Dollar General Corp Q3 FY2024 Earnings Call

Good morning. My name is Rob, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Third Quarter 2024 Earnings Call. Today is Thursday, December 5, 2024. All lines have been placed on mute to prevent any background noise. This call is being recorded. Instructions for listening to the replay of the call are available in the company's earnings press release issued this morning. Now, I'd like to turn the conference over to Mr. Kevin Walker, Vice President of Investor Relations. Kevin, you may begin your conference.

Thank you, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; and Kelly Dilts, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, strategy, initiatives, plans, goals, priorities, opportunities, expectations or beliefs about future matters and other statements that are not limited to historical fact. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include, but are not limited to, those identified in our earnings release issued this morning, under Risk Factors in our 2023 Form 10-K filed on March 25, 2024 and any later filed periodic report and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call, unless required by law. At the end of our prepared remarks, we will open a call up for your questions. To allow us to address as many questions as possible in the queue, please limit yourself to one question. Now it is my pleasure to turn the call over to Todd.

Thank you, Kevin, and welcome to everyone joining our call. We are pleased with our third quarter execution, particularly in light of significant impact of multiple hurricanes in the Southeast during the quarter. Before discussing our results, I want to express my appreciation for our team's tremendous efforts to serve our hometown communities following these storms. As an essential retailer and often the most convenient source of products our customers need, our teams worked diligently to reopen the stores as soon as we could safely do so in the impacted areas. In addition, we have helped those in need through donations to the American Red Cross, donating gift cards and through our own Employee Assistance Foundation. We further embrace the opportunity to help in recovery efforts by donating truckloads of products in these communities. Kelly will discuss the financial impact of these storms on our results later. But importantly, our thoughts remain with those impacted communities and we will continue to seek opportunities to partner with them in the months ahead. For today's call, I will begin by recapping our Q3 performance. After that, Kelly will share the details of our financial performance as well as our updated financial outlook for fiscal 2024. I will then wrap up the call with an update on our Back to Basics work before discussing our new same-day delivery pilot and our real estate plans for 2025, including Project Elevate. Turning to our third quarter performance. On the top line, while our core customer remains financially constrained, our results came in near the high end of our expectations for the quarter. Specifically, net sales increased 5% to $10.2 billion in Q3 compared to net sales of $9.7 billion in last year's third quarter. Importantly, we continued to grow market share in both dollars and units in highly consumable products sales during the quarter and also grew market share in non-consumable product sales. Same-store sales increased 1.3% during the quarter and was primarily driven by growth of 1.1% in average transaction amount, including increases in average items per basket and average unit retail price per item. Customer traffic also increased of 0.3% during the quarter. The comp sales increase was driven entirely by growth in our consumable category as customers continued to focus their spending on the items they need most for their families. This growth was partially offset by declines in the home, seasonal and apparel categories. From a monthly cadence perspective, same-store sales growth was strongest in October and was positive in all three periods of the quarter. Notably, the last full calendar weeks of both August and September were the weakest of the quarter, suggesting that our customers continue to face significant financial pressure as they are less able to stretch their budgets at the end of the month. While we saw an uptick in pre-hurricane sales in areas forecasted to be impacted, we believe it was largely offset by periods of store closures following the storms. As a result, we believe the net impact of our top-line results was immaterial. I mentioned our core customers continue to face significant financial pressure, which is having an impact on their shopping behavior. We see this pressure in the timing of their shopping during the month as well as in the mix of products they're buying. We know that they need value and we are working hard to deliver for them every day. We continue to feel very good about our everyday low price position relative to competitors and other classes of trade. However, the heightened promotional environment persisted throughout the third quarter and we anticipate that it will continue for at least the duration of the year. With that said, we continue to focus on enhancing our unique combination of value and convenience. We believe our results demonstrate that we have made significant progress in our Back to Basics work, which I will discuss in more detail in just a bit. Importantly, as we continue to improve our execution and enhance our value and convenience proposition, we believe over the longer term we can capture even more incremental market share, improve our financial results and create long-term shareholder value. Before I discuss our plans to achieve these goals, I'll turn the call over to Kelly to share more on the financial details of our third quarter results.

