Earnings Call Transcript
Dollar General Corp (DG)
Earnings Call Transcript - DG Q3 2023
Operator, Operator
Good morning. My name is Robert, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General's Third Quarter 2023 Earnings Conference Call. Today is Thursday, December 7, 2023. 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 now start your conference.
Kevin Walker, Vice President of Investor Relations
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 and 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 24, 2023, 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 the call up for your questions.
Todd Vasos, CEO
Thank you, Kevin, and welcome to everyone joining our call. Let me start by saying how excited I am to be back at Dollar General. I have a deep passion for this company and for the customers we are privileged to serve. I continue to believe in this model, our future growth prospects, and our ability to deliver value and convenience for our customers, a positive experience for our employees, and long-term value for our shareholders. We take our mission of serving others seriously and know that our customers are facing financial constraints, and communities are looking for strong partners in a tough macroeconomic environment. Historically, we've met those challenges head-on and delivered for our customers, and we believe that we are well positioned to do so now. In retail, one of the best ways to diagnose the state of the business is by looking at it through the eyes of the customer. And we know that our customers rely on Dollar General to provide the products they need at great values in convenient, friendly, and easy-to-shop stores. We have spent the last several weeks taking a fresh look at all areas of our business as well as the challenges and opportunities in front of us. We believe that we have a good understanding of what we need to do to address those challenges and opportunities, and we're already taking action. To be clear, this is not about rebuilding a team or organization, but about refocusing efforts already underway. This is where I want to spend the majority of our time today. I won't share all the details this morning but want to provide an overview to highlight our focus on getting back to the basics in our stores, in our supply chain, and within our merchandising. After that, Kelly and I will review our third quarter performance. I want to start with our stores, where everything begins and ends for our customers. As we drive improvement across our store footprint, we are doing so through the lens of our customers. As we have previously announced, we are investing approximately $150 million in store labor hours this year. After review, we continue to believe this level of investment is appropriate. But as we do with every dollar we invest, we must ensure we are spending it to drive the greatest return, which means we are directly helping our store teams support our customers. With that in mind, we have made the decision to redeploy labor hours away from smart teams and instead more directly to our store teams with a greater emphasis on customer service and store-level inventory management activities. To that end, I want to highlight two areas of focus we believe will drive the greatest improvement in our stores. First, we plan to increase the employee presence at the front end of our stores, particularly in the checkout area. While self-checkout has contributed to the convenient proposition for our customers in certain stores, it does not reduce the importance of a friendly, helpful employee who is there to greet customers and assist while the checkout process is happening. We have already begun by allocating more labor to front-end activities and clearly communicating our expectations around the visible presence of an associate at the front of our stores. Second, we are reemphasizing the role our store teams play in our perpetual inventory management process, which we believe will positively impact our on-shelf availability as well as our customers' convenience perception in our sales. To do this, we are reallocating some of our labor investments toward store-level inventory management processes, including an even greater focus on getting product on to our shelves more quickly. We are also reducing the span of control for our district managers, which will provide more opportunity for engagement with our store managers and their teams and more consistency and execution across the store base. As we take these actions and focus on the basics in our stores, we believe we will see improved retention at the store manager level where our turnover is currently higher than we would like. And we know from experience that when we stabilize the store manager position, the entire store and team benefit, which ultimately drives a more positive experience for our customers as well as improved sales and shrink results. Overall, we believe these actions will drive improvements in customer satisfaction, including customer service, on-shelf availability, and convenience, as well as sales while our focus on the front end should also reduce shrink. These efforts also should help us improve employee engagement and retention. Next, I want to talk about our supply chain. We have made significant progress recovering from the distribution capacity constraints that we had discussed late last year. However, through the lens of the customer, we see additional opportunities for improvement, particularly when it comes to serving our stores. As we focus on getting back to the basics, the goal within our supply chain is for our truck deliveries to be on time and in