Dollar General Corp Q4 FY2021 Earnings Call

Good morning. My name is Robert, and I will be your conference operator today. At this time, I'd like to welcome everyone to Dollar General's Fourth Quarter 2021 Earnings Conference Call. Today is Thursday, March 17, 2022. This call is being recorded, and 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. Donny Lau, Vice President of Investor Relations and Corporate Strategy. Mr. Lau, you may begin.

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. 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, strategy, initiatives, plans, goals, priorities, opportunities, investments, 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 2020 Form 10-K filed on March 19, 2021, and any later filed periodic report, and 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. We also will reference certain non-GAAP financial measures. Reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which, as I mentioned, is posted on investor.dollargeneral.com under News & Events. At the end of our prepared remarks, we will open the call up for your questions.

Thank you, Donny, and welcome to everyone joining our call. We are pleased with our fourth quarter and fiscal year results, and I want to thank our associates for their unwavering commitment to meeting the critical needs of our communities, particularly over the past two years of the COVID pandemic. Our fourth quarter performance was impacted by sustained and rising inflation, ongoing global supply chain pressure and a surge in Omicron cases, which impacted staffing levels at our distribution centers, contributing to elevated out-of-stocks. Despite these challenging conditions, our teams continued to focus on controlling what we can control and being there for our customers. Because of their efforts and great execution over the past two years, we believe our underlying business is even stronger than before the pandemic, which positions us well to deliver solid sales and profit growth in 2022 and beyond. And while we expect this challenging environment to persist over the near term, which is reflected in our Q1 and fiscal 2022 outlook, we're confident we are taking the appropriate actions to manage through this period and deliver on our full year plan. In fact, I'm pleased to report our staffing levels are back to 2019 pre-COVID levels in both our stores and distribution centers, and we are seeing a meaningful improvement in our in-stock positions. Additionally, although we experienced higher-than-expected product and supply chain costs in Q4, we are very confident in our price position as our price indexes, relative to 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 to our customers, and they will continue to have a significant presence in our assortment. In fact, approximately 20% of our overall assortment is $1 or less. And moving forward, we expect to continue to foster and grow this program where appropriate. And with more than 18,000 stores located within five miles of about 75% of the U.S. population, we believe we are well positioned to continue supporting our customers through our unique combination of value and convenience, even in a challenging economic environment. Looking ahead, we remain focused on advancing our operating priorities and strategic initiatives as we continue to strengthen our competitive position while further differentiating Dollar General from the rest of the retail landscape. Turning now to our fourth quarter performance. Net sales increased 2.8% to $8.7 billion, following a 17.6% increase in Q4 of 2020. Comp sales declined 1.4% compared to the prior year period, which translates into a robust 11.3% increase on a two-year stack basis. From a monthly cadence perspective, comp sales were lowest in January, with December being our strongest month of performance. Our fourth quarter sales results include a decline in customer traffic, which was largely offset by growth in average basket size. Notably, our average basket size at year-end was approximately $16 and consisted of nearly six items. This compares to an average basket size of about $13 and five items at the end of 2019, which we believe reflects the growing impact of our strategic initiatives and a degree of inflation. In addition, we are pleased with the market share gains as measured by syndicated data in our frozen and refrigerated product categories, where we have placed a good deal of emphasis over the past years in an effort to provide customers with an even wider variety of options. And even as our market share in highly consumable product sales decreased slightly in Q4, we feel good about our share gains on a two-year basis. We are also pleased with the retention rates of new customers acquired in 2020, which continues to exceed our initial expectations. For the full year, net sales increased 1.4% to $34.2 billion, which was on the high end of our full year guidance and on top of a robust 21.6% increase in fiscal 2020. Comp sales for the year decreased 2.8%, which translates into a very healthy 13.5% increase on a two-year stack basis. In total, we completed more than 2,900 real estate projects during the year, including the opening of our 18,000th Dollar General store and 50 stand-alone pOpshelf locations as we continue to build and strengthen the foundation for future growth. From a position of strength, we also made targeted investments in key areas, including the acceleration of our pOpshelf concept, as well as our most recent initiatives focused on health and international expansion as we continue to meet the evolving needs of our customers and further position Dollar General for long-term sustainable growth. Overall, we are proud of our fourth quarter and full year results, which further validate our belief that our strategic actions and targeted investments position us well for continued success while supporting long-term shareholder value creation. We operate in one of the most attractive sectors in retail. And while our mission and culture remain unchanged as the foundation for our success, with our robust portfolio of short- and long-term initiatives, I believe Dollar General is a much different company and is in a much stronger competitive position than it was just a few short years ago. As a result, I've never felt better about the underlying business model, and we are excited about the enormous growth opportunities we see ahead.

