Dollar General Corporation (DG) Q1 2025 Earnings Report, Transcript and Summary

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 decreased by 0.3% during the quarter, but remained strong on a 2-year stack basis as we lapped the 4.3% traffic increase from the prior year's first quarter. We are excited to see broad-based category growth during the quarter with positive comp sales in each of our consumables: seasonal, home and apparel categories, with both our seasonal and home categories comping at or above 3% during the quarter. We were especially pleased to see our non-consumable product categories resonate with our customers for the Easter and early spring seasons. From a monthly cadence perspective, all 3 periods were positive, led by April, which benefited from the later Easter compared to the prior year. We believe these top line results are a testament to our improved execution as well as the customers across multiple income bands seeking value. To that end, we continue to feel good about our everyday low price position relative to other competitors and classes of trade. As a reminder, our goal is to be priced within 3 to 4 percentage points of mass on average, and we ended Q1 within our targeted range. In addition, we continue to carry at least 2,000 SKUs at or below the increasingly rare $1 price point as we seek to help our customers stretch their dollars. We believe this value offering will become increasingly more important to customers in the months ahead. During our recent customer survey work, 25% of DG customers reported having less income than they did a year ago and nearly 60% of our core customers noted that they felt the need to sacrifice some necessities in the coming year. While our core customer remains financially constrained, we have seen increased trade-in activity from both middle- and higher-income customers. Our data shows that new customers this year are making more trips and spending more with us compared to new customers from last year, while also allocating more of their spend to discretionary categories. We believe these behaviors suggest that we are continuing to attract higher-income customers who are looking to maximize value while still shopping for items they want and need. To that end, in Q1, we saw the highest percent of trade-in customers we've had in the last 4 years. We are pleased to see this growth with a wide range of customers and are excited about our ongoing opportunity to grow share with them. Before I turn the call over to Kelly, I want to provide an update on how we are thinking about the impact of the evolving tariff environment on our business. Our direct imports remain a relatively small percentage of our overall purchases with most years in the mid- to high single-digit range. While our indirect import amount varies, in recent years, we estimated amount to be approximately twice that of our direct imports. We have continued to diversify the countries of origin as part of our direct foreign sourcing strategies in recent years. Importantly, we have successfully reduced our China exposure to less than 70% of our direct imports, and we estimate less than 40% of our indirect imports are sourced from China. While we have relatively low exposure, we are working diligently to mitigate the impact of current tariffs on our business as much as possible, using many of the same tactics that we used successfully in 2018 and 2019. These actions include working with our vendor partners to reduce cost in a variety of ways, including negotiating cost concessions, shifting manufacturing to other countries where possible, reengineering products or finding substitute products. While the tariff landscape remains dynamic and uncertain, we expect tariffs to result in some price increases as a last resort, though we intend to work to minimize them as much as possible. In turn, we believe our customers will continue to seek opportunities to save money, and we remain committed to serving them with the everyday low prices they have come to know and appreciate from Dollar General. Overall, we are proud of our Q1 performance and the tremendous progress we continue to make in the business, including lower year-to-date turnover at all levels within our retail operations, an improved overall supply chain on time and in full rate, higher in- stock levels and lower inventory levels, all of which has contributed to an improved in-store experience for our customers and our associates. Our efforts are yielding positive results, and we believe we are well positioned to succeed in a wide range of economic environments as we continue enhancing our value and convenience proposition for our customers, with a focus on working toward our long-term financial goals and creating long-term shareholder value. With that, I'll now turn the call over to Kelly.