full, or OTIF. As we continue to drive our OTIF rates higher, we simplify the work for our store teams, which again results in a better overall experience for both our customers and associates, as well as an expectation of higher sales. I want to briefly highlight three areas of focus within our supply chain. First, we plan to optimize the inventory within our distribution centers. As I will discuss in a moment, we are taking steps to reduce inventory, including SKU rationalization, which will allow for the more efficient movement of product for our distribution teams. Second, we are implementing productivity improvement initiatives within our distribution centers. While productivity rates have been impacted by both internal and external factors, we are working to mitigate or eliminate productivity impediments for our teams and control the things we can control. These efforts include standardizing system configurations and optimizing the product layout in our facilities while providing clear communication on performance standards and expectations. And third, now that we're past the capacity constraints we experienced last year, we are reducing the number of temporary outside warehouse facilities being used to store product as inventory flows more effectively to and through our existing distribution centers. By better leveraging these existing distribution centers and taking advantage of the new permanent facilities we have opened over the last year and those we will open next year, we believe we can significantly reduce the amount of temporary warehouse space needed. As we've done historically, we likely will continue to maintain a few of these temporary facilities. However, we expect to transition out of many of them in Q4 and into next year. All of these actions within our supply chain should translate to lower distribution and transportation costs, better OTIF rates, and a better customer experience, all while improving sales results. Finally, I want to speak to our focus on fundamentals and merchandising. Once again, we reflected on our approach to the eyes of our customer. For our merchants, there is no greater priority than offering great value on the products our customers want and need. Our customers are living paycheck to paycheck and continually tell us that value is the most important factor in their shopping decisions. I am pleased to note that we are in good shape when it comes to our everyday pricing. And we are right where we want to be in our price gaps with our competitors and classes of trade. With that said, we are taking a hard look at what else we can do to drive value for our customers in this challenging economic environment, including highlighting private brands and other opportunities for savings as well as maximizing the effectiveness of any promotional activity to drive traffic and share growth. Beyond these opportunities for our customers, we have also challenged our merchants to consider how they can drive simplification for our stores and supply chain as well with meaningful SKU rationalization as one of the most immediate areas of focus. To that end, we have identified several opportunities to eliminate certain SKUs that have become less productive; first, by moving them out of our distribution centers and then ultimately to our stores to sell through. As our store teams have fewer SKUs to manage, we can lower our cost to serve while driving higher inventory turns and higher sales of products that are most important to our customers. We believe these actions will help further reduce inventory and shrink while simplifying operations in both distribution centers and stores to drive greater efficiencies over the longer term. We all know that driving traffic and market share are essential to long-term retail success. And while our results have been improving in these areas, we are still not satisfied with our current position. We believe we have identified actions that will pay dividends over both the short and long term, as we remain focused on driving profitable sales growth. In summary, we are getting back to the basics here at Dollar General across all levels of the organization. Our desired results will not materialize overnight, but we believe we will see some early wins and continue to make progress towards executing on the fundamentals that have been foundational to our success over the past 85 years. As a result, we believe we will significantly enhance the customer experience while driving higher sales and increased profitability in our business. Now before I turn the call over to Kelly, I want to briefly discuss some of our top-line results for Q3 as well as our 2024 real estate plans, which we announced earlier this morning. Net sales in the third quarter increased 2.4% to $9.7 billion compared to net sales of $9.5 billion in last year's third quarter. Within our net sales growth, we again grew market share in both dollars and units in highly consumable product sales as well as in overall non-consumable product sales. Same-store sales decreased 1.3% in Q3, which was in line with our expectations. The decrease was driven by a decline in average transaction amount, primarily due to unit counts and included declines in all four product categories. From an overall monthly cadence perspective, same-store sales growth was very similar in all three months of the quarter. However, I'm pleased to note that customer traffic was positive in Q3. After starting the quarter slightly negative, traffic turned positive in the middle period and improved sequentially each period of the quarter. Notably, customer traffic and same-store sales continue to improve