Good morning. My name is Howard, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dollar General First Quarter 2019 Earnings Call. Today is Thursday, May 30, 2019. [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. Jennifer Beugelmans, Vice President of Investor Relations and Corporate Communications. Ms. Beugelmans, you may begin your conference.

Thank you, Howard, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events. Let me caution you that today's comments will include forward-looking statements about our strategies, plans, goals or beliefs about future matters, including, but not limited to our fiscal 2019 financial guidance and real estate plans. Forward-looking statements can be identified because they are not limited to statements of historical fact or use words such as may, should, could, would, will, can, believe, anticipate, expect, assume, intend, outlook, estimate, guidance, plans, opportunities, long term, potential or goal and similar expressions. These statements are subject to risks and uncertainties that could cause actual results or events to differ materially from our expectations and projections, including, but not limited to those identified in our earnings release issued this morning under risk factors in our 2018 Form 10-K filed on March 22, 2019, 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 unless required by law. [Operator Instructions] Now it is my pleasure to turn the call over to Todd.

Thank you, Jennifer, and welcome to everyone joining our call. 2019 is off to a great start, and our strong financial performance illustrates the progress we have already made against our goals for this year. This performance was driven by our innovative merchandising and marketing strategies as well as our focus on operational excellence. We delivered value and convenience across our footprint of more than 15,000 stores. And we believe our neighborhood store concept continues to resonate with our customers. As most of you know, we have a lot of exciting things happening at Dollar General, and I'm looking forward to updating you on our progress during today's call. I'll start with a few key highlights from our first quarter before turning the call over to John for a more in-depth look at our financial results. After that, I'll walk you through the progress we're making on our 4 strategic initiatives. And finally, I'll highlight the continued momentum our 4 operating priorities are generating for the business. Turning now to our first quarter performance. We delivered comp sales growth of 3.8%. Additionally, net sales grew 8.3% to $6.6 billion compared to net sales of $6.1 billion in the first quarter of 2018. This strong net sales performance in the first quarter of 2019 showed, once again, that we can continue to drive sales growth from both new stores and mature stores. Additionally, during the first quarter, we continue to gain market share in highly consumable product sales, which was a key driver of our strong and balanced performance. Syndicated data indicated we had mid- to high single-digit growth in both units and dollars over the 4-, 12-, 24- and 52-week periods ending May 4, 2019. Our 3.8% comp growth rate for the first quarter of 2019 resulted from both an…

Thank you, Todd, and good morning, everyone. I'm going to walk you through the financial details of the first quarter. Unless I specifically note otherwise, all comparisons are year-over-year. As Todd already discussed sales, I will start with gross profit. Gross profit as a percentage of sales was 30.2% in the first quarter, a decrease of 23 basis points. This decrease was primarily attributable to increases in distribution and transportation costs; a greater proportion of sales coming from the consumables category, which generally has a lower gross profit rate than our other product categories; and sales of lower-margin products comprising a higher proportion of sales within the consumables category. Partially offsetting these items were higher initial markups on inventory purchases. As we said we would, we normalized our promotional markdown activity in the first quarter, following targeted increases at the end of fiscal 2018. SG&A as a percentage of sales was 22.5%, an increase of 6 basis points. The increase was primarily driven by increased employee benefits and occupancy costs as a percentage of sales, partially offset by lower repairs and maintenance and workers' compensation expenses. As we noted on our fourth quarter call, we are investing this year in our 4 strategic initiatives. We remain excited about the long-term transformative potential of these initiatives and believe we are making the right upfront investments in 2019 to deliver mid- to long-term benefit. Moving down the income statement. Our effective tax rate for the quarter was 20.8% and compares to 21.6% last year. Diluted earnings per share for the first quarter increased 8.8% to $1.48. The team did a nice job delivering the bottom line in the quarter despite headwinds from the investments and initiatives and the change we made to our inventory replenishment process. Turning now to our balance sheet,…

