Earnings Call Transcript - DG Q4 2020

Operator, Operator

Good morning. My name is Donna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Fourth Quarter 2020 Earnings Call. Today is Thursday, March 18, 2021. This call is being recorded. Now I'd like to turn the conference over to Mr. Donny Lau, Vice President of Investor Relations and Corporate Strategy. Mr. Lau, you may now begin your conference.

Donny Lau, Vice President of Investor Relations and Corporate Strategy

Thank you, Donna, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; Jeff Owen, our COO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our strategy, plans, initiatives, goals, priorities, opportunities, investments, guidance, 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, including, but not limited to those identified in our earnings release issued this morning under Risk Factors in our 2019 Form 10-K filed on March 19, 2020, and in our Form 10-Q filed on December 3, 2020, 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. We also may reference certain financial measures that have not been derived in accordance with GAAP. Reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which as I mentioned, is posted on investor.dollargeneral.com under News & Events. At the end of our prepared remarks, we will open the call up for your questions. Now it is my pleasure to turn the call over to Todd.

Todd Vasos, CEO

Thank you, Donny, and welcome to everyone joining our call. We are pleased with our strong finish to fiscal 2020, and I thank all of our associates for their extraordinary efforts over the past year to support our customers, our communities, and each other. Despite a challenging operating environment, our team remains steadfast in their dedication to fulfilling our mission of Serving Others by providing affordable, convenient, and close to home access to everyday essentials. I could not be more proud of their efforts. Throughout the pandemic, our priority has been the health and safety of our employees and customers while meeting the critical needs of the communities we serve as an essential retailer. In response to the COVID pandemic, we implemented several safety protocols; enhanced our benefits and leave policies; invested in personnel and personal protective equipment; dedicated certain store hours for the most vulnerable members of our communities; and most recently, removed barriers for our frontline associates to receive the vaccine. In total, we invested approximately $248 million in response to the pandemic in 2020, including about $167 million in appreciation bonuses for eligible frontline employees to demonstrate our appreciation for their exceptional performance during an incredibly challenging year. At Dollar General, we remain committed to being part of the solution and believe we are uniquely positioned to continue supporting our customers through our network of more than 17,000 stores located within five miles of approximately 75% of U.S. population. At the same time, we remain focused on advancing our operating priorities and strategic initiatives as we continue to meet the evolving needs of our customers and further position Dollar General for long-term sustainable growth. To that end, we're excited to share an update on some of our plans for 2021. First, we plan to further the rollout of several value-creating initiatives, including our nonconsumables initiative, Fast Track and the completion of our initial rollout of DG Fresh. In addition, while still early, we are very pleased with the results of our POP SHELF stores, which have far exceeded our initial expectations for both sales and gross margin. As a result, we plan to accelerate our pace of new store openings for POP SHELF in 2021 and expect to incorporate this concept into a number of our larger-format Dollar General locations as we look to capitalize on the significant growth opportunity we see for this differentiated concept. We are also pleased to highlight key changes to our development strategy, including plans to build on the success of our Dollar General Plus store, or DGP, and the introduction of two new store formats, which we began testing in 2020. Similar to our larger-footprint DGP concept, the first new format has a selling space of approximately 8,500 square feet, which compares to about 7,300 square feet of selling space for our traditional store. Beginning later this year, this new format, along with our DGP concept, will become our base prototype for nearly all new stores, replacing both our traditional and higher cooler count DGTP formats, allowing for a more optimized assortment and room to accommodate future growth. Our second new format is even larger with approximately 9,500 square selling feet and will be deployed opportunistically across new store, relocation, and remodel opportunities. Notably, on average, our DGP and new store formats are outperforming the chain on a comp sales basis and have considerably higher sales volumes compared to both the traditional and DGTP store, which bodes well for the future as we look to increase their unit counts in the years ahead. Finally, we are pleased to provide an update on a number of our new small box store opportunities we see available in the continental United States, which represents an increase compared to our prior estimate. Jeff will discuss these updates in more detail later in the call. But first, let's recap some of the highlights for the fourth quarter and full year. The quarter was once again highlighted by strong growth on both the top and bottom lines. We're pleased that for the quarter, our three nonconsumable categories once again delivered a combined comp sales increase well in excess of our consumable business. Of note, this represents our 11th consecutive quarter of year-over-year comp sales growth in our combined nonconsumable categories, which we believe speaks to the strong and sustained momentum in these product categories. From a multi-cadence perspective, comp sales in December increased in the high single-digit range, with similar mid-teens growth in both November and January. In total, fourth quarter net sales increased 17.6% to $8.4 billion, primarily driven by comp sales growth of 12.7%. These results include significant growth in average basket size and units in particular, partially offset by a decline in customer traffic. And while customers continue to consolidate trips, on average, they are spending more with us compared to last year. Once again, this quarter, we increased our market share in highly consumable product sales as measured by syndicated data driven by a meaningful increase in both units and dollars. Importantly, our data suggests an increase in new customers this quarter as compared to Q4 of 2019. These new customers continue to skew younger, higher income, and more ethnically diverse, underscoring the broadened appeal of our value and convenience proposition. We continue to be encouraged by the retention rates of new customers, and we are working to drive even higher levels of engagement with more personalized marketing and continued execution of our key initiatives. We're particularly pleased that we delivered significant operating margin expansion, which contributed to fourth quarter diluted EPS of $2.62, an increase of 24.8% over the prior year. For the full year, net sales increased 21.6% to $33.7 billion, including net sales growth of 28.1% in our combined nonconsumable categories. Comp sales for the year increased 16.3%, representing our 31st consecutive year of same-store sales growth. In 2020, we celebrated the opening of our 17,000th store and the launch of our newest store concept, POP SHELF. In total, we completed a record 2,780 real estate projects during the year, exceeding our initial target of 2,580 projects as we continue to build and strengthen the foundation for future growth. From a position of strength, we also made targeted investments in other key areas, including the acceleration of certain strategic initiatives to strengthen our competitive position and further differentiate and distance Dollar General from the rest of the discount retail landscape. Collectively, our fourth quarter and full year results reflect strong and disciplined execution across many fronts and further validate our belief that we are pursuing the right strategies to enable sustainable growth while creating meaningful long-term shareholder value. As a mature retailer in growth mode, we are also laying the groundwork for future initiatives, which we believe will unlock additional growth opportunities as we move forward. We operate in one of the most attractive sectors in retail. And in an environment where customers continue to seek safe and convenient experiences, we believe our unique store footprint, further enhanced through our multi-year initiatives, provides a distinct competitive advantage and positions us well for continued success. Overall, I am proud of our associates and all that we've achieved over the past year. We feel very good about the underlying business, and I'm excited about the opportunities that lie ahead. With that, I'll now turn the call over to John.