Thank you, Todd, and good morning, everyone. Now that Todd's taken you through a few of the top-line highlights of the quarter, let me take you through some of the other important financial details. Unless we specifically note otherwise, all comparisons are year over year; all references to EPS refer to diluted earnings per share; and all years noted refer to the corresponding fiscal year. For Q3, gross profit as a percentage of sales was 28.8%, a decrease of 18 basis points. This decrease was primarily attributable to increased markdowns, increased inventory damages and a greater proportion of sales coming from the consumables category. These factors were partially offset by higher inventory markups, lower shrink and decreased transportation costs. Shrink was a year-over-year tailwind of 29 basis points in Q3, which was better than our expectations coming into the quarter. While shrink rates as a percentage of sales continue to be higher than we would like to see in our stores, we are making progress as we work to get closer to pre-pandemic levels and believe our actions are having a positive impact. Now turning to SG&A. As a percentage of sales, it was 25.7%, an increase of 111 basis points. The primary expenses that were greater percentage of net sales in the current year period were hurricane-related costs, retail labor and depreciation and amortization, partially offset by a decrease in professional fees. As Todd noted, our stores have been heavily impacted by multiple hurricanes in recent months. While we believe the net impact of these storms was immaterial to both sales and gross margin, they resulted in a negative impact to SG&A of $32.7 million during Q3. Moving down the income statement, operating profit for the third quarter decreased 25.3% to $323.8 million. As a percentage of sales, operating profit was 3.2%, a decrease of 129 basis points. Net interest expense for the quarter decreased to $68 million compared to $82 million in last year's third quarter. Our effective tax rate for the quarter was 23.2% and compares to 21.3% in the third quarter last year. This higher rate is primarily due to a decreased benefit from federal tax credits offset by the effect of certain rate impacting items on lower earnings before taxes. Finally, EPS for the quarter decreased 29.4% to $0.89. Turning now to our balance sheet and cash flow. Merchandise inventories were $7.1 billion at the end of Q3, a decrease of 3% compared to prior year and a decrease of 7% on a per store basis. Notably, total non-consumable inventory decreased 6% compared to last year and decreased approximately 9% on a per store basis. In addition to the financial benefit to our balance sheet, the significant improvement in our inventory position is having a positive impact operationally in our DCs and is beginning to positively impact our stores as well. We continue to focus on maintaining the appropriate mix and balance of inventory to improve in-stock levels and drive sales while also mitigating shrink risk and improving working capital. Importantly, we continue to believe the quality of our inventory remains good. The business has generated cash flows from operations of $2.2 billion through the end of the third quarter, an increase of 52% as we continue to improve our working capital position primarily through inventory management. In addition, we repaid our maturing $750 million of notes with cash during the quarter. Total capital expenditures in the 39-week period were $1 billion and included our planned investments in new stores, remodels and relocations, distribution and transportation projects, and spending related to our strategic initiatives. During the quarter, we returned cash to shareholders through a quarterly dividend of $0.59 per common share outstanding for a total payout of $130 million. Now I want to provide an update on our financial outlook for fiscal 2024. Our updated guidance includes the negative impact of the hurricane-related expenses of $32.7 million in third quarter as well as an estimated Q4 negative impact of approximately $10 million from expenses related to the third quarter hurricanes as we continue to work through the necessary repairs. Hurricane-related expenses are significantly greater than what was contemplated in the company's previous financial guidance. Our updated guidance includes expected net sales growth in the range of approximately 4.8% to 5.1% and same-store sales growth in the range of approximately 1.1% to 1.4%. These updated amounts contemplate our start to Q4 as well as the expected impact of five fewer holiday shopping days between Thanksgiving and Christmas this year. Turning to gross margin. We continue to expect pressure as a result of increased promotional markdown activity in the back half of the year as well as increased sales mix pressure due to the customers need to prioritize their spending on the consumables category. With regard to damages, our guidance assumes current rates will continue for the remainder of the year, though we remain focused on addressing this headwind through our continued emphasis on getting back to basics. With all of this in mind, we're updating our EPS guidance and now expect to deliver EPS in the range of approximately $5.50 to $5.90. This guidance continues to assume an effective tax rate of approximately 23%. We also continue to anticipate capital spending in the range of $1.3 billion to $1.4 billion as we invest to drive ongoing growth. This capital spending remains aligned with our capital allocation priorities, which continue to serve us well. 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. To that end, we remain on track to deliver our plans of approximately 2,435 real estate projects this year, including 730 new stores, 1,620 remodels and 85 relocations. Next, in our capital allocation priorities, we seek to return cash to shareholders through a quarterly dividend payment and, over time and when appropriate, share repurchases. Finally, although our leverage ratio remains above our target of approximately 3 times 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. In summary, we're pleased with our progress in the quarter. However, we still have significant room for improvement in our financial performance, and we're staying focused on continuing to advance our progress. To achieve our goals, we remain committed to disciplined expense and capital management as a low-cost operator 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 long-term financial priorities to drive profitable same-store sales growth, meaningful operating margin expansion, 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. I want to take the next few minutes to provide an update on our Back to Basics efforts in our stores, supply chain and merchandising. When I spoke with you one year ago and announced this plan, we noted that our customers rely on Dollar General to provide the products they need at great values in convenient, friendly and easy-to-shop stores. And when we step back and look at our business through the eyes of the customer, we weren't meeting that goal consistently across our chain. We laid out several important goals for the team to address these concerns, and I'm proud to note we have made substantial progress executing on these objectives and improving the overall customer experience. With