Dollar General Corporation (DG) Q3 2017 Earnings Report, Transcript and Summary

Good morning. My name is Hope, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Third Quarter 2017 Earnings Call. Today is Thursday, December 7, 2017. [Operator Instructions] 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 would like to turn the conference over to Ms. Mary Winn Pilkington, Senior Vice President of Investor Relations and Public Relations. Ms. Pilkington, you may begin your conference.

Thank you, Hope, and good morning, everyone. On the call today are Todd Vasos, our CEO; and John Garratt, our CFO. After our prepared remarks, we'll open up the call for questions. Our earnings release issued today can be found on our website at dollargeneral.com under Investor Information, News and Events. Let me caution you that today's comments will include forward-looking statements about our expectations, plans, future estimates and other non-historical matters, including but not limited to our fiscal 2017 financial guidance and our 2017 and '18 store growth plans, our planned investments and initiatives, capital allocation strategy and related expectations, future economic trends or conditions and the anticipated impact of proposed U.S. corporate tax legislation reform. The company's financial guidance does not reflect any potential impact from U.S. corporate tax legislation reform. Forward-looking statements can be identified because they are not statements of historical fact or use words such as outlook, will, believe, anticipate, expect, forecast, estimate, guidance, plan, opportunity, continue, focus on, intend, looking ahead or goal and similar expressions that concern our strategy, plans, intentions or beliefs about future matters. Important factors that could cause actual results or events to differ materially from those projected by our forward-looking statements are included in our earnings release issued this morning under Risk Factors in our 2016 form K -- 10-K filed on March 24, 2017, and in the comments that are made on this call. We encourage you to read these documents. 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, except as may be otherwise 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.

Thank you, Mary Winn, and welcome to everyone joining our call. I'm pleased with our third quarter performance, as the Dollar General team delivered strong same-store sales growth, driven by an increase in average transaction amount and positive traffic, all while expanding gross profit margin and exhibiting good underlying expense control. We are excited about our plans for the fourth quarter and into the new year. Our third quarter results were achieved even in the midst of the hurricanes that impacted our business during the quarter. We estimate that the net negative impact of these storms in the quarter, including loss of inventory and incremental repairs for damages and other expenses, offset by increased sales, was approximately $0.05 per diluted share. I'd like to thank and also recognize all of the Dollar General teams that worked extensively to be there in advance of the storms and afterwards to support our communities during the recovery process. When our employees, customers and communities needed us, team members from across the organization were there providing support for our impacted stores and co-workers. To all the teams that worked so hard to ensure our co-workers' safety, to secure and staff our stores and to meet the needs of our customers, thank you. This dedication to our mission of serving others is what makes us and our company so special. Turning now to the highlights of the third quarter of 2017. Net sales increased 11% to $5.9 billion, and same-store sales grew 4.3% as compared to the prior year third quarter. Same-store sales for the quarter benefited by an estimated 30 to 35 basis points from incremental sales due to the hurricanes. Same-store sales growth was positive for both consumables and combined non-consumable categories, with stronger growth in consumables. Our highly consumable market share trends in syndicated data continue to exhibit strength with high single-digit share growth in both units and dollars over the 12-, 24- and 52-week periods ending November 4. Our mature store base, which are stores that are over 5 years old and have not been remodeled or relocated, continues to deliver the best same-store sales growth that we've seen in 4 years. In addition, the contribution of same-store sales growth from our real estate maturation curve, including new stores, relocations and remodels, was at the high end of our expectations. We executed 634 real estate projects in the quarter, including 470 new store openings. Net income was $253 million and diluted earnings per share grew 11% to $0.93, which includes $0.05 per share for the estimated net negative impact associated with the hurricanes. Year-to-date through the 2017 third quarter, we have returned $512 million to shareholders through the repurchase of 4 million shares of common stock and the payment of quarterly dividends. Given our year-to-date performance and our expectations for the remainder of the year, we are narrowing our reported EPS guidance for the full year. John will provide more details on our outlook. The fundamentals of our business remain strong. Our third quarter results demonstrate our ability to deliver strong top line growth as we delivered the best same-store sales growth in 11 quarters. Now I'll turn the call over to John to go through more details of the quarter and our outlook, then I'll share some highlights of our initiatives for fiscal 2018.

