Good morning. My name is Robert, and I'll be your conference operator today. I would like to welcome everyone to the Dollar General Fourth Quarter 2023 Earnings Conference Call. Today is Thursday, March 14, 2024. This call is being recorded. Now I'd like to turn the conference over to your host, Mr. Kevin Walker, Vice President of Investor Relations. Kevin, you may now begin your conference.

Thank you, and good morning, everyone. On the call with me today are Todd Vasos, our CEO, and Kelly Dilts, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events. I want to remind you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, including statements about our financial guidance, strategy, initiatives, plans, goals, priorities, opportunities, expectations, or beliefs about future matters, as well as other statements that are not limited to historical facts. These statements are subject to risks and uncertainties that could lead to actual results differing materially from our expectations and projections. These factors include, but are not limited to, those outlined in our earnings release issued this morning under Risk Factors in our 2023 Form 10-K filed on March 24, 2023, and any later filed periodic report, as well as in the comments made during this call. You should not place undue reliance on forward-looking statements, which reflect our views only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law. At the end of our prepared remarks, we will open the call for your questions. Now it is my pleasure to turn the call over to Todd.

Thank you, Kevin, and welcome to everyone joining our call. I want to begin by thanking our associates for their commitment to serving our customers and their communities this year. I'm proud of the team's resilience and sense of purpose in fulfilling our mission of serving others. I was reminded again recently of the tremendous opportunity we have to serve as America's neighborhood general store as we celebrated the grand opening of our 20,000th store in Ellis, Texas. Our entire team takes great pride in serving the communities we call home with value and convenience every day. On today's call, I will begin by recapping some of the highlights of our Q4 performance as well as briefly sharing some of our plans for 2024. After that, Kelly will share our Q4 financial update and our financial guidance for 2024. And then I'll wrap up the call with an update on our work in getting back to the basics in our execution across the business. Turning to our fourth quarter performance. Net sales decreased 3.4% to $9.9 billion in Q4 compared to net sales of $10.2 billion in last year's fourth quarter. This decrease was primarily driven by lapping sales of $678 million from the 53rd week in fiscal 2022. Our net sales performance was highlighted by accelerating market share growth in both dollars and units in highly consumable product sales as well as market share growth in dollars in non-consumable product sales. Same-store sales grew 0.7% in Q4 and increased sequentially each period of the quarter, which we believe is a testament to the positive early impact of some of our Back to Basics work. The increase was driven by growth of nearly 4% in customer traffic, which was positive in all 3 periods of the quarter, and partially offset by a decline in average transaction amount, primarily driven by fewer items per basket. Additionally, the comp sales increase was driven entirely by our consumable category and was partially offset by declines in the home, seasonal and apparel categories. Customers are continuing to feel the impact of the last 2 years of inflation, which we believe is driving them to make trade-offs in the store. We see this manifested in the continued pressure on sales in discretionary categories as well as accelerated share growth and penetration in private brand sales. Our commitment to providing customers with value and convenience is as important as ever. We continue to feel very good about our pricing position relative to our competitors and other classes of trade and are well positioned to help our customers stretch their dollar. As we look to further enhance the shopping experience for our customers in 2024, I want to provide a quick update on some of our plans. We executed more than 3,000 real estate projects in 2023, including 987 new stores, 129 relocations and 2,007 remodels. We expect to build on this momentum in 2024 as we plan to execute approximately 2,385 projects, including 800 new store openings, 1,500 remodels and 85 relocations. These store opening plans include 30 pOpshelf stores and up to 15 stores in Mexico, where we recently celebrated the 1-year anniversary of our first store opening. We recently began shipping from a pOpshelf-only distribution facility in Georgia, which will allow us to drive greater efficiencies in our existing traditional distribution network and better serve our pOpshelf stores. As a reminder, pOpshelf is comprised of primarily non-consumable product categories and, as such, is more heavily impacted by a softer discretionary sales environment. As a result, we believe we are moving at an appropriate pace of openings for this year. We continue to believe that the pOpshelf concept provides an additional growth opportunity, but we are cognizant of the near-term pressures impacting non-consumable sales. We continue to diligently apply our learnings and refine our strategy and scaling of the business to drive higher returns. Finally, we have always prioritized going where the customer wants us to go. And we continue to hear from many of them regarding more fresh food options. Thanks to years of great work by our teams to add cooler doors to our stores while enabling the self-distribution of these products, we now have nearly 30 doors per store on average, with ongoing opportunities to add cooler doors and frozen and refrigerated items through our fresh initiative. In addition, we have fresh produce in more than 5,400 stores at the end of the year and are targeting up to 1,500 additional stores for produce in 2024. Overall, we are pleased with the progress we made in Q4, which I will discuss in more detail later, and we are excited about our plans for 2024. As we embark on our 85th year in business and with store locations within 5 miles of approximately 75% of the U.S. population, we are uniquely positioned as a growth company that is privileged to be here for what matters for millions of customers across the country. We take this responsibility seriously and are committed to serving our customers and communities while developing and supporting our associates and creating long-term shareholder value. With that, I'll now turn the call over to Kelly.