that in mind, I want to share a little about our progress in each area. I'll start with our stores, where everything begins and ends for our customer. Our goal in our stores is to deliver value and convenience in a clean and friendly shopping environment. We have made significant progress on this front with a meaningful increase in the number of stores that we believe meet or exceed our expectations as well as those of our customers. As we view our stores through the eyes of the customer, we have seen this notable improvement continue to develop in our own unannounced store visits and, more importantly, our customers are telling us as they have noted this improvement through our survey results at checkout. Notably, as of the end of Q3, customer satisfaction levels have increased by more than 900 basis points since Q1 when we first had these surveys available in the majority of our stores. This coincides with improving in-stock levels, which increased approximately 180 basis points from Q3 of 2020 through to the end of Q3 of 2024. These results are a testament to the hard work of the team as well as the focus on increasing the front-of-store employee presence and sharpening our perpetual inventory management in our stores. Our supply chain and merchandising teams have made significant contributions to our efforts in the store by helping to simplify operations for our teams, which enhances both the associate and customer experience in our stores. All of these improvements have continued to help drive lower year-over-year turnover at all levels within our retail operations, including regional director, district manager, store manager, assistant store manager and sales associate. We still have work to do, but we're proud of the progress in the stores over the last year and we continue to be pleased with the associate and customer response to these efforts. As a result, we believe we are well positioned to continue to elevate the in-store experience. Let me provide a quick update on our supply chain. Our top priority in this area continues to be improving our rates of on-time and in-full truck deliveries, which we refer to as OTIF. Our focused efforts here have led to significantly improved OTIF levels in Q3 compared to the same time last year. Notably, we have improved our on-time deliveries by approximately 470 basis points and in-full rates by approximately 900 basis points over that period. We continue to be pleased with what we have seen in both our traditional and fresh supply chain, but believe we have room for further improvement. As a reminder, as we drive our OTIF rates higher, we simplify the work inside of our stores, which ultimately results in a better overall experience for both our customers and associates. In addition, we have continued making good progress in optimizing our distribution capacity and, in fact, have been able to accelerate our plans to exit temporary warehouse facilities. We exited four more facilities in Q3 for a total of 15 within the last 12 months. This will leave us with three remaining opportunities, all of which we plan to exit in 2025. By closing these temporary facilities, we are able to improve overall efficiency in our supply chain while also reducing costs. Meanwhile, we've augmented our permanent DC footprint with two new facilities in Colorado and Arkansas, each of which is open and now shipping to stores. By the end of this year, we anticipate these efforts will result in year-over-year reductions in stem miles of approximately 4% or greater in both our fresh and traditional supply chains. I also want to note that we implemented an automated system that utilizes advanced technology to store and retrieve products in our Arkansas DC. As a reminder, we added automation in a DC for the first time last year in South Carolina and have been pleased with the performance and results in that facility. Over time, we believe automation in these facilities can increase efficiency for our teams, optimize storage in the facility and drive even greater inventory and order accuracy to further enhance the way we serve our stores. Finally, earlier this year we began the first full scale refresh of our sorting process within our distribution centers since 2017. As a reminder, the ultimate goal of this effort is to enable our store teams to stock shelves more quickly, which should drive greater on-shelf availability for our customers and ultimately support ongoing sales growth. We have made significant progress on this front. And as planned, we are on pace to complete this work by the end of the year. Overall, we remain focused on enhancing the agility of our supply chain, allowing us to meet changing demands and respond quickly to challenges, all while keeping costs low, driving greater efficiencies and further improving the experience for our store teams and customers. Finally, I want to provide an update on our merchandising efforts. As a reminder, our top priority is providing meaningful value to our customers. We have a multifaceted approach to deliver that value, including strong everyday low prices on national and private brands, compelling promotions and sales events such as our DG Deal Days, which featured discounts on more than 6,000 items store wide during the holiday season, and low opening price points including approximately 2,000 items at or below $1. To that end, comp sales in our Value Valley section of the store, which is comprised of a variety of items at the $1 price point, outperformed the rest of the store in Q3 by more than 600 basis points. We have also continued our strong progress in total inventory reduction this year, as Kelly previously noted, with a 3% overall decrease and a 7% decrease on a per store basis, all while improving in-stock levels and growing sales. Earlier this year, we began working toward a net reduction of approximately 1,000 SKUs within our chain by the end of the year and we are well on our way to meeting that goal with the vast majority of these items already out of the planograms. Finally, our merchants have continued working with our operators to reduce activity and simplify work inside of our stores. For example, we recently reached an important goal by completing the reduction of the number of floor stands by approximately 50% compared to Q3 of last year. As demonstrated by these results, Back to Basics has a significant positive impact on our business over the last year. While we still have room to improve, we have made substantial progress in each of our three priority areas and we believe we are well positioned to continue advancing this progress moving forward. I'm excited about the work we have done to solidify our foundation and position us to deliver even stronger customer experience in 2025 and beyond. With that in mind, while we are committed to executing on these basics at even a higher level as we move forward, we are excited to progress our discussion beyond Back to Basics and focus on our initiatives and plans to drive growth and value for customers and shareholders. I'll share a couple of updates today on how we are enhancing the value and convenience proposition in new and exciting ways for our customers and then we expect to share more of our plans for 2025 on our Q4 call in March. First, I'm excited to announce that we began a test of same-day home