Good morning. My name is Robert, and I'll be your conference operator today. I would like to welcome everyone to Dollar General's Fourth Quarter 2022 Earnings Call. Today is Thursday, March 16, 2023. This call is being recorded. Now I'd like to turn the conference over to Mr. Kevin Walker, Vice President of Investor Relations. Kevin, you may begin your conference.

Thank you, and good morning, everyone. On the call with me today are Jeff Owen, our CEO, and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News and Events. Please note that today's comments contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These include statements regarding our financial guidance, strategic initiatives, plans, goals, priorities, opportunities, investments, and expectations about future matters, as well as other statements that are not strictly historical facts. These statements are subject to risks and uncertainties that could lead to actual results differing significantly from our expectations and projections. These factors include, but are not limited to, those outlined in our earnings release issued this morning, as well as the Risk Factors in our 2021 Form 10-K filed on March 18, 2022, and any subsequent periodic report and 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 required by law. Now it is my pleasure to turn the call over to Jeff.

Thank you, Kevin, and welcome to everyone joining our call. I want to begin by thanking our associates for their dedication to serving our customers and communities this year. I am inspired by this team's commitment to our mission of serving others and the passion they have for helping our customers save time and money every day. Our fourth quarter performance was led by strong comp sales growth of 5.7%. And while this result was below our expectations, our performance included market share gains in both consumables and nonconsumables and contributed to a net sales increase of 17.9% to $10.2 billion. Our Q4 comp sales were driven by an increase in average basket size, primarily attributable to inflation and partially offset by a slight decrease in customer traffic, primarily due to a decrease in customer traffic in late December. And similar to recent quarters, average units per basket were down. Notably, both November and January comp sales at 6.7% and 6.5%, respectively, were within our expected range of 6% to 7% for the quarter. However, our December sales performance was negatively impacted by winter storm Elliott, which had the most significant effect on our stores in the final days leading up to Christmas. The quarter was also impacted by greater-than-anticipated inventory damages, which contributed to diluted EPS results that were below our expectations. While the storm had some damages impact, we also incurred higher damages than expected as we work through the residual impact of the storage capacity constraints and related store and distribution inefficiencies we experienced during the second half of the year. Although we expect some of these related impacts to be with us through the end of Q1, we are pleased to have the storage capacity constraints largely behind us, which we believe positions us well moving forward. Turning to a few highlights of the 2022 fiscal year. Net sales increased 10.6% to $37.8 billion and included a benefit of approximately 2 percentage points or $678 million in sales from the 53rd week. Comp sales for the year increased 4.3%, driven by strong growth in basket size. Although a significant portion of the basket growth was attributable to inflation, we were pleased to see an average basket size at the end of the year of more than five items and nearly $17. The team accomplished a great deal in 2022, and we closed the year with significant progress on our strategic initiatives and operating priorities while achieving several key milestones in Q4 and the weeks thereafter. We were particularly excited to celebrate the opening of our 19,000 store in Joplin, Missouri in January, as we continue to support our customers with our unique combination of value and convenience in their hometown communities. We also completed the initial rollout of our nonconsumable initiative, or NCI with the offering now in nearly all of our stores across the chain. Finally, we made strong progress in our supply chain, reducing our storage capacity constraints and improving operations during the quarter. More specifically, and as we said we would do, we added significant capacity in Q4, bringing nearly 3 million square feet of distribution capacity online. These efforts culminated with the opening of our newest distribution center in Blair, Nebraska during the quarter. I also want to highlight that we have started 2023 with the opening of our first store in Mexico. And while the store has only been open a few short weeks, we are very encouraged by the early response from our new customers. These achievements are a testament to this team's hard work and continued focus on execution and innovation as we continue to deliver on our mission of serving others. Turning now to an update on our customers. In addition to adjusting the mix of their baskets, we continue to see customers shift spending to more affordable options, including our private brands, which represent more than 20% of our total sales. Within consumables, private brand growth, both in absolute dollars and penetration was the highest in the fourth quarter. We also increased our share of wallet and share of trips across all segments of our core customer in Q4, and we believe we will be increasingly important to them in the year ahead. With regard to trade-in behavior, customers in income brackets above our core customers are shopping with us at an increasing rate, underscoring our belief that our value and convenience proposition resonates with a broad spectrum of customers. We remain focused on our goal to be priced at relative parity with mass merchants and we continue to feel very good about our price position relative to competitors and all classes of trade. Furthermore, given the strong demand from customers, we remain committed to offering products at the $1 or less price point. Notably, during Q4, our comp sales were over 30% in our Value Valley set, which is comprised entirely of items at the $1 price point. Overall, we continue to be pleased with the strong performance of this program and the value it offers to our customers. In addition, we believe we are well positioned to continue serving both new and existing customers, and we are moving with great intentionality to build on our momentum. To this end, we are excited about our plans for 2023. Building on the investments we made in 2022, we plan to make a larger targeted incremental investment of approximately $100 million in our stores this year. This investment will primarily consist of incremental labor hours to support our expectations regarding consistent store standards while further enhancing the associate and customer experience. In turn, we believe this investment will position us to drive greater on-shelf availability and capture additional market share while amplifying the potential of our initiatives and ensuring our readiness for our growing customer base. And with the progress we have made in the supply chain, the prior investments we have made in wages, and the growing customer engagement we are seeing, we believe we are well positioned to see a meaningful return on this investment. We operate in one of the most attractive sectors in retail and we believe our innovation will continue to distance and differentiate Dollar General from the rest of the retail landscape. In summary, we are excited about our plans to deliver strong growth in 2023 while also making significant and deliberate investments in the business. We believe our customers and communities will need us even more as we move throughout 2023. And as a mature retailer in growth mode, we are well positioned to serve them while also creating long-term value for our shareholders.

