Good morning. My name is Rob, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General First Quarter 2025 Earnings Call. Today is Tuesday, June 3, 2025. [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'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 Vasos, our CEO; and Kelly Dilts, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, long-term growth 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-K filed on March 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. [Operator Instructions] Now it is my pleasure to turn the call over to Todd.

Thank you, Kevin, and welcome to everyone joining our call. We are pleased with our start of the year, including strong results that exceeded our expectations on both the top and bottom lines. We believe our efforts are resonating with a wide range of customers as they continue to seek value in our more than 20,000 store locations around the country. Our results are a product of the dedication of this team to serving our customers and communities every day. I want to thank each of them for their great work they continue to do in our stores, distribution centers, private fleet and store support center to fulfill our mission of serving others. For today's call, I'll begin by recapping some of the highlights of our Q1 performance as well as sharing some of our updated consumer observations and our current approach to tariffs. After that, Kelly will share the details of our financial performance as well as our updated financial outlook for fiscal 2025. I will then wrap up the call with an update on some of our key growth-driving initiatives. Turning to our first quarter performance. Net sales increased 5.3% to $10.4 billion in Q1 compared to net sales of $9.9 billion in last year's first quarter. Contributing to the strong top line growth, we opened 156 new stores during the quarter as we continue to expand the number of communities we serve. We also continued to grow market share in both dollars and units in highly consumable product sales during the quarter, in addition to growing market share in non-consumable product sales. Same-store sales increased 2.4% during the quarter, driven by growth of 2.7% in average basket, including relatively similar increases in the average unit retail price per item and average items per basket. Customer traffic slightly…

Thank you, Todd, and good morning, everyone. 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 Q1, gross profit as a percentage of sales was 31%, an increase of 78 basis points. This increase was primarily attributable to lower shrink and higher inventory markups. Our shrink mitigation efforts have continued to drive positive results, including a year-over- year improvement of 61 basis points in the first quarter. With regards to damages, the year-over-year change was slightly favorable, which was relatively in line with our expectations. The gross margin increase was partially offset by increased markdowns, which were primarily driven by promotional activity during the quarter as we took this opportunity to serve our customers with targeted price markdowns. Turning to SG&A, which was 25.4% as a percentage of sales, an increase of 77 basis points. The primary expenses that were a higher percentage of net sales in the quarter were retail labor, incentive compensation and repairs and maintenance. Moving down the income statement. Operating profit for the first quarter increased 5.5% to $576 million. As a percentage of sales, operating profit was relatively flat at 5.5%. Net interest expense for the quarter decreased to $64.6 million compared to $72.4 million in last year's first quarter. Our effective tax rate for the quarter was 23.4% and compares to 23.3% in the first quarter last year. Finally, EPS for the quarter increased 7.9% to $1.78, which exceeded the high end of our internal expectations. Now turning to our balance sheet and…

Thank you, Kelly. I want to take the next few minutes to provide updates on three of our most important initiatives across the business as we look to accelerate our progress toward achieving our goals. I'll start with our real estate work as we continue to execute a significant number of projects aimed at driving market share growth in new communities as well as in our mature store base. As I mentioned earlier, we opened 156 new stores in Q1, primarily using our 8,500-square-foot formats. Notably, the cost to build new stores has risen more than 40% since 2019, and these formats average approximately $500,000 to open, including both CapEx and inventory. Despite this increase, we continue to target healthy returns of approximately 17% on average for our portfolio. This team is working to further reduce cannibalization this year by focusing on new communities for Dollar General. In addition, we are increasing the number of operating weeks for new stores compared to prior years by pulling forward more projects even earlier in the year. As a result, we expect to open the vast majority of our new stores within the first 3 quarters of this year. We are also pleased with the progress of our remodel projects to begin the year. 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. This initiative is aimed at bolstering performance 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 impacting approximately 80% of the total store. In addition, while the cost of a Project Renovate remodel is…

[Operator Instructions] And the first question today is from the line of Rupesh Parikh with Oppenheimer.

Also, congrats on a really nice quarter. So I have two related questions just on the top line. So I want to get a sense of your team's confidence in being able to sustain the comp momentum. And then during the quarter, was there anything that was surprising on the top line that you saw? And then just related to that, the guide for the full year -- the comp guide for the full year implies a moderation at least at the midpoint in comparison to these. So I just wanted to get a sense of is that conservatism or just how you guys are thinking about the top line for the balance of the year?