Thank you, Todd, and good morning, everyone. As Todd has taken you through the highlights of our third quarter, I'll share more details on the rest of the quarterly financial results, starting with gross profit. Gross profit for the 2017 quarter was $1.8 billion or 29.9% of sales, an improvement of 8 basis points from last year's third quarter. As compared to the prior year third quarter, the gross profit rate increase was primarily attributable to higher initial inventory markup and lower inventory shrink. Partially offsetting these items were a greater proportion of sales of consumables, which generally have a lower gross profit rate than other product categories; sales of lower-margin products comprising a higher proportion of consumable sales; and increased transportation costs. SG&A expense increased by 40 basis points over the 2016 quarter to $1.3 billion or 22.9% of sales in the third quarter. This quarter's SG&A increase was primarily attributable to increased retail labor expenses given our previously planned investment in store manager compensation and increased incentive compensation and occupancy costs, each of which increased at a rate greater than the increase in net sales. The increased occupancy costs were primarily attributable to a record number of 470 new store openings in the quarter, over half of which were related to acquired stores and which represents an 82% increase in openings over the prior year third quarter. We also recorded $24.8 million of incremental expenses related to the impact of the hurricanes, which occurred during the quarter, as Todd discussed earlier. Partially offsetting these increased expenses were lower utilities costs and a reduction in advertising costs. Please keep in mind, in the 2016 third quarter, we incurred charges of $13 million associated with store sites acquired from a large box retailer and the related closure of existing stores, plus an estimated $7.7 million of incremental disaster-related expenses. In our press release issued this morning, we have provided a table detailing the estimated impact of the 2017 hurricanes on our third quarter results. Moving down the income statement. Our effective tax rate for the quarter was 35.8% as compared to 36.2% in the third quarter last year. The effective income tax rate was lower in the 2017 third quarter due primarily to the recognition of greater federal Work Opportunity Tax Credits this quarter as compared to the prior year quarter. Looking at a few items on our balance sheet and cash flow statement. Merchandise inventories at third quarter end were $3.6 billion. For the quarter, total inventory increased 3.1% while declining 4.9% on a per-store basis. This marks our second consecutive quarter of inventory decline on a per-store basis. We believe our inventory is in great shape and are comfortable with the quality. Our longer-term goal continues to be inventory growth in line with or below our sales growth. Year-to-date through the third quarter, we generated strong cash flow from operations totaling $1.14 billion, an $18 million increase compared to the same period last year. This year's increase was primarily due to an improvement in our same-store inventory level, partially offset by increased income tax payments as a result of timing of income recognition for tax purposes. It is also important to note that we are lapping significant working capital improvements from 2016. We continue to be pleased with our solid cash flow generation. During the quarter, we repurchased 1.8 million shares of our common stock for $135 million and paid a quarterly dividend of $0.26 per common share outstanding at a total cost of $71 million. Year to date through the end of the third quarter, we have returned cash to shareholders totaling $512 million through the combination of share repurchases and quarterly dividends. From December 2011 through the third quarter of 2017, we repurchased $4.9 billion or 78.4 million shares of our common stock. We have a remaining authorization of approximately $635 million under the repurchase program. We remain committed to a disciplined capital allocation strategy to create lasting value for our shareholders. Our first priority remains investing in new stores, where we continue to see great returns, and the necessary infrastructure to support our store growth. Our second priority is to return cash to shareholders through anticipated dividends and share repurchases. Underlying our capital allocation strategy is our goal to maintain our investment-grade rating by managing to a leverage ratio of approximately 3x adjusted debt to EBITDAR. Looking ahead, please keep a couple of points in mind. Recall, fiscal 2017 is a 52-week year versus the 2016 53-week year. We estimated that the 53rd week in 2016 contributed about $0.09 per share to earnings that will not recur this year. As Todd mentioned, we are pleased with our performance at this point in the year. We are narrowing our forecast for GAAP diluted EPS to a range of $4.37 to $4.47 compared to our previous guidance range of $4.35 to $4.50. Given that our guidance is on a reported GAAP basis, we are absorbing the $0.05 per diluted share for the net negative impact associated with the hurricanes. However, we are only reducing the high end of our guidance range by $0.03. For the fiscal year, this guidance includes the debt extinguishment charge of $0.01 per share recorded in the first quarter and absorbs 2 items that were not contemplated when either we provided our initial fiscal 2017 EPS guidance or our most recent update: number one, the $0.02 per share charge recorded in the second quarter primarily for lease termination costs; and number two, the estimated $0.05 per share net negative impact of the hurricanes during the quarter. Our guidance does not contemplate any potential impact from U.S. corporate tax legislation reform. We are raising our 2017 same-store sales growth forecast to approximately 2.5% and updating our 2017 net sales growth forecast to approximately 7%, which is at the high end of our prior outlook of 5% to 7% growth. We are also updating our 2017 capital expenditures forecast to be in the range of $700 million to $750 million as compared to our previous guidance of $715 million to $765 million. Share repurchases for the fiscal 2017 continue to be forecasted at approximately $450 million. We have been very disciplined in how we manage expenses and capital, with the goal to deliver consistent, strong financial performance while positioning our business for long-term growth, and we plan to continue with this strategy into the future. We're investing in initiatives intended to drive same-store sales and build loyalty across our consumer base with the value and convenience that our customers need and trust from us. With that, I will turn the call back over to Todd.