John Garratt, CFO

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 its important financial details. Unless we specifically note otherwise, all comparisons are year-over-year. All references to EPS refer to diluted earnings per share, and all years noted refer to the corresponding fiscal year. As Todd already discussed sales, I will start with gross profit, which was positively impacted in the quarter by a significant increase in sales, including the impact of COVID-19. Gross profit as a percentage of sales was 32.5% in the fourth quarter, an increase of 77 basis points, which represents our seventh consecutive quarter of year-over-year gross margin rate expansion. This increase was primarily attributable to a reduction in markdowns as a percentage of sales, higher initial markups on inventory purchases, a greater proportion of sales coming from nonconsumable categories, and a reduction in shrink as a percentage of sales. These factors were partially offset by increased transportation and distribution costs, which were impacted by increased volume, some of which is attributable to the COVID-19 pandemic as well as higher transportation rates and discretionary employee bonus expense for our distribution center and private fleet employees. SG&A as a percentage of sales was 22.2%, an increase of 48 basis points. This increase was primarily driven by incremental costs related to COVID-19, including appreciation bonuses paid to our frontline retail employees and health and safety-related expenses as well as increased incentive compensation expense and hurricane-related expenses. These items were partially offset by certain expenses which were lower as a percentage of sales, including occupancy costs, retail labor, and depreciation and amortization. Moving down the income statement, operating profit for the fourth quarter increased 21% to $872 million. As a percent of sales, operating profit was 10.4%, an increase of 30 basis points. Operating profit in the fourth quarter was positively impacted by COVID-19, primarily through higher sales. The benefit from higher sales was partially offset by approximately $96 million or 110 basis points of incremental investments that we made in response to the pandemic, including approximately $69 million in appreciation bonuses for eligible frontline employees and additional measures taken to further protect our employees and customers. Our effective tax rate for the quarter was 22.7% and compares to 23% in the fourth quarter last year. Finally, as Todd noted earlier, EPS for the fourth quarter increased 24.8% to $2.62, which contributed to full year EPS of $10.62, an increase of 59.9%. Turning now to our balance sheet and cash flow, which remain strong and provide us the financial flexibility to further support our customers and employees during these unprecedented times while continuing to invest for the long term and provide meaningful returns to shareholders. Merchandise inventories were $5.2 billion at the end of the year, an increase of 12.2% overall and 6.3% on a per-store basis. While a lot of stocks remain higher than we would like for certain high-demand products, we continue to make good progress with improving our in-stock position and are pleased with our overall inventory levels. In 2020, we generated significant cash flow from operations totaling $3.9 billion, an increase of $1.6 billion or 73.2%. Total capital expenditures for the year 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 repurchased 4.3 million shares of our common stock for $900 million and paid a quarterly dividend of $0.36 per common share outstanding at a total cost of $87 million. With today's announcement of an incremental share repurchase authorization, we have remaining authorization of approximately $2.4 billion under the repurchase program. Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high-return growth opportunities, including new store expansion and our strategic initiatives. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment-grade credit rating and managing to a leverage ratio of approximately 3x adjusted debt to EBITDA. Moving to our financial outlook for 2021, we continue to operate in a time of uncertainty regarding the severity and duration of the COVID-19 pandemic, including its impact on the economy, consumer behavior, and our business. Despite continued uncertainty, we are providing select annual guidance in an effort to provide the best view we reasonably can, based on what we currently know. That said, there could be a number of potential headwinds and tailwinds this year, which are not incorporated into our guidance as the timing, degree, and potential impacts on our business are currently unclear, including, but not limited to, the recently approved government stimulus package, other unknown external factors related to the ongoing health crisis, including its impact on consumer behavior, and additional changes to minimum wage rates. With this in mind, we currently expect the following for 2021: net sales in the range of a 2% decline to flat; a same-store sales decline of 4% to 6% but which