Thank you, Todd, and good morning, everyone. Now that Todd has taken you through a few 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 Todd already discussed sales, I'll start with gross profit. For Q4, gross profit as a percentage of sales was 29.5%, a decrease of 138 basis points. This decrease was primarily attributable to increases in shrink and markdowns, lower inventory markups and a greater proportion of sales coming from the consumables category. These were partially offset by decreases in LIFO and transportation costs. Notably, year-over-year shrink headwinds continued to build during the year, increasing more than 100 basis points for both the fourth quarter and full year. We are taking multiple actions aimed at reducing shrink in 2024, which Todd will discuss in more detail later in the call. Turning to SG&A. It was 23.6% as a percentage of sales, an increase of 189 basis points. This increase was primarily driven by retail labor, including the remaining $50 million of our targeted labor investment as well as store occupancy costs, depreciation and amortization, repairs and maintenance and other services purchased, including debit and credit card transaction fees. These increased expenses were partially offset by a decrease in incentive compensation. Moving down the income statement. Operating profit for the fourth quarter decreased 37.9% to $580 million. As a percentage of sales, operating profit was 5.9%, a decrease of 327 basis points. Interest expense for the quarter increased to $77 million compared to $75 million in last year's fourth quarter. Our effective tax rate for the quarter was 20% and compares to 23.2% in the fourth quarter last year. This lower rate is primarily due to the effect of certain rate-impacting items such as federal tax credits on lower earnings before taxes as well as lower state effective rate resulting from increased recognition of state tax credits. Finally, EPS for the quarter decreased 38% to $1.83, which was at the higher end of our internal expectations. For the full year, EPS decreased 29% to $7.55, including an estimated negative impact of approximately 4 percentage points from lapping the 53rd week and a negative impact of approximately 4 percentage points from higher interest expense. Turning now to our balance sheet and cash flow. Merchandise inventories were $7 billion at the end of the year, an increase of 3.5% compared to fiscal year 2022 and a decrease of 1.1% on a per store basis. Notably, total non-consumable inventory decreased approximately 17% compared to last year and decreased 21% on a per store basis. I want to acknowledge the great work the team has done to reduce our inventory position this year. We've made significant progress optimizing our inventory mix and levels, and we continue to believe that the quality of our inventory remains good. As Todd will discuss in a few moments, we will continue to focus on inventory levels in 2024, including additional opportunities to reduce per store inventory. In 2023, the business generated cash flows from operations of $2.4 billion, an increase of 21% as we improved our working capital primarily through inventory management. Total capital expenditures were $1.7 billion, in line with our expectations 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 returned cash to shareholders through a quarterly dividend of $0.59 per common share outstanding for a total payment of $130 million. Overall, we are pleased with the progress we are making, including gains in customer traffic and market share, lower inventory levels and improving cash flow from operations. Moving to our financial outlook for fiscal 2024. While we continue to make progress in our Back to Basics work, the full benefits from these actions will not be realized in a single quarter, and we anticipate they will build as we move throughout the year. With that in mind, we expect the following for 2024: net sales growth in the range of approximately 6% to 6.7%, same-store sales growth in the range of 2% to 2.7% and an EPS in the range of $6.80 to $7.55. We currently anticipate an estimated negative impact to EPS of approximately $0.50 due to higher incentive compensation expense. Our EPS guidance assumes an effective tax rate in the range of 22.5% to 23.5%. We expect a reduced level of capital spending as a percent of sales compared to prior year in the range of $1.3 billion to $1.4 billion, which we believe is appropriate to support our ongoing growth. Before I move on, I want to reiterate our capital allocation priorities, which we believe continue to serve us well and guide us today. Our first priority is investing in our business, including our existing store base as well as high-return organic growth opportunities such as new store expansion and strategic initiatives. Next, we seek to return cash to shareholders through a quarterly dividend payment and over time and when appropriate, share repurchases. With regard to shareholder returns this year, our Board recently approved a quarterly cash dividend of $0.59 per share. Finally, to support reducing our debt leverage ratio and maintaining our current investment-grade credit ratings, we do not plan to repurchase common stock this year under our Board-authorized repurchase program. Although, as I mentioned, share repurchases remain a part of our future capital allocation strategy. Although our leverage ratio is currently above our target of approximately 3x adjusted debt to adjusted EBITDAR, we are focused on improving our debt metrics in support of our commitment to our current investment-grade credit ratings which, as a reminder, are BBB and Baa2. Cash generation is always important, and we are focused on further improving cash flow as we move through 2024. We believe these actions, which are aligned with our capital allocation priorities, will continue to strengthen our overall financial position for 2024 and beyond. Now let me provide some additional context as it relates to our outlook for 2024. As Todd noted, inflation continues to impact our customer as they make trade-offs in the aisle and we anticipate the related sales mix headwind to gross margin will continue in 2024. In addition, after multiple years of fewer markdowns, we expect the overall promotional environment in 2024 to revert to pre-pandemic levels. We anticipate this will result in higher promotional markdowns, which will offset the lower clearance markdowns compared to last year and we'll keep overall markdowns as a percent of sales in 2024 at a similar level to 2023. In addition, we expect shrink to be an ongoing headwind to gross margin in the first part of the year before the anticipated positive impact of our mitigation efforts begin to manifest in the back half of the year. Turning to SG&A. As I mentioned earlier, we anticipate a significant headwind this year from the normalization of incentive compensation as well as ongoing headwind from depreciation and amortization. Looking at the quarterly SG&A cadence, while we expect to deleverage each quarter, we also expect sequential quarterly improvement in the year-over-year basis point comparison as we move through the year. In addition, we expect pressure in Q1 as we annualize some of the headwinds from 2023, including shrink and our investment in retail labor as well as pressure from markdowns, which we expect will have a different cadence than 2023, which was back half heavy. While we do not typically provide quarterly guidance, given the specific Q1 headwinds, we are providing more specific detail on our expectations for the first quarter. To that end, we expect a comp sales increase of 1.5% to 2% in the first quarter, with EPS in the range of approximately $1.50 to $1.60. In summary, we are confident in the long-term strategy for this company and believe we are well positioned to drive top and bottom line growth in the years ahead. In the near term, we are taking actions to strengthen our position to support long-term growth with our Back to Basics efforts with a particular focus on driving comp sales, gaining market share and reducing shrink. Over the long term, our underlying opportunities to grow operating margin are still in place, including shrink reduction, the DG Media Network, private brands, global sourcing, category management and inventory optimization, distribution and transportation efficiencies and our Save to Serve approach to controlling costs. We remain committed to maintaining our discipline in how we manage expenses and capital as a low-cost operator with the goal of delivering consistent, strong financial performance while strategically investing for the long term. We are pleased with our progress, and we are excited about our plans for 2024 as we continue to reinforce our foundation for future growth, while driving profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value. With that, I'll turn the call back over to Todd.

