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<span data-sheets-value="{&quot;1&quot;:2,&quot;2&quot;:&quot;Dollar General roars into the Fortune 100 on the strength of a 21.6% net sales increase—a reflection in part of shoppers being mindful of budgets during the pandemic. But the deep discounter has also won many new customers with its increased focus on fresh food. While Dollar General expects a slight decrease in net sales this year after its 2020 bonanza, it will speed up the rollout of a new-format store called Popshelf, aimed at more affluent suburban shoppers. It also plans to open another 1,050 of its traditional Dollar General stores.&quot;}" data-sheets-userformat="{&quot;2&quot;:14723,&quot;3&quot;:{&quot;1&quot;:0},&quot;4&quot;:{&quot;1&quot;:2,&quot;2&quot;:16777215},&quot;10&quot;:2,&quot;11&quot;:4,&quot;14&quot;:{&quot;1&quot;:2,&quot;2&quot;:0},&quot;15&quot;:&quot;Arial&quot;,&quot;16&quot;:11}" data-sheets-textstyleruns="{&quot;1&quot;:0}{&quot;1&quot;:30,&quot;2&quot;:{&quot;6&quot;:1}}{&quot;1&quot;:38}">Dollar General soars 99 spots on the Global 500 on the strength of a 21.6% net sales increase—a reflection in part of shoppers being mindful of budgets during the pandemic. But the deep discounter has also won many new customers with its increased focus on fresh food. While Dollar General expects a slight decrease in net sales this year after its 2020 bonanza, it will speed up the rollout of a new-format store called Popshelf, aimed at more affluent suburban shoppers. It also plans to open another 1,050 of its traditional Dollar General stores.</span>

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F500-2021-91-Dollar General

<span data-sheets-value="{&quot;1&quot;:2,&quot;2&quot;:&quot;Dollar General roars into the Fortune 100 on the strength of a 21.6% net sales increase—a reflection in part of shoppers being mindful of budgets during the pandemic. But the deep discounter has also won many new customers with its increased focus on fresh food. While Dollar General expects a slight decrease in net sales this year after its 2020 bonanza, it will speed up the rollout of a new-format store called Popshelf, aimed at more affluent suburban shoppers. It also plans to open another 1,050 of its traditional Dollar General stores.&quot;}" data-sheets-userformat="{&quot;2&quot;:14723,&quot;3&quot;:{&quot;1&quot;:0},&quot;4&quot;:{&quot;1&quot;:2,&quot;2&quot;:16777215},&quot;10&quot;:2,&quot;11&quot;:4,&quot;14&quot;:{&quot;1&quot;:2,&quot;2&quot;:0},&quot;15&quot;:&quot;Arial&quot;,&quot;16&quot;:11}" data-sheets-textstyleruns="{&quot;1&quot;:0}{&quot;1&quot;:30,&quot;2&quot;:{&quot;6&quot;:1}}{&quot;1&quot;:38}">Dollar General roars into the Fortune 100 on the strength of a 21.6% net sales increase—a reflection in part of shoppers being mindful of budgets during the pandemic. But the deep discounter has also won many new customers with its increased focus on fresh food. While Dollar General expects a slight decrease in net sales this year after its 2020 bonanza, it will speed up the rollout of a new-format store called Popshelf, aimed at more affluent suburban shoppers. It also plans to open another 1,050 of its traditional Dollar General stores.</span>

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G500-2020-460-Dollar-General

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Discount retailer Dollar General operates over 20,000 stores and employs more than 195,000 people across the U.S., particularly in small towns and rural communities. The country’s biggest variety store by revenue, Dollar General sells a wide range of consumer staples from food and cleaning supplies to gardening tools and prepaid phones. The company has an array of private labels but also offers popular name brands like Clorox and Nestlé. Founded in 1939 as J.L. Turner and Son Wholesale, the company took its current name in 1968.

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Dollar General (DG): Company Profile, Stock Price, News, Rankings

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Dollar General

dollar general

Good morning. My name is Rob, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Second Quarter twenty twenty five Earnings Call. Today is Thursday, 08/28/2025. All lines have been placed on mute to prevent any background noise.

This 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. Now I'd like to turn the conference over to Mr. Kevin Walker, Vice President, Investor Relations. Kevin, you may begin your conference.

Thank you, and good morning, everyone. On the call with me today are Todd Bezos, our CEO and Kelly Dilts, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News and 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, 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 this morning under Risk Factors in our 2024 Form 10 ks filed on 03/21/2025 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. To allow us to address as many questions as possible in the queue, please limit yourself to one question.