Thank you, Rupesh. I'll take the first part and then pass it over to Kelly for that second part of the question. What gives us a lot of confidence on what we've seen on the top line are a few things. But I want to highlight, though, the biggest opportunity that we saw coming into the year and obviously for the past 18 months, and that was our Back to Basics work. And all the work that we have done over the last few months to set ourselves up for success has really benefited us. So if you think about at retail, our store standards are much, much better than they've been in quite a long time, and every single quarter that goes by continues to get better and better. Our service at store as well, customer service continues to grow as well. And I would tell you that our customers are seeing that. We're seeing that in the data that we get back on customer satisfaction scores are rising each and every quarter as well. Turnover continues to reduce at store level. That's another initiative that we had that will add to the top line. Our turnover for the fifth straight quarter at retail has decreased. So again, we're very proud of that stat. And then obviously, shrink plays a part of this. I'm sure we can talk about that later, but shrink, overall, you heard in our prepared remarks feels like we're on the right track. And the reason why we believe it adds to the top line is if it's there for the customer to buy and not being taken, then it will add to that top line. Very quickly on our supply chain, we feel really good about our on-time pieces. Not only are we hitting…

Yes. And Rupesh, in regards to your question just around the top line guidance, what might be helpful is for me to just go ahead and kind of walk through the P&L and just let you know how we're thinking about the guide. As you heard Todd say, lots of things to like about the Q1 performance. So I would say that the top line guide really does consider the Q1 outperformance, but it also considers just the heightened uncertainty as we move through the year. And so it allows for some incremental pressure on that consumer spending on the top line. As we think about gross margin, we are just really pleased with where shrink came in. We continue to believe that shrink is going to provide a tailwind throughout 2025, and so feel really good about that for all of the reasons that we just talked about. But as we think about tariffs, there's certainly a lot of potential outcomes. Now we've got plans in place to mitigate certain tariff ranges. And I would tell you that would include both lower tariffs that we are seeing in the current rates, but also up to the reversion of tariffs on China going back to those that were previously announced on that April 2 date. With that higher degree, I would say, of variability and potential outcomes and especially in regard to the various components that make up margin and the timing of those components, it's why we feel good about giving a full year guide, even though there could be some variability within the quarters. And so it does give us a chance to take whatever situation or reality ends up hitting as we move through the year, and it allows us to enact those plans over the years…

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

So Todd, maybe on the components of your comp, how do you see traffic progressing through the year? And any change in comps in May that you've seen relative to the 2.4% comp in the first quarter? Or just any change in consumer behavior that you're seeing in this backdrop? And then, Kelly, just within the gross margin, can you speak to higher markdowns that you saw in the first quarter? Just any change in the competitive landscape that you're seeing? Or how best to think about markdowns in the second quarter and in the back half of the year relative to pressure in the first quarter?

I'll start out, Matt, and thank you for the question. Yes, on the top line, a 2.4% comp in Q1 was a real testament to all the work that this team has done over the many quarters. But I would tell you that what we saw coming into May give you a little bit of color. We're really happy with where we ended up May, so period 1 to Q2 as well as our traffic, traffic turned positive in period 1. Now I just want to say, we got a lot of quarter left, but it's good to see that, that's happened. And just as a reminder, I know our prepared remarks had it, but Q1 was our toughest lap both on the top line and the traffic. Traffic was a 4.3% positive last year and just below flat this year at a 0.3% negative. So I would anticipate with all the work that we've done and depending on where the consumer falls, that we'll continue to see comp momentum and hopefully, traffic momentum as we move through the quarter and into the back half of the year. All the work, again, that we've done would line up with that thesis, not only from all the work that I laid out in Rupesh's question, but also when you think about the trade-in, we have seen trade-in come in at a pretty good clip during Q1 and nothing that -- nothing shows us so far in Q2 that has slowed down. And depending on where the macro environment goes, it should be very conducive to further trade-in possibly as we move forward. And then lastly, what we're working on right now, as you would imagine, from Dollar General is what does that future look like? And that is how do we…

Yes. And just to your markdown question, I would say it's really in line with our anticipation. So the increase on a year-over-year basis is really due to promotional activity. Now some of that's going to be related to the store closures that took effect in the first quarter, so a little bit outsized from what we would expect to see for the rest of the year. I think the good news here is we did get most of those promos covered. And so what you're seeing ultimately show up in the increase on the gross margin rate has a lot to do with the 61 basis points of shrink improvement that we saw. So from a promotional standpoint, we're expecting kind of normalized rates to last year. If for some reason, something changes in the outlook, obviously, we'll change with it, and we'll do what's right for the customer.

Our next question is from the line of Michael Lasser with UBS.