Thank you, Kelly. We remain committed to our 4 operating priorities of driving profitable sales growth, capturing growth opportunities, leveraging and reinforcing our position as a low-cost operator, and investing in our diverse teams through development, empowerment, and inclusion. To advance these priorities in the near term and following the period of evaluation of the challenges and opportunities in front of us, we have implemented a refreshed approach to getting back to the basics to improve store standards and the associate and customer experience in our stores. I want to take the next few minutes to provide an update on these efforts in our stores, supply chain, and merchandising. To better inform these efforts, the leadership team has spent a significant amount of time over the last couple of months directly engaging with our associates throughout the organization, including listening sessions in stores, distribution centers, and our store support center. We also hosted more than 400 field leaders in Nashville in February, and then several of us spent time on the road with more than 1,000 additional leaders across the country. These sessions allowed us to follow up on the feedback we've received, share our action plans and commitments, and align our expectations with our teams across the organization. We continue to prioritize this direct engagement with our associates and value the actionable feedback we gain to continue enhancing the way we support our teams and serve our customers, all while strengthening the sense of pride and purpose we all share at Dollar General. I want to start with our stores, where everything begins and ends with our customer. We completed the investment of $150 million in store labor during the fourth quarter, with the additional hours primarily focused on the 2 areas we discussed on our last quarterly call. First, we significantly increased the employee presence at the front end of our stores. These team members are dedicated to providing a friendly, welcoming, and positive checkout experience for our customers. Second, we took dedicated more labor to perpetual inventory management in our stores by adding specific inventory management shifts and specialized inventory training in each store. This effort has been well received by our managers and their teams and has contributed to in-stock level improvements in our stores. As we entered 2024, we have also reduced the span of control for our district managers, adding more than 140 new districts and district managers. This significant investment in our field teams reduces the number of stores assigned to each district manager by approximately 15% and is designed to increase both the opportunity for engagement with our store managers and their teams as well as to drive consistency and execution across our store base. Finally, we've taken a fresh look at store-level tasks and activities and have taken significant action to make it easier to operate our stores. While we have made progress, we continue to focus on how we can enhance the overall customer and associate experience in our stores. With that in mind, we are making 3 changes to our self-checkout strategy this year. As a reminder, we currently have self-checkout options available in more than 14,000 stores. Although adoption rates for self-checkout have been high, we believe there is truly no substitute for an employee presence at the front end of the store to greet customers and provide excellent customer service, including at checkout. Importantly, when choosing our self-checkout solution, we implemented a product that is convertible from self-checkout to associate-assisted checkout. To that end, we have begun immediately converting some or all self-checkout registers to assisted-checkout options in approximately 9,000 stores. This is intended to drive traffic first to our staffed registers, with assisted-checkout options available as second or third options to reduce lines during high-volume times. Our second course of action will apply to all remaining stores with self-checkout, where we have begun limiting self-checkout to transactions consisting of 5 items or less. And finally, over the first half of the year, we plan to completely remove self-checkout from more than 300 of our highest shrink stores. Collectively, we believe these steps are in line with where the customer wants us to be, which includes increasing personal engagement with them at the store. Additionally, we believe these actions have the potential to have a material and positive impact on shrink as we move into the back half of the year and into 2025. The 2024 portion of this benefit as well as additional labor in these stores to devote to the checkout process is included in our guidance that Kelly provided earlier. Beyond our changes to self-checkout, we are also executing on a variety of other actions to reduce shrink this year, including inventory reduction efforts where we see additional opportunity in 2024; SKU rationalization, which I'll discuss more momentarily; additional shrink incentive programs for our store managers to encourage and foster a greater sense of ownership; and the utilization of high-shrink planograms, whereby we will remove certain high-shrink items from high-shrink stores to target the greatest opportunity for improvement. While we anticipate a continuing headwind from shrink early this year, we believe