Thank you, John. We're very pleased with the first quarter results and the strong start to 2019. We have an innovative, robust portfolio of initiatives that are beginning to gain momentum and want to take the next few minutes to update you on the progress we made this past quarter. Starting with our nonconsumable initiative or NCI. As a reminder, NCI is our early-stage initiative focused on a new expanded product offering in key nonconsumable categories of home, domestics, housewares, party and occasion. The NCI offering was available at more than 1,100 stores at the end of the first quarter, and we plan to include it in approximately 2,400 stores by the end of 2019. We have learned a lot from these stores, and we are already applying the lessons learned from successes in many nonconsumable departments across the chain. We're very excited about the results we're seeing from these stores and have now moved through many replenishment cycles. We are seeing lifts in nonconsumable sales particularly within seasonal and home but also delighted to be seeing a positive halo effect in consumable sales. Additionally, while it's still early, we're seeing a positive impact on customer traffic in these stores. As a result, we are driving higher sales and seeing improvements in both mix and gross margin in these stores. Next, I want to update you on DG Fresh, which is one of the newest strategic initiatives we introduced in our Q4 call in March. As a reminder, DG Fresh is a strategic, multiphase shift to self-distribution of frozen and refrigerated goods such as dairy and deli. We began shipping from our first DG Fresh facility in Pottsville, Pennsylvania in January, and we are serving more than 800 stores in the Northeast. While it's still early, we're already successfully reducing…

[Operator Instructions] Our first question or comment comes from the line of Matt Boss from JPMorgan.

Congrats on a great quarter, guys.

Thank you.

Thank you.

So Todd, maybe to start off. You outlined a laundry list of top line initiatives underway. I think you probably could have hosted an Analyst Day for how much is clearly going on. I guess maybe could you help segment opportunities you think contributed to your first quarter comp, what you're most excited about maybe into the back half of the year versus initiatives you see accelerating into next year and beyond?

Sure. Our cooler program continues to be one of the key drivers, Matt, to what we've seen in our success so far in 2019 and also what we've seen in the past. But what I'm also excited about is what we're seeing in a lot of the initiatives that we continue to work on in our HBA world. As an example, the teams are doing a great job there, and the customer is really resonating to our great prices, our values as well as our extensive private brand and national brand offering in those areas. So they continue to do very well. And our new cosmetic line, Believe, I think will continue to build momentum as we move into the second quarter and back half of this year. As you look at later parts of this year and into next, we believe that many of our initiatives, including NCI, will continue to build momentum. And also, our DG Fresh initiative, as I look at that over the long term later this year and into next, it's already starting to deliver the gross margin that we see through better cost of goods, but also, it's showing us that we can be better in stock by controlling our own destiny there. And so we believe that, that will start paying even more dividends as we move to the back half of the year. We're very bullish on what we see in our top line right now, and we'll continue to push as much as we can to continue to see these great results as we move through the back half of the year.

Great. Maybe then just a follow-up. On the SG&A front, so excluding the incremental $50 million of initiative spend, any underlying change to the 2.5% to 3% comp of the expense leverage point? And Todd, I guess larger picture, is it fair to think about this year's strategic initiatives build as a peak level as you kind of look forward?

Yes, I'll let John start, and I'll add a little cover.

Yes. In terms of SG&A, we're pleased with the Q1 cost control. We deleveraged 6 basis points. As we'd mentioned, we're investing in initiatives for future growth. There was somewhat of a shift from Q1 to Q2 but very pleased with the cost control. In terms of the leverage point, as we discussed before, there is an impact as you're investing in things like DG Fresh, which we see as enhancing our operating margin over time, that does put pressure on SG&A as you're investing some labor in the stores and other initiatives like that. But I would say, we remain laser focused on cost control. We don't see it differently. And the main change here is that dynamic of investing in these strategic initiatives, which we see helping our operating margin and being as accretive as early next year.

[Operator Instructions] Our next question or comment comes from the line of Michael Lasser from UBS.

Given the success you had in the first quarter, why should we expect at comp better than the 2% that's implied at the -- in your full year comp guidance of 2.5% over the next few quarters?

Michael, this is Todd. When I look at the rest of the year, we do feel very good about where the comp is headed. We've got a lot of year ahead of us, right? And there's a -- could be a lot of noise out there. We don't know what these -- this last list of tariffs may or may not do to our core consumer and really, the consumer base in general. So I think we're -- our guidance reflects appropriately where the -- where we are today and where those risks still may lie. But we're doing everything we can to continue to drive that top line and of course, drive traffic. And our key here is traffic, and traffic is king. We know that, and we continue to -- all of our efforts around our sales are really guided by that traffic growth.

And on the subject of tariffs, we know that 5% of your sales come from direct imports, with China being one of those countries. Do you have an overall estimate of your cost of goods exposure to China if the list 4 does go through?

Yes. So as you indicated, it's about 6% of our purchases measured at cost are tied to direct imports predominantly China-centric, although we have been diversifying in recent years. This is an impact facing all of retail. Our exposure is relatively lower compared to many. And the team has been working very diligently to mitigate this impact as evidenced by the updated guidance or the guidance that we maintained. The team is working on continual negotiations with vendors, product substitutions, product reengineering and continuing to change the origin of countries where it's coming from. We're doing everything we can to minimize the impact on the customers. But as you know, and others have said, this is probably something that's going to impact the customers particularly if the list 4 comes out. I'd rather not speculate on what that impact will be. It's hard to say how that -- things will shake out there. But we believe that we're very well positioned to serve our customer as we're priced right, we're conveniently located and we're there to help her in good times and bad.

