Earnings Call Transcript - DG Q1 2021

Operator, Operator

Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dollar General First Quarter 2021 Earnings Call. Today is Thursday, May 27, 2021. This call is being recorded. I would like to turn the conference over to Mr. Donny Lau, Vice President of Investor Relations and Corporate Strategy. Mr. Lau, please begin.

Donny Lau, Vice President of Investor Relations and Corporate Strategy

Thank you, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; Jeff Owen, our COO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our 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 are not limited to, those identified in our earnings release issued this morning, under Risk Factors in our 2020 Form 10-K filed on March 19, 2021, and 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.

Todd Vasos, CEO

Thank you, Donny, and welcome to everyone joining our call. We are pleased with our strong start to fiscal 2021, and I want to thank our associates for their unwavering commitment to supporting our customers, communities and each other. As a testament to their efforts, our first quarter results exceeded our expectations, reflecting strong underlying performance across the business, which we believe was enhanced by the most recent round of government stimulus payments. The quarter was highlighted by net sales growth of 16% in our combined nonconsumable categories, a 208 basis point increase in gross margin rate and double-digit growth in diluted EPS. Despite what continues to be a challenging operating environment, we are increasing our sales and diluted EPS guidance for fiscal 2021 to reflect our strong first quarter performance. John will provide additional details on our outlook during his remarks. As always, the health and safety of our employees and customers continue to be a top priority while meeting the critical needs of the communities we serve. We believe we are uniquely positioned to continue supporting our customers through our unique combination of value and convenience, including our network of more than 17,000 stores located within five miles of approximately 75% of the U.S. population. Overall, we are executing well against 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. Now let's recap some of the top line results for the first quarter. As we lapped our most difficult quarterly comp sales comparison of the year, net sales decreased 0.6% to $8.4 billion, driven by a comp sales decline of 4.6%. Notably, comp sales on a two-year stack basis increased a robust 17.1%, which compares to the 15.9% two-year stack we delivered last quarter. Our first quarter sales results include a decline in customer traffic, which was partially offset by growth in average basket size. On average, customers continue to spend more with us compared to last year. From a monthly cadence perspective, comp sales increased 5.7% in February despite a headwind from inclement weather across the country. For March, which represents our most difficult monthly sales comparison of the year, comp sales declined 11.2%. Importantly, beginning in mid-March, in line with the timing of stimulus payments, we saw a meaningful acceleration in sales relative to the first two weeks of the month, especially in our nonconsumable categories. Comp sales declined 4.3% in April. Although year-over-year growth in nonconsumable sales moderated in comparison to March, they remained positive overall despite a more challenging lap. Overall, each of our three nonconsumable categories delivered a comp sales increase for the quarter. Of note, comp sales growth of 11.3% in our combined nonconsumable categories and 29.8% on a comparable two-year stack basis significantly exceeded our expectations and speaks to the continued strength and sustained momentum in these product categories, enhanced by the benefit from stimulus. Once again this quarter, we increased our market share in highly consumable product sales as measured by syndicated data. We continue to be encouraged by the retention rates of new customers acquired over the past several quarters and are working hard to drive even higher levels of engagement with more personalized marketing and continued execution of our key initiatives. In addition, we recently published our third annual Serving Others report, which provides context related to our ongoing ESG efforts as well as new and updated performance metrics. We look forward to continued progress on our journey as we move ahead. Collectively, our first quarter 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. We operate in one of the most attractive sectors in retail and believe we are well-positioned to continue advancing our goal of further differentiating and distancing Dollar General from the rest of the discount retail landscape. As a mature retailer in growth mode, we are also laying the groundwork for future initiatives, which we believe will unlock even more growth opportunities as we move forward. In short, I feel very good about the underlying business, and we are 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, 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 we believe was positively impacted in the quarter by a significant benefit to sales, particularly in our nonconsumables categories from the most recent round of government