our actions will have a significant mitigation impact in the back half of the year and into 2025. Overall, we believe these actions in our stores will drive improvements in customer satisfaction, including customer service and on-shelf availability and convenience; enhance the associate experience in our stores, including improved employee engagement and retention; and drive improvements in financial results, including sales and shrink. Next, let me provide a quick update on our supply chain. As a reminder, our top priority this year is to improve our rates of on-time and in-full truck deliveries, which we refer to as OTIF. Our distribution and transportation teams are laser-focused on serving stores as their most direct customers and are pursuing several opportunities to drive higher OTIF levels. Since Q3, we have seen significant improvements in our on-time deliveries as well as customer service levels. In 2024, we will continue to pursue improvements by undertaking our first full-scale refresh of our sorting process and distribution centers since the launch of our Fast Track sortation initiative in 2017. With the growth and evolution we have seen since that time, we are further updating the sorting process to improve our distribution flow while enabling our store teams to unload the truck and restock shelves more quickly, ultimately driving greater on-shelf availability for our customers and increased sales. In addition to improving OTIF rates, we have also been successful in reducing inventory and optimizing the flow within our supply chain. As we said we would last quarter, we have reduced the number of temporary warehouse facilities, exiting 5 buildings in 2023, with plans to exit 7 more in 2024. We will continue to maintain a few of these temporary facilities that are more complementary to some of our smaller permanent distribution centers, but by reducing the number of outside warehouses, we can lower costs and continue to improve inventory flow throughout our supply chain. As I mentioned earlier, we opened a pOpshelf-only distribution facility earlier this year to improve efficiencies, and we expect to open Dollar General distribution centers in Arkansas and Colorado later this year as we continue to support our ongoing growth. As a result of our reduced inventory levels and optimization of existing distribution centers, we now expect to open the planned facility in Oregon at a date beyond 2024. We are pleased with the progress we've made in our supply chain and are confident in our ability to continue progressing toward our goals. Ultimately, these actions should enhance our ability to meet challenging demands and respond to the challenges within the supply chain as well as drive greater efficiencies and further improve experience for our store teams and customers. Finally, I want to provide an update on getting back to the basics in merchandising. Our team continues to prioritize delivering value to our customers while simplifying the work for our store teams and driving profitable sales growth. I want to echo Kelly in acknowledging the great work the team has done on inventory optimization and reduction. This has lowered our carrying costs, driven efficiencies across the supply chain and store base, and positions us to better serve our customers. Importantly, we have been able to lower average inventory per store while improving our in-stock rates and driving higher comp sales growth. We expect to continue driving improvement in 2024 with several efforts already underway. We have begun actively reducing the number of SKUs we carry in our stores through our planogram reset process, and we expect net reduction of up to 1,000 SKUs in our stores by the end of 2024. Notably, we have already turned off the majority of these SKUs, which will allow us to sell through the remaining inventory while seeking to minimize the amount of related clearance markdowns, which are contemplated in our 2024 guidance. Finally, our merchant teams have focused on reducing activity for store teams by reducing the number of floor stands and monthly endcap resets and increasing the number of products that go straight to the shelf, all which saves time in our stores and enhances the customer experience. As we wrap up this morning, I want to reiterate that we are laser-focused on getting back to the basics of Dollar General and fulfilling our mission of serving others. I'm proud of the team's efforts over the last few months to identify gaps and opportunities, implement plans of action and deliver on our commitments that we make. We are moving with a sense of urgency and have made a lot of progress in a short amount of time. And while we are already seeing positive results from some of our actions, other efforts may take longer to deliver the intended benefit. With all that in mind, we are excited about the future of this business. We are working hard to capitalize on the opportunities in front of us to drive meaningful operational improvement in the near term and to deliver sustainable growth and value over the long term. I want to thank our approximately 185,000 employees for their engagement and for their dedication to serving others every day. This team is energized and committed to our Back to Basics plan, and I'm excited about all that we can accomplish together in the year ahead. With that, operator, I'd now like to open the lines for questions.