Thank you, Jeff, and good morning, everyone. Now that Jeff has taken you through a few highlights of the quarter and full year, let me take you through some of the 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 Jeff already discussed sales, I will start with gross profit. For Q4, gross profit as a percentage of sales was 30.9%, a decrease of 35 basis points. This decrease was primarily attributable to an increased LIFO provision, a greater proportion of sales coming from the consumables category, and increases in inventory shrink, damages and markdowns, partially offset by higher inventory markups and a reduction in transportation costs. Of note, product cost inflation continued as a significant headwind, resulting in a LIFO provision of approximately $164 million during the quarter and approximately $517 million for the full year. SG&A as a percentage of sales was 21.7%, a decrease of 29 basis points. This decrease was driven by expenses that were lower as a percentage of sales, the most significant of which were retail occupancy costs, incentive compensation and retail labor. These were partially offset by certain expenses that were greater as a percentage of net sales in the current year period primarily utilities. Moving down the income statement. Operating profit for the fourth quarter increased 17.1% to $933 million. As a percentage of sales, operating profit was 9.1%, a decrease of 6 basis points. Our effective tax rate for the quarter was 23.2% and compares to 21.2% in the fourth quarter last year. This higher effective income tax rate was primarily due to decreased income tax benefits associated with the stock-based compensation compared to 2021. Finally, EPS for the fourth quarter increased 15.2% to $2.96. For the full year, EPS increased 5% to $10.68 and included an estimated positive impact of approximately 4 percentage points from the 53rd week. Turning now to our balance sheet and cash flow, which remains strong and provide us the financial flexibility to continue investing for the long term while delivering significant returns to shareholders. Merchandise inventories were $6.8 billion at the end of the year, an increase of 20.4% overall and 14.3% on a per store basis. This increase continues to reflect the impact of product cost inflation as well as a greater mix of higher-value products, particularly in the home and seasonal categories, primarily due to the continued rollout of NCI as well as the earlier receipt of seasonal goods. While inventory growth is still elevated, the pace is moderating as we expected. Notably, our Q4 inventory growth rate per store was essentially half of what it was in Q3. Looking ahead, we anticipate more normalized growth rates as we move through 2023. Importantly, we continue to believe the quality of our inventory is in good shape. In 2022, the business generated cash flows from operations totaling $2 billion, a decrease of 31%, which was primarily attributable to higher inventory levels. Total capital expenditures were $1.6 billion and included our planned investments in new stores, remodels and relocations, distribution, transportation projects and spending related to the strategic initiatives. During the quarter, we repurchased 4.5 million shares of our common stock for $1.1 billion and paid a quarterly dividend of $0.55 per common share outstanding for a total payout of $121 million. At the end of the year, the remaining share repurchase authorization was $1.4 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 EBITDA. Moving to our financial outlook for the fiscal 2023 year. We anticipate the challenging economic and operating environment to continue into 2023, but we believe we are well positioned to drive strong growth as we move throughout the year. For 2023, we are reiterating the financial guidance we provided on February 23, 2023, and providing additional financial guidance to include the following expectations: net sales growth in the range of approximately 5.5% to 6%, including an anticipated negative impact of approximately 2 percentage points due to lapping the 2022 53rd week; same-store sales growth in the range of 3% to 3.5%; and EPS growth in the range of approximately 4% to 6%, including estimated negative impacts of approximately 3 percentage points due to higher interest expense and approximately 4 percentage points due to lapping the 2022 53rd week. Our EPS guidance assumes an effective tax rate in the range of approximately 22.5% to 23%. We also expect capital spending to be in the range of $1.8 billion to $1.9 billion, which includes the impact of significant inflation in the cost of certain building materials, construction of new distribution centers and continued investment in our strategic initiatives and core business to support and drive future growth. With regard to shareholder returns, our Board of Directors recently approved an increased quarterly dividend payment of $0.59 per share. We also plan to repurchase a total of approximately $500 million of our common stock this year. This is a lower amount as compared to recent years but consistent with our capital allocation priorities and reflects our commitment to our current credit rating, our continued strong liquidity position and confidence in the long-term growth opportunity for our business. Let me now provide some additional context as it relates to our outlook. In terms of quarterly cadence, we expect EPS growth to be much stronger in the second half compared to the first half. This is due in part to our expectation of continued headwinds from sales mix pressure, higher interest expense and increased shrink and damages as we move through the first half of the year. We anticipate certain of these headwinds to be most pronounced in Q1, including an estimated year-over-year increase in interest expense of approximately $40 million, inventory damages and residual impacts of the storage capacity constraints and related inefficiencies that Jeff mentioned earlier. In addition, we expect the year-over-year net impact of the labor investment to be most significant in Q1 as we don't begin lapping last year's smaller investments until Q2, and we believe the benefits of the incremental labor will become more significant later in the year. As we move into the back half, we also anticipate a benefit from lapping the significant supply chain costs and winter storm impacts from the second half of 2022. Turning now to gross margin for 2023. In addition to the material benefit from lapping the increased supply chain expenses in the second half of 2022, we expect significant benefits from greater distribution center capacity and productivity, lower carrier rates, the expansion of our private tractor fleet and other distribution and transportation efficiencies. We also expect to continue realizing benefits from our initiatives, including DG Fresh and NCI. Furthermore, we anticipate a significant contribution from our DG Media Network, which Jeff will discuss in more detail in a moment. Partially offsetting some of these expected benefits are the anticipated sales mix pressure and increased inventory shrink and damages I mentioned as well as increased markdowns as we return to rates more in line with the historic norms. With regard to SG&A, we expect continued investments in our strategic initiatives as we further their rollouts. However, in aggregate, we continue to expect they will positively contribute to operating profit and margin in 2023, as we expect the benefits to gross margin from our initiatives to more than offset the associated SG&A expense. And as Jeff noted, we plan to make an incremental investment of approximately $100 million in our stores, primarily through additional labor hours. While this investment will pressure SG&A in 2023, we believe it is the right thing for the business and will drive stronger in-store execution, positioning us well to build on the momentum we have with our customers. We expect a headwind from inflationary pressures in our business. So we continue to pursue efficiencies and savings through our Save to Serve program, including Fast Track. In closing, we are grateful for the team's hard work to deliver for our customers in 2022. Looking ahead, we are excited about our growth plans for 2023, including strong sales and operating profit while simultaneously making significant and deliberate investments in the business. 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 are 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.