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

Thank you, Kevin, and welcome to everyone joining our call. I want to begin by thanking our team for their great work to fulfill our mission of serving others every day in our stores, distribution centers, private fleet and store support center. These efforts are resonating with our customers as well as driving strong operating and financial performance. To that end, we are pleased to deliver strong second quarter results highlighted by earnings growth that significantly exceeded our internal expectations. For today's call, I'll begin by recapping some of the highlights of our second quarter performance as well as sharing our latest observations on the consumer environment.

After that, Kelly will share the details as well as our updated financial outlook for fiscal twenty twenty five. I will then wrap up the call with an update on some of our key growth driving initiatives. Turning to our second quarter performance. Net sales increased 5.1% to $10,700,000,000 in Q2 compared to net sales of $10,200,000,000 in last year's second quarter. This growth was driven by strong performance from new stores and our mature store base.

We grew market share in both dollars and units in highly consumable product sales once again during the quarter, in addition to growing market share in non consumable product sales. Same store sales increased 2.8% during the quarter, driven by relatively balanced growth of 1.5 in customer traffic and 1.2% in average basket. The basket growth was driven by an increase in both average unit retail price per item and average items per basket. We were excited to see a second consecutive quarter of broad based category growth with positive comp sales in each of our consumables, seasonal, home and apparel categories. From a monthly cadence perspective, we saw same store sales growth above 2% in all three periods with our strongest comps in June and July.

We believe these strong and balanced top line results are a reflection of the hard work the team has done to improve execution and further enhance the value and convenience proposition for both existing and new customers. To that end, we're pleased to see growth with customers across all income brackets during the quarter. This includes our core customer who increased spending despite worsening sentiment. In addition, we continue to see trade in growth with middle and higher income customers during the quarter, which we believe is contributing to the nice performance we've seen in our non consumable categories. Ultimately, customers across all income brackets are coming to Dollar General as they seek value.

As America's Neighborhood General Store in more than 20,000 locations across the country, we recognize and embrace our role in being here for what matters for our customers. This includes providing the items they want and need at prices they can afford. With that in mind, we are committed to delivering everyday low prices that are within three to four percentage points on average of mass retailers. While we are pleased that we continue to operate within the targeted price range, we are also focused on maintaining our substantial offering of more than 2,000 SKUs at or below the $1 price point. We know this price point is important in helping our core customers stretch their dollar, particularly at the end of the month and when budgets are tight.

In fact, our $1 value value merchandising set, which is comprised of more than 500 rotating SKUs was one of our strongest performing areas in the quarter with same store sales growth more than twice the rate of the overall company. We believe this holistic approach to offering value will continue to be important for our customers, particularly in the back half of this year. Now I'd like to provide a brief update on how we're thinking about tariffs. With the rates currently in place, we believe we will be able to mitigate the vast majority of the impact on our cost of goods. The proactive approach of our sourcing team coupled with our relatively low direct import exposure has positioned us well to serve our customers with a quality assortment at tremendous value.

While the landscape remains dynamic, tariffs have begun to result in some price increases and we will continue to work to minimize them as much as possible. Most importantly, we know this further amplifies the need for value within our communities and we remain committed to serving our customers with the everyday low prices they have come to know and appreciate from Dollar General. Overall, we're proud of our performance during the quarter and the tremendous progress we've made throughout the first half of the year. Our actions are delivering an enhanced shopping experience for our customers and driving strong operating and financial results. We are further strengthening our value and convenient proposition for our customers while making significant progress on our long term financial goals.

Before I turn the call over for our financial update, I want to thank Kelly for her partnership as well as her leadership of our financial organization over the last few years. We wish her the very best as she prepares and begins her new chapter. I also wanna note that we're excited to welcome Donnie Lau back to Dollar General as our next CFO beginning in October. He is highly regarded throughout the organization for his deep understanding of the business, thoughtful strategic leadership and appreciation for our culture and values. We look forward to his leadership of our financial organization as we seek to drive excellence and create long term shareholder value.

With that, I'd now like to turn the call over to Kelly.

Thank you, Todd, and good morning, everyone. First, on a personal note, I wanted to express my appreciation to this team, our customers and our shareholders. This is a special organization with a unique mission, and I'm grateful for the time I've had to serve alongside them. Now that Todd has taken you through a few of the top line highlights of the quarter, let me take you through some of the other 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.

For Q2, gross profit as a percentage of sales was 31.3%, an increase of 137 basis points. This increase was primarily attributable to lower shrink, higher inventory markups and lower inventory damages. Our focus on reducing shrink has continued to produce positive results, including a healthy year over year improvement of 108 basis points in the second quarter. We're excited to be outperforming the shrink reduction expectations contemplated within our long term financial growth framework in terms of both timing and magnitude. Given these results, we're optimistic about the potential for shrink reduction to contribute more than 80 basis points toward the operating margin goal of 6% to 7% contemplated within our long term financial framework.