Thanks, John. As we have shared with you over the course of the last several quarters, our expectations were that over time, the transitory headwinds we were facing would moderate and our merchandising initiatives, coupled with our store manager pay and training investments, will continue to contribute to our same-store sales growth. I believe we saw this continue to play out in our results for the third quarter and that we are well-positioned to continue to benefit from our model of value and convenience that is relevant to a broad cross-section of shoppers. Dollar General is differentiated by many strengths, all of which are focused on the combination of value and convenience for our customers. We are executing our comprehensive strategic plans focusing on the actions that we believe have the greatest potential to drive shareholder value over the longer term. We continue to believe we operate in one of the most attractive sectors in retail. Our unique strengths include more than 14,000 convenient, small-box stores with strong economics that allow us to serve an underserved customer who shops our stores differently than other sectors of retail. With an average basket of about 5 items and an average ticket of approximately $12, our stores and product mix are streamlined to help make the shopping trip convenient for our customers. They can easily shop our stores, find what they need and be on their way. With our strong stores growth, we anticipate that 75% of the U.S. population will be within 5 miles of a Dollar General by the end of fiscal 2017. Our range of formats, from 3,500 square feet to 16,000 square feet, allows Dollar General to capture growth opportunities in areas ranging from rural to metro locations. Once we find an attractive site, we can be flexible to optimize the store square footage that can best fit the opportunity. We are strategically investing in our business to help our customers utilize digital tools and resources for a personalized shopping experience at Dollar General. We have the unique opportunity to help shape our customers' behavior and habit as their digital shopping journey, all while leveraging our more than 14,000 brick-and-mortar stores and our geographic footprint to help them save time and money. We remain committed to our long-term operating priorities: first, driving profitable sales growth; second, capturing growth opportunities; third, enhancing our position as a low-cost operator; and fourth, investing in our people as a competitive advantage. Our first priority is to continue to drive profitable sales growth, with a focus on driving both the top line and bottom line. Our goal is to both attract and grow new customers and trips and to capture share with existing customers. This includes expanding the merchandising initiatives in our existing store base to drive traffic into those stores and improve same-store sales. For 2018, our merchandising initiatives are designed to provide our customers with trusted, simple solutions to help them manage their household budgets and provide them with even more value. We know that our customer looks to us to fill an immediate need while also providing the opportunity to make purchasing decisions in the aisle that fit within her budget. Our research indicates that our customers not only like but also have a need to make purchasing decisions they can see and touch while making in-aisle trade-offs between shopping considerations such as opening price points, affordability compared to value and/or pack size, to name just a few examples. Based on our customer insights, we know that among the most important drivers of our customers' trip to Dollar General is the ease of shopping our stores with the value and quality they expect from us in an enjoyable shopping experience. Our 2018 merchandising initiatives are designed to provide easy, identifiable, everyday low prices with a focus on opening price points, including the $1 price point, contemplated with -- complemented, excuse me, with compelling promotions. Our goals are for our assortment to be differentiated and on trend and to continue to elevate the in-store experience through our store layout and in-stock reliability, in an easy and fun shopping environment. In-store for 2018, we plan to redesign our snack and beverage aisle to create a best-in-retail shopping experience. This change should enhance customer awareness and further position us as a destination retailer for the immediate consumption shop through assortment and everyday low prices. Across a select group of stores, we also will be introducing an expanded assortment of better-for-you products with a focus on higher protein, lower salt and healthier food choices at price points that will be attractive to our customers. The Dollar General customer looks to us to be part of her solutions for her day-to-day shopping needs. Over the last several years, our expansion of coolers has helped drive trips and basket size. The affinity between perishables and other categories is evident in our customers' shopping habits. We continue to believe we have an opportunity to selectively expand cooler doors to allow for a great assortment of perishable foods, ice cream, single-serve drinks and cold beer. By the end of 2017, we anticipate that across our store base, we will have an average of 18 cooler doors, up from 10 in 2012. Year-to-date through the third quarter, approximately 18,000 cooler doors have been installed across our existing stores. For the locations receiving incremental coolers, we continue to see an improvement in transactions. Our initiatives for 2018 will continue to build on our multi-year track record of growth in cooler doors and associated sales. Given our success this year expanding health and beauty aid products, we will be launching Phase 2 of this initiative. The great news is that we have a substantial opportunity to capture share in health and beauty. Importantly, while we are making progress in our syndicated share trends this year, our health and beauty aid share is still below our customers' and household needs categories. Our 2018 plans are targeted to invest in driving overall category awareness with our customers through improved and impactful displays, consistent messaging in stores and across print and digital media, enhanced quality perception and superior shopability. We see significant runway for this category, given our price advantage relative to some other channels. The expansion of private brand offerings, with a focus on quality and appealing packaging, will play a role in our category management process while helping our customers stretch their budgets. For instance, in just 7 years, we have built the proprietary brand of Rexall to nearly $200 million in sales through our commitment to quality, price and assortment. We know that private brands resonate with our customer when we deliver the right combination of price and quality. Given the significant price gap as compared to national brands and to other channels such as drugstores, private brands play a significant role in helping our customers manage their budgets. Across the non-consumable categories, our 2018 merchandising initiatives will continue to be relevant to our customers while positioning Dollar General as a fun place to shop. We plan to introduce new and expanded categories with improved value across non-consumables. Our customer loves the in-store treasure hunt at Dollar General for unique items to delight her family. We believe our product offering will be at price points that she is comfortable with, as the vast majority of our product offering will continue to be priced below $10. Moving now to our marketing initiatives. We see a continued opportunity to improve engagement and build loyalty through expansion of our digital footprint and further integration of our traditional and digital media mix. Our plan is to reach our customers where, when and how they decide to engage with us. We intend to continue to innovate in the channel in this area. To assist with these efforts, we have hired our first Chief Digital and Customer Engagement Officer, a newly created position that will help lead the strategy for customer engagement, including digital experience and tools. This position should help accelerate our digital strategy as we continue to develop resources to personalize offerings for our customers to save time and money. With more than 10 million subscribers to the DG Digital Coupon program, we have a great foundation to build on for the future. We have ongoing opportunities for gross margin expansion that include improvements in shrink, global sourcing, private brands, distribution and transportation efficiencies and non-consumable sales. Inventory shrink reduction continues to be a large