Thank you, John. Let me take a few minutes to update you on our operating priorities and strategic initiatives, which have transformed this company in recent years, resulting in strong growth and enhanced profitability. Our first operating priority is driving profitable sales growth. Starting with NCI. With the initial rollout phase now complete, we will focus on continuing to refine the assortment and enhance the treasure hunt offering to provide value to our customers in the nonconsumable categories. Overall, we are very pleased with the success of NCI including market share gains in nonconsumable sales in Q4. Moving to our pOpshelf store concept, which further builds on our success and learnings with NCI. As a reminder, pOpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience delivered through continually refreshed merchandise, a differentiated in-store experience and exceptional value with the majority of our items priced at $5 or less. During the quarter, we opened 37 new pOpshelf locations, bringing the total number of stores to 140 at the end of 2022, located within 14 states. While sales in this economic environment have been somewhat softer than our earlier results, we continue to be pleased with the customer response. Looking ahead, we plan to more than double the pOpshelf store count in 2023, bringing the total number of pOpshelf stores to nearly 300 by year-end, and we are excited about our goal of approximately 1,000 locations by year-end 2025. Turning now to DG Fresh, which is a strategic, multiphase shift to self-distribution of frozen and refrigerated goods along with a focus on driving continued sales growth in these areas. We are now delivering perishable products to more than 19,000 stores from 12 facilities, and we continue to be pleased with the cost savings from this initiative and importantly, the significantly enhanced profitability of our perishables offering. In addition to capturing cost savings, DG Fresh also aims to increase sales in frozen and refrigerated categories. We are pleased with the performance on this front, including enhanced product offerings in stores and strong performance from our perishables department, which had our strongest rate of comp sales growth during 2022. 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. And while produce is not included in our initial rollout, we continue to believe that DG Fresh provides a potential path forward to expanding our produce offering to more than 10,000 stores over time. To that end, at the end of 2022, we offered fresh produce in more than 3,200 stores with plans to expand this offering to a total of more than 5,000 stores by the end of 2023. Finally, DG Fresh has also extended the reach of our cooler expansion program. During 2022, we added more than 66,000 cooler doors across our store base. And we plan to install a similar number of cooler doors in 2023. Importantly, despite the meaningful improvements we have made and savings we realized to date as a result of DG Fresh, we believe we still have an opportunity to drive significant additional returns with this initiative in the years ahead. Turning now to an update on our health initiative, branded as DG Wellbeing. As a reminder, the initial focus of this project is an expanded health offering, which consists of approximately 30% more selling space and up to 400 additional items as compared to our standard offering. This offering was available in nearly 4,400 stores at the end of 2022, and we plan to expand to a total of more than 5,500 stores by the end of 2023. Looking ahead, our plans include further expansion of our health offering and testing of our mobile clinic with the goal of increasing access to basic health care products and ultimately, services over time, particularly in rural America. Finally, we also plan to make significant enhancements to our private brand offering in 2023 as we know how important these value offerings are for our customers. We are increasing private brand offerings across many important categories, including candy and snacks, perishables, pet food and over-the-counter health care products. We believe these products will further differentiate Dollar General in the marketplace as we look to provide our customers with tremendous value on quality products. In addition to the initiatives I just discussed, as well as the anticipated supply chain efficiencies I mentioned earlier, we continue to pursue other opportunities to enhance gross margin, including improvements in global sourcing as well as shrink and damage reduction. Our second priority is capturing growth opportunities. Our proven high-return, low-risk real estate model has served us well for many years and continues to be a core strength of our business. In 2022, we completed a total of 2,961 real estate projects, including 1,039 new stores, 1,795 remodels and 127 relocations. For 2023, our goal remains to execute approximately 3,170 real estate projects in the United States across our Dollar General and pOpshelf banners, including 1,050 new stores, 2,000 remodels and 120 store relocations. Notably, this would be the most real estate projects we have executed in one year. Our ability to innovate on the store formats continues to be an important strength for the business, and we expect to leverage multiple formats to drive strong returns in the year ahead. Approximately 80% of our new stores in nearly all of our relocations will be in one of our larger store formats, which continue to drive increased sales productivity per square foot as compared to our traditional store. With regard to remodels, approximately 80% will be in our DGTP format, which provides the opportunity for a significant increase in cooler count as well as the ability to add fresh produce in many stores. In addition to our planned Dollar General and pOpshelf growth, we are excited about our international expansion. We were pleased to open our first Mi Super Dollar General in Monterrey, Mexico last month, and we have been very encouraged by the customer response and community reception we have seen so far. Looking ahead, our goal is to have approximately 20 stores serving underserved communities