stimulus payments. Gross profit as a percentage of sales was 32.8% in the first quarter. As Todd noted, this was an increase of 208 basis points and represents our eighth consecutive quarter of year-over-year gross margin rate expansion. This increase was primarily attributable to: higher initial markups on inventory purchases, a reduction in markdowns as a percentage of sales, a greater proportion of sales coming from our nonconsumables categories and a reduction in shrink as a percentage of sales. These factors were partially offset by increased transportation costs, which were primarily driven by higher rates. SG&A as a percentage of sales was 22%, an increase of 152 basis points. This increase was driven by expenses that were greater as a percentage of net sales, the most significant of which were store occupancy costs, disaster expenses related to Winter Storm Uri, retail labor and depreciation and amortization. Moving down the income statement, operating profit for the first quarter increased 4.9% to $908.9 million. As a percentage of sales, operating profit was 10.8%, an increase of 56 basis points. Our effective tax rate for the quarter was 22% and compares to 22.2% in the first quarter last year. Finally, EPS for the first quarter increased 10.2% to $2.82, which reflects a compound annual growth rate of 38% over a two-year period. Turning now to our balance sheet and cash flow, which remain strong and provide us the financial flexibility to continue investing for the long term while delivering significant returns to shareholders. Merchandise inventories were $5.1 billion at the end of the first quarter, an increase of 24.2% overall and a 17.6% increase on a per-store basis as we cycled a 5.5% decline in inventory on a per-store basis, driven by extremely strong sales volumes in Q1 2020. In anticipation of a more challenging supply environment, we strategically pulled forward certain inventory purchases during the quarter, particularly in select nonconsumable categories to better support the sales momentum we were seeing in the business. While out-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 the overall quality of our inventory. The business generated significant cash flow from operations during the quarter totaling $703 million, a decrease of 60% but which reflects a compound annual growth rate of 11% over a two-year period. This decrease was primarily driven by higher levels of inventory as a result of improving inventory positions, including the pull-forward of certain inventory purchases. Total capital expenditures for the quarter were $278 million 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 5 million shares of our common stock for $1 billion and paid a quarterly cash dividend of $0.42 per common share outstanding at a total cost of $100 million. At the end of Q1, the remaining share repurchase authorization was $1.7 billion. Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high-return growth opportunities, including new store expansion and our strategic initiatives. We 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 an update on our financial outlook for fiscal 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, as Todd mentioned, we are increasing our full-year guidance for sales and EPS due to our strong Q1 outperformance, which we believe was aided by the latest round of stimulus. For 2021, we now expect the following: net sales in the range of a 1% decline to an increase of 1%; a same-store sales decline of 5% to 3% but which reflects growth of approximately 11% to 13% on a two-year stack basis; and EPS in the range of $9.50 to $10.20, which reflects a compound annual growth rate in the range of approximately 20% to 24% or in the range of approximately 19% to 23% compared to the 2019 adjusted diluted EPS over a two-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 continues to assume an effective tax rate in the range of 22% to 23%. We now expect to repurchase approximately $2.2 billion of our common stock this year compared to our previous expectation of about $1.8 billion. Our 2021 outlook for capital spending and real estate projects remains unchanged from what we stated in our Q4 2020 earnings release on March 18, 2021. Let me now provide some additional context regarding our full-year outlook. There could be additional headwinds and tailwinds this year, the timing, degree and potential impacts on our business of which are currently unclear, including but not limited to the potential impacts from legislation and regulatory agency actions. Given the unusual situation, I will now elaborate on our comp sales trends thus far in May. From the end of Q1 through May 23, comp sales declined by approximately 7% as we continue to cycle extremely difficult prior year comparisons. As a reminder, comp sales growth for the month of May in 2020 was 21.5%. We are nonetheless encouraged with our sales trends, but remain cautious in our 2021 sales outlook, given the continued uncertainty that still exists, the unique comparisons against last year and the anticipation of fading tailwinds from the most recent round of government stimulus. As you think about the comp sales cadence of 2021, we continue to expect our performance to be better in the second half, given a more difficult comp sales comparison in the first half.