delivery from our stores during the quarter. This pilot launched in September and we are currently partnering with a third party to offer delivery through our DG app from approximately 75 stores. As a reminder, we have a highly successful and incremental delivery partnership with DoorDash in approximately 16,000 of our stores and the learnings from that initiative and our own customer work have provided the foundation from which to test our own delivery offering. With our unique customer base, we believe this offering will even further enhance the convenience of our customers expect from Dollar General while still providing the value they need. We are quickly learning and refining our process and, over time, we believe we can have delivery through the DG app available in the same number of stores as our DoorDash offering, which we expect to continue expanding over time. We are excited about the opportunity for our customers. Our goal is to drive greater customer loyalty within the digital platform while ultimately increasing market share and accelerating growth. Next, as we look to extend and enhance the unique combination of value and convenience at Dollar General, I want to discuss our plans for real estate growth in 2025. With more than 20,000 stores across 48 states, Dollar General is located within five miles or less of approximately 75% of the U.S. population. And with approximately 80% of these stores in towns of 20,000 or fewer people, we are uniquely positioned to serve an underserved customer in rural America. As we look to leverage our real estate strength, we plan to increase the number of real estate projects next year. More specifically, we continue to see very strong returns in our remodel projects. We are expanding and enhancing our efforts to impact our mature stores. Accordingly, the growth in projects this year is focused on our remodels while continuing to balance our portfolio and capture growth opportunities through a significant number of new stores as well. With that in mind, in fiscal 2025, we plan to execute approximately 4,885 projects, including 575 new store openings in the U.S., 2,000 full remodels, and an additional 2,250 Project Elevate remodels and 45 relocations, and we plan to open up to 15 additional stores in Mexico. With regards to our remodels, we are revamping our approach to further improve the shopping experience and elevate our brand through our mature store base. In our full remodels, we are increasing the scope of work to include additional upgrades and refreshes to the physical store assets. We expect more than 80% next year to be in our DGTP format, which will continue to allow for incremental cooler counts to provide a fuller shopping trip for our customers. We continue to expect average returns in our remodels that are consistent with what we have seen historically and are even greater than what we have seen from our new stores, driven by expected first year comp sales lifts in our full remodels of approximately 6% to 8% on average. We are also introducing a new remodel approach that is incremental to our full remodel program in order to expand the number of mature stores we impact each year. We are calling this incremental remodel initiative Project Elevate and our goal is to bolster performance in portions of the mature store base that are not yet old enough to be part of the full remodel pipeline. These projects will include nearly all of the same assortment updates as our full remodels other than cooler expansion and the addition of produce. Notably, they will include planogram optimizations and expansions across the store, updated adjacencies and physical asset refreshes in most prominent customer-facing areas in the store. Our investment in these stores will be less than our full remodels and, in turn, our goal is to drive first year comp sales lifts in the range of approximately 3% to 5% in these projects. We believe our customers will respond very favorably to these updates in their local stores and ultimately believe that this will enhance the associate and customer experience in our mature stores while also driving incremental sales growth. Turning to our new stores. As a reminder, we monitor the following five metrics of our portfolio including performance against pro forma sales expectations; new store productivity compared to the mature store base; cannibalization, which overall has remained consistent and predictable; cash payback, which we continue to expect in approximately two years; and new store returns which we expect to be approximately 17% on average in 2025. I want to note that our expectations for new store returns, while still very strong, have been down modestly from our historic targets of 20%-plus. As we discussed for our 2024 pipeline, this change is also driven by higher new store occupancy costs as well as by higher operating costs. We continue to work to mitigate some of these higher costs where possible and continue to see significant opportunities for growth with approximately 12,000 opportunities for Dollar General branded stores in the U.S. As we said before, for a variety of reasons, we will not capture each of these opportunities, but we are pleased that the overall number of opportunities remains high. We anticipate that more than 80% of our new stores next year will be in one of our 8,500 square foot store formats and will predominantly be located in rural communities and nearly all of our relocations are planned for one of our 8,500 or 9,500 square foot stores. These stores continue to drive increased sales productivity per square foot as compared to our traditional 7,300 square foot box and also provide additional opportunities to serve our customers, including expanded cooler offerings, more health and beauty products and we anticipate adding fresh produce to approximately 300 new stores in 2025, bringing our expected total to approximately 7,000 by the end of next year. I also want to note that we do not plan to open any additional pOpshelf stores in 2025. We have continued to test and learn in our existing store base with new products and layouts, but in light of the current weaker customer shopping trends in discretionary categories, do not believe opening new stores in the coming year is the best use of our capital. Collectively, we believe our planned real estate projects will further solidify Dollar General as an essential partner to communities in rural America while strengthening our foundation to drive long-term sustainable growth. In closing, I want to reiterate that we are pleased with the tremendous progress the team has delivered through our Back to Basics plan, and we are poised to continue building on that progress through the remainder of this year and into 2025 as we continue to strengthen the foundation for more meaningful growth in the future. With that in mind, I'm looking forward to sharing more about our plans and goals for 2025 and beyond in the months ahead. We are confident in this business and the actions we are taking to deliver value for our associates, customers and shareholders. As we move through our busy holiday season, I want to again thank our more than 195,000 employees for their commitment and dedication to fulfilling our mission of serving others. With that, operator, we would now like to open the lines for questions.