Our first question comes from Matthew Boss with JPMorgan.

Congrats on the improvement. So Todd, I think it would be helpful if you could maybe speak to the top line and traffic self-help improvement that you're seeing, just given the volatile macro backdrop. So as you break down your 2024 comp guide, could you elaborate on the Back to Basics strategy? What's working today that supports the first quarter comp guidance relative to maybe incremental opportunity that you see potentially building throughout the year, particularly in the back half?

Thank you for the question, Matt. We're quite satisfied with our progress in returning to our fundamental principles. This is evident in our fourth-quarter comparable sales, traffic figures, and customer data, all indicating that we are on the right path at Dollar General. As noted, our comp guidance for the first quarter is set at 1.5% to 2%, which reflects a stronger performance than we have experienced for much of the past year. This confidence stems from our commitment to our Back to Basics initiatives. To reinforce that confidence, I want to highlight a few key points. First, we've invested $150 million in labor this year to ensure we have adequate staffing in our stores. In the fourth quarter, we also focused on reallocating this labor to critical areas that matter most to our customers. We are now consistently ensuring that there is always someone available at the front register to assist customers, which has been executed at a high level. Additionally, we've put effort into improving our inventory accuracy by allocating labor to maintain accurate on-hand counts. This program, which we implemented in the fourth quarter alongside comprehensive training, will help us achieve long-term stability in our stores. Our employees have responded positively to these labor investments, and we are already witnessing benefits such as improved product availability on shelves. Another significant factor contributing to our confidence is our thorough review of our transportation and distribution center efficiency. In the fourth quarter, we analyzed and restructured our supply chain, resulting in a marked improvement in our on-time delivery rates. In fact, we've met our goals for both fresh and traditional distribution for the first time recently, which translates into a more efficient workflow in our stores. Moreover, we've discontinued 1,000 SKUs, which is already streamlining operations at the store level. Though we anticipate some markdowns in 2024 to clear out existing products, this reduction will help alleviate the burden on our stores. A significant decrease in the number of floor stands and other items will also be implemented in the coming quarters. Finally, as I mentioned earlier, we're reintroducing the rolltainer sort, which we haven't used since 2017. This process enhances the speed at which products are placed on shelves, contributing to increased sales and efficiency for our stockers. We are optimistic about the progress we've made and what lies ahead. We have experience and confidence in executing these initiatives with enthusiasm and commitment.