Jeff Owen, COO

Thank you, John. Let me take the next few minutes to update you on our operating priorities and strategic initiatives. Our first operating priority is driving profitable sales growth. We are off to a great start to the year as our team continues to drive strong execution across our portfolio of growth initiatives. Let me take you through some of the more recent highlights. 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 over 7,300 stores at the end of Q1, and we remain on track to expand this offering to a total of more than 11,000 stores by year-end, including over 2,100 stores in our light version, which incorporates a vast majority of the NCI assortment but through a more streamlined approach. We're especially pleased with the strong sales and margin performance we continue to see across our NCI product categories. Notably, this performance is contributing to an incremental comp sales increase in nonconsumable sales of 8% in our NCI stores and 3% in our NCI light stores as compared to stores without the NCI offering. Given our strong performance to date, coupled with the added flexibility of a more streamlined approach, our plans now include completing the rollout of NCI across nearly all of the chain by year-end 2022. Moving to our newest concept, pOpshelf, which further builds on our success and learnings with NCI. pOpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience delivered through continually refreshed merchandise, a differentiated in-store experience and exceptional value with the vast majority of our items priced at $5 or less. During the quarter, we opened 3 new pOpshelf locations, bringing the total number of stores to 8. While still early, we continue to be very pleased with the initial results, which have far exceeded our expectations for both sales and gross margin. In fact, year 1 annualized sales volumes for our first 8 locations are trending between $1.7 million and $2 million per store, with an average gross margin rate of about 40%, which we expect will climb as we continue to scale this exciting initiative. As a reminder, this compares to year 1 sales volumes of about $1.4 million for a traditional Dollar General store and a gross margin rate of about 32% for the overall chain in 2020. For 2021, we remain on track to have a total of up to 50 pOpshelf locations by year-end, as well as up to an additional 25 store-within-a-store concepts, which incorporates a smaller footprint pOpshelf shop into one of our larger-format Dollar General market stores. Importantly, we currently estimate there are about 3,000 pOpshelf store opportunities potentially available in the Continental United States. When combined with pOpshelf's compelling unit economics, we remain very excited about the significant and incremental growth opportunities we see available for this unique and differentiated concept. Turning now to DG Fresh, which is the strategic, multiphase shift to self-distribution of frozen and refrigerated products. The primary objective of DG Fresh is to reduce product costs on these items, and we continue to be very pleased with the 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. We expect this benefit to grow as we continue to optimize our network and further leverage our scale. Another important goal of DG Fresh is to increase sales in these categories, and we are pleased with the success we see on this front, driven by higher overall in-stock levels and the continued rollout of additional products, including both national and private brands. At the end of Q1, we were delivering to more than 17,000 stores from 10 facilities and now expect to complete our initial rollout across the chain by the end of Q2, which is ahead of our previous expectation of year-end as communicated on our Q4 call. Moving to our cooler expansion program, which continues to be our most impactful merchandising initiative. During the quarter, we added nearly 18,000 cooler doors across our store base and are on track to install approximately 65,000 cooler doors this year. The majority of these doors will be in high-capacity coolers, creating additional opportunities to drive higher on-shelf availability and deliver a wider product selection, all enabled by DG Fresh. In addition to the gross margin benefits associated with NCI and DG Fresh, we continue to pursue other gross margin enhancing opportunities, including improvements in private brand sales, global sourcing, supply chain efficiencies and shrink. 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 the first quarter, we completed a total of 836 real estate projects, including 260 new stores, 543 remodels and 33 relocations. We now have produce in more than 1,300 stores. For 2021, we remain on track to open 1,050 new stores, remodel 1,750 stores and relocate 100 stores, representing 2,900 real estate projects in total. We plan to add produce in more than 1,000 stores, which compares to our previous expectation of approximately 700 stores. Our development strategy includes establishing two of our larger footprint formats, which each comprise about 8,500 square feet of selling space as our base prototypes for nearly all new stores going forward. With about 1,200 square feet of additional selling space compared to a traditional store, these larger formats allow for expanded high-capacity cooler counts, an extended queue line and a broader product assortment, including NCI, a larger health and beauty section with about 30% more selling space and produce in select stores. We are especially pleased with the sales productivity of these larger formats as average sales per square foot are currently trending about 15% above an average traditional store, which bodes well for the future as we look to grow these unit counts in the years ahead. Overall, our strategy consists of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience. We are pleased with the growing engagement we are seeing across our digital properties. Going forward, our plans include providing more relevant, meaningful and personalized offerings, with the goal of driving higher levels of digital engagement and customer loyalty. Our third operating priority is to leverage and reinforce our position as a low-cost operator. Over the years, we have 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, both around rolltainer and case pack optimization, which have led to 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 3,400 stores at the end of Q1, which represents more than double the store count at the end of Q4. We are pleased with our results, including customer adoption rates as well as positive feedback from customers and employees. Our plans consist of a broader rollout this year, and we are focused on introducing this offering into the vast majority of our stores by the end of 2022. Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion. We continue to create new jobs and opportunities for career advancement. Over 12,000 of our current store managers are internal promotions. We believe these efforts yield positive results across our organization and are an important driver of our consistent execution. We continue to make progress against our operating priorities and strategic initiatives, and we are confident in our plans to drive long-term sustainable growth while creating meaningful value for our shareholders. In closing, I'm proud of our team's performance, and we are pleased with our strong first quarter results, which further demonstrate that our unique combination of value and convenience continues to resonate with customers and positions us well going forward. I want to offer my sincere thanks to each of our approximately 157,000 employees across the company for their hard work and dedication to fulfilling our mission of serving others. With that, operator, we would now like to open the lines for questions.