Thank you. We'll now be conducting a question-and-answer session. Our first question is from Simeon Gutman with Morgan Stanley. Please proceed with your question.

Good morning, Todd and Kelly. My question is about the comp algorithm. How does it change now that you're transitioning to a higher number of remodels compared to store growth? It seems like there could be an almost one-point lift from remodels, assuming they continue to grow at the expected rate over the next few years. What is the current standing of the comp algorithm? Additionally, if it ends up being a bit lower than what DG is accustomed to, how much will the cost structure need to adapt? It sounds like you're making strides in various areas, although some aspects of the supply chain may take more time. Can you align the cost structure to achieve some of the previous earnings growth seen before the last couple of years?

Thanks, Simeon, for the question. I think as we go forward, especially with the introduction of Project Elevate that we feel good that we can get back to the contribution that our real estate programs have given us on a comparable sales line. But with that, I'd also say you're absolutely right on the cost structure, and that's something we're focused on as we go forward into 2025 and beyond. Certainly, around shrink and damages, we've got a lot of focus on what that can do. Depreciation, that will play out over time and same will retail salaries as we move the year. So I would say we're going to focus on all those components, both top line and cost structure as we work to get back to our long-term double-digit EPS growth target.

Thank you. The next question is from the line of Michael Lasser with UBS. Please proceed with your question.

Good morning. Thank you so much for taking my question. Have you seen enough progress with improved execution as well as the mitigation in shrink for you to see line of sight to restoring double-digit EPS growth in 2025 despite having some incentive comp recurring next year?

Michael, this is Todd. Just real quickly, I do want to say that we're really pleased with the progress we have made on Back to Basics. Really excited about Project Elevate as well as other initiatives that we've either announced like home delivery or others that we're working on that we'll talk a little further about when we have our call in March. But in saying that, when you look in totality, we feel really good about being able to deliver on a lot of different aspects and lines. I'm very happy with the merch side as well as our operators and our DC pieces of the Back to Basics work, because it is laying that strong foundation for the future and getting back to where Kelly indicated, over the long term, those double-digit EPS algorithm growth models that we've traditionally have had. Now in saying that, we have still more work to do. We're never happy here at Dollar General, right. We want to capture as much growth as we possibly can. So we'll continue to work hard, not only on Back to Basics, but all the initiatives as we go forward.

Thank you. The next question is from the line of Matthew Boss with J.P. Morgan. Please proceed with your question.

Great. Thanks. So Todd, have you seen any notable change in consumer spending or behavior between consumables and discretionary from your low-income customer? Maybe could you talk to top-line trends that you've seen in November, maybe relative to same-store sales in the third quarter? And then, Kelly, just with the heightened promotional backdrop, I think you cited, now expected at least through year end. How best to think about gross margin puts and takes in the fourth quarter, maybe notably markdown?

