Good morning. My name is Robert, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General Third Quarter 2021 Earnings Conference Call. Today is Thursday, December 2, 2021. The call is being recorded. Now I'd like to turn the conference over to Mr. Donny Lau, Vice President of Investor Relations and Corporate Strategy. Mr. Lau, you may begin your conference.

Thank you, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; Jeff Owen, our COO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events. I want to remind you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, covering our financial guidance, strategy, initiatives, plans, goals, priorities, opportunities, investments, expectations, or beliefs about future matters and other statements that are not strictly historical facts. These statements are subject to risks and uncertainties that could cause actual results to differ significantly 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 2020 Form 10-K filed on March 19, 2021, as well as comments made during this call. You should not place undue reliance on forward-looking statements, which are only accurate as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless legally required. We will also refer to certain non-GAAP financial measures. Reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which is posted on investor.dollargeneral.com under News & Events. After our prepared remarks, we will open the call for your questions. Now it's my pleasure to turn the call over to Todd.

Thank you, Donny, and welcome to everyone joining our call. We are pleased with our third quarter results, and I want to thank our associates for their unwavering commitment to meeting the needs of our customers, communities, and each other. Despite what continues to be a challenging operating environment, including elevated cost pressures and broad-based supply chain disruptions, our teams remained focused on controlling what we can control and they are delivering for our customers. We are grateful for their efforts. Looking ahead, we believe we are well positioned to navigate the current environment. And although we've experienced higher-than-expected costs, both from a product and supply chain perspective, we're very confident in our price position as our price indexes relative to our competitors and other classes of trade remain in line with our targeted and historical ranges. And because so many families depend on us for everyday essentials at the right price, we believe products at the $1 price point are important for our customers, and they will continue to have a significant presence in our assortment. In fact, approximately 20% of our overall assortment remains at $1 or less. And moving forward, we will continue to foster and grow this program where appropriate. As the largest retailer in the U.S. by store count, with over 18,000 stores located within 5 miles of about 75% of the U.S. population, we believe our presence in local communities across the country provides another distinct advantage and positions us well for continued success. Overall, we remain focused on advancing our operating priorities and strategic initiatives as we continue to strengthen our competitive position while further differentiating and distancing Dollar General from the rest of the discount retail landscape. To that end, I'm excited to share an update on some of our more recent plans. First, as you saw in our release, we expect to execute a total of nearly 3,000 real estate projects in 2022, including 1,100 new store openings as we continue to lay and strengthen the foundation for future growth. Of note, these plans include the acceleration of our pOpshelf concept, as we expect to nearly triple our store count next year as compared to our fiscal '21 year-end target of up to 50 locations. In addition, given the sustained performance of our pOpshelf concept, which continues to exceed our expectations, we plan to further accelerate the pace of new store openings as we move ahead, targeting a total of about 1,000 pOpshelf locations by fiscal year-end 2025. Importantly, we anticipate these new pOpshelf locations will be incremental to our annual Dollar General store opening plans as we look to further capitalize on the significant growth opportunities we see for both brands. We are also now at the early stages of plans to extend our footprint into Mexico, which will represent our first store locations outside the Continental United States. We believe Mexico represents a compelling expansion opportunity for Dollar General, given its demographics and proximity to the U.S., and we are confident that our unique value and convenience proposition will resonate with the Mexican consumer. While our initial entry into Mexico is focused on piloting a small number of stores in 2022, we expect the seeds we plant today will ultimately turn into additional growth opportunities in the future. Finally, as previously announced, we recently introduced our digital services by partnering with DoorDash to provide delivery in under an hour in over 10,000 locations, further enhancing our convenience proposition while broadening our reach with new customers. Jeff will discuss these updates in more detail later in the call. But first, let's recap some of the top line results for the third quarter. Net sales increased 3.9% to $8.5 billion, following a 17.3% increase in Q3 of 2020. Comp sales declined 0.6% to the prior year quarter, which translates to a robust 11.6% increase on a 2-year stack basis. From a monthly cadence perspective, comp sales were lowest in September, with October being our strongest month of performance. And I'm pleased to report that Q4 sales to date are trending in line with our expectations. Our third quarter sales results include a year-over-year decline in customer traffic, which was largely offset by growth in average basket size, even as we lapped significant growth in average basket size last year. In addition, during the quarter, we saw an improvement in customer traffic as compared to Q2 of 2021, and we continue to be pleased with the retention of the new customers acquired in 2020. We're also pleased with the market share gains as measured by syndicated data in our frozen and refrigerated product categories. And even as our market share in total highly consumable product sales decreased slightly in Q3, we feel good about our overall share gains on a 2-year stack basis. Collectively, our third quarter results reflect strong execution across many fronts and further validates our belief that we are pursuing the right strategies to enable sustainable growth while supporting long-term shareholder value creation. We operate in one of the most attractive sectors in retail. And as a mature retailer in growth mode, we continue to lay the groundwork for future initiatives, which we believe will unlock additional growth opportunities as we move forward. Overall, I've never felt better about the underlying business model, and we are excited about the significant growth opportunities we see ahead. With that, I'll now turn the call over to John.