And Mike, I'll just add as well. Remember, we're a limited source -- limited SKU retailer, meaning we don't have to carry everything. And we can make decisions on what to carry and what not to carry depending on cost of goods and what may or may not increase. And I think the team has done a real nice job in the first few lists. And while list 4 is very extensive, that work is ongoing right now as well. So stay tuned. We're hoping that there'll be some resolution here. But make no mistake that this will -- if list 4 goes in, will cost the consumer on [ during ] and with her budget. The great thing is, though, I believe that Dollar General stands ready to be able to serve that customer because she'll need us more at that time.

Our next question or comment comes from the line of Karen Short from Barclays.

Just a very quick -- just a question in terms of having such a strong 1Q. Obviously, you indicated there will be more SG&A pressure in 2Q. But I guess, any thoughts on keeping kind of the full year overall guidance given that some of these costs abate in the second half and gross margin compares also get quite a bit easier?

Yes. I'll start by saying we feel great about the fundamentals of business and the strong start to the year. As I did note, there was some investment spending shifted from Q1 to Q2, and importantly, we absorbed the impact of the recently enacted tariff increases not previously assumed into the guidance. And as Todd mentioned, there's still a lot of year left, perhaps the comp laps are a little tougher as the year goes on. But we feel great about the business. We feel comfortable about the guidance we've provided, and we're very pleased with the start of the year.

Okay. And then just switching to comps for a second. On the NCI, maybe can you give a little bit of color on the comp lift that you're seeing in those stores and also the margin impact? And then, you made a comment on the 26% improvement, I guess, in in-stocks at the below-standard stores. Any color you can give us on the comp benefit from having the better in-stocks?

Sure. On the NCI program, we're very pleased with the early results there. The team has done a really nice job in procuring goods. We're now into our fourth and fifth replenishment cycle, and some of the product that I've seen recently with this newest wave is even better than the previous one. So I could tell you that we feel very good with what we're seeing. We're seeing overall lifts in the store, both in our nonconsumable areas and our consumable areas. So we're getting a very nice halo effect out of that. And not only are we seeing those lifts in our top line sales, but we're seeing gross margin benefits, of course, in our nonconsumable area but overall as well for the entire box. So we're feeling very good about where we're going. We'll do up to 2,400 stores this year and looking to see how we accelerate that as we move into 2020 and beyond. But again, we feel very good. Your second part of the question was on the in-stock piece. We've been working very hard, it started at the end of last year, in really looking at how we look at on-shelf availability. And very proud of what the team has done in and around making sure we have product on the shelf for our consumers. Now it did come with a little bit of a cost of some inventory. But as you alluded to, and we talked about in our prepared remarks, we're seeing in the 20% range increase of on-shelf availability, meaning in-stocks for our customer. And I can tell you that in those stores, it's meaningful, and it does add to the comp. So we'll continue to work that piece. And as I also talked about, as Fast Track continues to move forward, and this would probably be more into the late '19 and into 2020, we're going to be getting some on-shelf availability benefits from that as well as we continue to reduce those case packs and rationalize our SKU base on the shelf to better keep our in-stock levels on fast-movers. And stay tuned for more of that. We believe that will pay some real benefits as we move into the end of the year and into '20.

Our next question or comment comes from the line of Paul Trussell from Deutsche Bank.

The gross margin performance in 1Q was better than my forecast. Just curious how it stacked up to your expectations. And previously, you had mentioned that you expected the most pressure on a year-over-year basis in 1Q. Just want to make sure that guidance still stands and just give some overall puts and takes on GPM.