Sure. I'll begin, Matt. Thank you for your question, and I'll hand it over to Kelly. From the consumer viewpoint, we observed a very similar behavior as we exited the second quarter and now the third quarter. Consumers are making purchases very close to their immediate needs, being quite selective at the shelves. For instance, on both discretionary and non-discretionary fronts, private brands continue to perform well. Additionally, in our Value Valley segment, which consists of $1 offerings up to 24 to 36 feet of product depending on store size, this category was the best performer for the quarter, outperforming the nearest category by 600 basis points. This clearly indicates that consumers are looking for value to help manage their budgets. We also noted that the last week of the month tends to be some of our slowest, further illustrating that consumers are trying to stretch their dollars. There are some signs of hope. We've mentioned in Q2 and a bit in Q3 that consumers are starting to spend on discretionary items, but they remain very cautious and are purchasing close to actual needs. For example, we are pleased with our Halloween product range and the consumer response towards discretionary Halloween items, aside from candy, which also did well. So, there is a lot of potential there. Our holiday offerings are strong, and while there's much selling still to do and five fewer selling days between Thanksgiving and Christmas, we feel optimistic about consumer spending as the holidays approach.

Yes. And just to give you a little bit more color on Q4. So what we're seeing as we move into November, obviously, the calendar shifts are pretty significant. And that makes 2019 the best comparison. And we did talk about that a little bit on the last call that it's probably if you take sales on a 2019 CAGR basis, that may be the best way to look at it. On a little color for November, we did come in slightly above the midpoint of our sales expectations for November. So certainly contemplated in our guidance, and there is a lot of selling season left, which is why we slightly narrowed our expectations of our previous sales guidance to make sure that we are capturing that. I'll tell you on the high end, what we're expecting is just kind of a macro-neutral environment. And then on the lower end, it does provide for some softening of that. The other primary driver really of the guidance is around the hurricane-related expenses. And so you heard us talk about $33 million of pressure in the third quarter. And then we're expecting another $10 million of pressure from the same hurricanes in Q4, and that's really as we work to finish all of the repairs that we need to do on the stores that were impacted. To your question on the margin piece of that, the promo backdrop, it is a little bit elevated, but it's not anything outside of our expectations. So that didn't really change much. And neither did the other expectations around shrink or damages. So shrink is still considered to be a tailwind in Q4.

Thank you. Our next question is from the line of Kelly Bania with BMO Capital Markets. Please proceed with your question.

Hi. Good morning. Thanks for taking our question. Todd and Kelly, I was wondering if you could talk a little bit more about the same-day delivery pilot. What have you learned so far from there? How much of that cost your consumer, if they would like the added convenience of that program? And how are you thinking about the margin implications, either passing on the cost of that to the consumer or absorbing those? And just kind of big picture thoughts about what that could add to the DG kind of growth profile going forward?

Thank you for the question. We're enthusiastic about the pilot program. We initiated a soft launch towards the end of Q2, and by Q3, we have up to 75 stores operational. We're actively testing, learning, and enhancing both the native app and our website to ensure an optimal customer experience. Thus far, customers are responding positively. Our approach focuses on the customer's perspective, and they are indicating three main desires: convenience, opportunities to save money, and a personalized experience. Customers prefer not to remain anonymous as they associate this with tailored offerings, which we can provide through our delivery service. A few points about our delivery model: it differs from others in that we're partnering with a third-party service, which means we have not added labor costs on our end. Eventually, we anticipate scaling this to thousands of stores and integrating it closely with our existing DoorDash partnership, which has been successful so far. We're optimistic about the initial results and will continue to evaluate costs. We've consistently stated our commitment to executing delivery in our unique style, aligned with what our Dollar General customers prefer, ensuring low costs for both them and us. We believe we can find ways to offset the inherent costs of delivery through our vendor relationships. Additionally, while we expect significant revenue growth from this initiative, we are also excited about its potential to enhance our profit margins, beyond just product sales, through our robust media network that we've been developing for years. The missing piece for us to fully leverage this network has been the delivery service, and now that it's coming together, we anticipate major benefits for Dollar General, both in terms of revenue and profit margins.

Our next question is from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question.

Good morning and thanks for taking my question. So I just wanted to go towards FY 2025. Any initial puts and takes you can provide? I know your incentive comp could normalize. There could be some hurricane expense benefit. And including that, any initial thoughts on CapEx spend just given the significant increase in real estate products anticipated next year? Thank you.