in Northern Mexico by the end of 2023 as we look to leverage our brand awareness while extending our value and convenience proposition to a customer base that is similar to our core customer in the United States. Overall, our real estate pipeline remains robust, and with more U.S. brick-and-mortar stores than any retailer, we are excited about our ability to capture significant growth opportunities in the years ahead. Next, our digital initiative, which is an important complement to our physical footprint as we continue to deploy and leverage technology to further enhance convenience and access for customers. Our efforts remain centered around creating a digital front porch for our customers as we look to continue building engagement across our digital properties, including our mobile app. We ended 2022 with approximately 4.5 million monthly active users on the app and expect this number to continue to grow as we look to further enhance our digital offerings. Our partnership with DoorDash continues to serve us as an important extension of the value offering of Dollar General, combined with the convenience of same-day delivery in an hour or less. DoorDash is available in nearly 14,000 stores, and we anticipate extending this offering to an additional 1,000 stores in 2023. We are pleased with the incremental sales growth attributed to this partnership as well as its profitability, and we believe we have an opportunity to drive even stronger growth moving forward. In addition, we are excited about the continued growth of our DG Media Network. We are seeing significant interest and participation from CPG companies and brands who are seeking to connect with our more than 90 million unique customer profiles, especially rural customers, who represent about 30% of the country. We expect our DG Media Network to grow significantly in 2023 as we expand the program and enhance the value proposition for both our customers and brand partners while substantially increasing the overall net financial benefit for the business. Overall, our strategy consists of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience, and we are pleased with the growing engagement we are seeing across our digital properties. 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 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. The first phase of this initiative, which included rolltainer optimization and self-checkout, is focused on enhancing customer convenience and labor productivity in our stores. Self-checkout, which provides customers with another flexible and convenient checkout solution, was available in more than 11,000 stores at the end of 2022, and we continue to be pleased with our results, including strong customer adoption rates. Looking ahead, our goal is to have a self-checkout offering in more than 13,000 stores by the end of 2023, including the full self-checkout option in more than 2,000 stores as we look to further extend our position as an innovative leader in small box discount retail. Moving forward, the next phase of Fast Track consists of increasing our utilization of emerging technology and data strategies, which includes putting new digital tools in the hands of our field leaders. When combined with our data-driven inventory management, we believe these efforts will drive greater efficiencies for our retail leaders and their teams while laying the foundation for additional phases of Fast Track in the future. We also continue to reduce costs through the expansion of our private tractor fleet, which is one of the largest private retail fleets in the U.S. Our fleet consisted of more than 1,600 tractors at the end of 2022 and accounted for more than 40% of our outbound transportation needs. Looking ahead, we plan to have more than 2,000 tractors in our private fleet by the end of 2023, which would account for more than 50% of our outbound transportation fleet. Overall, 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 created more than 10,000 new jobs in 2022, while continuing to drive opportunities for personal and professional development and ultimately, career advancement. Our internal promotion pipeline remains robust as evidenced by internal placement rates of more than 70% at or above the lead sales associate position. Additionally, more than 10% of our growing private fleet team, which nearly doubled in size in 2022, began their careers with us in either a store or distribution center. We continue to have great success hiring the talent we need, and we are pleased with our staffing levels and applicant flow. Ultimately, we believe the opportunity to start and develop a career with a growing and purpose-driven company is what sets Dollar General apart from the competition and remains our greatest currency in attracting and retaining talent. We added incredible individuals across the organization in 2022 as we grew teams in our stores, distribution centers, private fleet and at our store support center, while also adding a local team in Mexico to support our new customers in those communities. In addition to new opportunities, we have made significant investments in our people, including raising average hourly retail wages by approximately 23% over the last 3 years and investing over 4 million training hours in 2022 to promote education and development. The people of Dollar General are our greatest strength and the driving force of this company. In closing, we made great progress against our operating priorities and strategic initiatives in 2022 while making a difference in the lives of our customers. As we enter 2023, we are excited about our robust plans for growth, which we believe will further enhance our ability to serve our customers in meaningful ways. We are the innovation leader in our space, and we are laser-focused on executing at a high level to continue driving long-term sustainable growth while delivering strong returns for our shareholders. Finally, I want to thank more than 170,000 employees for their commitment to serving others every day, and I am looking forward to all we will accomplish together in 2023. With that, operator, we would now like to open the lines for questions.