Yes. We were pleased with the performance in Q1. We'd indicated that on our Q4 call that Q1 would be pressured. But we did say that we expected to see sequential improvement on a year-over-year basis as we went from Q4 to Q1. But nonetheless, we did see pressure from the change in the replenishment process as well as the ongoing pressure of distribution and transportation costs and the ongoing mix pressures. However, as we said we would, we were successful in normalizing the promotional markdown costs while, at the same time, delivering strong comps and traffic. So we're very pleased with that. The team did a great job managing through the various headwinds. And as we said in our prepared statements, we expect to see further sequential improvement over the balance of the year on a year-over-year comp basis. And longer term, we believe we have a lot of opportunities to increase not only gross margin but operating margin over time. As Todd indicated, we're very excited about the progress we're making on DG Fresh as we convert items and convert stores. We're seeing the benefit to the cost savings we expected there. Very pleased with what we're seeing from NCI in terms of not only the sales lift but also the improvement that adds to mix. We're investing more in EAS units. We're going to be adding another 3,000 this year. We've seen great success from that and the benefit it has on shrink. And there continues to be opportunities for us with category management, increasing foreign sourcing penetration, increasing private-label penetration, and we mentioned the nonconsumable opportunity. And then lastly, while we did see pressure from transportation costs in Q1, and fuel remains a pressure, we're very pleased by what we've seen in terms of the proactive efforts of the team to mitigate these efforts and take advantage of an improving environment. So we're optimistic that over the long term, we can not only maintain but enhance overall operating margin over the long term, and that's the way we look at it.

And just as a follow-up, Todd, could you maybe just speak bigger picture to what your core consumer is saying about their financial health and overall sentiment on the economy? And then maybe rank for us, as you look in your stores comp gains occurring from your core customer coming more frequently versus shopping the store more broadly versus actually getting that trade down from higher-income shoppers.

Yes. Sure, Paul. Yes, when you look at our gains, our core consumer is continuing to tell us, "I feel pressured." But again, this core consumer always is under pressure financially. Her income levels are on the lower end, as we all know. In saying that, she continues to tell us that she's back to work. She continues to tell us that she's got a little bit more money in her pocket, more so from productivity, meaning more -- working more hours than actual wage growth, but yet, more money. She has headwinds, make no bones about it. She still has headwinds of health care being one of the largest. Rents continue to be out there for her as a headwind. But as we looked into last year when we started to hear from our consumer that she was feeling a little bit more stressed, we continue to hear that. But what we do very well here is we -- we're able to move our promotional activity, our mix inside the store, our end-cap presentations to match where we believe she will be. And we did that in the first quarter and, I believe, very successfully. And we'll continue to do that as our customer tells us where she believes she'll be in her journey as we move through 2019. The -- as you look at our consumers overall, though, I would tell you that our consumer that makes a little bit more money, so that next level-up consumer, is our fastest-growing consumer that we have here at Dollar General. So that trade-in is alive and well. But it's not coming at any cost of our core consumer, and our core consumer continues to come more often as well as we're seeing that she's spending more once she's in the store. So we're both getting the transaction growth side and that basket size. So we feel very good about our customer segments and where they're headed. And the great thing is we're attracting a higher-end consumer, I believe, because of all the work that we've done in this box over the years.

Our next question or comment comes from the line of Rupesh Parikh from Oppenheimer.

Also congrats on a nice quarter.

Thank you.

So I had 2 questions on your DG Fresh efforts. So as I guess, first, anything that has surprised you, thus far? I know it's only been a few months at this point. And then, as you think longer term or even in the intermediate term, how do you think about what flows to the bottom line versus being reinvested in the business from some of the gross margin benefits that you expect to see?

Yes. Right now, I would tell you that the DG Fresh initiative is really performing about where we thought it would perform. Again, our teams are very good at executing very complex projects. And this, as you could imagine, is one of the big ones. But I would tell you, opening 1,000 stores a year and remodeling another 1,000 is no easy feat. So we're very good at this type of work. And I would tell you that DG Fresh was no different. And it's executing as we thought and are producing the results that we thought. You heard from John. We're seeing the cost of goods savings. We're seeing better in-stocks already at store level, and we're only 800 stores in. And so more to come as we move through the next cycles of this. The great thing is the plan is rolling out as designed. We've already got all 4 of our DCs signed and ready to go. And the next one will be shipping here in the next few weeks. So we feel good about that. And then, as you continue to look at DG Fresh on that margin rate, the great thing about Dollar General is we never took our eye off of price, whether that be in our fresh area or our dry areas of the company. And we're priced very, very well across the board. So I would tell you that we feel very good about that, and we feel very good about those margin gains that should come from this over time. Should -- the majority of it should drop to the bottom line, which is very exciting.

Great. And 1 quick follow-up question. Weather clearly was a challenge last year. And I know it appeared also as a challenge in Q1. Just curious if you guys think it had a negative impact on your business.

What I would say is there are a lot of puts and takes between weather laps, weather this year and the pull-forward of the SNAP benefit. When you net all that together, all that noise together, it's about a push. And really, the 3.8% comp was a solid 3.8% comp not impacted by any real outside noise.

Our next question or comment comes from the line of Anthony Chukumba from Loop Capital Markets.