Thank you, Todd, and good morning, everyone. Now that Todd has taken you through a few highlights of the quarter, let me take you through some of its 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. As Todd already discussed sales, I will start with gross profit. As a reminder, gross profit in Q3 2020 was positively impacted by a significant increase in sales, including net sales growth of 24% in our combined non-consumable categories. For Q3 2021, gross profit as a percentage of sales was 30.8%, a decrease of 57 basis points but an increase of 121 basis points compared to Q3 2019. The decrease compared to Q3 2020 was primarily attributable to a higher LIFO provision, increased transportation costs, a greater proportion of sales coming from our consumables category, and an increase in inventory damages. These factors were partially offset by higher inventory markups and a reduction in shrink as a percentage of sales. SG&A as a percentage of sales was 22.9%, an increase of 105 basis points. This increase was driven by expenses that were greater as a percentage of sales in the current year period, the most significant of which were retail labor and store occupancy costs. The quarter also included $16 million of disaster-related expenses attributable to Hurricane Ida. Moving down the income statement, operating profit for the third quarter decreased 13.9% to $665.6 million. As a percentage of sales, operating profit was 7.8%, a decrease of 162 basis points. And while the unusual and difficult prior year comparison created pressure on our operating margin rate, we're very pleased with the improvement of 78 basis points compared to Q3 2019. Our effective tax rate for the quarter was 22.2% and compares to 21.6% in the third quarter last year. Finally, EPS for Q3 decreased 10% to $2.08, which reflects a compound annual growth rate of 21% over a 2-year period. Turning now to our balance sheet and cash flow, which remains strong and provides us the financial flexibility to continue investing for the long term while delivering significant returns to shareholders. Merchandise inventories were $5.3 billion at the end of the third quarter, an increase of 5.4% overall and a decrease of 0.1% on a per-store basis. And while we're not satisfied with our overall in-stock levels, we continue to make good progress and are focused on improving our in-stock position, particularly in our consumables business. Looking ahead, we are pleased with our inventory position for the holiday shopping season, and our teams continue to work closely with suppliers to ensure delivery of goods for the remainder of the year. Year-to-date through the third quarter, we generated significant cash flow from operations totaling $2.2 billion. Capital expenditures through the first 3 quarters were $779 million and included our planned investments in new stores, remodels, relocations, distribution and transportation projects and spending related to our strategic initiatives. During the quarter, we repurchased 1.6 million shares of our common stock for $360 million and paid a quarterly dividend of $0.42 per common share outstanding at a total cost of $97 million. At the end of Q3, the total remaining authorization for future repurchases was $619 million. We announced today that our Board has increased its authorization by $2 billion. Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high-return growth opportunities, including new store expansion and our strategic initiatives. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment-grade credit rating and managing to a leverage ratio of approximately 3x adjusted debt to EBITDAR. Moving to an update on our financial outlook for fiscal 2021. We continue to operate in a time of uncertainty regarding the economic recovery from the COVID-19 pandemic, including any changes in consumer behavior and the corresponding impacts on our business. Despite continued uncertainty, including cost inflation and ongoing pressure throughout the supply chain, we are updating our sales and EPS guidance, which reflects our strong performance through the first 3 quarters as well as our expectations for Q4. For 2021, we now expect the following: net sales growth of approximately 1% to 1.5%; a same-store sales decline of approximately 3% to 2.5%, but which reflects growth of approximately 13% to 14% on a 2-year stack basis; and EPS in the range of $9.90 to $10.20, which reflects a compound annual growth rate in the range of 22% to 24% or approximately 21% to 23% compared to 2019 adjusted EPS over a 2-year period. Our EPS guidance now assumes an effective tax rate of approximately 22%. Finally, our expectations for capital spending, share repurchases and real estate projects remain unchanged from what we stated in our earnings release on August 26, 2021. Let me now provide some additional context as it relates to our outlook. In terms of sales, we remain cautious in our outlook over the next couple of months, given the continued uncertainties arising from the COVID-19 pandemic, including additional supply chain disruptions and the impact of the end of certain federal aid, such as additional unemployment benefits and stimulus payments. Turning to gross margin, please keep in mind, we will continue to cycle strong gross margin performance from the prior year, where we benefited from a favorable sales mix and a reduction in markdowns, including the benefit of higher sell-through rate. Consistent with Q2 and Q3, we expect continued pressure on our gross margin rate in the fourth quarter due to a higher LIFO provision as a result of cost of goods increases, a less favorable sales mix compared to the prior year quarter, and an increase in markdown rates as we continue to cycle the abnormally low levels in 2020. We also anticipate higher supply chain costs in Q4 compared to the 2020 period. Like other retailers, our business continues to be impacted by higher costs due to transit and port delays as well as elevated demand for services at third-party carriers. However, despite these challenges, we're confident in our ability to continue navigating these transitory pressures. With regard to SG&A, we continue to expect about $70 million to $80 million in incremental year-over-year investments in our strategic initiatives. This amount includes $56 million in incremental investments made during the first 3 quarters of 2021. However, in aggregate, we continue to expect our strategic initiatives will positively contribute to operating profit and margin in 2021, driven by NCI and DG Fresh, as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense. Finally, our updated guidance does not include any impact from the proposed federal vaccine and testing mandate, including potential disruptions to the business or labor market or any incremental expense. In closing, we are pleased with our third quarter results, which are a testament to the strong performance and execution by the team. As always, we continue to be disciplined in how we manage expenses and capital, with the goal of delivering consistent, strong financial performance while strategically investing for the long term. We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow, and long-term shareholder value. With that, I will turn the call over to Jeff.