Our first question comes from Simeon Gutman with Morgan Stanley.

Sorry about the noise. Open-ended question for you. So the business has executed well over a long period of time. Last couple of quarters, we've had some missteps or things that haven't gone to plan. Not all of that I think is clear to us for the Street. And yet all these growth initiatives are still happening at the same time. So the open-ended question is have you debated or is the debate the balance of sort of the growth against investments that's focusing on the core?

Well, Simeon, thank you for the question. I first want to say, certainly, the last two quarters have been challenging. And I can tell you, we're disappointed in our results. This team takes great pride in delivering on our commitments and we've been doing that for almost 30 years I've been here. And that is something that is not changing. And I can tell you, we have a tremendously deep and outstanding team that's laser-focused on executing and innovating over the long term. And certainly, we have faced some challenges. But what we do here at Dollar General is we control what we can control, and that has allowed us to emerge even stronger as we move forward. So as I think about our balance between execution and innovation, one of the things I think it's important to remember is we have a long track record of execution, and this team will continue to deliver on that. And on the innovation front, we don't do things on the side of our desks. And so as we innovate, one of the things that our team does more than anything is, as you know, capital is not an issue for us. It's all about organizational capacity. And I think the team has done an excellent job of making sure that we've dedicated the resources, the focus and the time to be able to grow this foundation. And it certainly served us very well. If you think about these challenging times we're in right now, this company is in a much different place. And as our customer has gravitated towards more consumables, the investments we've made in our strategic initiatives have allowed us to serve her even better and more profitably. And so as we look forward, we're excited about some of the investments we announced today, which will be on top of the strategic investments we've made previously, which has put us in a very, very enviable position of having a rock-solid foundation strategically and a laser focus on execution. And this team is committed to delivering that as we look forward into '23 and beyond.

And the one follow-up to that is the $100 million in wages, I don't think it's a big surprise, but it was maybe in man hours and not rate. So can you talk about that trade-off or the balance between those two and where, I guess, you feel comfortable where you are on rates?

Yes. We absolutely do, Simeon, and that's a great distinction. Here, at Dollar General, for the 85 years we've been around, the store has always been the company. And our ability to serve local communities is something that we do better than anybody and we take great pride in that. And so when you think about the investment that we're very excited about, the reason why it's in hours rather than wages is because we've been paying competitive wages for many years. And you heard in my prepared comments that our wages have increased 23% over the last three years. So our ability to attract and retain talent remains one of our core competencies. And the other thing you got to remember is where our stores are located. They're located in rural communities. 75% are in communities at 20,000 or less. And we provide career growth opportunities that are unmatched in retail, which leads to our staffing levels being very robust, which we mentioned. And that gives us the opportunity because we're in such a good position to invest in the hours. And so as we think about hours, we're pleased at what we believe this will do to elevate our store standards and our consistency, which we believe the customer will benefit and the associate will benefit. And so as you move throughout '23, when you combine the improvements we're making in our supply chain, which really gives us the timing to do this, and you combine that with the in-stock improvements, our customers will begin to see our standards improve, our on-shelf availability will improve, and we'll be ready to serve that growing customer base that we're really pleased that we're seeing. And so that's what gives us the confidence in this. We feel this is the right level of investment. And the reason we feel that way is because we've been testing and learning this in 2022. You know Dollar General very well. We don't do things just on a whim. We test and learn. We've been doing that in '22. We liked what we saw. And we wanted to make sure our supply chain was in a position where we could take advantage of the ability to elevate the experience for the customer while we flow goods freely to the stores. And right now, we're in a good position to do that as we enter '23, and we're excited about what this is going to do for the customer and ultimately, the return we're going to see over time.

