure we got that point across.

But I would tell you that, as it relates to all the work we're doing around Back to Basics, it will continue, we believe, to gain momentum. Everything would show that. And many of those opportunities that we have to gain momentum directly affect the shrink line. As Kelly indicated and I also indicated earlier, when you look at inventory levels across the store, I mean, pretty aggressive, but impressive reduction in inventory in light of rising sales. And so, when you think about that, with a 9.5% reduction in per store inventory, and 22.5% on our non-con business or discretionary business, we believe all that -- those actions will help that shrink line, because too much inventory, or over inventory in some instances, always leads to additional shrink. So, we continue to watch that carefully.

Now, the great thing is, our inventory is in really good shape as far as the quality and always has been. But we want to make sure that at store level that it gets to the shelf when it comes in, and it gets in front of the consumer as quickly as possible. And those levels are so important to make sure that happens.

And then, as I look at other levers, and all the other work we're doing, the expense lines, as you mentioned, we feel confident on where we are today. Wage rates being the largest. $150 million investment last year in wages was a strong commitment to grow that consumer awareness and grow our stores in a way that the consumer sees and resonates with. And I believe we're starting to see some of that benefit now. But when you look past that, we believe that we are -- we have the right amount at this point of labor hours inside of our stores.

We also, over the many years, from really, the store -- 2019 to 2023, we've seen over a 30% increase in our average hourly rate as well. And so, we've invested there. That's what gives us confidence that we're on the right track. We continue to make those investments, where we see needed. The other investment we made this year was we added 120 additional district managers, and that's very important, because, again, being an ex-district manager that I was at one point, anytime a district manager can have less span of control, is able to get to their stores more often, they're able to teach, train, develop, and most importantly, solve problems at each and every store that is either his or her responsibility. So, those spans of control and reducing those is very important. That should pay dividends as we move through '24, as those start to take hold.

So, we feel good about all the investments we've made. We feel that they were appropriate. We feel that they're right on track. And right now, we feel good about where we are and -- with everything else that we could see today baked into our guidance for the rest of the year.

[Operator]

Thank you. The next question is coming from Scot Ciccarelli of Truist. Please go ahead.

[Scot Ciccarelli, Analyst at Truist Securities]

Good morning, guys. So, as you guys reduce SKUs and consumables continue significantly outpace discretionary sales, and that certainly appears to be the case in the stores as well, how do you eventually balance out the relative growth rates of consumables versus discretionary, so you can alleviate some of that marginal pressure from mix, or don't you? It just becomes more of a permanent shift in the mix. Thanks.

[Todd Vasos, Chief Executive Officer at Dollar General]

Yeah. We don't believe it's a permanent shift. And let me step back and say, again, I believe we're doing exactly the right thing at the right time. You may recall, over the years, I've always said we, at Dollar General, go where the consumer wants us to go. And right now, because of her finances, meaning with the inflation over the last couple of years and those pressures that have come with that, this is where she needs us to be right now for her. And we doubled down on that, right, because we need to take care of her. And I believe, you see in our comp for Q1 and our transaction growth in Q1, would all benefit what I just said, meaning, that consumer is resonating with that.

Now, the thing I do want to point out is that all the work we did around our non-consumable initiatives through the pandemic and even exiting the pandemic is still alive and well in our stores. And again, when the consumer needs the spend around discretionary right now, she has what she needs at Dollar General. It's proven. We see it. We see it in her spend. So, we don't believe that this is a permanent shift. We believe it's temporary. How long? We'll wait to see. Again, the consumer will tell us that. But in the meantime, we'll go where she wants us to go. We'll have the right products for her that she needs to feed her family, take care of her family in the meantime, but at the same time, continue to foster and grow that discretionary side of the business with either -- even more options and more value as we continue to move through this year and into the back-half of the year, standing ready and willing and able to serve her when she's ready to start spending more freely on that side.

[Operator]

Thank you. The next question is coming from Michael Montani of Evercore ISI. Please go ahead.

[Michael Montani, Analyst at Evercore ISI]

Hey, good morning. Thanks for taking the question. I just wanted to dig into a little bit further the inventory side and supply chain. So, on the inventory front, should we expect kind of further reductions at this point, or do you feel like you have what you need and you could start to grow inventory a little bit again? How are in-stocks looking?

And then just, on supply chain, Todd, what's your vision there with the two additional DCs coming in line this year? When can we get kind of optimal product flow back?

[Kelly Dilts, Executive Vice President and Chief Financial Officer at Dollar General]

So, I'll start on that with the inventory question. And I'll say, reducing inventory still really remains a high priority for us. So, we're going to focus on reducing that per store inventory. What that does is really simplifies things, both upstream in the supply chain as well as in our stores. And so, we continue to look at that as a high priority.