Thank you, John. Let me take the next few minutes to update you on our operating priorities and strategic initiatives. Our first operating priority is driving profitable sales growth. The team did a great job this quarter executing against a robust portfolio of growth initiatives. Let me highlight some of our more recent efforts. Starting with our nonconsumables initiative, or NCI. The NCI offering was available in nearly 11,000 stores at the end of Q3 and we continue to be very pleased with the strong performance we are seeing across our NCI store base. Notably, this performance is contributing an incremental 2.5% total comp sales increase on average and NCI stores, along with a meaningful improvement in gross margin rate as compared to stores without the NCI offering. Overall, we now plan to expand this offering to a total of more than 11,500 stores by year-end, including over 2,000 stores in our light version and we expect to complete the rollout of NCI across nearly the entire chain by year-end 2022. Moving to our pOpshelf concept, which further builds on our success and learnings with NCI. pOpshelf aims to engage customers by offering a fun, affordable, and differentiated treasure hunt experience delivered through continually refreshed merchandise, a unique in-store experience, and exceptional value with the vast majority of our items priced at $5 or less. During the quarter, we added 14 new pOpshelf locations, bringing the total number of stores to 30, opened our first 14 store-within-a-store concepts, and celebrated the 1-year anniversary of our first pOpshelf store opening. For 2021, we remain on track to have a total of up to 50 pOpshelf locations by year-end as well as up to an additional 25 store-within-a-store concepts, which incorporates a smaller footprint pOpshelf shop into one of our larger format Dollar General Market stores. Importantly, as Todd noted earlier, we continue to be very pleased with the performance of our pOpshelf stores, which have far exceeded our expectations for both sales and gross margin. In fact, we anticipate year 1 annualized sales volumes for our current locations to be between $1.7 million and $2 million per store, and expect the initial average gross margin rate for these stores to exceed 40%. We believe this bodes well for the future as we move towards our goal of about 1,000 pOpshelf locations by year-end 2025. Turning now to DG Fresh, which is a strategic, multiphase shift to self-distribution of frozen and refrigerated goods. As a reminder, we completed the initial rollout of DG Fresh across the entire chain in Q2 and are now delivering to more than 18,000 stores from 12 facilities. The primary objective of DG Fresh is to reduce product cost on our frozen and refrigerated items, and we continue to be very pleased with the savings we are seeing as DG Fresh remains a meaningful contributor to our gross margin rate. Another goal of DG Fresh is to increase sales in these categories, and we are very happy with the performance on this front as overall comp sales of our frozen and refrigerated goods outperformed all other product categories in Q3, even against the difficult prior year sales comparison. Going forward, we expect to realize additional benefits from DG Fresh as we continue to optimize our network, further leverage our scale, deliver an even wider product selection, and build on our multiyear track record of growth in cooler doors and associated sales. With regards to our cooler expansion program, during the first 3 quarters, we added more than 52,000 cooler doors across our store base. In total, we expect to install approximately 65,000 additional cooler doors in 2021, the majority of which will be in high-capacity coolers. Turning now to an update on our expanded health offering, which consists of about 30% more feet of selling space and nearly 400 additional items as compared to our standard offering. This offering was available in nearly 800 stores at the end of Q3, with plans to expand to approximately 1,000 stores by year-end. Looking ahead, our plans include further expansion of our health offering with the goal of increasing access to basic health care products and ultimately services over time, particularly in rural America. In addition to the gross margin benefits associated with the initiatives I just discussed, we continue to pursue other opportunities to enhance gross margin, including improvements in private brand sales, global sourcing, supply chain efficiencies, and shrink. Our second priority is capturing growth opportunities. We recently celebrated a significant milestone with the opening of our 18,000th store, which reflects the fantastic work of our best-in-class real estate team as we continue to expand our footprint and further enhance our ability to serve additional customers. Through the first 3 quarters, we completed a total of 2,386 real estate projects, including 798 new stores, 1,506 remodels, and 82 relocations. For 2021, we remain on track to open 1,050 new stores, remodel 1,750 stores, and relocate 100 stores, representing 2,900 real estate projects in total. In addition, we now have produce in approximately 1,900 stores, with plans to expand this offering to a total of over 2,000 stores by year-end. For 2022, we plan to execute 2,980 real estate projects in total, including 1,110 new stores, 1,750 remodels, and 120 store relocations. We also plan to add produce in approximately 1,000 additional stores next year, with the goal of ultimately expanding this offering to a total of up to 10,000 stores over time. Of note, we expect approximately 800 of our new stores in 2022 to be in our larger 8,500 square foot new store prototype, allowing for a more optimal assortment and room to accommodate future growth. Importantly, we continue to be very pleased with the sales productivity of this larger format as average sales per square foot continue to trend about 15% above an average traditional store. Our 2022 real estate plans also include opening approximately 100 additional pOpshelf