reflects growth of approximately 10% to 12% on a 2-year stack basis; and EPS in the range of $8.80 to $9.50, which reflects a compound annual growth rate between 15% and 20%, or between 14% and 19% on an adjusted basis over a 2-year period, which is well above our long-term goal of delivering at least 10% annual EPS growth on an adjusted basis. Our EPS guidance assumes an effective tax rate in the range of 22% to 23%. Capital spending is expected to be in the range of $1.05 billion to $1.15 billion as we continue to invest in our strategic initiatives and core business to support and drive future growth. With regards to shareholder returns, as outlined in today's press release, our Board of Directors recently approved a quarterly dividend payment of $0.42 per share, which represents an increase of 16.7%. We also plan to repurchase a total of approximately $1.8 billion of our common stock this year, reflecting our strong liquidity position and confidence about the long-term growth opportunity for our business. Finally, as noted in today's press release, our outlook for 2021 real estate projects remains unchanged from what we stated in our Q3 earnings release on December 3, 2020. Let me now provide some additional context as it relates to our expectations. Given the unusual situation, I will elaborate on our comp sales trends thus far in Q1. Despite approximately 8,400 lost store operating days as a result of closures due to winter weather across the country, same-store sales for the month of February increased 5.7%, reflecting a healthy comp sales increase of 11.2% on a 2-year stack basis. From the end of February through March 16, comp sales decreased approximately 16% as we are in the midst of lapping our most difficult monthly comp sales comparison of the year. As a reminder, comp sales growth for the month of March in 2020 was 34.5%. Looking ahead, we remain cautious in our 2021 sales outlook, given the continued significant uncertainty that still exists as well as the unique comparisons against last year. That said, as you think about the sales cadence of 2021, our performance is expected to be stronger in the second half, given a more difficult sales comparison in the first half and particularly in Q1. Turning to gross margin. In 2020, gross margins benefited from a greater proportion of sales coming from our higher-margin nonconsumable categories, driven by a full year net sales percentage increase of these categories well in excess of our consumables business. We expect our sales mix will ultimately shift towards our consumables categories in 2021, resulting in pressure on our rate. However, the timing of when this dynamic may occur and its corresponding impact to gross margin are currently uncertain. Gross margins in 2020 also benefited from a reduction in markdowns, including the benefit of higher sell-through rates as a result of significant customer demand in seasonal and other clearance-sensitive nonconsumable categories. In 2021, we expect our markdown rates will increase somewhat from the abnormally low levels we saw in 2020, which likely will create some gross margin pressure compared to last year. In addition, while we continue to see the effect of higher carrier rates and fuel costs, our ongoing efforts to improve efficiencies and reduce expenses, including further expansion of our private fleet, are expected to help partially mitigate these cost pressures in 2021. Also, please keep in mind that the second and third quarters represent the most challenging laps of the year from a gross profit rate perspective, following improvements of 167 basis points in Q2 2020 and 178 basis points in Q3 2020. In terms of SG&A, while we expect to incur ongoing expenses related to the pandemic in 2021, overall, we anticipate a meaningful reduction in COVID-19-related costs compared to last year. However, the leverage from these reduced costs is expected to be offset by deleverage associated with lower comp sales and approximately $60 million to $70 million in incremental year-over-year investments related to our strategic initiatives as we further the rollouts. With regards to our strategic initiatives, in aggregate, we anticipate they will positively contribute to operating profit and margin in 2021, driven by NCI and DG Fresh as we expect the benefits to gross margin from our initiatives will more than offset the associate expense. Finally, we estimate operating profit will be negatively impacted by approximately $35 million to $40 million in Q1 as a result of lost sales from store closures and expenses related to the widespread winter weather that we experienced in February. In closing, we are very proud of the team's execution and performance, which resulted in exceptional fourth quarter and full year results. As always, we continue to be disciplined in how we manage expenses and capital, with the goal of delivering consistent, strong financial performance while strategically investing for the long term. We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow, and long-term shareholder value. With that, I will turn the call over to Jeff.