opportunity in gross margin. In 2018, we plan to expand electronic article surveillance to an incremental 5,000 stores, bringing the total stores with EAS to about 10,000 locations. This is a proven high-return project for us to help further reduce shrink and drive sales to improve product availability. While we have seen carrier rates and fuel costs on the rise, we are working to mitigate these costs through stem mile reductions and optimization of loads. Our Jackson, Georgia distribution facility began shipping in October of this year. Given our experience in opening 6 distribution centers since 2012, the team is getting better and more efficient with each opening. The Jackson, Georgia location has come out of the gate strong as well. Additionally, across our distribution centers, we have implemented pay-for-performance, which is a win-win for our employees and for our company. As always, we continue to work to ensure that our value proposition resonates with our customers. We are committed to providing them with everyday low prices that they know and trust. Our goal is to ensure we are highly relevant with our customers through our ongoing investments in everyday low prices and targeted promotional activity. We have consistently shared with you one of the keys to our business is growing transaction and item units. Our pricing surveys continue to indicate that Dollar General is well-positioned from a price perspective against all classes of trade and across all geographic regions where we operate. We are committed to being priced right for our customers to drive traffic to our stores. Our focus on initiatives to capture growth opportunities is our second priority. We have a proven high-return, low-risk model for our real estate growth. We constantly monitor new store productivity and returns to ensure our stores' growth is the best use of our capital, focusing on the following 5 metrics: first, new store productivity as a percent of our comp store sales; actual sales performance compared with our pro forma model; average returns of 18% to 20%; cannibalization of our new stores on our comp store base; and finally, a payback period of less than 2 years. Our 2017 new store growth is right on track, with strong sales and returns. The nearly 300 store sites we acquired earlier in 2017 continue to be an exciting opportunity for us as we gain more exposure in metro locations. We are seeing that our brand is resonating in geographic areas that are new to us, as some of our highest sales performance is coming from areas where we historically have not had a presence. Overall, the performance of this group of stores continues to gain traction as we build our brand in these locations. For 2018, we expect to open 900 new stores, remodel 1,000 of our mature store locations and relocate about 100 stores. That's about 2,000 projects in total. With solid new store productivity, we have the opportunity to significantly increase our mature store remodel program with the goal to touch each location approximately every 7 to 10 years. Our experience gives us confidence in the incremental sales lift and returns from our remodel program as we look to enhance and consistently deliver on our brand promise to help our customers save time and money every day. Of the 1,000 planned store remodels for 2018, we currently expect approximately 400 locations to be in the Dollar General traditional Plus format, with 34 cooler doors for increased perishable selection. Our cooler door expansion has proven to drive baskets and trips with our customer base while also attracting new customers with the expanded offering. Our strong real estate model allows us the ability to invest in new store growth, enter new markets, deliver new formats and reinvest in our mature store base. Our third operating priority is to leverage and reinforce our position as a low-cost operator. Over the years, we have established a clear and defined process to control spending. At the store level, we are always focused on our process to drive productivity inside the 4 walls of our stores. For 2018, our store operation initiatives are centered on space optimization and ongoing efforts to simplify operations in our stores by reducing inventory, operating complexity and product movement within the stores. These actions are designed to allow our store managers and their teams to reinvest time savings to provide better customer service and a clean in-stock shopping experience. Additionally, we have a focus on improving the speed of checkout. We look for opportunities to capture the benefits of reducing transaction time at checkout. For example, consider the significant opportunity we have to drive costs out of the system by reducing as little as 3 seconds in each of our approximately 2 billion customer transactions. These time savings can be reinvested by the store teams to deliver a higher level of customer service, which ultimately helps improve sales. Our ability to drive execution across our large and growing store base is a key strength to Dollar General. Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities, control expenses and always seek to be a low-cost operator. Our fourth operating priority is to invest in our people, as we believe they are a competitive advantage. The significant investment in store manager compensation and training we made this year is paying off, as our store manager turnover for 2017 is on track to be at the lowest level in the recorded history of the company. For the seventh consecutive year, Dollar General was named to Training magazine's top 125 training list, moving up every year in the rankings of companies that are recognized for excellence in employee training and development. For 2018 list, to be released in February, we rank now in the top 5. Collectively, the team and I are very proud of these results. The leadership of our store manager is key to helping improve the customer experience and profitability of our stores. Our investment in store manager compensation is anticipated to continue to positively impact our results next year. We are excited about how engaged our workforce is across our business. I believe that this has helped to contribute to our improvement in our overall customer satisfaction scores, which are currently at the highest level of the year. Turning now to our customer. We operate with the assumption that in challenging times, she needs us more than ever, and in good times, she has a little bit more money to spend with us. Regardless of the economic outlook for our consumers, our goal is to do everything we can to provide them with a great shopping experience, to deliver value and convenience they need and expect from Dollar General. We are committed to our long-term growth and to the creation of shareholder value. Our business generates significant cash flow, and we are in a position to invest in store growth while continuing to return cash to shareholders through our share repurchase program and anticipated dividends. We are excited about our plans for the future. The team is making thoughtful investments that ensure our strategy resonates with our customers and positions us for the long term. I look forward to sharing more details with you in the future. As we are in the busiest time at retail, I want to thank each of our approximately 130,000 employees across the company for their tremendous efforts to help our customers save time and money every day. The team did an amazing job during the third quarter of 2017, executing a record 634 real estate projects in just a single quarter. I appreciate all the hard work of our employees across the store operations, distribution centers and at the store support center, to support the approximately 2 billion customer transactions we execute annually. Before we open the lines for questions, I want to let you all know that after 8 years, Mary Winn, our SVP of Investor Relations, will be leaving Dollar General. Her last day will be December 15. I would like to take this opportunity to personally acknowledge Mary Winn and the significant role she has played, not only in building and leading a first-class communication team, but also a trusted adviser to me and the rest of the team. On behalf of everyone here at Dollar General, we thank Mary Winn for all her insights and commitment to our organization. We wish her all the best in her next chapter. Donny Lau, Vice President of Strategy, along with Kevin Walker, Director of Investor Relations, will oversee our IR function in the interim. As we search for a replacement, we are fortunate to have people like Donny and Kevin on our team who have deep knowledge of the business. I am confident you will enjoy working with them. With that, Mary Winn, we would now like to open the lines for questions.