To what extent is Dollar General either willing or needing to make further investments in price and wage rates in order to sustain this comp momentum and ensure sure that it's not just a short-lived gain? And how have you factored that into the guidance? And how do the returns on these investments compare to the returns that you're now seeing on new stores, which do appear to be declining from what was 20% to now around 17%?

Yes, Michael, thank you for the question. I would tell you that, first of all, we're happy with the investments we've made over the last couple of years on both hours in our store and wage rates in our stores. At this point, again, we feel comfortable. We don't see a need to go outside of where we are today. And a lot of that is evidenced by a few things. One, what our employees are telling us through turnover and through our -- the pieces that we put in front of them that allows feedback to come back up to us. So we feel good about that, but also what the customer is seeing. And the customer is seeing a lot of good things at store level. And as we all know, a happy employee then translates into better store conditions and sustained store conditions. So feel good about those investments. What we've done now, Michael, is quite frankly, pivoted from those labor investments to now investing back into the mature store base with Project Elevate, Renovate, a lot of what we're doing to ensure that the physical plant is taken care of as well as getting the freshest merchandising thoughts and execution inside of our stores. So that's where that has now moved, which I think is very prudent and appropriate. As it relates to price, we feel very comfortable. In my prepared remarks, we're right where we believe we should be on an everyday price basis. I've been here quite a while, as you know, almost 17 years now. And I tell you, I feel as good about my everyday price as I always have, and we continue to watch that each and every week that goes by, not just quarter. So we're very, very diligent to…

Yes. And just around the new store piece, so we still feel really good about the IRRs on our new stores. Real estate investments are absolutely the best use of our capital. But as Todd talked about just kind of shifting those investment dollars, we're really excited about doing that with Project Elevate and Project Renovate. And the long-term financial framework that we laid out last quarter assumes that we get more sales contributions from those mature stores, which we think will be benefited by these programs. And frankly, it's just a great way to leverage our current infrastructure. And so we're excited about the increase in these projects, including all of the expanded investment in our mature stores as we talked about and just think this is a great allocation of capital, and it moves us towards just achieving those mid- and longer-term goals that we laid out.

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

Todd, as you think about margins re-expanding because your margins are depressed, and I think you said 6% to 7% by 2028, how important is getting to the 3% comps in order to get there? It feels like your Back to Basics is working and putting less pressure or opening less new stores could be helping, not hurting. And then separate unrelated, can you just tell us, Kelly, the shrink benefits that you got this quarter? Does that run rate, can that get better from here? Or does that hold? Does that run rate, we hold that for the rest of the year and you get benefits year-over-year, but you don't step up from the rate that you've gotten to accrue in quarter 1?

Yes. Simeon, thanks for the question. And yes, we believe that a healthy traffic and top line is imperative. 3% might be a little strong, but we believe that a sustained comp over 2% gets you to where you want to be. But we always strive for more, and that's why that 2% to 3%, we felt very good about talking about in that long-term framework that we put out there. But I would say that overall, we can and should be able to deliver longer term on those pieces. Now there's a lot in front of us over the next few years. But I would tell you, this team is squarely focused. You could see the momentum building as we left Q4 of last year. You can see it now in these results in Q1. And I would tell you that there's nothing in front of us that would say that momentum slows down. If anything, it starts to pick up steam as we get Project Elevate and Renovate in that flywheel that Kelly talked about as well as our non-consumable initiatives. That is a key because I think not only the 2% to 3% comp but also the composition of that comp is important. And us moving the needle on our non-consumable or discretionary areas is vital. And I would tell you, the team has done a really good job there, and we feel good about where that's at. And then lastly, at least for this foreseeable future, that trade-in helps that as well because that trade-in customer comes with a little bit more disposable income. So she's seeing the value as she starts to come into -- for the first time or on a lapsed basis back into our stores.

Yes. And on your shrink question, we were just really pleased with the progress, and it exceeded our expectations this quarter at a benefit of 61 basis points. We do expect that to continue as we move through the quarters for the remainder of the year. So excited about that. I think there's some other things we're excited about as well. One thing that we did see is that the stores that didn't have self-checkout are also seeing similar levels of improvement as the stores that did have the self-checkout removal. And that's just really a testament to the operational excellence that's occurring in the stores and that higher control environment is starting to take hold in those stores. . And then as you know, we have lots of other actions that we're seeing, so around inventory reduction and the SKU rationalization. As Todd noted, the improved retail turnover always helps the shrink incentive programs that we have in place, just the utilization of the higher shrink planograms. And then again, kind of just looking at that end-to-end process to mitigate any shrinks at any point of exposure in that end-to-end process. So all of those are going to continue to take flight. And as you know, it does take a full year to see those benefits show up in the P&L. And so shrink improvement should be the gift that just keeps on giving here. And Dollar General, we're not going to stop working on shrink. We're going to continue to work on shrink as we go forward. But right now, we like the progress that we're making, and we are well on our way to improvements that will allow us to hit that mid- and longer-term target.