Jeff Owen, COO

Thank you, John. Let me take the next few minutes to update you on our operating priorities, including our strategic initiatives and plans for 2021. Our first operating priority is driving profitable sales growth. The team did a fantastic job in 2020, executing against our portfolio of growth initiatives. Let me highlight some of our more recent efforts as we look to further build on our progress in 2021. Starting with our nonconsumables initiative, or NCI. As a reminder, NCI consists of a new and expanded product offering in key nonconsumable categories. The NCI offering was available in more than 5,800 stores at the end of 2020, including nearly 400 stores in our light version. This compares to our prior expectation of more than 5,600 stores at year-end. Given our strong performance to date, we plan to expand this offering to about 5,700 additional stores this year, bringing the total number of NCI stores to more than 11,000 by year-end. This total includes over 2,100 stores in our light version, which incorporates a vast majority of the NCI assortment but through a more streamlined approach. Moving to our newest concept, POP SHELF, which further builds on our success in learnings with NCI. POP SHELF aims to engage customers by offering a fun, affordable, and differentiated treasure hunt experience, delivered through continually refreshed merchandise, a differentiated in-store experience, and exceptional value with about 95% of our items priced at $5 or less. We opened our first five locations in 2020. And as Todd mentioned, given our strong results to date, we plan to accelerate the rollout of POP SHELF in 2021. In fact, we are now targeting to have a total of up to 50 POP SHELF stores opened by year-end compared to our previous goal of about 30 total locations. In addition to these stores, we also plan to incorporate this concept in up to 25 Dollar General stores in 2021. In terms of our store-within-a-store concept, a smaller footprint POP SHELF shop will be prominently positioned in the center of the store, and we will display both Dollar General and POP SHELF branding on exterior entrances to build and maximize awareness. From these initial stores, our goal is to test, learn, and ultimately expand to more locations over time as we look to leverage the unique strengths of these complementary formats and build on our early success with POP SHELF by making it more available to a broader range of customers. Turning now to DG Fresh, which is a strategic, multiphase shift to self-distribution of frozen and refrigerated goods. The primary objective of DG Fresh is to reduce product costs on our frozen and refrigerated items, and we continue to be very pleased with the product cost savings we are seeing. In fact, DG Fresh continues to be the largest contributor to the gross margin benefit we are realizing from higher initial markups on inventory purchases, and we expect this benefit to grow as we continue to scale this transformational initiative. Another important goal of DG Fresh is to increase sales in these categories. We are pleased with the success we are seeing on this front, driven by higher overall in-stock levels and the introduction of new products in select stores being serviced by DG Fresh. Given our success to date, we are further accelerating the rollout of additional offerings with the recent introduction of even more products, including both national and private brands as we look to further optimize our assortment while increasing our relevance with customers. And while produce is not included in our initial rollout plans, we believe DG Fresh provides a potential path forward to expanding our produce offering to more than 10,000 stores over time as we look to further capitalize on our extensive self-distribution capabilities. In total, we were self-distributing to more than 16,000 stores from 10 facilities at the end of 2020. This compares to our previous expectation of over 14,000 stores at year-end. Overall, we remain well on track to complete our initial rollout across the chain in 2021. Moving to our cooler expansion program, which continues to be our most impactful merchandising initiative. During 2020, we added more than 62,000 cooler doors across our store base. In total, we expect to install more than 65,000 cooler doors in 2021 as we continue to build on our multi-year track record for growth in cooler doors and associated sales. As a reminder, in 2019, we began incorporating high-capacity coolers into the majority of our new, remodeled, and relocated stores, creating additional opportunities to drive higher on-shelf availability and deliver a wider product selection, all enabled by DG Fresh. Next, a quick update on our FedEx relationship. This convenient customer package pickup and dropoff service is now available in over 8,500 stores, with plans to be in a total of over 9,500 stores by year-end, further advancing our long track record of serving rural communities. In addition to the gross margin benefits associated with NCI and DG Fresh, we continue to pursue additional opportunities to enhance gross margin, including improvements in private brand sales, global sourcing, and supply chain efficiencies. With regards to our supply chain, our plans for 2021 include further expansion of our private fleet, which accounted for more than 20% of our outbound fleet at the end of 2020. Reducing stem miles is also an important contributor to these efforts, and the recent opening of our Walton, Kentucky dry distribution center is expected to drive additional efficiencies as we move ahead. We also plan to open two additional DG Fresh facilities in 2021 as we look to further optimize our fresh network and support future growth. In addition, we anticipate our combination DG Fresh and dry distribution center in Blair, Nebraska will be completed in late 2022, which should contribute to a further reduction in stem miles over time. Finally, while we are very pleased with our progress in 2020, shrink reduction remains an important area of opportunity. We continue to build on our success with electronic article surveillance by increasing the number of items tagged while further leveraging technology to drive even higher levels of in-store execution. Our second priority is capturing growth opportunities. Our proven high-return, low-risk real estate model continues to be a core strength of our business. In 2020, we completed a total of 2,780 real estate projects, including 1,000 new stores, 1,670 remodels, and 110 relocations. Additionally, we now have produce in more than 1,100 stores. For 2021, we expect to open 1,050 new stores, remodel 1,750 stores, and relocate 100 stores, representing 2,900 real estate projects in total. We also plan to add produce in approximately 700 stores, bringing the total number of stores that carry produce to more than 1,800. In addition, as Todd noted earlier, we continue to advance the evolution of our store base with plans to build on the success of our DGP format, including the introduction of two new format types. With about 8,500 square feet of selling space, both