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 cash flow, where we continue to make great progress in strengthening our financial position. Merchandise inventories were $6.6 billion at the end of Q1, a decrease of $344 million or 5% compared to prior year and a decrease of 7% on a per store basis. The team continues to do a tremendous job reducing inventory while increasing sales and improving in- stocks, which is having a positive operational impact in both our stores and distribution centers. The business generated cash flows from operations of $847 million during the quarter, an increase of 27.6% compared to the prior year. This strong performance is a result of our sales results and ongoing inventory management efforts. Additionally, with a continued focus on strengthening our balance sheet, we were able to use cash on hand to repay $500 million of our senior notes in Q1, which was earlier than the November maturity date and ended the quarter with balance sheet cash of $850 million. During the quarter, we returned cash to shareholders through a quarterly dividend of $0.59 per common share outstanding for a total payment of $130 million. Overall, we are very pleased with our cash and inventory positions and the progress we've made in strengthening our balance sheet. We're proud of our strong performance in Q1 and continue to position the business to deliver value for associates, customers and shareholders moving forward. With that in mind, I'd like to discuss our updated financial outlook for 2025. We believe our positive first quarter results are a testament to the importance of our value and convenience proposition for our customers, particularly in a time of continued uncertainty and a financially constrained core consumer. Furthermore, our Q1 performance has positioned us well as we look towards achieving our guidance range for 2025. However, the tariff landscape remains dynamic and uncertain, and there is a higher degree of variability in potential outcomes around tariff-related impacts, including on consumer spending, cost of goods and the supply chain. With this in mind, we're updating our financial guidance for 2025 to reflect our Q1 outperformance, while considering a heightened level of uncertainty as we move through 2025. The updated guidance assumes current tariff rates remain in place through mid-August 2025 when the 90-day pause on increased tariff rates on the goods from China is set to expire. And we have plans in place to address the potential reversion to the tariff rates previously announced on goods from China on April 2, 2025. Our financial guidance is based upon our best estimates and assumes successful mitigation of a significant portion of the anticipated tariff impact on our gross margin, but also allows for some incremental pressure on consumer spending. We believe this is the prudent approach to setting expectations at this point in the year, and we're excited about the potential for our business as we move throughout the year. With that in mind, we now expect the following for 2025: net sales growth of approximately 3.7% to 4.7%; same-store sales growth of approximately 1.5% to 2.5%; and EPS in the range of $5.20 to $5.80. Our EPS guidance continues to assume an effective tax rate of approximately 23.5% and that we will not repurchase shares under our share repurchase program. Now I want to provide some additional context around our expectations. While we're not providing specific quarterly guidance, we expect SG&A in Q2 to be pressured by a more significant year-over-year increase in incentive compensation expense than other quarters as we lap the prior year reversal of the incentive compensation accrual. I also want to note that for the full year, we now anticipate incentive compensation expense to be a headwind of approximately $180 million to $200 million. As we look at the top line for the remainder of the year, we expect the potential impact of tariffs on our core and trade-in customers could be more substantial if price increases take effect more broadly across retail. Moving to the final portions of our guidance for 2025. We continue to expect capital spending in the range of $1.3 billion to $1.4 billion, designed to support our ongoing growth. This includes our continued expectations to execute approximately 4,885 real estate projects in 2025, including 575 new store openings in the United States, up to 15 in Mexico, 2,000 Project Renovate remodels, 2,250 Project Elevate remodels and 45 relocations. Importantly, we believe that the tariff impact on our net CapEx will be minimal. All of this aligns with our capital allocation priorities, which begin with investing in our business, including our existing store base as well as high-return growth opportunities such as new store expansion and strategic initiatives. Next, we seek to return cash to shareholders through a quarterly dividend payment and over time and when appropriate, share repurchases. Finally, I want to provide a brief update on how we're thinking about and planning to communicate our adjusted debt-to-adjusted EBITDAR leverage ratio. Going forward, we intend to speak to our target calculation using balance sheet lease liabilities in place of the more general 8x rent multiple that we have communicated historically. Using this approach, which aligns with the calculation more frequently used by credit investors and rating agencies, our leverage target is below 3x adjusted debt to adjusted EBITDAR. While our leverage ratio remains above our goal, we are making good progress, reducing it closer to our target level, and we remain focused on improving our debt metrics in support of our commitment to middle BBB ratings by S&P and Moody's. In summary, we're pleased with our Q1 results and our performance to begin the year. We continue to make progress against our goals. And while we have more work to do, we're happy to see our efforts translating into improved financial results. We're excited about the future of this business, and we're confident in the long-term approach, including our long-term financial framework. We believe this business model is strong and that we're well positioned to drive sustainable, long-term growth on both the top and bottom lines while creating long-term shareholder value. With that, I'll turn the call back over to Todd.