The other piece of that is really around focusing on inventory optimization. And so, we talked a little bit last quarter about some investments that we are making in technology. Those are starting to pay dividends. And so, we are really looking on how to right size the inventory over the next 12 months to 18 months from just what we're carrying in the stores and making sure that we are in a better position to serve our customers from an in-stock level. We are seeing in-stocks improve, so we are happy to do that.

And I know I've had a shout out to the team a couple of quarters now, but they have just done a fantastic job of both reducing inventory and improving our in-stocks. And I'll tell you all along, we have felt really good. And Todd said this earlier about the quality of our inventory, so that's really not our issue, it's really just about getting those levels down, so that they're more manageable than the store and in the DCs.

And, again, felt great about the decreases, Todd called out the numbers, but just to reiterate, we've got a 22.5% decline in that non-consumable inventory. So, just huge there. And then, if you don't mind, I'm just going to segue a little bit into cash. One thing that we did see on the inventory management side, is what that did for our cash flow. So, our cash from operations was up 247% to last year. And so, this is a really important driver, not only from the operations standpoint, but also just lowering our carrying cost and being really impactful to our cash.

[Todd Vasos, Chief Executive Officer at Dollar General]

I mean, Kelly, I'll just add on the second part of your question. Again, as I reiterate it, I'll reiterate, I'm sorry, as I said, we feel good about where our supply chain is right now. And as we bring Little Rock, Arkansas, on later this year, and a little closer in our Colorado DC, it'll give us even more confidence as we move forward.

Matter of fact, as we also said, out of these temporary facilities that we had, we're already out of seven of those and the remaining five will come out in 2024. And really the catalyst there will be these two facilities that we open, again in Colorado and in Little Rock, Arkansas. So, again, I believe that we're well on our way. The consumer is definitely telling us in all the consumer work we've done. They're also saying, they're seeing the benefit of that at the shelf, meaning, finding what they need more often inside Dollar General. Are we perfect yet? No. But, boy, we are light years from where we were. And continue to grow that in-stock level inside the store.

So, all systems seem green there right now, and we continue to benefit from that in-stock level and that on-time levels from our supply chain.

[Operator]

Thank you. Our final question today is coming from Joe Feldman of Telsey Advisory Group. Please go ahead.

[Joe Feldman, Analyst at Telsey Advisory Group]

Oh, great. Thanks for taking the questions, guys. Wanted to ask, have you seen any initial green shoots, like you said, in the 12,000 stores that you've remodeled? I know, 3,000 just happened in May. But, like, maybe the original ones that you did, I know it's only four months. But if removing the self-checkout has made any kind of measurable difference? I'm wondering if it's changed the flow, is it created longer lines or is it just better for the customer, because they're engaged with an associate? Thanks.

[Todd Vasos, Chief Executive Officer at Dollar General]

Yeah. Well, thank you for that. There is no doubt, we're getting positive customer feedback across the board on the 9,000. And quite frankly, some of the 3,000 that we did in May, a couple of them have -- many of them have been for a couple of weeks now, so we're getting that feedback. It's always positive from what we're getting, the vast majority of it from our consumers, because they like the interaction at the front of the store.

And with that interaction, then also comes having somebody at the front of the store very visible at all times, which, as you recall, was not always the case in 2023. So, with that, should come as we continue to move through '24 better shrink results from that action. Now, we'll watch and see, what we believe those are -- some of those green shoots that we'll start to see even more as we move to the back-half of the year and into '25. But the overall reaction from the consumer is thank you. We like the checkout with someone that we can interact with at all times at the front. That is overwhelmingly what we get. So, that really gave us that confidence, if you will, to take the other 3,000 and move it to an assisted lane in May from all the good work that we saw happen from the 9,000 we did earlier in the year, and again, that consumer response, which we rely on across the board for all actions that we take, because everything starts and stops with that consumer in the store.

[Operator]

Ladies and gentlemen, that is all the time we have for today. We would like to thank you for your interest in Dollar General, and your participation on today's conference. [Operator Closing Remarks]

Participants

Corporate Executives

• Kevin Walker, Vice President, Investor Relations
• Todd Vasos, Chief Executive Officer
• Kelly Dilts, Executive Vice President and Chief Financial Officer

Analysts

• Michael Lasser, UBS Group AG
• Matthew Boss, J.P. Morgan
• Kate McShane, The Goldman Sachs Group, Inc.
• Simeon Gutman, Morgan Stanley
• Paul Lejuez, Citi Research
• Rupesh Parikh, Oppenheimer & Company
• Seth Sigman, Barclays PLC
• Scot Ciccarelli, Truist Securities
• Michael Montani, Evercore ISI
• Joe Feldman, Telsey Advisory Group