Our next question is from Simeon Gutman with Morgan Stanley.

Todd, I wanted to ask you something that kind of puts together some of the comments you made as well as what Kelly said. I wanted to ask what's gone well since you joined, what's sort of taking longer. You mentioned some things need a little more attention. And as the construct of getting back to 7-plus margins, I think we talked about it theoretically by '25. Is that something that's still achievable? And listening to the finer points and some of what Kelly spoke about, like promotions being a little bit higher, it seems like shrink is about where you thought it would be. I don't know if you were trying to signal that it's a little worse that you're taking more action, but those type of puts and takes sort of what's gone well, what's not, and then something around the 7% in the future.

Yes, thank you for the question. I'll begin and then let Kelly address the second part. I've mentioned some positive developments, and we're optimistic about the sales and customer satisfaction initiatives we've implemented as part of our Back to Basics strategy. If we consider our progress outside of shrink—which I'll discuss shortly—I would describe our current position as a foundational step in returning to basics. When we embarked on this journey in mid-October last year, we were, unfortunately, quite far from our goal, akin to being on our own 10-yard line in football. Now, as we finish Q4 and enter Q1, we feel we are nearing the 35-yard line. I believe we are heading in the right direction to cross the 50-yard line as we progress through Q1 and into Q2, with plans for continued growth into '24 and '25, ultimately reaching a more favorable position. Some improvements are being realized quickly in stores and from the customer perspective, while others will take more time. One of those areas is shrink, which requires a longer timeframe. Since we conduct physical inventories annually, any efforts initiated last October will take a year to reflect in our financial outcomes, and in some cases, longer as changes take effect at different paces. The good news is we have successful strategies for managing this situation. Our current head of store operations, Steve Decker, has previously run our shrink program and achieved historically low levels prior to the pandemic. We are committed to reducing shrink back to those pre-pandemic levels by '25 and '26, but it will require some time. I want to highlight the measures we are taking, including significant actions regarding self-checkout. We’ve decided to remove self-checkout from 9,000 stores and switch to assisted check stands, which should have immediate benefits. We invested in an AI solution, Everseen, to monitor thousands of self-checkout transactions over many months. This data allowed us to identify both intentional and inadvertent shrink caused by scanning errors. Based on this analysis, we've opted for the assisted checkout model, which we implemented in October, and we anticipate it will positively impact our shrink situation. Furthermore, improving inventory control will significantly aid in managing shrink. From my extensive experience in operations, it's clear that having excessive inventory contributes to increased shrink and damages. I am confident that we are gaining control over these issues and am optimistic about our path forward.

Yes. No, I think Todd told you all the reasons that we really believe that we're strengthening our foundation for long-term growth. And we really believe that this business is going to return to 10% to 10% plus EPS growth on an adjusted basis over the long term. As we move past some of the significant headwinds that Todd just talked about and getting back to all the mitigating actions that we're doing to combat those headwinds, we still have a lot of really good fundamentals in this business even with where we are, and they're only going to get better. We're seeing momentum and growing share. We're growing traffic. We're starting to see healthy comps again, all the while, we've been generating a lot of cash flow. So this model is absolutely intact. And when we think about it, we've still got a long runway for growth. We think 700 and 900 stores are certainly still in our future. We've got a lot of remodel progress that we have on our plates as well. And that, as you know, contributes 150 to 200 basis points of comp contribution, so still really solid there. And we've got a lot of long-term drivers, some new, which Todd just talked about, making sure that we're reducing shrink. The inventory optimization gives us a lot of efficiencies, both in the store and in the distribution centers. But then we have those long-term drivers that we've had in place for a while and continue to benefit of, the DG Media Network, private brands, global sourcing, category management, all of those things that we've had for a while are certainly still in place. And with that, we expect to continue to generate cash and are looking forward to being able to return that cash back to shareholders, not only through the dividend, which we're doing now, but also through share repurchases over the long term. So lots of reasons to believe back in that 10% to 10% EPS growth, and we feel good about the future.