Thank you, Kelly. I 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 approximately half that of a new store, a Project Elevate remodel costs significantly less. Notably, we anticipate returns on both of these projects to well exceed the healthy returns generated by our new stores. We completed 668 Project Elevate stores in Q1 and an additional 559 Project Renovate remodels during the quarter. As we focus on driving greater profitability in our mature store base, our goal is to drive first year annualized comp sales lifts in the range of 6% to 8% for Project Renovate stores and 3% to 5% for Project Elevate stores. Between these two remodel approaches, we expect to touch approximately 20% of our store base annually and to significantly improve the shopping experience within our stores, while elevating the brand and driving greater top and bottom line contributions from our robust mature store base. The next area I want to discuss is our digital initiative, which is an important complement to our unique store footprint as we continue to deploy and leverage technology to further enhance convenience and access for our customers. Our digital capabilities include an engaging mobile app that is popular with our customers as well as our website, growing delivery options and DG Media Network. Our delivery partnerships with DoorDash continues to exceed our initial expectations for both incrementality and sales, and our Q1 sales through this platform increased more than 50% year-over-year. We continue to seek ways to grow sales through this channel exclusive partnership, including expanding the number of stores in the program to more than 16,000 and growing. In addition, we are now processing both SNAP and EBT transactions for our delivery orders, which contributed nicely to our sales growth in Q1. Moreover, our partnership with DoorDash has extended to the launch of our own same-day home delivery offering through our DG digital solutions. We launched with approximately 400 stores late in 2024 and have now expanded the offering to more than 3,000 stores as we continue to leverage customers and associates' feedback. We believe our expansive real estate footprint uniquely positions us to offer a compelling home delivery option and ultimately become the fastest delivery alternative for customers and our communities, further expanding their access to value and convenience that saves them time and money every day. The linchpin of our digital initiative is our DG Media Network, which enables a more personalized experience for our unique customer base while delivering a higher return on ad spend for our partners. We are excited about the potential for the DG Media Network, which grew retail media volume more than 25% in Q1 compared to Q1 of 2024. Over time, we believe we can leverage this offering to increase market share and drive profitable sales growth, while further evolving our relationship with our customers and driving greater customer loyalty within the digital platform. The final initiative I want to discuss is our non-consumable growth strategy. As a reminder, we are focused on 4 pillars of growth to drive sales in non-consumable categories over the next 3 years. These pillars include brand partnerships, a revamped treasure hunt experience and a reallocation of space within our home category. We are already beginning to realize benefits from these efforts and have seen particularly strong sell-through in SKUs associated with our brand partnerships. During Q1, we were pleased to deliver positive quarterly same-store sales growth in each of our 3 non-consumable categories. This performance was led by our seasonal category and a strong Easter selling season. In addition, our pOpshelf stores delivered strong same-store sales growth during the quarter, exceeding our expectations and supporting our optimism in the new store layout, including a greater emphasis on categories such as toys, party, candy and beauty. We also continue to leverage learnings from this banner and apply them in our non-consumable categories in our Dollar General stores to further strengthen that offering for our DG customers. We also believe our non-consumable sales performance, both in Dollar General and pOpshelf stores, has benefited from the expanded trade-in shopping we have seen from middle- and higher-income customers. Importantly, our customer feedback, sales performance and market share gains give us confidence that our treasure hunt approach is resonating with customers and that we are well positioned to serve them in these discretionary categories in stores across both banners. In closing, we are excited about the business and the strong results we delivered in Q1. This team is working hard and is laser-focused on continuing to improve execution and implement our initiatives while building on our strong foundation. We are proud of the progress we've made, and we believe we have ample opportunity to continue to enhance the way we serve our customers. And looking ahead, we believe this work continues to strengthen our position as we work to achieve our longer-term financial goals in the next few years. Our team is excited about the opportunity to serve, and I want to thank our more than 193,000 employees for their ongoing commitment to each other and our customers. I'm excited about our plans for the remainder of the year and all that we will accomplish together. With that, operator, we would now like to open the lines for questions.

[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 our goal, but we have sustained hitting that goal now for more than 2 quarters in a row, which is a trend. So we feel good about that. And then in full continues to get better and better. Our inventory at store level while down in total and same store, it's up in availability to the consumer and up in a pretty good way. So that just shows that our on time and in full is well on track. And then as you think about our merchandising pieces, and this is the heartbeat of what we do at Dollar General, SKU reduction has been a big win. And the reason being while we have taken out 1,000 SKUs last year and we're in the process of taking out more this year, and it's evidenced by that reduction in our inventory levels. What we have been able to do, though, is make more room for what matters on the shelf to stay in stock on those SKUs that turn fastest. And that adds to our top line and gives us confidence. And then lastly, those discretionary initiatives that I laid out in my prepared remarks have done very, very well at retail. We were really happy to see our discretionary comp where it was. It's the first time we've seen that in a while, and it gives us a lot of confidence. So all these things give us confidence. And then lastly, trade-in continues to play a part of this. We saw it start in Q3 of last year. It accelerated [ in the 4 ] now into Q1. Nothing that we've seen so far in Q2 would say that, that has slowed down. So we believe the trade-in is here, and we are primed to take advantage of that and retain that customer long term. So a lot of good things happening here at Dollar General that gives us that confidence. But as you know, retail is dynamic. So we'll continue to work hard and drive that top line.