The next question is from the line of John Heinbockel with Guggenheim Partners.

Todd, just two related things. Number one, the trade-in, most of that has been organic, I think, to date, right, people finding you. Is there a thought in tweaking marketing and customer acquisition, right, to do that less organically, number one? And then number two, what's your current thought on pack size architecture in consumables, meaning small pack sizes in this environment is an advantage? Do you want to shift more or less to smaller pack sizes?

Thanks, John, for the question. I would tell you, I think overall, your assessment is correct on the trade-in. But I would tell you what we've really seen really in Q4 and Q1 in particular, and everything that we've seen so far in Q2 also points to our DoorDash and our beginning of our delivery initiative as incremental customers. The incrementality on DoorDash has always been over-the-top phenomenal, but we're starting to also measure and see the incrementality on our white label or our delivery piece through DoorDash. And with that, I believe those are both attracting a new and diverse customer base than what we normally have. And then as we continue to grow that, our media network points directly to what you're talking about. We're able to reach customers outside of our core with our media network as well. And that's been growing at a very nice clip. You heard in our prepared remarks, 25% increase. year-over-year. We believe that's going to continue to grow and should leverage a lot of those customers and reach those customers that we traditionally do not reach. And then as it relates to pack size, we've never given up on that smaller pack size. As a matter of fact, even in the face of a lot of opposition through CPG and maybe other folks that talk about a smaller pack size, I would tell you, it's exactly what the customer needs. I would argue, needs all the time, but especially where we are right now in her economic cycle. She definitely wants to be able to afford those luxuries and/or just name brand products as evidenced by what she shops. But she needs it at a price point that she can afford. And at times, that means the ounces could be a little bit smaller than what you would find in traditional grocery or mass or even drug for that matter. But it really hits home for her because she can balance that with her monthly budget. And so more to come. We continue to work that. We work it hard. And I would tell you that our CPG partners over the years have come to realize that we were right all along when it related to what that customer wants at that pack size she needs. So we're the -- probably the leader there and the architect of that, and we'll continue to lead there.

The next question is from the line of Seth Sigman with Barclays.

I wanted to focus on damages. That's been one of the lingering issues here for some time. It seems like it could be at an inflection now. Can you just talk a little bit more about what's changing? How are you running the business differently now? And remind us of what that opportunity actually is. I assume that's both a sales and margin opportunity, but just any more thoughts there.

Yes. I can start that and then give it to Kelly to add any further color. Yes, I would tell you that as we continue to work all the levers around shrink and inventory, we will see continued success, we believe, in both shrink and damages. And let me explain real quickly. I've been around retail for 40 years almost here. And I would tell you that as goes inventory levels normally as goes shrink. And as you've seen, our inventory levels continue to come down. And what I mean by that is that we are able to control inventory levels and get what the customer wants in these at the shelf when she needs it. And with that, inventory levels come down and then traditionally, shrink will also follow that, but also damages. Now we don't just rely on that. You heard from Kelly, along our Back to Basics work, and many of you heard me say this over the last 18 months or so, and that is we have gone back to really getting back to what we know how to do at store level and that is execute, execute, execute. We've got the game plan. We've had the game plan for years. We may have just moved off of it a little bit. And so what we've done now is really gone back and instituted what is tried and true around shrink control and damage control. Normally, shrink starts first and then damages follow. And that's why we believe that this is going to occur. Now again, we're not taking it at face value. There's a lot of work being done right now. I won't go into all the details around controlling damages even further as we move through Q2 and into the back half of the year. And it's really about locking down more and more processes at store level to be able to ensure damages are well in hand, if you will, as we move through the back half of the year. So we feel good about the trajectory. We feel good about what's ahead, but there's a lot of work. It's retail. And as Kelly indicated, shrink is always ongoing work. And how I look at damages, it's really just known shrink, and we just need to control it the same way.