In addition, we were pleased to drive a reduction in damages in the second quarter as our efforts in this area have begun to take hold as well. The gross margin increase was partially offset by increased LIFO provision as well as increased markdowns and increased distribution costs. Now let's turn to SG and A, which as a percentage of sales was 25.8%, an increase of 121 basis points. The primary expenses that were a higher percentage of net sales in the quarter were incentive compensation, repairs and maintenance and benefits. Moving down the income statement, operating profit for the second quarter increased 8.3% to $595,000,000 As a percentage of sales, operating profit increased 16 basis points to 5.6%.

Net interest expense for the quarter decreased to $57,700,000 compared to $68,100,000 in last year's second quarter. Our effective tax rate for the quarter was 23.5% and compares to 22.3% in the second quarter last year. Finally, EPS for the quarter increased 9.4% to $1.86 which exceeded the high end of our internal expectations. Turning now to our balance sheet and cash flow, where we continue to make great progress strengthening our financial position. Merchandise inventories were $6,600,000,000 at the end of Q2, a decrease of $391,000,000 or 5.6% compared to prior year and a decrease of 7.4% on an average per store basis.

The team continues to do a tremendous job reducing inventory while increasing sales and improving in stock levels, which is having positive operational impacts in both stores and distribution centers. The business generated cash flows from operations of $1,800,000,000 during the first half of the year, an increase of 9.8% compared to the prior year. Our strong top and bottom line results along with our focused inventory management efforts continue to generate significant cash flow. During the quarter, we returned cash to shareholders through a quarterly dividend of $0.59 per common share outstanding for a total payment of approximately $130,000,000 Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in our business, including our existing store base as well as high return growth opportunities such as new store expansions, remodels and other strategic initiatives.

Next, we seek to return cash to shareholders through a quarterly dividend payment and over time and when appropriate share repurchases. And while our leverage ratio remains above our goal, which is below three times adjusted debt to adjusted EBITDAR, we are making great progress towards reaching our target level. Importantly, we remain focused on improving our debt metrics in support of our commitment to middle BBB ratings by S and P and Moody's. Overall, we're very pleased with our operating performance and financial results. Our strong performance has positioned us to raise our financial outlook for 2025.

This update primarily reflects our outperformance in the second quarter and improved outlook for the second half of the year, while considering the potential uncertainty, particularly on consumer behavior as we move through the back half of 2025. With that in mind, we now expect the following for 2025. Net sales growth of approximately 4.3% to 4.8%, same store sales growth of approximately 2.1% to 2.6% and EPS in the range of $5.8 to $6.3 Our EPS guidance continues to assume an effective tax rate of approximately 23.5% and that we will not repurchase shares under our share repurchase program. Now I want to provide some additional context around our expectations. While we're not providing specific quarterly guidance, the low end of our sales and earnings guidance ranges allow for increasing pressure on consumer spending as we move through the back half of the year with Q4 potentially more impacted than Q3.

In addition, we expect shrink to be a continued tailwind throughout the remainder of the year, though to a lesser extent in Q4 as we begin to lap the improvements we made toward the end of last year. Turning to SG and A, given our strong performance, we now anticipate incentive compensation expense to be a headwind of approximately $200,000,000 Moving to the final portions of our guidance for 2025, we continue to expect capital spending in the range of $1,300,000,000 to $1,400,000,000 designed to support our ongoing growth. This includes our continued expectations to execute approximately 4,885 real estate projects in 2025, including five seventy five new store openings in The United States and up to 15 in Mexico, 2,000 project renovate remodels, 2,250 project elevate remodels, and 45 relocations. Finally, as a result of our strong cash position, we are using cash on hand to redeem $600,000,000 of our senior notes in the third quarter earlier than their April 2027 maturity. In summary, we're pleased with our Q2 results, and we're proud of the work that the team has done to strengthen our operating and financial position.

This business model is strong and we believe Dollar General is well positioned to drive sustainable long term growth on both the top and bottom lines while creating long term shareholder value. With that, I'll turn the call back over to Todd.

Thank you, Kelly. I'll take the next few minutes to provide updates on three of the most important initiatives across the business as we look to further advance our progress toward achieving our short and long term goals. I'll start with our real estate work as we continue to focus on driving sales and market share growth by expanding our unique real estate footprint while also enhancing our mature store base. We opened two zero four new stores in Q2, primarily using our 8,500 square foot format in rural markets. Dollar General continues to serve as a vital partner, bringing value and convenience to communities across the country through new store growth.

In addition to our US growth, we opened four new stores in Mexico during the quarter, bringing us to a total of 13. Our team is doing a wonderful job serving those communities as we continue to test and learn and further develop that potential growth opportunity. We are also pleased with the progress of our remodel projects. As a reminder, in addition to our traditional remodel program, which we call project renovate, we have introduced a new incremental remodel program called project elevate in 2025. This initiative is designed to drive sales and market share growth in portions of our mature store base that are not yet old enough to be part of a full remodel pipeline.