All right. Go ahead, please, with the first question.

Your first question is coming from the line of Alan Rifkin with BTIG.

Mary Winn, you are certainly going to be missed. Thank you for everything over all of these years. Todd, maybe just give us an update on where you stand on the GPV. One would have thought that perhaps with the very strong comp, even including the hurricane expenses, we would've saw maybe a little bit more leverage on the SG&A line.

Yes, I'll start, and I'll turn it over to John for a little bit more color. But we continue to be very focused on expense control here at Dollar General. And I can tell you that the team has generated a tremendous amount of savings and value this year in 2017. And what I'm happy to report is that we have identified a lot of also savings for the upcoming 2018 time frame that we'll discuss with you on our next call. But I think as you look out, this team has proven over time that we are very cost-conscious as well as reinvesting where appropriate to continue to drive sales. John, you might want to add something?

Yes, adding a little more color to that. As you alluded to, while SG&A was up 40 basis points, the hurricane impact of nearly $25 million was 42 basis points. While we did have some headwinds last year, I think it's important to note that the 2 key headwinds this quarter was the ongoing impact of the store manager investment, which, again, we continue to see as a great investment that will pay off for us, and as we get into next year, will no longer be a headwind. And then the other key point is the ramp-up of acquired stores. Again, as we mentioned, we opened a record number of stores this quarter, up 82% over the previous year. And over half -- there's 470 stores, over half of those were new stores, many of which had expenses throughout the quarter as we were opening those up. So those put pressures on that. When you strip that out, we're still in the place we want to be from a leverage standpoint. And as Todd said, that with zero-based budgeting, that's really become ingrained in everything we do here. And I can share you, the team is laser-focused on driving out any and all spending that don't touch our customer, support our strategic initiatives or change our risk profile. So we continue to be very focused on that, as well as gross margin, making the right trade-offs there, while investing in the business and still see ourselves in that same leverage point that we targeted.

And just a follow-up, if I may. With respect to wages, certainly, the pressures on your wages are well documented. But maybe, Todd, if you could maybe share with us, as you look to 2018, what incremental wage pressure do you see at the store level? And then also considering your core customer with higher wages being implemented in more and more states via increases in minimum wages, what benefits do you see from that consumer to your business?

Sure. We -- the one thing about what we've seen on the wage front is we continue to be, right now as we stand today, at our highest level of participation inside of our stores, meaning open positions are at some of the lowest levels we've seen. So we feel very good about where we are as it relates to the wages that we pay. There's no doubt that in certain states and municipalities, we've seen additional wage pressures, but we continue to operate in those environments just like we do everywhere else. As we go into 2018, we believe that some of the increase in wages, whether it be with our core consumer or others, should help continue to benefit the economy in totality, which I believe that with our initiatives that we have in place, we should get more than our fair share of that participation. So we feel good about where the consumer is right now, but as I always say, we work under the premise that she's always tight, because her expenses continue to rise on the other side of expense -- excuse me, of her income rising. So we continue to make sure we're laser-focused on offering value and convenience every day for our consumer.

Your next question comes from the line of Karen Short with Barclays.