So Jeff, could you speak to recent behavior that you're seeing from the low-income consumer? Or maybe any changes in the ranking of their priorities from those customer surveys that I know you run regularly? And John, help us to think about the cadence of comps as we think about the year? Or just any color on the first quarter same-store sales? Or any comments on business to date just relative to that 3% to 3.5% full year forecast?

Well, thanks, Matt. I'll start, and then I'll kick it over to John. As you think about the customer, one of the good things about Dollar General is we're an all-weather brand. And we've shown over the last 3 decades how we can serve that customer in any economic environment. But what we're seeing right now with our customer is the best news we have is that she's still employed. And as we've talked about for many years, that is the single most important factor to her economic health. But we are certainly, as we talk to our customers, and as you know, Matt, we do this very, very frequently, and our digital capabilities allow us to do it in many different ways, which we're pleased, we're seeing that she's worse off financially. And it's primarily due to food inflation. And obviously, as you think about how that changes her behaviors, one of the things we're seeing is she's relying more on savings, credit cards, and also borrowing money, quite frankly, from friends. And as that shows up in the store, what we're seeing in the shopping behavior is that translates into our customer coming more often, she's buying fewer items on occasion. And I got to tell you, one of the things we're very, very pleased with is the fact that we are still leaning hard into our dollar price point. And we're there for that customer. And as you saw in our prepared comments, that is resonating extremely well with her, as you saw from the comp sales we're seeing in that category. But also, we're seeing her lean into private brands, and we're seeing her shift her purchases more to consumables. But as you know, our core customer, she's the smartest customer, I believe, in retail, and she figures this out over time. And our box is more relevant than ever as a result of the investments we've made over the last several years. And that allows us to go where the customer wants us to go and do it more profitably. And that's a very enviable position for us, and I think our market share gains kind of show that. But that's kind of what we're seeing from the customer standpoint. And certainly, there's some near-term challenges that have just recently emerged. I'll let John talk about that in Q1.

We are observing that our customers are facing increasing economic challenges, and their shopping behaviors reflect this situation. We are closely watching two recent developments: the cessation of SNAP benefits in the remaining states and the decrease in tax refunds observed recently. This could add pressure on low-income customers in the near future, though it's uncertain how much of an impact it will have compared to last year. While some customers have moved on, the current situation is different. We will monitor this issue closely, but we believe that during tough times, customers rely on us even more, as history indicates, and our full-year guidance accounts for everything we know at this point. Regarding the year's performance, we expect earnings per share growth to be more prominent in the second half of the year. Sales comparisons are likely to be relatively balanced between the first and second halves, with a slight uptick in the second half. However, we anticipate ongoing challenges from sales mix issues, increased interest expenses, and greater shrink and damages in the first half. We predict these challenges will be especially noticeable in the first quarter, including an estimated $40 million year-over-year increase in interest costs, inventory damages, and the lingering effects of storage capacity limitations and supply chain inefficiencies we have discussed. Additionally, with respect to labor investments, we expect the net impact of this investment to be most felt in the first quarter, as we will not start realizing the benefits of last year's smaller investments until the second quarter, and we believe the positive effects of the additional labor will be more significant later in the year.

Great. And then maybe just a follow-up, John, on the balance sheet. Could you just update us on free cash priorities? What is the multiyear debt leverage target? How best to think about CapEx as a percent of sales moving forward? And just share repurchase as a use of cash going forward?

Sure. I'll start by saying that our capital allocation priorities have not changed. Our first priority remains investing in the business. When you have high-return growth opportunities like new store growth, remodels and our strategic initiatives, that's where we focus our capital. Then our second priority is then returning the excess cash to shareholders based on the excess cash and debt capacity, paying a competitive dividend as we increased this quarter, and then by buying back shares with the remaining excess cash and debt capacity. But we remain focused on protecting our current investment-grade credit rating by keeping our adjusted debt to EBITDA around 3. In terms of CapEx, that is up a bit this year. We guided to $1.8 billion to $1.9 billion. Really includes the impact of pretty significant inflation, particularly when you think of steel. As we accelerate the unit growth story here, the remodels as well as build, we're working on three distribution centers here, which is going to help our capacity. So it takes some capital to do that, but we see great returns in these. And as you look at the stores, not only are we doing more stores, we're doing bigger stores. And we love what we see with these bigger stores with more sales, more profit per store. So a little more CapEx but really like the return from these. So I think that's the way to think about our capital allocation priorities and the drivers.

You had commented just on one of the last questions around tax refunds and SNAP as potential headwinds. I was hoping you could also address the social security cost of living increase that kicked in at the beginning of the year. Has that been any tailwind to your business that you've noted so far?