Thank you, Todd, and good morning, everyone. Now that Todd has taken you through a few highlights of the quarter and the full year, 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 Q4 2020 and fiscal year 2020 were both positively impacted by a significant increase in sales, including net sales growth of 24% and 28%, respectively, in our combined non-consumables categories. For Q4 2021, gross profit as a percentage of sales was 31.2%, a decrease of 131 basis points. The decrease compared to Q4 2020 was primarily attributable to a higher LIFO provision, increased transportation and distribution costs and a greater proportion of sales coming from our consumables category. Of note, while we expect some relief as we move through 2022, our Q4 supply chain expenses were significantly higher compared to Q4 2020, resulting in a headwind to gross margin of approximately $100 million. These factors were partially offset by a reduction in markdowns as a percentage of sales in higher inventory markups. SG&A as a percentage of sales was 22% in the quarter, a decrease of 16 basis points. This decrease was primarily driven by lower incremental costs related to COVID-19, lower hurricane-related expenses and a reduction in incentive compensation. These items were partially offset by certain expenses that were higher as a percentage of sales, including retail labor, occupancy costs and depreciation and amortization. Moving down the income statement. Operating profit for the fourth quarter decreased 8.7% to $797 million. As a percentage of sales, operating profit was 9.2%, a decrease of 116 basis points. Our effective tax rate for the quarter was 21.2% and compares to 22.7% in the fourth quarter last year. Finally, EPS for the fourth quarter decreased 1.9% to $2.57, which reflects a compound annual growth rate of 10.6% over a two-year period. Turning now to our balance sheet and cash flow, which remained strong and provided us the financial flexibility to continue investing for the long term while delivering significant returns to shareholders. Merchandise inventories were $5.6 billion at the end of the year, an increase of 7% overall and 1.4% on a per store basis. Importantly, as Todd noted, we have begun to see a meaningful improvement in our in-stock levels since the end of the year and expect continued improvement as we move through 2022, underscoring our optimism that we are well positioned to serve our customers with the products they want and need. In 2021, we generated significant cash flow from operations totaling $2.9 billion. Total capital expenditures for the year were $1.1 billion and included our planned investments in new stores, remodels and relocations, distribution and transportation projects and spending related to our strategic initiatives. During the quarter, we repurchased 2.2 million shares of our common stock for $490 million and paid a quarterly dividend of $0.42 per common share outstanding at a total cost of $97 million. At the end of the year, the remaining share repurchase authorization was $2.1 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 our financial outlook for fiscal 2022. First, I want to remind everyone that our fiscal year 2022 includes a 53rd week which will occur during the last period of the fourth quarter. We also continue to operate in a time of uncertainty regarding, among other things, the impacts on the business arising from the current geopolitical conflict and the recovery from the global COVID pandemic, including recovery of the U.S. economy, changes in consumer behavior, labor markets and government stimulus and assistance programs. Despite these uncertainties, including cost inflation, ongoing pressure in the supply chain and rising fuel costs, we are pleased to provide annual guidance that reflects our confidence in the business. With that in mind, we expect the following for 2022: net sales growth of approximately 10%, including an estimated benefit of approximately 2 percentage points from the 53rd week; same-store sales growth of approximately 2.5%; and EPS growth of approximately 12% to 14%, including an estimated benefit of approximately 4 percentage points from the 53rd week. Our EPS guidance assumes an effective tax rate range of 22.5% to 23%. We also expect capital spending to be in the range of $1.4 billion to $1.5 billion, which includes the impact of increases in the cost of certain building materials as well as continued investment in our strategic initiatives and core business to support and drive future growth.

Thank you, John. Let me take the next few minutes to update you on our operating priorities and strategic initiatives, including our plans for 2022. Our first operating priority is driving profitable sales growth. We have a growing portfolio of initiatives which are contributing to our strong results as well as strengthening the foundation for future growth. Our non-consumables initiative, or NCI, which was available in more than 11,700 stores at the end of 2021, continues to perform strongly in terms of sales and margin. Notably, NCI stores outperformed non-NCI stores in both average ticket and customer traffic. We expect to realize ongoing sales and margin benefits from NCI in 2022, and we are on track to complete the rollout across nearly the entire chain by the end of the year. Moving to our newest store concept, pOpshelf, we opened 25 new locations during the quarter, exceeding our initial goal of 50 stores. Additionally, we opened 11 new store-within-a-store concepts during Q4, bringing the total to 25. In 2022, we plan to nearly triple the pOpshelf store count and expand our store-within-a-store concepts to a total of approximately 50. We continue to anticipate annualized sales volumes for our current locations to be between $1.7 million and $2 million per store, with margins expected to exceed 40%. Turning now to DG Fresh, our strategic shift to self-distribution of frozen and refrigerated goods, we completed the initial rollout of DG Fresh across the entire chain in 2021 and are now delivering to more than 18,000 stores. The primary objective is to reduce product costs and to increase sales in our frozen and refrigerated categories, driving continued growth in these areas. Our perishables department had a high single-digit comp increase in Q4 and contributed more sales dollars than any other department for both Q4 and the full year. We expect to realize additional benefits from DG Fresh as we continue to optimize our network and further leverage our scale. Our second priority is capturing growth opportunities through our proven real estate model, which has served us well for many years. In 2021, we completed a total of 2,902 real estate projects, including new stores and remodels. For 2022, we expect to execute nearly 3,000 such projects, including 1,110 new stores. We are also excited about our plans to expand internationally with the goal of opening up to 10 stores in Mexico by the end of 2022. Overall, our strategy consists of building a digital ecosystem to enhance convenience and access for our customers.

Thank you, Jeff. I'm proud of this team, which continues to execute at a high level, even in a consistently evolving environment. As you heard today, we're excited about our initiatives and plans for 2022, which we believe positions us well to grow same-store sales, new stores, operating profit margins and market share over time. Overall, a mature retailer in growth mode, we believe this company is in a very strong position, which speaks to our strategy, our resilience and the strength of our culture and our people. I've never felt better about the underlying business model, and I can't wait to see what 2022 holds for Dollar General.

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