locations, bringing the total number of pOpshelf stores to about 150 by year-end as well as up to an additional 25 store-within-a-store concepts. As Todd noted, we are also very excited about our plans to expand our footprint internationally for the first time, with plans to open up to 10 stores in Mexico by year-end 2022 as we look to extend our value and convenience offering to even more communities, while continuing to lay the foundation for future growth. Overall, our proven high-return, low-risk real estate model continues to be a core strength of our business. And the good news is we believe we still have a long runway for new unit growth ahead of us. In fact, across our Dollar General, pOpshelf, and DGX format types, we estimate there are approximately 17,000 new store opportunities potentially available in the Continental United States alone. Although these opportunities are available to all small box retailers, we expect to continue capturing a disproportionate share as we move forward. And while still early, we expect our entry into Mexico will ultimately unlock a significant number of additional new unit opportunities in the years to come. When taken together, our real estate pipeline remains robust, and we are excited about the significant new store opportunities ahead. Next, our digital initiative, which is an important complement to our physical store footprint as we continue to deploy and leverage technology to further enhance convenience and access for our customers. Our efforts remain centered around building engagement across our digital properties, including our mobile app. Of note, we ended Q3 with over 4.4 million monthly active users on the app and expect this number to grow as we look to further enhance our digital offerings. As Todd noted, our partnership with DoorDash is another example of meeting the evolving needs of our customers by providing the savings offered by Dollar General combined with the convenience of same-day delivery in an hour or less. And while still early, we are pleased with the initial results, including better-than-expected customer trial, strong repurchase rates, high levels of sales incrementality, and a broadening of our customer base. Our DG Media Network, which we launched in 2018, is also seeing strong results, including significant growth in the number of campaigns on our platform. Overall, we remain very excited about the long-term growth potential of this business, and we look to better connect our brand partners with our customers in a way that is accretive to the customer experience. Going forward, our plans include providing more relevant, meaningful, and personalized offerings with the goal of driving even higher levels of customer engagement across our digital ecosystem. Our third operating priority is to leverage and reinforce our position as a low-cost operator. We have a clear and defined process to control spending, which continues to govern our disciplined approach to spending decisions. This zero-based budgeting approach, internally branded as Save to Serve, keeps the customer at the center of all we do while reinforcing our cost control mindset. Our Fast Track initiative is a great example of this approach, where our goals include increasing labor productivity in our stores, enhancing customer convenience, and further improving on-shelf availability. The first phase of Fast Track consisted of both rolltainer and case pack optimization, which has led to more efficient stocking of our stores. The second component of Fast Track is self-checkout, which provides customers with another flexible and convenient checkout solution while also driving greater efficiencies for our store associates. Looking ahead, our plans now include expanding this offering to over 6,000 stores by year-end 2021 and to the majority of our store base by the end of 2022 as we look to further extend our position as an innovative leader in small box discount retail. Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities while controlling expenses and always seeking to be a low-cost operator. Our fourth operating priority is investing in our diverse teams through development, empowerment, and inclusion. As a growing retailer, we continue to create new jobs in the communities we serve. As evidence, in 2022, we plan to create more than 8,000 net new jobs. In addition, our growth also fosters an environment where employees have opportunities to advance to roles with increasing levels of responsibility and meaningful wage growth in a relatively short time frame. In fact, over 75% of our store associates at or above the lead sales associate position were internally placed, and we continue to innovate on the development opportunities we offer our teams. Importantly, we believe these efforts continue to yield positive results across our store base, as evidenced by our robust promotion pipeline, healthy applicant flows, and staffing above traditional levels. We believe the opportunity to start and develop a career with a growing and purpose-driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent. We also recently completed our annual community giving campaign, where our employees came together to raise funds for a variety of important causes. And I was once again inspired by the generosity and compassion of our people. Our mission of serving others is deeply embedded in the daily culture at Dollar General, and I am so proud to be a part of such an incredible team. In closing, we are making great progress against our operating priorities and strategic initiatives. And with the actions and multiyear initiatives we have in place, we are confident in our plans to drive long-term sustainable growth and shareholder value creation. As we are in the midst of a truly unique and busy holiday season, I want to offer my sincere thanks to each of our more than 162,000 employees across the company for their hard work and dedication to fulfilling our mission of serving others. With that, operator, we would now like to open the lines for questions.