These projects include physical asset investments as well as merchandising optimization, product adjacency adjustments, and category refreshes, all of which impacts approximately 80% of the total store. We completed 729 project elevate remodels in q two and an additional five ninety two project renovate remodels during the quarter. While still early, we expect to reach our goal of delivering first year annualized comp sales lifts in the range of 6% to eight percent for project renovate stores and 3% to 5% for project elevate stores. Importantly, we've seen significant improvements in customer satisfaction in these locations upon completion of the remodels. And we believe the improved performance and customer response in these stores paves the way to make Project Elevate a key component of our real estate strategy in the years ahead.

The next area I wanna discuss is our digital initiative, which serves as an important complement to our expansive store footprint as we continue to deploy and leverage technology to further enhance convenience and access for our customers. Our digital capabilities include an engaging mobile app and website that continues to be very popular with our customers as well as growing our delivery options and DG media network. We continue to expand the reach of our delivery options with solutions targeted both new and existing customers. Our DoorDash partnership, now serves more than 17,000 stores, continues to drive significant incrementality and sales growth. To that end, our Q2 sales through this platform increased by more than 60% year over year.

Building on this success, we partnered with DoorDash to launch our own same day delivery offering through our DG digital solutions late in 2024. We have now expanded this offering to nearly 6,000 stores. We are also excited to note that we now expect to offer DG delivery for more than 16,000 stores by year's end compared to our previous expectation of approximately 10,000 stores. And most recently, we entered a partnership with Uber Eats to further expand the reach of our delivery capabilities as we provide value and convenience to customers on their platform. We have already expanded to approximately 4,000 stores with Uber and expect to be in approximately 14,000 stores by the '3.

Collectively, more than 75% of the orders through these offerings are delivered in one hour or less. Ultimately, we believe this suite of delivery options will introduce new customers to Dollar General and drive incremental sales growth while also further enhancing the value and convenient proposition for our existing customer base. The linchpin of our digital initiative is our DG media network, which enables a more personalized experience for our unique customer base while delivering a higher return on ad spend for our partners. We continue to be pleased with the performance of DG media network, which is driving significant year over year growth in retail media volume as partners seek to access our unique customer base. This initiative is an important component of our strategy to deliver on our long term growth framework, and we are excited about its potential.

Over time, we believe we can leverage our digital initiative to increase market share and drive profitable sales growth while further evolving our relationship with our customers and driving greater customer loyalty within the digital platform. The final initiative I wanna discuss is our non consumables growth strategy. As a reminder, we are focused on a few key growth drivers in our non consumable categories over the next three years. These include brand partnerships, a revamped treasure hunt experience, and reallocation of space within our home category. During Q2, we were pleased to deliver positive quarterly same store sales growth in each of the three non consumable categories for the second consecutive quarter.

Notably, the magnitude of growth was broad based with same store sales increases in each of these categories of at least 2.5%. Our brand partnerships are resonating with customers and we have been pleased with the strong sell through in many of these sets. As a result of the success, as well as our improved execution, our home products category saw its largest quarterly same store sales increase in more than four years. In addition, our pop shelf stores delivered another quarter of strong same store sales growth. We continue to be pleased with the performance of the new store layout in this banner, including a greater emphasis on categories such as toys, party, candy, and beauty.

The pop shelf banner also continues to produce learnings that we are able to apply to our non consumable categories in our Dollar General stores to further strengthen that offering for our DG customers. We believe our non consumable sales performance both in Dollar General and Popshell stores also benefited from improved execution in our stores and supply chain as well as from the expanded trade in shopping we've seen from middle and higher income customers. These results including strong sales performance and market share gains continue to demonstrate that our treasure hunt approach is resonating with the customer. In turn, we believe we are well positioned to serve them in these discretionary categories in stores across both banners and ultimately drive further growth in both sales and gross margin. In closing, we're pleased with our second quarter performance.

Operationally, we are improving execution, stabilizing our workforce through lower turnover rates, advancing our key initiatives and enhancing our position for sustainable long term growth. Financially, we're delivering balanced sales growth, significant margin improvement and strong earnings, while also strengthening our balance sheet and operating cash flow. With that said, we have ample opportunity in front of us to drive growth and further improve our operating and financial performance. And this team is laser focused on delivering on these goals. As an essential partner and communities across the country, our customers rely on Dollar General in all economic environments.

Delivering on our mission of serving others continues to guide everything we do, and we are excited about our plans for the 2025 and beyond. Lastly, I want to thank our more than 195,000 employees for their commitment and dedication. And I'm looking forward to all we can accomplish together in the second half of the year. With that operator, we would now like to open the lines for questions.