our first new format and DGP concept allow for expanded higher capacity cooler counts, an extended queue line, and a broader product assortment, including NCI, a larger health and beauty section, and produce in select stores. In total, we expect more than 550 of our overall real estate projects this year to be in one of these format types as we look to further enhance our value and convenience proposition, particularly in rural America. The second new format consists of about 9,500 square feet of selling space. In addition to an extended queue line and broader assortment, this larger layout also includes nearly 50 high-capacity coolers and expanded produce offering, fresh meat, and additional checkout lanes, including a self-checkout bullpen with multiple stations. We believe this even larger format better positions us to meet the growing needs of our customers, particularly in highly underserved markets, and we are targeting more than 100 locations by year-end. Overall, these larger formats allow us to incorporate our best and most impactful initiatives and are designed to expand high-growth, traffic-building categories in a more customer-friendly format, all while continuing to drive strong returns. Moving to an update on the number of new store opportunities. Through a combination of our growing relevance with customers, format innovation, an evolving retail landscape, and leveraging new technologies, we estimate there are now approximately 13,000 additional small-box store opportunities in the continental U.S. which are available for a Dollar General store. This compares to our prior estimate of nearly 12,000 opportunities and is inclusive of our 2021 new unit pipeline. Although these opportunities are available to all small-box retailers, as a leader in small-box retail, combined with our proven track record of new unit development and format innovation, we believe we are well positioned to capture a disproportionate share as we move ahead. And while we continue to evaluate, we currently estimate POP SHELF could add approximately 3,000 additional store opportunities in the Continental U.S., with about another 1,000 additional opportunities available for our smaller footprint DGX format. When taken together, we estimate there are a total of approximately 17,000 new store opportunities available across our format types, which we believe represents a long runway for new unit growth. Overall, our real estate pipeline remains robust, and we are excited about the significant new store opportunities ahead. Next, our digital initiative, which is an important complement to our brick-and-mortar footprint as we continue to deploy and leverage technology to further enhance the customer in-store experience. Overall, our strategy consists of building a digital ecosystem that is specifically tailored to provide our customers with an even more convenient, frictionless, and personalized shopping experience. We made significant progress in 2020, highlighted by the accelerated rollout of DG Pickup, our Buy Online Pick Up In-store offering to more than 17,000 stores, providing another convenient access point for those seeking a more contactless shopping experience. During the year, we also saw continued growth in customer engagement across our digital ecosystem, including our digital coupon offering, shopping list feature, cart calculator shopping and budgeting tool, e-commerce site, DG GO! mobile checkout, and our mobile app, which ended the year with nearly 4 million monthly active users. Looking ahead, our plans include providing more relevant, meaningful, and personalized offerings, with the goal of driving even higher levels of customer engagement and loyalty. Our third operating priority is to leverage and reinforce our position as a low-cost operator. Over the years, we've established a clear and defined process to control spending, which governs our disciplined approach to spending decisions. This zero-based budgeting approach, internally branded as Save to Serve, keeps the customer at the center of all we do while reinforcing our cost control mindset. Our Fast Track initiative is a great example of this approach, where our goals include increasing labor productivity in our stores, enhancing customer convenience, and further improving on-shelf availability. We continue to be pleased with the labor productivity improvements we are seeing as a result of our efforts around both rolltainer and case pack optimization, which have led to the more efficient stocking of our stores. The second component of Fast Track is self-checkout, which provides customers with another flexible and convenient checkout solution while also driving greater efficiencies for our store associates. Self-checkout was available in more than 1,600 stores at the end of 2020, with plans for an aggressive expansion as we move ahead. In fact, we expect to introduce this offering into the vast majority of our stores by the end of 2022. Our underlying principles are to keep the business simple but move quickly to capture growth opportunities while controlling expenses and always seeking to be a low-cost operator. Our fourth operating priority is investing in our diverse teams through development, empowerment, and inclusion. As a growing retailer, we continue to create new jobs in the communities we serve. And for those associates already on our team, this growth is resulting in numerous opportunities for career advancement. In fact, more than 12,000 of our current store managers are internal promotes, and we continue to innovate on the development opportunities we can offer our teams, including continued expansion of our private fleet and those associated with DG Fresh as well as POP SHELF. In addition, we transitioned to a virtual learning environment in 2020, resulting in the continued development of our people, including nearly 3 million training hours for our employees, all supported by our award-winning training and development programs. Importantly, we believe these efforts continue to yield positive results across our store base, as evidenced by continued record low store manager turnover, record staffing levels, healthy applicant flows, and a robust internal promotion pipeline. We believe the opportunity to start and develop a career with a growing and purpose-driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent. Overall, we are making great progress against our operating priorities and strategic initiatives. We have a robust set of initiatives in place for 2021 and are confident in our plans to drive long-term sustainable growth while creating meaningful value for our shareholders. In closing, I am proud of our team's performance and our 2020 results, which further demonstrate our unique combination of value and convenience continues to resonate with customers and positions us well going forward. I want to offer my heartfelt thank you to each of our more than 157,000 employees across the company for the incredible work they do every day to fulfill our mission of serving others. I look forward to all that we can accomplish together in the year ahead.