Our next question comes from John Heinbockel with Guggenheim Partners.

Todd, could you discuss the mini-market format and your thoughts on how many stores you envision, possibly in the thousands? Also, could you remind us about the economics related to that? I realize it's relatively new, but how do you view metrics like sales per store, sales per square foot, and 4-wall margins in comparison to your other formats?

Sure. Thanks for the question, John. And you and I have been talking about fresh and about these types of stores for quite a while. And I would tell you, when we put into place here years ago, our ability to grow cooler count, to grow fresh produce, the way we have over the years very methodically to be profitable at it as well as then enabling all of that and soon to be produced in the near future into self-distribution, I would tell you that we feel very good about that. Then as you think about municipalities across this country that are in food deserts and/or looking for help in more fresh options, that mini market, as you indicated, our DG Market is really a lifesaver for those areas and a true lifeline for those areas where the grocery have left years ago, and we're there and can be there to help them. So we believe in that concept greatly. And as you look at the economics, and I'll pass it over to Kelly to add a little bit more color to it. But I would tell you that we like the sales economics there. We do like the 4-wall profitability that's thrown off by that. As we continue to look at balancing it, I would tell you there are thousands of opportunities for that box across the U.S.

That's right now and I think Todd hit on most of it. We really like the internal rate of return. They're certainly at the upper end of what we expect from new stores and a payback of less than 2 years. We like the top line and the flow-through on the operating margin, and the 4-wall is strong. So we think it hits all cylinders. It's great for the business, but as Todd alluded to, it's also great for our customer.

Our next question comes from Rupesh Parikh with Oppenheimer.

So I have 2 related questions to gross margins. So Kelly, you commented on your expectation for the promotional backdrop to revert to pre-pandemic levels. Just curious if you're seeing any changes in the promotional backdrop today or whether that's just an expectation for the balance of the year. And then just on gross margins, we heard a lot about the headwinds. But just wanted any granularity in terms of whether you expect gross margins to be up or down as we think about '24.

Rupesh, let me begin and then I'll hand it over to Kelly. Looking ahead to 2024, we expect an increase in the promotional environment, returning closer to pre-pandemic levels. We also observed an uptick in 2023, so this is not a sudden shift. This was anticipated over the past few years, and we believe that as we enter 2024, we will start to see these changes. Our CPG partners have indicated for some time that they need to move units, which will likely drive promotional activities. One of the advantages of Dollar General is our size and scale, which allows us to receive significant support from CPG partners regarding this increased activity. Therefore, our margins usually remain stable during periods of higher promotional markdowns. This situation also benefits customers who are currently seeking greater value. We are noticing that our customers are becoming more financially savvy. It takes some time for them to adjust after experiencing a financial shock. The inflation we faced in recent years has certainly been a challenge for them. Nevertheless, they are beginning to adapt, as seen in our transaction data and the increase in non-consumable and discretionary items they are purchasing each week. Thus, we have good reason to believe that these markdown promotions will encourage customers to spend more at Dollar General when they need us the most.

Yes. To build on what Todd mentioned, as we progress through the year, Q1 will be a pivotal period for sales. However, regarding markdowns, it’s more about the timing rather than just its overall impact on gross margin for the year. Last year, our markdown strategy was concentrated in the latter half of the year due to clearance efforts. This year, we are focusing on a more promotional strategy, which will spread markdowns more evenly throughout the quarters. Additionally, we are evaluating our retail labor hour investments, which will create some pressure in Q1. We also noted that shrink levels were significantly higher year-over-year in Q4, so we anticipate some pressure in the first half of the year due to that exit rate. As we consider the overall momentum from the actions we are taking, we are encouraged by current trends and expect top-line improvement and robust bottom-line growth as we enter the latter half of the year. Regarding gross margin challenges, while shrink has been a recurring issue, we believe our efforts will help address this trend in the second half of the year, with benefits beginning to be realized. Looking ahead to 2025, we expect sales mix challenges to persist as product trade-offs occur in-store, although it’s encouraging to see progress with discretionary items, as Todd mentioned. On the positive side, we have made significant strides in our supply chain efficiency and structural improvements, and the reduction in inventory will aid both shrink and damage reductions. The DG Media Network is also showing growth, and we are pleased with our private brand development. These factors are vital as we consider margins. Additionally, regarding SG&A, retail labor will slightly affect our Q1 baseline due to annualization. We also anticipate ongoing pressure from incentive compensation across all quarters, estimating a $0.50 headwind for the current 2024 year, alongside increased depreciation costs compared to the previous year. These are the various elements influencing both gross margin and SG&A flow.