Yes. And I will tell you for this quarter, what we were pleased to see is that damages were relatively in line with our expectations. And while not big enough to call out, I'll say it was a slight improvement at 3 basis points on a year-over-year basis, which is the first time that's occurred in a while. We are expecting for the full year that damages are flat to slightly favorable compared to 2024 as we make that progress. The size of the price here is really what we laid out in our financial framework, which is 40 basis points of improvement as we think about the time of the midterm to longer term. And some of those longer-term actions as we think ahead really are around continued improvement in inventory management, how we buy and how we allocate. We have done a lot of work and will continue to do a lot of work on improvement and optimizing days of supply, which really helps to mitigate damages. The other piece is just the proactive investments that we're making in Project Elevate and Renovate. That helps mitigate not only the R&M side, but also as coolers go down, we have more damages. And so as we get the stores optimized there, we should have fewer damages. And of course, we do have a team that's focused on damages as well. So we feel good about that path to improvement that we identified over that financial framework and think we'll achieve those 40 basis points in the mid- to longer term.

Our next question is from the line of Scot Ciccarelli with Truist Securities.

This is Josh Young on for Scot. So it sounds like quarter-to-date comps have been solid so far with traffic turning positive, but it does look like you've had some heightened clearance activity lately. So just curious how much of a benefit to sales do you think that's been?

Yes, this is Todd. I'll answer that. No, we really haven't seen heightened clearance activity. We have some clearance around the stores that we closed. But to be honest, that really didn't add to the comp in any appreciable manner. So I would tell you, we feel very good about the construct of that comp. We feel good about it. So what we really feel good about is was well balanced between consumables and non-consumables. And as we indicated, all the work that we're doing in merchandising around the non-consumable categories as well as that trade-in starting to come in at a heightened level, we believe that, that balance should continue as we move forward. But again, a lot of quarter left for Q2 and a lot of back half of the year. But everything lines up to show that we're well on our way there. And markdowns are well in check. But again, we know that this is a very tight environment for the consumer, so we'll be there for her when we need to be. But at this point, we see promotional activity, clearance activity at a very tame rate.

Got it. That's helpful. If I could just squeeze in a quick follow-up. So you had positive comps across all categories this quarter. So just curious how you're thinking about the sustainability of that, particularly on the discretionary side as we move through '25 here.

Again, all the work that we're doing around the Back to Basics work in merchandising, in particular, is really aimed at the balance of consumable and non-consumable. As you heard me talk about a few moments ago, not only the comp is important, but the composition of the comp is important. And we're squarely focused on that through a lot of initiatives that are going on in merchandising in our discretionary areas, our partnerships that we talked about as well as even pOpshelf as we looked in the quarter and we look as we move through Q2 and into the back half of the year, we see that continuing to do well. So it shows that we're on the right track with the right merchandise at the right value. But I think that's the key here is in a tight economic environment that our consumers are facing, it's going to be that fine balance and it always is between value and convenience. And that value translates both from and into consumables and non-consumables. So squarely focused on both, and we want to be able to move the needle squarely on both of those metrics as we move forward.

Our final question is from the line of Corey Tarlowe with Jefferies.

Great. Todd, I wanted to ask about your thoughts around the competition and specific competitors calling out a willingness to lean into price potentially during times of uncertainty to drive market share gains and Dollar General's ability to respond to those actions and the willingness to get perhaps more competitive on price. And if so, which categories do you think that you could lean into a little bit more? And then secondarily, you talked in your prepared remarks about a balance between new communities and cannibalization as you think about building new units. Is there anything that's different about these new communities that you're going to be moving into in terms of the demographics or cost structures?

Thanks for the question. I would tell you, from a competitive standpoint, as I indicated, we see the competitive landscape, at least right now on a price perspective, both everyday price and promotional activity to be about the same as it was coming out of Q4, heightened from years leading out of the pandemic but definitely more in line of what we saw just prior to the pandemic. So when I look at it, it really isn't heightened from what normality looked like. The pandemic sort of drove everything to be abnormal in many instances. So I think we're living right now in a pretty normal environment. But we've got great competitors out there. We've been competing with mass drug and grocery for our full existence of 85-plus years now and going. And I would tell you that I would say in my 17 years here, we are as well positioned today on an everyday price that I've seen. And our promotional activity is well in line for what we thought it would be. But we always say, because we're usually the leader here, is if the consumer needs us to heighten that activity, we will do so. But we just don't see a real need at this point to get -- to move a lot further into that promotional cadence. But as we continue to watch the landscape, we know tariffs could play a piece of this. We'll continue to watch it very carefully. But to answer your second part of that first question, we believe we are well positioned to be able to do that. And the reason being is that we're a very large company. We are in the top 5 with most CPG companies in the United States as far as their volume and their hit…

Ladies and gentlemen, this concludes our question-and-answer session. It also concludes today's presentation. We thank you for your participation, and this will conclude today's teleconference.