This is Sean Kras on for Karen. And Mary Winn, you will certainly be missed. Did the comps slow down over the course of the quarter? I'm just trying to get a sense of maybe why the implied fourth quarter guidance is for a slowdown on a 1- and 2-year basis.

Yes, if you look at the cadence across the period in the third quarter, every period was positive, but September was the most positive of the quarters period-to-date. I think it's also worth noting that the balance between both consumables and non-consumables being positive overall.

Okay. And then on the gross margin, could you give us a sense of what that number would have been excluding the acquired stores?

I don't know that it really is something with a meaningful impact to that at all.

Yes, it wasn't a meaningful impact. So we were pleased to -- we were pleased with the balance of delivering a strong top line and 8 basis points of expansion, but there wasn't a meaningful impact from that on the margin.

It was a couple basis points at most.

Your next question comes from the line of Edward Kelly with Wells Fargo.

This is actually Anthony Bonadio on for Ed. Just back on gross margin again. Guidance seems to imply a little compression in Q4, similar to earlier in the year. Can you just walk us through the puts and takes here? How should we be thinking about that?

Yes, well, as in the past, we don't guide on gross margin. We really look to make sure we're making the right trade-off between gross margin and SG&A. But what I will say is that as you look at the quarter, Q3, we're pleased to see the gross margin expansion, driven by higher initial markups and shrink improvement. That was the fourth consecutive quarter of shrink improvement. What you didn't see in there is any issues around promos or clearance, that being a non-impact. And what I would say is as we look over the long term, we continue to see opportunities to enhance margins or strategically invest back as needed to drive traffic, but continue to see opportunities around shrink. Even though we've had 4 consecutive quarters, we continue to see opportunity to further improve that. Team continues to do a great job around category management, with more opportunity there. We see opportunity to enhance private label and foreign direct sourcing penetration and continue to see operations -- or opportunities around supply chain efficiencies, despite some pressure from, in the near term, from fuel rates and carrier rates. So over the long term, we continue to see opportunity there, but then also look to strike the right balance between that and managing the levers between gross margin and SG&A to deliver strong operating margin.

Your next question comes from the line of Matthew Boss with JPMorgan.

So Todd, can you speak to some of the learnings from your remodel program to date and just touch on maybe some of the more recent performance that you're seeing in your mature store base?

Sure. We continue to be very, very encouraged on the remodel program, both our traditional remodels and our remodels that incorporate the additional coolers and in some of those, the entrance of produce in some of those locations. Those locations, in particular, continue to outpace our normal remodel program almost 3x. And that's what gives us great confidence as we expand the remodel program next year up to 400 stores that -- 1,000 stores, excuse me, but 400 of them being under that banner of the larger coolers and in some cases, not all 400, but in some, additional produce. So it continues to do very well. The customers are resonating well. We continue to see that we get about one additional trip in those stores than normal from our core customer because of that expansion of coolers. And by the way, we see expansion in those remodels in health and beauty as well and in some of our non-consumable categories. So all ships in the harbor, if you will, rise within those remodels.

That's great. And then just a follow-up. I guess larger picture, as we think about the 10% to 15% earnings growth algorithm, I think that you laid out last March, if same-store sales remains in the 2% to 4% target range that they are today, are there any headwind to achieving the 10% to 15% bottom line as we think to next year and beyond? Is that still the algorithm you think that fits with 2% to 4% comps?

Yes, we still see that 2% to 4% helps deliver the 10%-plus growth algorithm. And really, we'll be commenting on 2018 when we get to the March time frame, but still see ourselves as double-digit growers and really don't see any meaningful headwinds to that in the near future.

Your next question comes from the line of Scot Ciccarelli with RBC Capital Markets.

So I guess as a bit of a follow-up, maybe to Alan's question from earlier. Given the -- on the wages, given the success that you've seen with the increased training and the increased payroll, does it make sense, in your view, to actually accelerate those investments as you look out to 2018 and 2019, just given the benefits that they've yielded? Or do you think you're pretty happy with kind of the performance that you've seen and there's not going to be incremental investments on that side?

Yes, we're very happy with the investments that we made in -- here in early 2017. As I indicated, our store manager investments in both compensation and training are really paying off. We're -- what we're very proud about here is that we are seeing lowest turnover rates in recorded history from our store managers. And being an old operator, and I use the term old myself, there is nothing more important than the store manager to the key of any company's success in retail. So I think we made the exact right move in the investment in both the compensation and training. And we don't see -- we think we're in a great spot, based on everything we've seen and heard and continue to see out in the marketplace as far as compensation is concerned. So we don't see another round of large investment there. And we'll continue to monitor it, and we'll continue to ensure that our store managers and all of our employees are taken care of on a compensation basis, where appropriate.

That's super helpful, Todd. And just a quick follow-up, because John had talked about the comp contribution from new store maturity -- the new store maturity curve. Can you guys just update us in kind of where we are today in terms of the comp contribution from that new store maturity?

Yes, so what we've said in the past is when you look at the net impact netted against the cannibalization, it's about 150 to 200 basis points, and we're at the high end of that. So we're very pleased with what we're seeing from that, from sales contribution as well as great returns.