So related question on comps. I mean in the first quarter, obviously, you had the pull-forward becoming the SNAP benefit, the 70 basis points. Sounds like you got half of that back. Tax refunds looked like were a little bit lower than people expected. And then weather was pretty bad. So putting that all together, what do you think allowed you to do close to a 4% comp with those 3 headwinds? Was it macro? Or was it more about the positive impact of the -- of a lot of initiatives that you're -- that you talked about on this call?

Yes. I would tell you that our core consumer, again, is -- has a little bit more money in her pocket. But I would tell you when you look at the performance and as we see it broken down into categories that we watch very closely here, many of our gains occurred from the initiatives that either we worked through in 2018 that are continuing to still pay off and even some of those early 2019 ones. So it gives us a lot of confidence that we're on the right track and as we move through the rest of this year.

Our next question or comment comes from the line of Scot Ciccarelli from RBC Capital Markets.

So I know a bunch of people have asked about kind of the comp momentum. But Todd, specifically, you talked about how last year, which -- where we generally saw rising average ticket but softer traffic, was due to the relative health of your core customer and trip consolidation. So I guess, what I'm kind of trying to figure out is what specifically changed this quarter. I mean, you had mentioned core expansion earlier in the call, but you've been expanding cooler doors for years. So I guess, what I'm trying to figure out specifically in 1Q maybe what changed on the traffic front.

Yes. So I think the best way to look at this is 2 things. Number one, I mentioned earlier, this core customer started to signal middle of last year that she was feeling a little bit more pressured, not feeling as robust as she did. So I would tell you that this core consumer, her shopping patterns are -- and habits are changing a little bit, we're seeing it, and maybe moving more back to what we were used to seeing with maybe not quite as a fuller -- full basket and coming a little bit more often. Now 1 quarter doesn't make a year, so we're going to continue to watch what she does. But in Q1, we saw some start of that normalization back to where this core customer normally is resonating at. The other thing that I would tell you in Q1 specifically is the actions we took in Q4 promotionally to really solidify that customer in Q4 did exactly what we thought and brought forward that customer in a very sticky manner, if you will, to Q1, and she spent accordingly. So we feel good about that initiative in Q4. It did exactly what we thought in Q1. And I believe that was a big piece of why we only gave back half of that SNAP benefit that we pushed into Q4 last year from that top line.

Our next question or comment comes from the line -- our final question comes from the line of Kelly Bania from BMO Capital Markets.

Just wanted to ask another one about tariffs. It sounds like you did a lot of work there to mitigate that and do some substitutions. Just was wondering if you can help us understand how much price you expect to pass along. And maybe too early to tell from a competitive standpoint, but how do you think you performed on that mitigation strategy relative to competitors? And how much price do you think really we're going to see being passed through broadly?

As you -- again, you take a look at Dollar General, and again, we've been, all along, many, many years now, we ensure that we have the right price for our consumer. We watch price very, very closely here. But the other thing to keep in mind about Dollar General, I mentioned earlier, is we don't have to carry everything. We're a limited SKU assorted retailer, and we can make decisions based on a lot of different factors to include price, meaning cost of goods. And we'll continue to do that as we move through these tariffs. I think our teams have done a great to date. But I would tell you, even through the first 3 lists if you will, we've seen in the marketplace the consumers paying a little bit more money across the board in the marketplace. And with list 4 looming out there, which is probably the big -- well, not probably, it is the biggest impacted list, I would have to assume the consumer is going to bear the brunt of some of this as well. And so we're doing everything we can here at Dollar General to make sure we soften that blow. But again, the great thing is this model works so well in good times and not-so-good times. And if this consumer is having to pay more across the board at every retailer because of these tariffs, we'll stand ready to build with open arms to take her in when she needs us most. And we're positioning ourselves for that as we move through 2019.

Okay. And maybe just to follow up on the prior question about the stickiness and the promotional activity that you did last quarter. How do you expect that -- or do you expect that stickiness to continue to impact your consumer and the traffic patterns for the rest of the year?

What we see normally is that, that stickiness does stay with us for a couple of quarters. So we believe that we'll still see some benefit from that as we move into Q2, may not be quite as much as Q1. But again, we feel very good about where we are and our start to the fiscal year. So we feel that, that customer resonates very well with price and value. We know that, and we continue to offer that. So even though that we've normalized the promotional activity, you've got to remember who Dollar General is. And that is everyday low price on the shelf that she can count on, and she sees that when she's in the store each and every day. So again, we feel very good about our competitiveness on price, and we feel good about our -- both traffic and ticket as we move into the second quarter and back half of this year.

That concludes our Q&A session today. I'd like to turn the conference back over to management for any closing remarks.

Thank you very much, and we hope to talk to you soon. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.