Our first question comes from Simeon Gutman with Morgan Stanley.

My first question, I'd like to put the spotlight on the low-income consumer. We have stimulus rolling off, we're going to be lapping massive stimulus in the first half of next year. And on the other side, you have jobs and wages starting to grow. Can you talk about your stance? Are you seeing any signs that the customer is getting stronger or weaker?

Simeon, it's Todd. I would tell you that our core consumer continues to be in pretty good shape. You're 100% right that a lot of the stimulus money has now dissipated. But I've always said, and our core customer has always said, as long as she is gainfully employed, that is probably the biggest driver of her confidence to spend. And there is no doubt that she is gainfully employed right now and can work as many hours as she may or may not want to. But as we look through the remainder of this year and into next, we believe that she'll continue to be gainfully employed. And with that, will have money to spend. And then the other thing to think about with this low-cost consumer, to your point, we continue to show great value, right? When you look at how we operate, our pricing is as good as ever against all classes of trade. And as we talked about in our prepared remarks, we're not walking away from a $1 price point. We believe that's so important to her as we continue to move forward. Not that we believe it, she tells us that each and every day. So I think that value and convenience message will continue to resonate with our core consumer.

And maybe transitioning to the fourth quarter, more of a near-term financial question, it implies that the fourth quarter EBIT margin is going to be pretty below where it was 2 years ago, I think, by about 80 bps, even though year-to-date, you're up nicely versus 2 years ago and even Q3 was as well. So besides the typical conservatism in the way you model, anything else can we speak to discrete incremental expense for investments?

No, nothing incremental in terms of investments. We noted the $70 million, $80 million of investments in the strategic initiatives, which again are accretive overall. And then the other thing we pointed out is just on the gross margin. You certainly have continued pressure that we anticipate, associated with the supply chain, which again, we believe that's transitory in nature. It's a supply and demand issue, but we saw that increase as we went from Q2 to Q3, and we expect that to remain elevated year-over-year as we look at Q4. And then obviously, the other big piece here is inflation. We're seeing higher prices passed along from vendors, and that's showing up in terms of the LIFO provision, which we noted. But that's really the key drivers I would point to on a 2-year basis. And then on a 1-year basis, I would just point to the very difficult lap as we're lapping extremely high sales of nonconsumable goods, which have a higher margin as well as unusually low markdowns around clearance items, just given the extremely high sell-through last year.

Our next question comes from Matthew Boss with JPMorgan.

Congrats on a nice quarter. So Todd, the high end of your full year comp guidance implies a 12.7% stack in the fourth quarter. I think that's more than 100 basis points improvement from the third quarter. Any drivers behind the recent reacceleration in business? Is this value in convenience as you cited in the face of rising cost of living for your core consumer? Or is this confidence based on what you've seen in November? Just any color on the fourth quarter so far.

Thanks for the question, Matt. As you know, right, we put out a range and we definitely see that the consumer is still shopping at a pretty good rate. But I would tell you there's a lot of the quarter left. So let's make sure we temper that just a bit. But the great thing about Dollar General is that we have never taken our eye off the ball on what that consumer is looking for. And that gives us that confidence as we move through this year and into next on our ability to continue to service that consumer and if there is any trade down that tends to come in that, that consumer will also enjoy those benefits. And then lastly, we still are very positive on the trade-down consumer that came in during the pandemic or trade-in is probably a better term for it. And those numbers continue to exceed our expectation on retention rate. So we've got that moving through the fourth quarter and into next year as well. So with all that high end of the guidance is very attainable. But on the other side, we've got a lot of quarter left and that's why we give you that nice range.