Michael Lasser, Analyst

It appears you are anticipating an increase of about 60 basis points in operating margin from 2019 to 2021. Why wouldn't this be higher? Considering you are performing better than your algorithm predicts on a two-year basis, along with the advantages from margin-improving initiatives like DG Fresh, Fast Track, NCI, and others. Furthermore, how do you expect your gross margin to compare this year to 2019?

John Garratt, CFO

Yes, I’ll address both questions, Michael. This is John. First, I want to say we’re very pleased with our accomplishments in 2020, particularly our operating margin expansion of 223 basis points. Although we didn’t provide specific guidance on the operating margin or its components, we did highlight some challenges, the largest being the SG&A deleverage associated with lower comparable sales this year. We also noted an expected shift back to consumables, which affects both the sales mix and markdowns, especially as we compare to last year's unusually low clearance markdowns. Additionally, we mentioned the impact of rising carrier rates and fuel costs, all of which put pressure on our overall operating margin. Regarding gross margin, we are pleased with the 77 basis points of expansion we achieved this year, marking our seventh consecutive quarter of growth, totaling 117 basis points for the year. As you pointed out, initiatives like DG Fresh and NCI have significantly contributed to this improvement. The main drivers we identified were lower markdowns, higher initial markups, and the benefits from NCI and DG Fresh. However, we are also facing increased distribution and transportation costs in the short term, which will weigh on us. Looking further ahead, we believe we are well positioned to continue expanding both gross margin and operating margin over the long term, thanks to the ongoing impact of our initiatives and other factors we've discussed related to gross margin and SG&A. At the same time, we are committed to investing in the business to achieve our long-term goal of double-digit EPS growth. As mentioned, we will be reinvesting $60 million to $70 million into SG&A next year. Additionally, we will continue to incur some COVID-related expenses to ensure the health and safety of our employees and customers, though the extent will depend on the evolving situation. We have incorporated our best estimates of these factors into our guidance.

Michael Lasser, Analyst

Understood. That's very helpful. My second question is quite focused on the immediate future as we try to understand what will happen in the coming months. If we look at the figures, a 16% decline compared to the 34.5% drop in March of last year suggests a high teens two-year stack. Could you provide some insight into how March played out last year? Are you just beginning to face the most challenging comparisons within that month, which could lead to a high teens two-year stack being a misleading indication of what to expect in the upcoming months?

John Garratt, CFO

Yes. I can help you there, Michael. I'll start by saying it's bumpy, right? There's a lot of noise. You had the storm in February. And then in March, you're extrapolating over a very short period of time, which was pretty bumpy last year. But to help you out here, we called out, yes, as you mentioned, the negative 16% month-to-date from the end of February through March 16 this year. If you look at the corresponding period of time last year, it was not dissimilar to the 34.5% comp where we ended the period, so fairly representative. But again, there's a fair bit of noise within this so I'd be cautious in extrapolating too much based on that. But hopefully, that helps you understand where we were at this point.

Simeon Gutman, Analyst

I have a couple of questions. First, regarding the comparisons, the 10% to 12% range mentioned in the release for a two-year stack seems achievable moving forward if all initiatives are taken into account. Additionally, you will still have stimulus in the early part of the year, likely for a while longer. Therefore, the top line appears somewhat conservative. Can you discuss this? What are your thoughts on why, if we believe the 10% to 12% is attainable, the top line couldn't also be a bit stronger?