Sure. I will provide some insights on SNAP and then discuss tax refunds and COLA. Regarding SNAP, it's notable that there has been a significant increase in the tender over the past few years since the pandemic, particularly as states implemented emergency allotment benefits. However, in the past couple of years, about 18 states have phased out these benefits, including some of our key states. The removal of these benefits led to a shift in other tender methods, but overall, we did not experience a negative impact on our sales. We are keeping an eye on the situation, especially in relation to tax refunds, which are generally lower this year. Although the number of returns filed is slightly ahead of previous years, the overall return amount has decreased. We are closely monitoring both factors to see how they may affect our customers and our business in the future. Regarding COLA, we did notice some positive impact from the cost of living adjustment, particularly among consumers and stores that serve those who benefit from COLA. While this was beneficial, the overall impact was not significant. Yes. The way to think about this is very significant LIFO charge last year. We don't expect a deflationary environment this year, so we do expect a LIFO charge. But we are assuming a more moderate LIFO charge. So less of a headwind this year. I think one thing to just bear in mind as you think about the year-over-year, we did mitigate where we could, the LIFO charge by taking targeted pricing actions as we saw the market move. So that mitigated the impact of that. So I wouldn't consider this fully a tailwind, but certainly less of a headwind as we go into this year.

First, can you just clarify, John, like are you expecting earnings to actually be down in the first half or just lower?

In terms of the year, we see it as primarily a back-half story where growth is anticipated to occur in the latter half of the year. We do not expect a significant decline in the first half; rather, we anticipate modest growth or stability. As for the relationship between accounts payable and inventory, the increase in inventory levels along with the timing of payments are key factors. Notably, the 53rd week affects payment timing, such as pulling in the first week's rent payment. Looking ahead, we expect inventory levels to stabilize. In the fourth quarter, our inventory per store decreased by 50%, reflecting a growth rate that was about half of what we experienced previously. This is driven by product cost inflation and a higher mix of premium products, especially as we completed the rollout of the NCI initiative. Importantly, these products are not time-sensitive, so we are confident in the quality of our inventory and our capacity to move it, and we expect this normalization to continue throughout the year.

I also wanted to ask on CapEx. So historically, CapEx has been about 3% of sales. And last year and this year, it's about 4%. So just want to get a sense of where you think the normal level of spending could be in a normalized environment as a percent of sales or any other commentary?

Sure. Regarding capital, a significant factor has been inflation along with the increased real estate activity and the number of projects we're undertaking with our distribution centers. We are currently working on three distribution centers in one quarter, and I have confidence in the returns we're seeing from these investments. I prefer not to speculate or provide future guidance on capital expenditures. However, I could see a situation where decreasing inflation could lead to moderation in our spending. We will provide more details on capital expenditures later, but our primary focus is on the returns from these projects, and I feel optimistic about them. We will assess what is necessary to grow the business in the future, and further updates will follow.

Great. And then maybe just one follow-up question. So DG Media, the commentary is very positive there in terms of what you're seeing with your vendors. As you think about the dollars there, how do you think about reinvesting the business versus flowing that through the bottom line?

Rupesh, you're right. We are very excited about what we're seeing on our DG Media Network. And quite frankly, our digital acceleration in general. One of the things that we've learned over the last couple of years when we started this journey was how digitally savvy our customer is and how much it helps her to be more connected and more loyal to Dollar General and it shows up in her ability to spend with us. Certainly, as you think about the network and you think about what we're able to bring to the market, we're able to bring access to a segment of the population that's really difficult to connect with. And when you think about the rural population, 30% of the United States population, that's meaningful. And that's why our brand partners and our CPG partners are very excited to partner with DG, and we're excited about where the media network will go over time. In terms of kind of how we handle the dollars that we're receiving from that, obviously, one of the things that's great about this company is our ability to grow our operating profit and reinvest in the business. And this is one of the ways it allows us to do that. And so that's why we're all very excited about the strategic foundation we've built here, the muscle we've built. And we're excited about some of the initiatives that we're going to bring to the forefront as we look forward, especially in '23 and beyond.

And John, sad to see you go. It's been great working with you. I just wanted to go back to the overall algorithm for DG. Obviously, there's noise in '23, and we all appreciate that. But can you just maybe give a little bit of an update on what you think the long-term algorithm should be as we get beyond '23? And then I wanted to just clarify on the wage investment and/or wage. Can you just let us know what your average hourly wage rate is? And how you think about that as opposed to investing more in dollars, and I realize you need to invest in hours, but dollars?

Yes, it's Karen. I'll take the first part of that question, and then John, I'll kick it to you for the algorithm question. But Karen, we don't disclose our average hourly rate. But what I can tell you is, as I said earlier, is we have and we continue to pay very competitive wages. And I think the one nuance to Dollar General that I frankly believe is underappreciated is the ability to come into this company as a part-time sales associate and grow into a career. And you can do it faster than you can in any other retailer because we're committed to internal development and we have the opportunity to provide you with growth opportunities because of our dynamic growth. So I think those two things are the reason why we feel great about our staffing levels, our ability to attract and our ability to retain our talent. And so that's why we're investing in hours. And right now, we're very pleased to see that wage grow 23% over the last 3 years. So we're in a great position, and that's why we're able to put this investment more towards the hours in the store rather than having to catch up on wages. And John?