Thank you for the question, Rupesh. We're not ready to provide guidance for 2025 yet, but I can share some factors we're considering. One pressure we anticipate is incentive compensation. We’ll have more clarity on this during our discussions in March, but it will impact 2025. The other two factors that have affected us this year will likely continue to do so, including retail salaries, as we've seen wage rate pressure that persisted into Q3 and is expected to carry into Q4 and possibly into 2025. Additionally, depreciation and amortization have been ongoing pressures for the last couple of years. Regarding capital expenditures, we are confident in our capital allocation strategy. I'm enthusiastic about our remodels and the investments we're making in our mature stores. Currently, we expect our CapEx to be similar to this year’s as a percentage of sales, focusing on high-return projects.

Our next question is from the line of Zhihan Ma with Bernstein. Please proceed with your question.

Hi, Todd and Kelly. Thank you for taking my question. I wanted to circle back on the remodeling side of things. Maybe a two-part question. One, I believe you historically mentioned that the DGTP remodels had an 8% to 11% comp sales lift that compares to the 6% to 8% you were mentioning today. So has there been any update on that front? And secondly, in terms of the mix of remodels versus new stores going forward, is 2025 a good model for the next couple of years as we think about the medium to longer term? Thank you.

Yes, absolutely. Thanks for the question. And so yes, we are expecting a comp lift of around 6% to 8%. You're right. We had quoted 8% to 11% last year. What it is, is really a function of what is occurring in the remodels. So as the base has a higher cooler count, when we go to remodel those stores, we are not including as many cooler accounts, and so that impacts top line. What I will say, though, is that the IRRs are still better than the new store returns. So we're really pleased with where those are landing. And then now that we've got Project Elevate, we're looking to add an additional comp lift of 3% to 5%, again, with a great IRR on those projects as well, higher than our new store returns. So anytime you can touch that many stores, you always get a big positive, and so we're pleased to do both with those lifts.

Yes. I would like to add that while we aren't focused on the years ahead, considering Project Elevate and our established store base, we want to ensure we provide customers with exactly what they need. We see exciting possibilities with additional renovations each year. Over the next three to five years, we could reach 80% to 90% of our store base much more quickly, significantly faster than in the past. There's more to come as we begin this journey. The great thing about Project Elevate is that from a customer's viewpoint, they will experience everything in Project Elevate that they would in a traditional remodel, except for the extra coolers and produce. They will enjoy the remodel experience they love in this Project Elevate. We look forward to discussing it more as we progress through 2025.

Our next question is from the line of Kate McShane with Goldman Sachs. Please proceed with your question.

Hi. Good morning. Thanks for taking our question. Todd, you had mentioned last quarter that of the share gain that was up for grabs at the time that you didn't quite get your fair share, I know there's still been quite a few door closures in Q3 and we were wondering if you've seen any change with what you've seen with those opportunities this quarter?

Yes. We have observed a slight rebound. In fact, our mid- to high-end consumers gained share again in Q3, which is encouraging. It's interesting to note how the consumer is reacting; they are somewhat selective, but ultimately, value prevails. It seems that consumers are increasingly looking for value. It's promising to see that we captured a larger share this quarter compared to last. We are focused on maintaining this trend as we progress through Q4 and into early 2025.

Thank you. Our next question is from the line of Karen Short with Melius Research. Please proceed with your question.

Thank you for the opportunity to speak. Could you provide more detail on the funding for the standard remodels compared to Project Elevate, and also share insights on the return profile as you calculate it? I understand that it may be early for Project Elevate, but I would appreciate any information you can provide on both topics.

For our traditional remodels, we anticipate a comparable investment in capital expenditures. However, for Project Elevate, the investment will be significantly lower. This alignment supports our capital allocation strategy. Regarding returns, while it's still early for Project Elevate, we expect the internal rates of return to be much higher than those of our new stores and fairly similar to those of the traditional remodels.

Our next question comes from the line of Seth Sigman with Barclays. Please proceed with your question.

Hey. Good morning, everyone. I wanted to focus on the gross margin. The trend is improving, down less this quarter than prior quarters. As you think about some of the tailwinds such as shrink on paper that should build into the fourth quarter and into next year, can you speak about that? And how you're thinking about gross margin expansion year over year, starting in the fourth quarter? And maybe just in general, how you think about the recoverability of the gross margin from here? Thanks so much.

I believe shrink presents a significant opportunity for us. As we look ahead to the fourth quarter, it should positively impact our gross margin. While we've made substantial progress on shrink, there is still much work to do. We expect this to be beneficial as we enter 2025. I'm pleased with the advancements we've made, but it's important to note that shrink is an ongoing improvement process. Because of the extended timeline, it takes time for the effects of any actions we implement to be reflected in our financial results. As inventory moves through the year, we'll see those benefits, which might make the journey a bit longer. However, it should provide support for 2025. Our aim is to return to pre-pandemic shrink levels, and we believe we have a clear path to achieve that.