Operator, Operator

Our first question comes from Simeon Gutman with Morgan Stanley.

Simeon Gutman, Analyst

My first question is on the business, a look maybe one year later or one year after this COVID started. Can you talk about the traffic? I know the rural store bases across retail seem to do well. Can you talk about how you're doing on the lap? And then anything changing in the basket that you're seeing, whether you're doing well and still in the consumables or how the basket may be evolving?

Todd Vasos, CEO

Yes. Simeon, this is Todd. Thanks for the question. Yes, we're very happy with what we're seeing now a year out of the pandemic or again, lapping the pandemic may be a better term. When you look at it, what we've seen is those customers that we were able to bring in during the COVID crisis or the heat of it, we have retained a very large portion, better than we had anticipated. As you may recall, we launched a very aggressive campaign back in August-September to not only retain but keep her engaged at Dollar General. That seems to be working very nicely. But as we've indicated in the past, when we see that our core consumer has more money to spend and stimulus has given her some of that tailwind, she tends to contract on the number of visits but spends a lot more, and that's exactly what we saw. We saw our basket size increase with our core consumer as well as with these trade-in consumers that we saw during the heat of the battle of COVID that we've been able to retain. It really sets us up nicely as we continue to move through this year. We feel very good about what we're seeing. And we're staying squarely focused on what we can control here and that's driving profitable sales growth.

Simeon Gutman, Analyst

And the two-year stack, I think if I did the math right, or if I heard the numbers right, I think it's running now 14 in May, if that's right. What are the puts and takes to that? I think there's a little more stimulus coming. Do you think this could be the run rate that you can hold going forward?

John Garratt, CFO

Yes. You're correct about the stack. Looking at the quarter's rhythm, we saw a significant pickup with the introduction of the stimulus, positioning us well to capture more than our fair share. On a two-year stack basis, there was some moderation, but overall performance remains strong, especially in nonconsumables, which had an impressive two-year stack as we mentioned. This reflects the effectiveness of our initiatives on both the consumable side, which enhances the grocery shopping experience, and the nonconsumable side, where we are gaining market share from specialty retail. Moving forward, the comparisons become easier in the latter half of the year, but we feel excellent about the business fundamentals.

Operator, Operator

Our next question comes from the line of Matthew Boss with JPMorgan.

Matthew Boss, Analyst

Congrats on the performance. Todd, could you speak to new customer acquisition that you're seeing in market share that you see driving the performance continuing? And how would you compare what you're seeing today to maybe the time at which we were exiting the financial crisis as we think about customer acquisition, new households shopping Dollar General? And if you were to rank, where do you see market share opportunities by category from here?

Todd Vasos, CEO

Yes, Matt, I'll try to weave all that in. But I would tell you that we're very happy with what we see on that customer acquisition side. Let me try to go to one part of your question, that is financial crisis coming out of that compared to what we are seeing now on the back side of COVID. Very similar from the standpoint that that consumer is still very engaged. I think the biggest difference here is the amount of stimulus that is in the system right now. Our core shopper continues to have a lot more money than she normally would, and she's spending a great deal of that with us, which is great to see. The other side of the equation is that trade-in shopper is financially doing pretty well as the economy opens back up. We can see it's opening up in a very robust manner. The difference of '08 and now is that the consumer has more money to spend, and she continues to come back to Dollar General, that higher-income shopper and shop with us. And that's exactly what we saw in '08 but in a way, she didn't have a lot of money. This time, she does have money but still continues to shop. This speaks to the relevancy that we've built in this box since that '08 crisis. This box has transformed tremendously since then. We feel good about those trends and our core shopper trends. As it relates to market share, we're seeing gains across the board. Drug continues to be our #1 donor share, grocery is donating as well as consumers start to go back to some normal shopping patterns as it relates to food at home. We're seeing those come back to Dollar General in a nice way. Even in our space, we're taking share, which is great to see. So it's really across the board. I think it's a real testament to the initiatives we've put in place years ago. This isn't just because of COVID; this underlying business is as strong as I've ever seen it.

Matthew Boss, Analyst

Todd, maybe as a follow-up to that, what inning would you characterize those key initiatives? If we think about DG Fresh, NCI, private label, I think you have a laundry list that you've walked through. But what inning would you characterize overall these initiatives as we think going forward?