Our next question comes from Kelly Bania with BMO Capital Markets.

Just wanted to talk a little bit more about inventory. I think the total inventory was up and with the decline in discretionary inventory, I think it means that the consumable inventory might have been up maybe 19% or 20%. So I was wondering if you could just talk about that, if that's related to SKU changes. And just in general, when do you expect to get into a normalized inventory position really across both categories?

Yes. No, I think the teams have done a lot of nice work on inventory, and you're absolutely right on what you're thinking about as far as trajectory. I think that they've done a really good job here threading the needle. And so we're seeing both sides of that. We're seeing the nonconsumable side inventory drop on a per store basis. And to your point, we're seeing the consumables increase. But that's us getting improvements in our in-stock, which is helping to drive sales. So they're doing a good job of balancing both of those things. As we move into 2024, inventory continues to be a high priority for us. We see opportunity to reduce our inventory on a per-store basis as we move through. And then, as you know, as we do that, the benefits just continue for us. It lowers our carrier costs, and it continues to drive efficiencies both in the stores and in the distribution centers. It takes pressure off of both shrink and damages. And frankly, with the improved in-stocks, that just positions us better to serve our customers.

Our next question comes from Chuck Grom with Gordon Haskett.

I just want to circle back a little bit on Simeon's question, but just looking at it from the margin angle. It looks like operating margins this year are going to finish in the high 5%, low 6%, if we back out the incentive accrual. So when you look back to pre-COVID, you guys were running in that, call it, high 7%, mid-8% range. Just curious when you look ahead, now that the business is starting to stabilize, how quickly you think you could get back to those levels? And when you look at the P&L, what are the key ingredients to get you there?

Thanks for the question, Chuck. Right now, we're focused on returning to the fundamentals that have historically made our company successful. We're in the early stages of this process, and there's still a lot of work to be done. However, you can sense the enthusiasm in our team and within our stores; we are starting to see progress. Our approach is about refining existing practices and ensuring we follow established procedures. While we faced challenges over the past year and a half, particularly concerning margins, I believe that as we correct these issues, especially shrinkage, we'll be well-positioned to achieve our goal of over 10% EPS growth. I'm optimistic about our long-term prospects and feel that we currently have more opportunities to drive revenue than ever before, particularly with our fresh food offerings and improvements in non-consumables. We're beginning to notice positive signs as customers return, especially in discretionary spending, and we're ready with fresh inventory to meet that demand. We're committed to making swift progress and have already made a strong start.

Our final question is from Corey Tarlowe with Jefferies.

Great. You've seen now positive traffic for 2 quarters in a row, I believe. I was curious to get your thoughts. And within your outlook, what's embedded for traffic and ticket within your guide? And then if you could also maybe just touch on what you're expecting ahead from a wage standpoint and what's embedded in your guide as well there?

Sure. I'll begin and then hand it over to Kelly. During the latter part of Q3, we began to observe encouraging signs of increased traffic. As we progressed through Q4, we noted a sequential rise in this metric, which has continued into Q1, though we are not providing guidance for Q1. We feel optimistic about the traffic trends. We believe that our ongoing efforts to refocus on the fundamentals will lead to significant traffic growth as we advance into the next quarters. This is why the comparable store sales guidance we've provided is crucial, as we anticipate seeing positive traffic. Additionally, all the initiatives aimed at returning to the basics, such as stocking management, not only support this traffic growth but also give us confidence that we are beginning to regain share for the first time in several quarters. We've observed this trend across all customer segments we've analyzed, from higher-income to lower-income groups, indicating that our strategies are effective and should translate into sustainable long-term growth in revenue.

Absolutely right. And then on the wage side of things, I'll tell you, we feel really good about our wages. We've increased wages almost 30% since 2019 and feel we're in a good position there. We're not seeing a lot of stress on the wage front. So a more normalized annual wage growth is what we're expecting. And then with all of the investments that we've made in the labor hours, we feel like we are well positioned on that front in 2024. And all of that's considered in the guidance that we gave. So feel good about that as well.

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