Thank you. At this time, we'll be conducting a question and answer session. Session. Thank you. And the first question is from the line of Michael Lasser with UBS. Please proceed with your question.

Good morning. Thank you so much for taking my question. Given that you are optimistic that shrink could contribute more than 80 basis points to your long term financial framework, does that mean that you expect to be able to realize the 6% to 7% operating margin maybe as soon as next year or alternatively your long term range should be recalibrated above 7%? Or are you seeing anything in the environment that might suggest you'll have to take some of this upside in shrink and other factors and reinvest it back in the business in order to drive the top line? Thank you so much.

Yes. Thank you, Michael. Great question. So we are definitely optimistic that we could potentially outperform on shrink and get a little bit more than those 80 basis points over the mid to longer term. But we're still targeting that long term framework of 6% to 7% on the operating margin.

This quarter just solidifies the fact that we feel good about where we are. Shrink is a big component of that and we've got a lot of strategies and initiatives in place to achieving that long term framework. I think what's important for us is not only getting to that 6% to 7%, but also the sustainability of that operating margin as we go forward.

The next question is from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Hey, good morning everyone and Kelly. Good working with you and then eventually congratulations to Donnie. Going to ask a two part welcome. Two part question. So first, if you take the gross margin in the second quarter and we hold that base, it does look like it steps down in Q3.

But is there any reason why it should step down more than expected seasonally? Meaning is there anything temporal about the gross margin that's not a good proxy? And then second, Todd, from when you came back in 2023, thinking about all the execution items, can you talk about what's left and what you've gotten done? Thanks.

Yes. So I'll answer the gross margin question first. What we're seeing now is obviously just an outperformance on shrink. So 108 basis points this quarter of the 137 basis points improvement. As we think about cadence for the back half, we're certainly expecting a year over year improvement in both of the quarters.

But what I would tell you is we actually have tougher lapse in Q4 on the gross margin front. And so we would expect maybe a little bit less on Q4 as far as improvement over year over year. And then you didn't ask about SG and A, but I do want to call out just one thing on the SG and A front. We would expect more pressure in SG and A in third quarter, and that's really around repairs and maintenance. It's kind of the season for repairs and maintenance as we get into hurricane season, and we're still kind of in that warm weather.

But what's the big contributor there is we're also wrapping up our project Elevate and Renovate projects mostly in the third quarter and so that puts a little bit of pressure on Q3.

Yes. And Simeon, I am very, very pleased with where we are with our back to basics work. I would tell you that the team has done a really good job from back of house, so our supply chain, our merchants to front of house, if you will, and that's in our stores and the execution. It really is paying off. You can see it in our top line, not only a strong 2.8% comparable sales number that we posted, but as you look at that sales number, it's very balanced consumables and non consumables contributed very nicely to that 2.8%.

I would tell you that we're retailers. We always have work to do as it relates to a lot of what we've been working on. But, again, if I was to step back and think about it in baseball terms and innings, I would say we're in the very late innings of this game. And then we're really into now, sustainability of what we have worked on. And I would tell you, feel real good about that as well from a couple standpoints.

Number one, we have done a really nice job in in our turnover rates have come down. We've had some consecutive quarters of those decreases and we continue to be happy with where we're at. I would tell you that our pipeline for folks coming into the organization is as robust as ever. And I'm very happy to to say that our store manager turnover rates are down again this quarter. So a lot of what we've been working on to make life easier at the store level is starting to really resonate not only with the customer, but our employee base, which is really important.

Our next question is from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question.

Good morning and thanks for taking my question. And also Kelly best of luck. So I'm going to focus my comments just on delivery. So as you look at the DoorDash partnership and I guess Uber is still very early, but just any surprises or key learnings to date? And then as you've added Uber like how do you think about the incrementality of that offering? Thank you.

Yeah, Rupesh. Thank you. Yeah. I'll tell you, our digital solutions in general, just in totality, we're very happy with where we are. Very early innings, again, baseball analogy for you, very early innings on our digital journey.

But as you know, and you've pointed out, DoorDash has been, really the, the start of our digital journey, if you will, from, a delivery perspective. We're up to 17,000 locations, which is great to see. And I would tell you that we saw a 60% year over year increase on that platform. And by the way, off of a pretty robust number to start with. So very happy with what what we're seeing there.

But the team isn't slowing down here because again, we're in the early innings. You saw where we just signed a deal with Uber Eats, and we're happy with what we're seeing very early there in the partnership. 4,000 stores up and running and by the end of the third quarter, we'll have 14,000 stores is what our goal to have up and running on that platform. And that just expands the reach to our to our consumer. And then lastly, on our delivery piece, our white label program that we stood up, again, very early days, but we're seeing both incrementality there as well as larger baskets.