Great. It's a perfect follow-up, I think, for my second question. If I use that same math, 12.7% 2-year stack in the fourth quarter, again, high end of your guide exiting the year. It basically translates to a 6% to 7% 1-year comp, and that's double your pre-pandemic 3-year average. I think it was around 3% to 3.5%. So is this new customer acquisition? Is this market share gains? Is this a trade-down consumer? I guess, question being is, how best do you think about your ability to hold some of these gains as we think about next year and beyond?

You're right, Matt. This is John. And you're right. As you look at the implied 2-year stacks, it is a significant outperformance versus pre-pandemic levels. And I'd really point to 2 things. You mentioned and Todd mentioned the retention of the new customers that came into the brand. And the other piece I would point to is the larger baskets, growing our baskets on top of basket growth last year. And so I think both of these are really enabled by the strategic initiatives. The strategic initiatives have really increased the relevance of Dollar General, providing a fuller fill in trip for bigger baskets. You can do more of your grocery shop, you can do more of your home shop on the nonconsumables side, purchase services as well as the broader appeal to these new customers. And I think also the initiatives really highlight and further enhance the unique combination of value and convenience that we bring to the consumer. That's what I see as the key drivers of that outperformance.

Our next question is from Michael Lasser with UBS.

Recognizing that your multi-year stacks are more challenging than those of other retailers, your one-year comparisons are falling behind, indicating that you may be losing some market share this year. What do you think is causing this, and what steps do you need to take to reverse these market share trends?

Yes, this is Todd. I would tell you that the way we've been looking at this all along this year has been on a 2-year stack basis, right? Because some of our laps are pretty difficult as you know, Michael. But we're happy with where our 2-year stacks are right now on market share. And quite frankly, in some of our key initiative categories like Fresh, it will outpace where we thought it would be on a market share basis. We're confident as we go forward that we'll continue to pick up market share at the same rate, if not accelerated as we move into 2022 and beyond, with all of the initiatives that we have. And keep in mind, that value and convenience message resonates across not only our core customer but many different customer bases. And that is being preserved at all costs. Our pricing continues to be as good, if not was as good as I've seen it over the last few quarters and over the last few years. And as we continue to look out, we don't see that changing either. Promotional environment has been pretty tame. So when you put all that together, we feel that our market share gains will continue to move in a really positive manner with really, the same classes of trade being those donors as we continue to move into '22.

Understood. And speaking of '22, you were helpful to provide a piece of the formula and the algorithm that you typically target. For next year, would you expect the same-store sales element to be in line with your typical 2% to 4% comp growth that's part of your long-term algorithm? Or given the stimulus roll-off along with some of the other uncertainties out there, would you expect another year of below 2% to 4% before returning to that in 2023?

Michael, this is John. I will address the question. It's too early to provide specific guidance for 2022, which we will discuss on the next call. However, as you consider next year, I want to emphasize that we have never been more confident in our business model. We're optimistic about our fundamentals and initiatives, as well as our real estate performance, including new formats that enhance sales. With regard to the challenges and advantages for the upcoming year, it’s important to note that the first half, particularly Q1, will be challenging due to the difficult comparison with stimulus effects. Although this will present a tough benchmark, we are well-prepared with our initiatives and the value and convenience we offer consumers when they need it most. Moreover, as you look at next year overall, we are entering it with high inflationary pressures. We expect supply chain costs to remain high through Q4, and they won’t suddenly drop at the start of Q1, along with ongoing product cost pressures. Nonetheless, we believe this situation will stabilize over time, and it may eventually turn into a favorable factor as we progress through the year. More details will be provided soon. Overall, while the fundamentals are strong, the early part of the year will experience more pressure compared to the latter half.

Our next question is from Karen Short with Barclays.

I want to approach the EBIT growth question from a different angle. For the fourth quarter, compared to 2019, the expectation is a growth range of about 1% to 14%. Can you provide some more detail on this? Even after excluding your LIFO charge, the EBIT growth range for the first three quarters varies from 48% to 77%, depending on the quarter. How much of this growth expectation for the fourth quarter is influenced by LIFO, supply chain issues, or possibly not passing on cost increases? I also have a broader question to ask.

I'll take that. There's still a lot of time left this year, and the environment is quite dynamic. There are uncertainties that led us to keep our guidance range wide, although we've narrowed it to the upper half of our earnings and sales forecast. As we assess the key pressures and uncertainties in the fourth quarter, supply chain issues are still significant and we expect that to continue. It’s unclear how the ongoing pandemic will affect supply chain costs, but we anticipate they will remain high along with the pressures from the LIFO provision. We've accrued costs year-to-date based on our projections of full-year inflationary expenses from our vendors, but that could change. However, I believe our team is effectively managing these challenges. Compared to some competitors, we've performed well in terms of expanding our operating margin this year. This reflects the key inflationary pressures we face, which we consider to be temporary, though they may still be unstable in the short term.