Todd Vasos, CEO

Yes, you heard Jeff's prepared remarks. If I take a step back and look at NCI as an example, we will be fully rolled out by the end of '22, so I would say we're probably halfway through the process as we go through this year and into next, which feels good. In our cooler initiative and DG Fresh in general, I would say that we're still in the fourth inning, perhaps closer to the bottom of the fourth inning, but still in the fourth inning. There's a lot of runway ahead of us there. That's been the largest contributor on our initiative side that we've seen affecting both our top line and bottom line. We still have plenty of opportunity there. As for pOpshelf, we're just getting started. We're really pleased with what we're observing. We provided a bit more detail, and I hope it was helpful regarding our early sales and margin results from that area. We're very encouraged. As you know Dollar General well, as we start to see more evidence that this is a highly effective initiative, we can move quickly. So stay tuned on that. Digital will continue to be an ongoing initiative, but I would say we're in the early stages with plenty of opportunity for growth in both top line and bottom line since these initiatives target both. The important point here is managing every aspect of that profit and loss statement.

Operator, Operator

Our next question comes from the line of Karen Short with Barclays.

Karen Short, Analyst

I wanted to see if you could give a little color in terms of the May sales trends with respect to discretionary versus consumables. And I do have a question related to how you answer that from a bigger picture perspective.

John Garratt, CFO

Yes. If you look at May, we gave the May 23rd comp sales were down 7%, obviously, as we mentioned, a strong two-year stack in the 14%. There was a question also in terms of did that month-to-date differ from the full month, and it didn't change much at all. Strong performance continued and we saw continued strength in our nonconsumables, but also the consumables when you look at a two-year stack, so very strong performance from both sides of the box.

Karen Short, Analyst

When I consider the broader perspective, your discretionary mix has increased nearly 200 basis points since 2018. Additionally, it seems there is a significant opportunity to improve gross margins. Looking ahead a year or two, what do you anticipate the discretionary mix will be within your sales? And how should we approach the topic of gross margins as we move into 2022, especially considering that 2021 had some challenging comparisons?

John Garratt, CFO

Karen, as you consider the nonconsumables business, it's clear that there was a boost from the pandemic and stimulus. However, I want to highlight the consistent strength we have demonstrated in this area. We have achieved comparable growth in nonconsumables for 12 straight quarters, which reflects the importance we have placed on this segment. As we continue to expand, nearly doubling our efforts this year, we feel confident about the nonconsumables business moving forward. We recognize that the comparisons will become more challenging as we enter Q2, given that we are comparing to last year's 40.8% sales growth in the nonconsumables category, which will create pressure. Nevertheless, I am optimistic about the nonconsumables segment. As we scale this, we will leverage the best ideas, apply them throughout our operations, and integrate them into pOpshelf as well. We are very enthusiastic about this business. Yes. Obviously, we're not giving '22 guidance just yet. But what I'd tell you is this: as you look at the performance in gross margin, we've delivered eight consecutive quarters of gross margin growth, up 208 basis points this quarter, lapping 49 basis points last year. When you look at the drivers, there was some tailwind from nonconsumables from the stimulus. But when you look at the drivers, it's the strategic initiatives driving that. The top three, we've been talking about these top three for several quarters now: higher initial markups, that’s DG Fresh driving that, a gift that keeps on giving as we scale that, complete that across the chain, and then drive efficiency than that. The next two we talked about were lower markdowns and the mix benefit. Again, you got extra tailwind from the stimulus, but it's nonconsumables driving that and that's been consistent. You look at shrink; shrink was another benefit. There are near-term pressures regarding transportation costs, but we feel good about our ability to maintain those margins. The biggest wildcard is what impact child tax credits will have. So while we've not assumed more stimulus or child tax credits, we've noted that there are macro puts and takes influencing results.

Edward Kelly, Analyst

Nice quarter. Maybe the first one turns out to be a little bit of a follow-up now. But as it relates to product cost inflation, can you just talk about what you are seeing and what you're expecting from a product cost inflation standpoint, especially in consumables? What are your expectations for pass-through? To what extent are you in the driver seat? To what extent do you kind of need to follow what Walmart does? Are you seeing anything out there to suggest that you wouldn't be able to pass through higher product cost inflation if that happens?