And these larger baskets and and some of them well north of $20 baskets for us would point to incrementality and would point to more of a fill up versus a fill in. And and with that notion, you would feel that and and we feel that it is a lot of it is increment incremental to our base. The great thing about our delivery piece is we're going to have more and more stores up and running, we believe, and we were great to be able to put out there 16,000 by year end now, which is an acceleration from where we were. And I think that's a real testament to what we've already seen so far. You know, to use my terminology, we're gonna put the pedal to the metal here because we we see some some real opportunity ahead.

And I would tell you again, the the platform across all the digital properties, the linchpin of this is our our digital media network. And again, it has shown strong results this quarter and continues to show strong results. So stay tuned there because I believe that there's going to be even more incrementality that comes from that media network. We have a very unique customer base as you know, being that 80% of our stores are in small town rural America. And and it is hard for CPG companies and other companies to get a hold of clientele that is just in those areas, and we have all that data.

And so that data will be, be used in our media network. And I would tell you that our partners are already, very interested in that. Then lastly, our our secret sauce here, if you will, is that is that so far to date, we have seen that 75% plus of our deliveries are in one hour or less. And I would tell you that that is the fastest that we've seen out there across the spectrum so far, especially in rural America, where it is hard to reach many, many customers. So we believe that's a competitive advantage for us and will continue to be as we move forward.

Our next question is from the line of Matthew Boss with JPMorgan. Please proceed with your question.

So Todd, on your forecast for increasing pressure on the low income consumer as the year progresses, what are you seeing in your survey work today across your income customer cohorts? And where do you see DG's value proposition as it stands today relative to opportunities maybe planned to amplify value? And Kelly, on the gross margin, where do you see shrink recovery in terms of innings today? And how best to think about additional drivers of gross margin multiyear from here?

I'll start Kelly and, send it over to you. Right now, Matt, I would tell you that, I would characterize the customer number one as resilient, and number two, seeking value. And seeking value, we're seeing that in all cohorts of customer, meaning our core customer, mid and high end customers, all seeking value at this point. We're seeing in our numbers, our trade in has been accelerating over the last few quarters. We saw that again coming into and out of Q2.

And what we're seeing from the customer is a good start to q three. You know, where our back to school offering was solid and in good shape. And I would tell you our harvest and Halloween programs are off to a great start. And it it really shows and what we see in our data is not only our existing customers, but those new customers coming in. And those new customers coming in have a little extra money in their pocket to spend on that non consumable categories.

And as you heard in my prepared remarks and I mentioned earlier, we we saw a really nice balance in our sales of both consumables and non consumables. But I would tell you it's it's much deeper than that as well. As they seek value, we have a great proposition for them. Right? So our our everyday low price stance, we have never lost focus on that.

We're as good as ever across all classes of trade on our everyday, price, and our customers resonate with that very nicely. We have a great promotional cadence that we use to continue to stimulate that consumer and especially stimulate these newer consumers as they come in to deliver value. Because they're not as familiar with that value proposition and what we offer them. So that, that digital through digital properties, we're able to reach them, and, so a nice promotional cadence as well. Here's the other value proposition that I think gets lost at times, and that is we still have and will continue to have at least 2,000 items at a dollar or less every day on the shelf.

Matter of fact, our Value Valley area, which I know you know, Matt, pretty well, we have over 500 SKUs, and they're rotating SKUs at that $1 price point still today with 2,000 overall inside the store. And I would tell you in Valley Valley and across the store, the gross margin on those items are they exceed the category margins in each one of those items that that they play in. So it's very sustainable for us. And by the way, when you look across the retail spectrum, it's it's a very elusive price point at this point. I would say we're one of the only ones that have really doubled down here and and really pushed that $1 price point.

So value to me, and I believe as our consumers look at it, is multi pronged here at Dollar General and is very sustainable.

On the gross margin side, I'll I'll take it in a a couple of pieces. So first on on the shrink side, again, we were just really excited to be outperforming the shrink reduction expectations that we contemplated in our long term framework again in timing and magnitude. Shrink continues to build then the trend. And like I talked earlier, we do anticipate it's going to continue to be a tailwind into 2025 even with the tougher lapse in the second half and particularly in Q4. If you don't mind, I'm just going to list out all the actions that we're taking because as you know, we've got a full team that sits on this shrink problem and they are really producing results.

The first thing was just the self checkout conversion and that's been a big tailwind. But we're also getting back to our operational excellence with strong in store control environments. And we see that because we continue to see shrink improvement in stores that never had self checkout. And so that's great to see. All the inventory reduction and SKU rationalization work is contributing.

The improving retail turnover that you heard us talk about is certainly a contributor to this as well as just the expanded shrink incentive programs that we put in place. And we're still utilizing the high shrink planograms. And then as you know, we've really worked at this end to end process enhancements so that we make sure that we're mitigating shrink at all points of exposure. I think what all of this combined gets us really excited because as you can remember, it takes a full year for benefits of any actions to truly show up in the P and L and our work around shrink never ends. So as we add continual actions, we should see some improvement.