Yes, our new store program is hitting on all cylinders right now.

Your next question comes from the line of Peter Keith with Piper Jaffray.

So there have been a couple of questions around the Q4 guidance. I guess, maybe I'll rephrase it as have you changed your outlook for Q4 within the context of the overall full year guidance? Because it certainly looks like there's this deceleration of fundamentals, based on the implied guide.

We continue to see the same strong business fundamentals and feel great about the business, top line, bottom line. If you look at EPS, based on year-to-date performance, we did narrow the guidance on that, raising the bottom end of it $0.02. We only lowered the top end of that $0.03 after taking into account the $0.05 net negative impact from the hurricanes. So if you strip out the hurricane impact, we really see it as a raise on both the top end and the bottom end. And recall, we had indicated previously that Q3 would be the strongest quarter of the year, with Q4 having a more difficult lap, and included in that overlap, an estimated $0.09 benefit last year from the 53rd week. So continue to see things in a similar light.

Okay. A follow-up that's unrelated. But there seems to be a growing drumbeat around potential welfare reform as we look out to 2018. I was wondering if you could provide a historical perspective on when there's been past welfare reform, how that's impacted your business and if there are specific pockets of government subsidy programs that you'd be most concerned about getting cut?

Yes, obviously, our core customer does rely on assistance in many areas. But the one thing that we see is that if we continue to show our core customer quality and value, give her a reason to shop with Dollar General, she'll shop with us no matter what kind of economic condition is out there. And as we've always said, when times are tough, and they could be tougher if certain things happen along governor -- government assistance, then she needs us more and -- because we offer that great value. So we feel that over time, she figures that out, figures her budget out, and over time, we can continue to deliver a real benefit to her through our everyday low prices and convenience.

Your next question comes from the line of Paul Trussell with Deutsche Bank.

You guys touched on this a little bit in the call, but I just want to circle back to the acceleration that we saw this quarter on both comps and gross margins. It was a really nice acceleration, but certainly, we also recognize that it came against easy compares from a year ago. And so just help us with some additional details, the puts and takes on the sustainability of some of the drivers of comps and gross margins. Particularly, we'd like to hear about some of the initiatives on both the consumable but also the discretionary side of the store. And also, just your outlook around the macro environment and what you're seeing that might be different in terms of just the way the consumer is acting and shopping.

Yes, Paul, when you look at -- in our top line sales, we delivered exactly what we said we were going to deliver. And we knew that the transitory headwinds that we had called out would start to subside as we moved through third quarter and into the fourth quarter as well. We saw that, but what we also saw was our initiatives really starting to take hold and really make a difference, both on the consumable side and the non-consumable side of the ledger. So it was great to see the teams -- the category management teams have done a great job of working in tandem with our store teams and our marketing teams to get the message out. Our core customer continues to rely on Dollar General very heavily to offer that value, that convenience. And what we continue to do is we continue to be a leader in that, in the channel. And as you look at our initiatives for the balance of '17 and into '18, it really capitalizes, I believe, on what our core strengths are, and exactly it is all put together and executed against what the customer is telling us that she needs. And I think that's the important part of what has made Dollar General successful over the many, many years, is that we really work hand-in-hand with our consumer, and we make the trade-offs inside the store. And sometimes it could be consumables versus non-consumables, depending where she's at in her economic cycle. What we see moving into 2018, as I talked about in my prepared remarks, I think we have a real opportunity to accelerate our non-consumable businesses, especially in areas that the consumer gives us credit for and where she'd like to see enhancements. And stay tuned. As we get into March, we'll talk a little bit more about what those are, but I could tell you that the treasure hunt is what she's looking for, and that's what we're going to be delivering to her as we continue to move forward. So we feel good about that. We feel good about our margins. Our margins, as you continue to look into the back half of this year and into early next year, we have, as John indicated, a lot of levers to continue to work, but we always make sure that we balance that with driving traffic. And I think we've exhibited in Q3 here that we can do both of those.

And then just looking at the cash and the balance sheet. Just remind us, you guys are, I think, outlined a plan for $450 million or so, I believe, in share repurchase this year, which is, again, materially below some prior year levels. Just remind us, was that very specifically related to kind of the real estate acquisition and projects that you guys took on? And just want to better understand how you guys think about contribution or earnings from buyback going forward. And then also, while I know it's pretty early and hypothetical, given that we are having conversations around tax reform, if that was to flow through in terms of a lower corporate tax rate, how would you think about your investment strategy, your capital plans and your cash usage?

Sure. In terms of this year, it was lower than previous years because of the investments, the 2 key investments being the investment we made in store manager pay, which, again, we think was the exact right decision to make and we're seeing the benefits of that, as well as the increased development. Now as I look forward and as we consider tax reform, obviously, we're watching this very closely. As it's currently drafted, the bills are expected to have a material favorable impact to us. Obviously, the likelihood, timing and details of that are uncertain, so I can't comment specifically what we would do here. But what I can tell you is we don't fundamentally see this changing our capital allocation priorities. They've worked very well for us, and we see them working very well for us in the future. And just to remind folks what those are, it's first and foremost, investing in the business. As long as we continue to see great returns on new store growth like we have, that's the best use of our capital. We'll continue to do that, as other -- evaluating other high-return investments in the business. The good news is this business generates a tremendous amount of cash as is, so we do well under any tax code. But with the excess cash, what we do want to do is strike the right balance, pay a competitive dividend and continue to repurchase shares with the excess cash flow up to -- while protecting our investment-grade rating. So I don't see that as fundamentally changing. As things solidify around the tax changes, we can comment on that further in the future.