Jeff Owen, COO

Ed, this is Jeff. Thanks for the question. Our merchants have done a fantastic job of partnering with our suppliers, and our scale and limited SKU assortment allow us to find innovative ways to protect that underserved customer and mitigate cost pressures. We have seen product cost inflation, but we're pleased with our pricing position. We feel good about where we are. We are committed to serving our customer, and we've made strategic decisions to enhance our pricing position. We're monitoring it closely, and feel good about the team's performance to date.

Edward Kelly, Analyst

Okay. And then just one on labor cost here. Can you just provide some color on what you're seeing out there? A lot of companies have talked about challenges. You grow a lot, so you're adding a lot of employees. Has it caused you to rethink wage levels at all? Do you see this as transitory? Just how do we think about the pressure there and how that's changing?

Jeff Owen, COO

Ed, we have seen some pressure, but I am proud of what our team has done to respond. In April, we announced our national hiring event with a goal to hire up to 20,000 additional employees. I'm pleased that we've beaten that goal by 50%. It points to Dollar General's reputation as a great place to start a career. We continue to attract talent and have a robust internal pipeline. We're surgical in our response to challenges. While we have seen some pressures, we are mitigating these challenges effectively, and we remain competitive in our wage offerings.

Operator, Operator

Our next question comes from the line of Michael Lasser with UBS.

Michael Lasser, Analyst

Your two-year compound annual growth for consumables grew 12% in the fourth quarter and 12% in the third and fourth quarters last year. You experienced an 11% growth in the first quarter, just 100 basis points lower. How much of that slowdown do you think is because consumers are returning to dining out and therefore visit Dollar General less frequently? Or how much is it because consumers are using their stimulus checks to shop at Walmart, Target, or other discretionary retailers, which reduces their trips to Dollar General?

Todd Vasos, CEO

Yes. It was difficult, Michael, to understand you and the question. But if I got some of your sense, we feel good about our consumable and nonconsumable businesses where they're at. I feel better than I ever have about being able to continue to drive the top line on both consumables and nonconsumables. If I missed that question or you'd like to ask it again, I'm happy to answer it.

Michael Lasser, Analyst

The question is your two-year compound annual growth rate for your consumables business slowed modestly from 4Q to 1Q. How much do you attribute that to people going back out to eat? Or they got a $1,400 check, so now they're going to Walmart to buy a TV and while they're there, they're filling up their basket, which could take away a fill-in trip from DG?

Todd Vasos, CEO

Yes, I apologize, Michael. Thank you for repeating. I would tell you it's definitely not the latter we've seen. It’s probably more a slowdown that we have seen due to one, such a robust last year and even into the fourth quarter. The economy is opening up a little bit, so that consumer has the ability to do other things. Food away from home, like yourself, many people wanted to get out of the house. That definitely played into Q1. What we’re already seeing in early Q2 is that food at home seems to be pretty sticky. I’m not ready to talk about Q2 right now, but I can tell you that in areas like DG Fresh, our perishable areas, we're seeing very nice sales, robust sales in there. Food at home has become ingrained, and I think it will continue.

Michael Lasser, Analyst

Got it. On the gross margin, 200-plus basis points, John. You did provide the order of magnitude. Could you quantify how much of the gross margin was due to factors driven by your initiatives like DG Fresh, NCI, which should continue? Is it 100 basis points over the next couple of quarters versus temporary factors such as mix or lack of promotions?

John Garratt, CFO

Yes, Michael. As you look, the #1 contributor was higher initial markups, which was DG Fresh. I would say it continues as we scale that across the chain. The next two were lower markdowns and the mix benefit. We've stated we remain tight on promotional activity while seeing some increase from last year due to virtually no promotional activity. Compared to 2019, it’s down. The promotions remain fairly tame now, and we still see positive performance overall. Our buying power and price strategies reinforce our position.

Scott Mushkin, Analyst

Seeing that pOpshelf, it's just an insane format, one of the best I've seen in about 20 years, so I look forward to hearing more about it. But my question is on DGX. You guys didn't mention it. Is there potential for DGX to supplant normal convenience stores? I'm looking at how the consumer's spending patterns are changing during the pandemic?

Jeff Owen, COO

Scott, thank you for the question. We are real excited about DGX. DGX is situated to locate where you work and play. We saw some pullback during the pandemic with remote work. However, we feel good about seeing economic activity return and our DGX locations are recovering nicely. We previously discussed the opportunity for 1,000 potential DGX locations. If we find a concept that works well, we’ll adjust accordingly. The offering inside DGX is exceeding our expectations, as seen in high customer satisfaction scores. Stay tuned. We have great confidence that we can continue to grow our brand across the country.