As you think of the algorithm and if you just step back and look over the last 3 years, while it's been up and down over the last 3 years in this environment, every element of that well in excess of the algorithm. If you look at sales comp, well in excess of the algorithm; expansion of gross margin and operating margin; operating income, EPS, well in excess of the algorithm. So we feel very good about the performance over this period of time, and we feel the model remains very strong and very resilient. We continue to see ourselves as 10%-plus EPS growers over the long term, not every year. Some years, we see it prudent to invest to protect that growth over the long term. But if you look at the business model and fundamentals, they're very strong with the unique combination of value and convenience resonating as strong as ever. We continue to see very compelling store-level economics in new store returns and then significant bumps from the remodels. And we continue to see 16,000-plus new store opportunities for everybody in our space. But obviously, we've been getting an outsized share of that. So significant runway for growth. The initiatives are performing very well, helping both the top line and bottom line. They're focused on both. And we see, as I mentioned, a lot of levers within gross margin to continue to expand that over the long term. And the business generates a lot of cash to then buy back shares and reinvest in the business. So we think top to bottom, the business model and fundamentals remain very strong.

Our final question comes from Corey Tarlowe with Jefferies.

And congrats, John, on your retirement announcement. It's been a pleasure to work with you. My first question for Jeff on market share. You talked in your prepared remarks about seeing customers trade in the Dollar General. You talked about higher income consumers trading down to Dollar General. So I think it's clear that Dollar General is gaining share across income cohorts and categories, and you talked about Value Valley as well, comping up over, I think it was 30%. So maybe could you talk a little bit more about where you think this market share is coming from? And where you see it likely to come from even more so as we look ahead?

Well, Corey, first of all, we are very pleased at the market share gains that we've been able to achieve, both in the consumable and on the nonconsumable segments of our business. And when you think about our customers as well, we're also incredibly pleased with the fact that we were able to increase our productivity with really all segments of our core customer. We increased our share of wallet, our share of trips. Those are all really encouraging signs and very pleased to see that. It's a credit to our team and their ability to connect with this customer, bring an assortment that she's looking for and delivered in a consistent fashion. As you think about the donors, it's really the same donors we've had for quite some time, primarily drug is our biggest share donor. And so as we look forward to continuing to refine our assortment, our strategic initiatives really allow us to bring even more, we believe, relevant assortment to our customer. We think we're in the early to mid-innings of many of these initiatives when you think about our treasure hunt with NCI, when you think about DG Fresh and the relevance of the perishable and frozen offering, you think about produce. And we're very pleased on our digital strategy that's allowing us to, quite frankly, through our first-party data, our ability to understand this customer on an even greater level than we ever have before, we'll be able to continue bringing the relevance she's looking for. And when you think about our growing store base, we continue to see our share opportunity very, very optimistically, and we would expect us to continue to take it from the same donors we've seen in previous.

Yes. As you think of the headwinds and the tailwinds, I'll start with the headwinds, but then go to what we see as a pretty sizable tailwind. The ones we talked about were one, sales mix, that pressure continuing. So we've assumed that. We've also assumed shrink and damages as we move through the first half, in particular. And then increased markdowns, and that's really just getting back to rates more in line with historical norms. I wouldn't say of these one really stands out significantly over the others, but they all contribute as headwinds. And then, again, the shrink and damages more of a first half pressure than back half as we see it now. Damages, in particular, Q1 pressure as you look at the cadence of the year. We mentioned the LIFO impact, and we do think that will provide some benefit, but I wouldn't flow the whole thing through because you had the pricing that went with that last year. But then as you think of the tailwinds, the biggest one I would point to and the biggest overall driver I would point to here is the supply chain. We expect a pretty material benefit from lapping the increased supply chain expenses in the second half of last year as well as the sizable benefits from greater distribution center capacity and productivity, lower carrier rates as well as the benefit of expanding our private tractor fleet, which we're growing from 1,600 tractors at the end of last year to over 2,000 by the end of next year. And again, as we make those conversions, it's about a 20% savings in addition to other benefits that we expect as we optimize DG Fresh, NCI, and then expect a pretty sizable benefit from DG Media Network to name a few. And then obviously, we intend to leverage our scale as we have as a limited SKU operator, and that's another lever amongst the other levers we've mentioned in the past. So again, as you look at the guide for the year, we gave the top line, the bottom line, we didn't give gross margin, but I think it implies a pretty healthy operating profit growth than rates overall despite pretty sizable investments in the business.

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

I'd like to thank you all for your questions and your interest in Dollar General. And while our operating environment is dynamic for our customer and business, we are staying focused on the things that we can control, which is continued innovation and execution in our business. If I could summarize our discussion today, I'd like to leave you with these three things. First, we have a powerful growth strategy. Second, we are investing in the future. And third, we are doing this while also planning to deliver strong results in 2023. We're excited about this business, and I am confident we are well positioned to serve our customers and also create value for our shareholders in the year ahead. Thank you for your listening today, and I hope you have a great day.

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