Okay. Could you provide more insight into why Mexico is an attractive market? Where are your first stores going to be located, and how will the supply chain operate? I'm also curious about whether entering another country is necessary considering the significant growth opportunities available domestically.

We're really excited about the potential opportunity, and as you mentioned, there are plenty of opportunities right here in the Continental United States. We are committed to identifying 17,000 opportunities to open stores between pOpshelf and Dollar General. That focus hasn't changed. As for Mexico, entering another country is more complex than expanding within the United States. We've been working on this for over a year, and it will take many years to fully develop our presence there. Although launching up to 10 stores next year is ambitious, it's important for us to start now rather than waiting until we need to accelerate our plans. We approach everything methodically and believe starting the process now is the right choice. We will focus on Northern Mexico to begin with, but will explore additional opportunities as we progress. Regarding distribution, we aren't quite ready to share all the details, but we know that we'll need more critical mass before establishing distribution centers in Mexico. Our team has done an excellent job getting set up in Mexico, and we're currently hiring and preparing to operate there. This is a significant opportunity for us to expand the brand beyond the Continental United States.

Our next question is from Kate McShane with Goldman Sachs.

Our first question was just on traffic. I know you mentioned in the prepared comments that it was sequentially better, but still down. We were wondering your thoughts on that, is it something that got better throughout the quarter? And have you seen any meaningful change in traffic in the last few weeks, given the latest variant news?

Yes, this is Todd. The traffic numbers remain somewhat weak, but I want to emphasize that they have definitely improved sequentially from Q2 to Q3. It's important to keep in mind our core consumer behavior; when she has more disposable income, she tends to visit less frequently but spends more. Our basket sizes have remained strong throughout this period. Typically, in better economic times for her, this pattern holds true. If the situation changes, you would see her visit more often and spend less, which would increase the number of smaller baskets and improve traffic. We are focused on this situation and while we are not satisfied with the overall traffic, we understand the factors at play. We are committed to enhancing traffic, and our priorities are maintaining competitive pricing and convenience for our core consumer.

Okay. And I just want to ask one question on pOpshelf. You had mentioned several times, it's exceeding expectations. We were just wondering if there were certain merchandise categories that have been stronger than expected. And just what the quarter looked like for this concept, given the majority of what you're selling is discretionary?

Thanks, Kate. This is Jeff. We're very excited about pOpshelf and pleased with how our customers are responding to the entire concept. We're thrilled to announce that we plan to triple the store count in 2022 and are laying the groundwork for 1,000 stores by 2025. Our enthusiasm reflects what our customers are telling us. Regarding the store in general, there are many areas where customers are showing interest and responding positively, and there are more than we can cover right now. However, I can share that we’re seeing great interest in toys, and in the home area, customers are discovering creative ways to engage. Over 90% of our items are priced under $5, allowing customers to treat themselves and enjoy their shopping experience. The team is just getting started, and we are committed to improving continually. Currently, the concept is performing exceptionally well, and we’re excited about how it will enhance the traditional Dollar General network as we progress.

Our next question comes from Rupesh Parikh with Oppenheimer.

I also had a few questions on the pOpshelf concept. So first, as you look at the pOpshelf acceleration, how does that impact your longer-term algorithm? And then secondly, as you look at the pOpshelf in-store concept, just curious how you guys think about that in the coming years?

I'll take the first part of that question, Rupesh. I think it's important to note, and Todd touched on this in his prepared comments, that as we look at pOpshelf, we see this as additive to our Dollar General banner growth plans. And the other thing we've noted is we see over time, as many as 3,000 additional store opportunities from this, incremental to the 13,000 DG banner opportunities. We're accelerating it rapidly, effectively tripling the number of stores next year as we add 100 on top of 50, and then look to have 1,000 by the end of 2025. So as you think of the algorithm going forward, I don't want to give any specific long-term guidance at this point, but I think it's important to note that it is additive. As you look at next year, the 100 is additive on top of the 1,000 DG stores, and that's the way we look at that going forward. While in the near term, you do have start-up costs that offset the near-term benefits, but when you look at the fantastic unit level economics of these stores, and we've talked about these, $1.7 million to $2 million sales margins that we see as 40% and growing over time. It's just fantastic unit level economics that we anticipate and fully expect to be increasingly accretive to operating profit long term as we scale it.