John Garratt, CFO

Sure. Let me clarify that for you. Historically, we’ve indicated that this model operates effectively with a 2% to 4% comparable sales growth, which is the foundation for over 10% growth in earnings per share. With a two-year comparable sales growth rate of 10% to 12%, we are seeing a significant improvement. We feel confident about the fundamentals of the business, including the brand’s relevance, its expanding appeal, the new customers we've attracted, and the larger purchases we’re seeing. The business model has never been stronger, and our initiatives are effectively enhancing this relevance. We are positive about the guidance we've provided. However, we did mention that we did not factor in the potential effects of stimulus because it’s uncertain how much it might help. This could potentially offer an upside, which we hope it does, but there is considerable uncertainty. Compared to prior stimulus rounds that benefited us, the economy is now more open, creating competition for consumer spending outside of retail. Thus, it’s unclear how much we might receive from that. Additionally, consumer surveys indicate that people plan to save more this time and prioritize paying off bills. However, often there is a discrepancy between what people say and what they do, so we will have to wait to see how it plays out. While we are cautiously optimistic and did not incorporate this into our projections, it remains difficult to predict its potential impact and to what extent.

Matthew Boss, Analyst

So Todd or John, regarding the acceleration in same-store sales to the mid-range that we've observed so far, what differences have you noticed between discretionary and consumables? Additionally, concerning the double-digit two-year stack that you projected for this year, how much of the acceleration compared to the last two years do you believe is due to new customer acquisition or market share gains? I'm trying to understand the two-year double-digit stack in relation to the mid- to high single digits in the past two years. How much of this acceleration do you think is sustainable?

Todd Vasos, CEO

Yes. This is Todd. Yes, I would tell you, let me take the second part first. I would tell you that, that comp, we believe that we are retaining a nice portion of the new customers that we saw come in. We can see that with our data at a pretty good real-time rate. And the great thing is, we've seen them continue to come back, so repeat as well. So we feel good about that going into '21. We see them still here in '21, which is really good to see. And again, with all of our initiatives that we've got put together, I would tell you that it gives her a lot of confidence to continue to shop with us. So I know I'm not going to give you exactly what you're looking for, but I would tell you that it plays a portion of it. But I would also say that all of our initiatives also really come into play here. And then what we've seen so far, just to give you a little bit more color, nonconsumables or that discretionary side of the business continues to do very well for us into the early part of Q1 here. And as we move through March, it will become even more meaningful because as you recall, the stock-up trip from last year, with the pandemic, with paper and cleaning and many of the consumable, food, perishable areas really took off last year and nonconsumables were a little soft, quite frankly. And we're seeing the opposite, quite frankly, right now. So that's great to see. But what we can also see is that our initiatives around nonconsumables has really helped because our baskets seem to be a little higher with those nonconsumables in them as well. So they're spending at a good rate there, and we believe that she'll continue to do that as we move into the middle part of the year.

John Garratt, CFO

Yes, I'll address both points. Regarding the COVID-related expenses, we are committed to taking necessary actions to protect the health and safety of our employees and customers. The guidance reflects our best estimate of the spending needed for this, which will obviously fluctuate based on the pandemic's severity and duration. However, we have factored in a significant reduction in those expenses, assuming a positive change in the situation. While we haven't specified an exact number, it is a considerable decrease. When considering SG&A and the 2.5% to 3% leverage point, we have advised caution against adhering strictly to that range due to the geographical factors involved. We are investing in SG&A to enhance overall operating margin expansion, especially in gross margin. For example, in initiatives like DG Fresh, as we begin self-distribution at NCI, the initial SG&A expenditure leads to much greater savings and a significant boost in gross margin, making it worthwhile overall. However, this does complicate the calculations. Additionally, other projects like POP SHELF require more start-up costs, which adds some pressure as well. We've also increased our remodel efforts, which impacts the initial figures as well. If we set aside all these factors, along with the COVID expenses, we are still targeting the 2.5% to 3% leverage point. There hasn't been any structural change in that regard, and our commitment to cost containment remains stronger than ever. This approach won't change for the next few years as we scale these initiatives and implement DG Fresh; some extra labor will be necessary in the stores, including some contract labor for the remodels. Overall, while this adds pressure, it is beneficial from both a dollar and rate perspective.

Scot Ciccarelli, Analyst

I apologize for asking another sales-related question. However, we know that the stack comparisons can become distorted with larger numbers and fluctuations. If we were to analyze your sales data, it appears that there hasn't been much change in your sales run rate from a sales per store perspective between February and March. So, I have two questions: first, is that a reasonable assumption? And related to that, do you expect to maintain a steady sales per store rate for the rest of the year, or are you anticipating a decline in sales per store as we hopefully move toward a more normal environment?