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 so that we can land that full year guide. I would tell you on the SG&A side, I think it's just important to call out a couple of things really more around timing than anything else. Most of these you heard on the last call. First, that first half is getting a little bit pressured by the number of projects that we're doing, so the initial expenses related to the Project Elevate and Project Renovate. As you heard us talk about on the last call, we really expect to execute more of those real estate projects in the first half of this year than we did last year. And we're trying to complete a vast majority of those real estate projects by the end of Q3. This really helps us maximize the number of operating weeks. And it benefits not only 2025, but it starts that flywheel turning that is going to continue to benefit us as we move into 2026. If we think about second quarter in particular, I just want to remind you that we did call out that headwind on incentive compensation of $180 million to $200 million for the full year. But Q2 is going to be the most impacted by that incentive comp headwind. And so what you'll see there is really the incremental incentive expense for the second quarter versus last year is expected to be almost double what it is for the rest of the quarters. And that's really because we're comparing against the 2024 accrual reversal that occurred in the second quarter. And with that, we expect EPS to decline on a year-over-year basis for the second quarter. And then finally, on SG&A, just as we think about the full year, we are considering that we will be pressured by this incentive comp for all of the quarters, as I said, particularly in Q2. We still continue to expect wage rate increases of 3.5% to 4%. And I will tell you, Q1 landed right in that range. Still expecting headwinds around R&M utilities and depreciation. But as you heard us put together the financial framework last quarter, we have a lot of things in place to start to mitigate some of that deleverage around simplification so that we can drive efficiencies, the initiatives we have in place, particularly the remodels and how that can help some of the R&M expenses and drive towards those long-term goals that we laid out. So the increased sales guidance and the increase in the bottom end of our range, really, as Todd noted, reflect the underlying health of the business and just all of the foundational work that's been done, and it was great to see it show up in the Q1 results. But it is really early in the year, and there is a lot of potential outcomes from a macro perspective. So we just believe that this update is a prudent approach to setting expectations for the remainder of the year.

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 retain this trade-in consumer that we've been blessed with, if you will, over the last couple of quarters and how do we continue to keep them? So that's being worked on as we speak. We've got a nice playbook for that, but we want to make sure we continue to work that. And then lastly, I want to also talk about Project Elevate and Renovate because they are two good drivers for that comp in that mature store base. And so as Kelly talked about, we see those two adding to our top line as we move through this year. And the great thing is accelerating them as far as getting done so that most of that work is pretty well complete by the end of Q3 so that we can take advantage of that longer term. And then the last thing I think that we want to make sure we concentrate on is our ever-growing both our DoorDash partnership and our delivery partnership with now over 3,000 stores as of now up and running on delivery. We feel good about that. That's jumping up from just a couple of hundred at the end of Q4 of last year. So stay tuned. I think there's a lot to like, but there's a lot of year left, and we're squarely focused on delivering that.

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 ensure that. Keep in mind, too, Michael, that we're probably one of the only retailers that can say this at this point, and that is we continue to invest in that $1 price point. And I would call it more and more, it's elusive out there, if you will, as far as trying to have that $1 price point. But we have over 2,000 items at or below $1 price inside of our store, which when you look at it, equates -- when you only have about 12,000 items, it equates to a nice percentage of your total inventory. So we continue to foster that, which we believe is the right thing on price for our consumer, especially as she gets closer to the end of the month when that money runs out. So we continue to watch that. And I believe the environment overall on a promotional basis is about where it was in Q4. So we don't see that accelerating at this point, but we'll continue to watch as we move forward, depending on what tariffs do and where that consumer is. And we've always said, we reserve the right to be there for her if need be. But as Kelly indicated, we'll let you know if something changes.

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 parade. And with that, they are very willing to work with us and our customers to ensure that they continue to move the units that they need to move. And that usually translates into better prices for the consumer if it needs to be. And normally, CPG levers that up pretty well. So more to come. We're in a great position to be able to do that as we go forward. And then lastly, on your second part of the question on new communities versus existing. I would tell you that when we talk about new communities, it really is still in our heartland, but where there's more white space than what we have normally looked at in the last couple of years. We have a strategy in the last couple of years of intentionally cannibalizing ourselves to ensure we took advantage of great real estate out there. Well, when you think about that and think about how well penetrated we are in many of these areas, we took advantage of most of those opportunities over the last few years. And so this now has led to where we can go further from our stores in states that we operate in today in a very meaningful manner, and understand how to operate in and -- but yet not cannibalize the store as much. So it's really distance from existing stores that we're working from versus new states or states that were less penetrated in since we're pretty much in every Lower 48 at this point. It's really about distance from our current locations and reducing that cannibalization. We think we're in a good position to do that and off to a good start in Q1.

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.