And Rupesh, I'll talk about the store-within-a-store concept that you mentioned, like pOpshelf, we're very excited about what we're seeing here as well. This is obviously very new here, just been in stores just a few months. But very pleased with what we're seeing again from the customer. And when you think about this store-within-a-store concept, really what it is able to do is it takes about 70% to 80% of the pOpshelf assortment and right inside this Dollar General Market. And so the store-within-a-store, as you look forward, will continue, as we mentioned earlier, to expand that. But as we think about the long term here, we recently announced a larger square foot store format, which we've talked about, pleased with that productivity. But again, things like that give us the opportunity to create enough theater to perhaps bring some of that merchandise into the broader assortment of the Dollar General network. So we'll have to wait and see long term as we look forward, but the team is continuing to refine and look at ways that we can continue to learn from this store-within-a-store just like we learned from NCI and how it really was the genesis for pOpshelf to begin. So more to come, but very pleased with the store-within-a-store concept and our ability to grow that over time.

Our next question comes from Paul Lejuez with Citi.

Can you talk about what you tend to see when a drug store closes in your trade area? Any quantification of any lift that a nearby DG store might get? And then second, just one follow-up on pOpshelf. I was curious about the geographic rollout. Is that going to be kind of concentrated as you think about next year's openings? Or more spread throughout the country?

Yes. This is Todd. I'll take that. If you consider the drugstore business, it has been our largest contributor to market share over the years, and we have been quite vocal about it. With our health initiatives, we are consistently increasing our share among consumers in health and beauty. So when any competitor leaves the market, it provides us an opportunity to capture more share in that area. Drugstores usually operate in locations with multiple competitors, which tends to distribute the market share among them. However, we are focused on gaining share whenever the opportunity arises. We will continue to monitor that closely, but we believe we are well-positioned to capitalize on health and beauty overall. Regarding the pOpshelf question, we are currently focusing on the Southern Midwest and Southeast regions. The Mid-Atlantic area, particularly Virginia down into the Carolinas, is also part of our focus. We view this as a nationwide opportunity in the long run, so we are not limiting ourselves to specific geographical regions. Our approach remains methodical, as we want to ensure we can supply our goods promptly and effectively. The advantage of our warehousing setup is that it is integrated with Dollar General, allowing us to reduce costs. This integration supports not only distribution but also numerous back-office operations, making our growth of the pOpshelf brand efficient over the years, as John mentioned.

Our next question comes from Krisztina Katai with Deutsche Bank.

I was just wondering if there were any notable patterns or anything that you could point out to as it relates to performance of rural stores versus some of your urban stores in the quarter? And then also, I guess, with the implied 2-year stack in the fourth quarter, pointing to a potential reacceleration, where do you see the greatest opportunity to start to take back market share?

I'll take the first part. This is Jeff. And when you talk about the geographic footprint of our stores, first of all, we're pleased with the balance in terms of our sales performance, and that's one of the real beautiful things about this company is, is just how evenly distributed and how well the company is performing across all geographic. When you think about the rural, earlier in the pandemic, we did see outsized performance in our rural stores. But it's beginning to normalize where it traditionally has performed, where we continue to perform better in rural, but not to the same degree from a disparity standpoint that we saw early in the pandemic. So as things open up, we're seeing performance open up just like we would expect across all of our store base. So generally speaking, we're very pleased with really, the performance across all of our geographic regions and the demographic regions. So real pleased with what we're seeing there.

Regarding the second part of your question, we expect things to stabilize in 2022. As John mentioned, in the first quarter, we still face challenges from the impact of stimulus and the ongoing pandemic that affected 2021. However, as we transition into 2022 and especially by mid to late 2022, we anticipate that market share gains will likely continue to emerge from the same sectors that were strong prior to the pandemic. This improvement will be broadly applicable across various trade classes, with pharmaceuticals remaining a significant component. We are confident that this trend will persist and potentially accelerate as we advance our focus on health and beauty initiatives and our overall health services in the coming years. We feel optimistic about our position for gaining market share, but our immediate priority is to conclude the fourth quarter positively and transition into 2022.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Todd Vasos for closing comments.

Thank you for all the questions, and thanks for your interest in Dollar General. I'll wrap up things by saying we're very pleased with the third quarter results, which I think speaks to our strategy, our culture, and the great execution by our team, even in a constantly evolving environment. As we look forward, I'm very optimistic about our robust set of initiatives, including today's announcements to accelerate the pace of new unit growth at pOpshelf and expand internationally for the first time. As I said earlier, I never have felt better about the underlying business model. And in fact, I believe this is a much different company than it was just a few years ago and that we are very well positioned to capitalize on the enormous growth opportunities we see in front of us. Thank you for listening. Have a great day and a happy holiday.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.