John Garratt, CFO

Yes, that's a good question. I'll start with the second one. As you look at the guidance we provided this year, a key element of it is our expectation to retain a significant portion of the new customers and their larger purchases. A major factor in this is the initiatives we've implemented, such as NCI, which position us well to capture some of that spending as new customers experience our brand and appreciate what we offer, including the coolers that enhance their grocery shopping experience. We have assumed a substantial retention of these customers. However, throughout the year, we have acknowledged that customer spending might shift somewhat. Currently, there's a trend toward consolidating shopping trips due to the pandemic, which benefits us, along with a share of wallet increase. As the year progresses, we anticipate losing some of that advantage as we compete with other sectors for this customer spending. Nonetheless, we remain optimistic about our retention potential and the strength of our business fundamentals and brand relevance. I want to avoid overanalyzing February and March because those months were quite variable due to storms in February and several factors in March. When we remove this noise, I can confirm that our guidance reflects what we've observed thus far. The unpredictable factor is stimulus, but we chose not to include any projections for that, as we are uncertain about its potential impact.

Karen Short, Analyst

I just wanted to get a little bit of color in terms of how we should think about kind of the composition of traffic versus ticket as we go into calendar '21? I mean, obviously, you saw a pretty meaningful, I think, deceleration in traffic in February, but that's off of a pretty high number in February of the prior year. So wondering if you could talk a little bit about that just broadly.

Todd Vasos, CEO

Thanks for the question, Karen. I'll address the first part and then pass it over to John for the '22 gross margin discussion. Regarding traffic, February was quite inconsistent. We experienced storms that resulted in 8,500 lost store hours. More significantly, for nearly two days, 20% to 30% of our stores were closed. This makes it difficult to provide a clear picture of February's traffic and what has transpired in March. However, we feel optimistic about the overall traffic figures, which were similar to what we saw coming out of Q4. As John mentioned, it is important to consider various factors. We noticed a slight increase in traffic with the second round of stimulus checks, and although we’ve only had a few days to assess, initial data shows an uptick in both traffic and sales due to this recent stimulus. That said, it is still too early to draw definitive conclusions. The key takeaway is that we are successfully retaining many customers we gained during the pandemic, and we are committed to keeping Dollar General top of mind for them. As they consider where to shop for their everyday needs and the nonconsumable items we offer, we believe they will continue to choose us. We feel confident in our ability to maintain that repeat customer base based on our previous service and our plans for the future.

Rupesh Parikh, Analyst

So I guess, John, first, starting with guidance. I was curious what your team is assuming for the promotional backdrop. And as your trends have turned negative and a number of other players are also starting to turn negative, I was just curious if you have seen any shifts in the promotional backdrop lately.

John Garratt, CFO

Yes. As you look at the promotional backdrop, we think it remains rational. It's been that way for the last about 1.5 years, so things have been pretty consistent. And so as we look forward, we're not assuming any major changes there because we feel like we're very well positioned on price. And Todd, do you want to add anything?

Todd Vasos, CEO

Yes, Rupesh, I would tell you, from a position of strength last year, we've positioned ourselves to be in the best position in pricing than we've been in many, many years. And so if you take a look at our everyday pricing, we are better than we've been across all channels of trade. And as John indicated, the promotional environment has been pretty stable and tame, and quite frankly, has been that way for 1.5 years. So we feel pretty good about where we are but always reserve the right if we need to help our consumer out, we'll do that. But right now, we don't see that in the near future.

Chandni Luthra, Analyst

I wanted to talk about these new banners that you spoke of today. And especially with POP SHELF, you mentioned doing a store-within-a-store concept with signage for both POP SHELF and the Dollar General banner outside. As you think about your core customer, what gives you confidence that the customers will not feel an alienation to the core banner with this double signage outside in a store-within-a-store concept? How do you think about that?

Todd Vasos, CEO

Yes, that's a great question. Our core consumer is somewhat different from the POP SHELF consumer. However, in the areas where we plan to implement these store-within-store concepts, the demographic is slightly higher than our core. Specifically, the income range in these areas is between $50,000 and $75,000, compared to our typical Dollar General range of $35,000 to $40,000. It's not quite comparable to POP SHELF, where the income is over $75,000. Nevertheless, I think there's enough crossover to attract those consumers. Additionally, we have already demonstrated that certain items sold well in Dollar General without any POP SHELF signage, indicating they resonate with our core consumers. We believe we can cater to both higher-end and lower-end consumers with this new format. This is a test, so it will involve 25 stores this year. If successful, we anticipate expanding this concept in 2022 and beyond.