So over the mid to long term, we do feel optimistic that we would give it more than the 80 basis points of shrink improvement. I think the other piece that we've talked about in the long term framework and that we're starting to see improve is also around damages. So our goal going into 2025 for damages was flat to slightly favorable. We're still holding that in the back half, but I'll tell you that Q2 exceeded our expectations. And as you saw, it was actually a call out of the good guy in our variance analysis in our earnings release.

So really pleased to see that starting to take hold. Just like shrink, we've got a team after this. A lot of the things that help us on the shrink side also help us on the damage side, which is the inventory reduction, SKU rationalization. We're also having a full court effort around product rotation, getting more precise in our inventory allocation, which helps us to mitigate future expiration damages. And then just that proactive investment in the repairs and maintenance through our two remodel programs should also help us reduce cooler damages.

So I would tell you between the two overall, we are just feeling really good about the path to the improvement, that 80 basis point on shrink, the 40 basis points on damages that we identified in our framework that we rolled out in March. And then just on the initiative side, I think you've heard Todd talk all about the initiatives that we have in place to drive their 150 basis points around DG media network, all the exciting things that we're doing with delivery and the non consumable initiatives as well. So we feel good about gross margin as we head into that mid and longer term.

Our next question is from the line of Edward Kelly with Wells Fargo. Please proceed with your question.

Hi, good morning everyone. Thank you for taking my question. I wanted to follow-up on the gross margin. Obviously, a very strong result this quarter, shrink a big driver. But LIFO was an offset and it does seem like there's, I don't know, roughly like 80 basis points in here of tailwind that I mean, I guess, it seems like a lot of it is initial markup.

So can you just talk about what that is? And then just a quick follow-up. SG and A, there has been some retailers talking about increased higher liability claims. Just kind of curious, is that something that you are seeing sort of like where you are in the process there from like an actuarial standpoint and assessment and if there's any risk there? Thanks.

Yes. Thank you for the question. So yes, on the LIFO, would say year to date Q2 reflects what we know as regards to current tariff rates as well as it contemplates any cost increases that we've gotten from any of our vendors. But if you step back and just take a look at the big picture, what I would say is of the 137 basis points improvement in gross margin, we got 108 basis points of that in shrink. And then we're getting 29 basis points tailwind from all of the other areas combined. So solid improvement on the gross margin front.

You want to address the workers' comp and those pieces?

Yes. Thank you, Todd. And on the general liability front, we are seeing some impact, it's not material. Generally, we're seeing the trend towards claims being more expensive as we resolve those, but not material impact to us right now. And then any trends that we are seeing has certainly been contemplated in our guidance.

Our next question is from the line of Zihan Ma with Bernstein. Please proceed with your question.

Great. Thank you so much for taking my question. I wanted to break down the comp sales performance a bit more in terms of you mentioned the trade in benefit and also of course the better store operations driving more traffic. Can you help us better understand what proportion of the comp is driven by more macro oriented trading versus more company specific? And then going into next year as we start to lap the tougher trading comps, what is going to be sustainable on the top line? Thank you.

Yes. Well, I would think as we look at where we are today, let me address the first part and then we'll get to that sustainability piece. We feel good about where we are both from our core consumer as well as this trade in consumer. And I would tell you that a lot of the work that we did on Back to Basics has has served us well and quite frankly has set us up nicely for that trade in consumer. But as that trade in consumer came into the brand over the last few quarters, they've seen a a better store both from cleanliness in stock as well as friendly as well as having somebody at the front end to meet and greet them.

So I would tell you that, you know, from all the work that the team has done organically has produced a nice outcome on the comp of 2.8%. I would tell you that as I look at the composition, as I mentioned earlier, being pretty balanced between consumables and non consumables That the work the team has done on the merchandising side on our nonconsumable business has been phenomenal. All these brand partnerships that we've been talking about along with great execution at store level and the flow of freight from our distribution centers has all been very, very good to deliver that outsized comp that we saw in our non consumable businesses. We believe as we move, to the back half of the year, we're well positioned. Think about it this way.

Right now, as we look at the back half of the year, our value proposition is as strong as ever. Matter of fact, we've got we've got about $1 SKUs for the seasonal piece for the back half of the year, 25% of the offering is at $1 or less. So even in the face of tariffs, we've been able to maintain a $1 price point in our seasonal offering, which should resonate with the consumer. Matter of fact, 70% of the total offering is at $3 or less. So again, the team has done a great job.

What that shows me and I believe will show in our results with our customer is that value is alive and well at Dollar General and seeing that as they trade into the brand. So I would say it's really both sides. It was some self help, but also that consumer coming into the brand. But without that self help, I'm not so sure that she would have stuck with us. So that really brings me to the second part of your question.