Thank you. Our next question is from the line of Scot Ciccarelli with Truist Securities. Please proceed with your question.

Hey, guys. So historically, when your core customers have been pressured, it usually resulted in higher traffic, but lower ticket as folks buy less become in more frequently. Today, we're seeing the opposite happen with traffic dropping in the last few quarters. Todd, why do you think that is playing out that way? And would you expect that to change at some point?

We are primarily focused on driving traffic, which is crucial. This was the first quarter where we surpassed last year's positive traffic numbers, and we expected some softening compared to the previous year. However, we were pleased with the traffic increases during the quarter, though we continually strive for more. It's worth noting that the increase in ticket prices is an important trend. Many of these ticket increases came from discretionary areas of the store, which is positive as customers are engaging with those categories. I believe customers have money to spend, but they are being very cautious about how they spend it. We will keep an eye on this while working hard to boost traffic in the second half of this year and to kick off the new year positively.

Our next question is coming from the line of Paul Lejuez with Citi. Please proceed with your question.

Hey. Thanks, guys. Curious when you do a remodel, how much of that expected comp lift is traffic versus conversion versus ticket? And then second, on that shrink opportunity on the gross margin line, I'm curious if there's an offset on the SG&A line? And then, Kelly, maybe just high level, how you're thinking about SG&A leverage point for next year?

Yes, I'll start, Kelly, and I'll pass it over to you. Yeah, as we look at that remodel program, what we normally see in remodels is that normally, your uptick happens from the offering itself. So more on the ticket side of the equation. And then as time goes, the traffic starts to pick up as well. So just like any remodel that we've done, we believe Project Elevate will probably fall into that same category because what will happen is word of mouth will get out that we've remodeled the store and then traffic normally builds. So it's usually ticket first and then traffic to come as we move through the months beyond those remodels.

And then on the shrink side, on 2025, I think it could be a big contributor to gross margin as we move into next year. On the SG&A leverage point, I think it still stays the same as where it's been historically. A 2% to 4% comp helps us get to that leverage point, and that's what we'd be looking for, and that's what we would want comps to build to over the longer term.

Thank you. Our final question is from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Thanks. Good morning. Good progress. Todd, just how are you thinking about the company's operating margin structure over time? It looks like if we back out the hurricane costs, you're going to exit this year a little bit around 5%. Can you improve on that over the next couple of years? Or do you feel like the business needs to see some investments both from labor and maybe price before you build from there?

Yes. Thanks for the question, Chuck. Let me start, and I want Kelly to jump in as well. I would tell you that we are pleased where we came out here in Q3. As you look at our business, there is expense headwind that's there. We've got a lot of levers to be able to pull though as well into the future. While we're not here yet to talk about 2025 and beyond, I would tell you that we are squarely focused on achieving a better rate than where we are today that you mentioned. But we've got some work to do. Now I would also tell you, we feel good about the labor line from the respect of how many hours the stores have. We don't believe a big investment is still needed at this point. I do feel good about the hours we have and the ability of the stores to be able to produce from that. So we don't believe a big uptick there. And we don't see any huge upticks in other expense lines other than obviously, incentive pay and some of the other things that Kelly already mentioned, that will come back at us in 2025. Kelly?

Yeah. No, absolutely. And as you can hear, we're really managing this business for the long term and focusing on double-digit EPS growth. And we do think we can get back to that over the time. We've got still a lot of underlying long-term drivers in place, and that includes a long runway for new store opportunities with high returns. And so that hasn't changed. We've got other long-term margin drivers. We think we've got a path to the shrink reduction. We have a path, we believe, to stabilizing the sales mix. And then we have DG Media Network, which we're really excited about and continue to be excited about and delivery could certainly play a big role in that. You've got private brands and global sourcing opportunities, our category management. I'm really excited about the potential of inventory optimization as we look in the future, both on the sales line and as well as what it gives us on working capital. Supply chain efficiencies with some of the automation that we talked about today, and then, of course, our save-to-serve approach of controlling costs and always being that low-cost operator. And then the other thing I would just point out is that we have been generating a significant amount of cash flow, which does allow us to invest in the business. You say that today with our real estate announcement and being able to invest even more in our existing stores at a rapid pace with Project Elevate. So with all of those things in mind, we really do believe we've got a long-term opportunity to drive higher sales and margins that would support that double-digit EPS growth. So while we're not ready to commit to a timeline or, of course, the guidance beyond 2024 at this time, we do think that that double-digit EPS growth remains our long-term target, and we believe it's possible to achieve it.

Thank you. At this time, this will conclude our question-and-answer session and also conclude today's conference. We thank you for your participation. You may now disconnect your lines at this time, and have a wonderful day.