Your next question comes from the line of Michael Lasser with UBS.

Good luck and best wishes, Mary Winn. Todd, if you had to rank between your initiatives, maybe a more favorable environment and an easier compare, how would you rank those in terms of driving the acceleration in your comps?

Yes, so when you look at it, I would tell you that our initiatives are really paying off. I would tell you that would be first and foremost. And I think as you look at it, you see those initiatives paying off both in our mature stores, some of the best comp we've seen in our mature store base in many years, and also in our new stores, you see that because remember, our new stores get the best and the brightest, if you will, of all of our initiatives all at one time. So I think your -- I think that would be first and foremost. And then, obviously, some of those headwinds we've been talking about abating would be second on the list. So that's why we feel very good about the positioning we are in right now for Q4 and as we move into 2018.

And then John, you talked a little bit about what you would do from a capital perspective to the extent that there is tax reform, your tax rate goes down. How would you think about your P&L in that sort of environment? Would you take that as an opportunity to invest more in your margin, lower your margin, and either lower prices or invest more in your stores, if you saw below the line, to boost your profitability?

Again, we'll have to wait and see exactly how that comes out, but what I would say is as we see it now, we see ourselves continuing to operate and run the business the same way we have that has worked quite well. Obviously, evaluating situations as we go, but feel pretty happy about the way we're managing all the levers now.

And I guess a piece of that will depend on what your competitors do. So with that being said, are you seeing any changes in the promotional environment, the pricing environment, that would suggest maybe it's getting better or worse right now?

No, I would tell you that as far as the competitive environment, it's always competitive in retail. But as you look at it, we really haven't seen a change in the competitive environment in the last few quarters. So it's about where it was. And the great thing is that Dollar General is positioned very well, price-wise, both everyday price and the promotional activity that we have to offer for the consumer. And the other thing that we offer her is a great compelling offering on our digital side. More and more digital engagement is starting to happen here at Dollar General with our core consumer. And as that continues to resonate with our core, you'll continue to see more of that. And I believe that overall, our core customer is responding pretty well to all of the initiatives that we put together here in 2017. And again, that's what gives us great solace as we move into 2018, that we can continue to keep that momentum moving.

Your final question comes from the line of Chuck Grom with Gordon Haskett.

Most of my questions had been asked, but I guess just first, on the fourth quarter implied comp, it doesn't sound like it, but are you seeing anything with your consumer that's giving you guys pause here in the first 5 or 6 weeks of 4Q? And then second, to follow up on Matt's question earlier on the remodel cadence, you're doing 1,000 total projects, 400 are the traditional Plus, and as you alluded to, the comp lift is usually 3x a traditional remodel. So I guess my question is, why not accelerate that pace? What's the potential to -- what's the store potential to roll that traditional Plus out? And then could you shed some light on how many are going to receive produce this year?

Sure. So as you look at so far in the quarter, yes, we don't see anything that shows us that anything is really changing in the quarter. We feel good about where the comp is. But keep in mind, we have a lot of quarter ahead of us, some of our biggest weeks leading up to Christmas here in the next 3 weeks. And January, traditionally in our channel, is a very good month for us as well. So we'll continue to watch that. Stay tuned. But we feel good about where that comp is headed. As it relates, Chuck, to the remodel program, you're right, 1,000 remodels is on the books for next year, as we indicated. I think that's a very aggressive plan. It really touches a lot of our mature store base. And with 400 of them being in the traditional Plus model, we feel very good about where those comps can head. But one thing to keep in mind on the traditional Plus model is that like our real estate program in general, we are very disciplined on where we put certain stores and what format we put them in, because we've got a proven track record of where they're most successful. And I can tell you that of the 1,000 that we're doing, the 400 that we picked, we feel very good about the success rate that we should see from those 400. We probably have another 2,000 to 3,000 of those opportunities as they exist today. But you know what, as we continue to learn more about what the consumer is buying out of those traditional Plus stores and what they continue to ask us for, that actually could expand. We could see that opportunity could be as high as 5,000, and we're watching that as we speak and we'll continue to monitor it as we move forward. And then produce, we continue to work the produce side, because it is a competitive advantage for us in many areas when we offer produce. I could tell you that out of the 400, probably 25% of them or so will probably have produce as we look at it. But as we continue to learn the produce business, our stores learn more about it, I think there's going to be more and more opportunity for that as well in the upcoming years ahead of us.

With that, that will conclude our call for today. Kevin, Donny and I will be around today to do calls, and I look forward to speaking to you. But thank you for your continued support of Dollar General.

Thank you. That does conclude today's conference call. You may now disconnect.