And we do this very well and that is being able to retain that trade in customer. We've got a playbook that is very robust and dense. We digitized it a few years back coming out of COVID. And what I mean by digitized it, we had a great playbook coming out of the great recession, let's call it that twenty ten, twenty eleven timeframe. We digitized it coming out of COVID in in 2122.

And now we're pulling that playbook back out. Matter of fact, we've already started marketing to these new customers digitally to to one, continue to keep them engaged and two, hopefully keep them on on that Dollar General journey even if time start to get a little better or different for that core consumer. So or I'm sorry for that trade in consumer. So we're working on all angles as you would imagine from Dollar General, but the comp sales are the lifeblood of this business and we're pushing to to deliver a comp at or above where we said we would be.

The next question is from the line of Chuck Grom with Gordon Askett. Please proceed with your question.

Thanks. Good morning. Hey, Real nice work here, Todd. It seems like the only really missing ingredient here is getting the comp back above three percent and being able to do it consistently. I guess, how are you feeling about that opportunity?

And what are the drivers to get there? And then Kelly, on the gross margin line, a lot of questions there. Can you talk about the interrelationship between shrink and inventory damages and maybe size up the damages opportunity relative to maybe where you were the past couple of years? Thank you.

Yeah, Chuck. Thanks for the question. You know, in our long term framework, as as you probably recall, we feel very comfortable in that 2% to 3% to deliver that. Now, we're retailers. You know me pretty well.

You know this team well. We will we will strive for more to drive it above those numbers. But I would tell you, we we feel very comfortable in that two to three range as we go forward. Now in saying that, we've got a lot of drivers, not only the self help that we talked about, not only that great value proposition that we continue to have for our core consumer as well as these trade in consumers. But what we also have is a plethora of initiatives.

So when you start to think about our project renovate and elevate stores, those are great comp drivers. Matter of fact, our mature store base really threw off a very nice comp this past quarter. A lot of that driven again on all of the initiatives that we laid out. But also as you start to look at what projects Elevate and Renovate doing. They're starting to produce those comps of six to eight for renovate and starting to produce and working our way to three to five on the on the project elevate stores.

So those are all great mature store based comp drivers. And we've got a long runway for that as you would imagine over the next few years with 20 to almost 21,000 stores now in the portfolio. So we've got a great opportunity there. And by the way, the customer response has been overwhelming on these remodels. And as important, so as the, our associate our employee base has has really loved the, the remodels because they're very proud because the the customer is loving it.

And then lastly, you know, we wanna deliver a very balanced portfolio sales. And so those non consumable initiatives continue to be very important. And I would tell you that that pop shelf is will continue to be important for us as we continue to test, learn and then bring back to the mother ship, if you will, Dollar General, those learnings and then deploy those across the chain. We're doing that as we speak and I believe that's been some of the comp driver you've also seen on our non consumable businesses.

And then just as I think about shrink and damages, one thing I'd just like to say is seeing shrink and damages improve together is a real positive. And so we've talked a lot about shrinks, so maybe I'll just give you a little bit more color on the damage side. Like I noted just a little bit earlier that we did expect damages to be flat to slightly favorable as we work towards that 40 basis points improvement over our mid to long term framework. And we believe we're well on our way to that with Q2 exceeding our expectations there. And so as you're probably noting in your question, a lot of the things that improve shrink will also improve damages and we're seeing all of those things come to fruition.

And so we feel good about our ability and our path to that 40 basis points of improvement.

The next question comes from the line of Seth Sigman with Barclays. Please proceed with your question.

Hey, good morning everyone. I wanted to focus on SG and A. Q2 seemed unique because of the incentive comp returning. You talked about maintenance and repairs, I guess, in Q3. Can you talk a little bit more about the path back to normal operating leverage in light of the 2% to three percent comps that you mentioned?

I guess a lot of costs have come back over the last two years including this year or year to date. Should we assume this is just catch up and then we enter next year with a more normal expense base? How do you guys think about that? Thank you so much.

Yes. That incentive piece is certainly a big headwind for us this year at almost $200,000,000 And so I think probably a more normalized rate is one that we would exit out of this year as we think about going into 2026. I will say, there's just been a ton of work that around just making sure that we're mitigating SG and A deleverage as we move forward. It's part of our framework that we called out. So that's a huge focus for us, specifically around simplifying work and driving efficiencies as well as we think about the CapEx side and how it plays into depreciation, just optimizing CapEx to stabilize depreciation and amortization.

And so working hard to make sure we're mitigating that SG and A deleverage. And then with all of the gross margin levers that we have in place, that's where we feel really good about getting to that 6% to 7% framework as we go over the mid to longer term.

Dollar General (DG) Q2 2026 Earnings Call Transcript

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