in November, which, although early in the quarter, we believe reflects early traction from our work on getting back to the basics here at Dollar General. Turning to a quick update on our customer. During our most recent survey work, our customer continues to tell us they are feeling significant pressure on their spending, which is supported by what we see in their behavior. Based on these trends and what we see in the macroeconomic environment, we anticipate customer spending may continue to be constrained as we head into 2024, especially in discretionary categories. This further reinforces the importance of the work we're doing today, and we believe our unique value and convenient proposition is as relevant as ever in this marketplace. To that end, I want to discuss our plans for real estate growth next year as we look to extend our offering to many more communities. Real estate continues to be one of our core competencies and we remain pleased with the performance of our real estate projects. As a reminder, we monitor the following five metrics of our new store 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 two years or less; and new store returns, which we expect to be approximately 18% on average in 2024. I want to note that our expectations for new store returns, while still very strong, are down modestly from our historical target of 20% or above. This change is being driven partially by higher new store openings and occupancy costs, which I will discuss in more detail in a moment. We also continue to see strong performance from our remodel stores, which drive comp sales lifts between 8% and 11% for our DGTP format and average returns, which continue to be greater than what we see from our new stores. With this consistently strong performance, we continue to see real estate projects as one of our best uses of capital. In fiscal 2024, we plan to execute approximately 2,385 projects, including 800 new openings, 1,500 remodels, and 85 relocations. While this is a significant number of projects, I want to acknowledge that this is a smaller number than we have opened in recent years, due primarily to a couple of considerations. First, we want to ensure that our teams across the company are focused on getting back to the basics and the efforts I discussed a few moments ago. And second, the capital required to execute these projects has increased significantly. For example, the initial opening of our 8,500 square foot store has increased more than 30% since we began rolling out the larger format in 2022. Additionally, nonresidential construction costs have increased significantly since pre-COVID. Our team has a number of efforts underway to reduce these costs, including minimizing engineering costs out of the projects. And we believe, over time, we will be able to mitigate some of the impact we have seen from inflation. With that said, our pipeline remains robust. We continue to see more than 12,000 opportunities for Dollar General bannered stores in the United States. And 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 continue to innovate on store formats as an important element of our real estate strategy, and I want to take a moment to provide some additional color on our plans for 2024. We are placing a heavier emphasis on rural stores in 2024, with more than 80% of our new stores planned in rural communities where we believe we can have the most significant and positive impact for our customers. In addition, more than 90% of our new stores and relocations will be in one of our larger store formats, which continues to drive increased sales productivity per square foot compared to our traditional 7,300 square foot box. These larger stores also provide additional opportunities to serve our customers, including expanded cooler offerings to help them build meals to feed their families, more health and beauty products, and fresh produce in many stores. Also included within our store plans are approximately 30 new pop shelf locations as we continue to move at a measured pace with this concept in a softer discretionary sales environment. Finally, we've been very pleased with our initial entry into Mexico, and our new store plans for 2024 also include approximately 15 new Mi Súper Dollar General stores in Mexico. Turning to remodels. Nearly 70% are planned to be in our DGTP format, which will provide the opportunity for significant increases in cooler count as well as the potential to add fresh produce in many of these stores. We are excited about our real estate plans for 2024 as we continue to grow the number of communities we are serving, particularly in rural America. In closing, we have tremendous growth opportunities in front of us, which we are uniquely well positioned to capture. We are working diligently on getting back to the basics, and we are laser-focused on serving our customers while providing meaningful opportunities for our employees and creating long-term value for our shareholders. With that, I now would like to turn the call over to Kelly.
Kelly Dilts, 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 the important financial details. Unless we specifically note otherwise, all comparisons are year-over-year, all references to EPS refer to diluted earnings per share, and all years noted refer to the corresponding fiscal year. For the third quarter, gross profit as a percentage of sales was 29%, a decrease of 147 basis points. This decrease was primarily attributable to an increase in shrink, lower inventory markups, and increased markdowns. These were partially offset by decreases in LIFO and transportation costs. Turning to SG&A, which was 24.5% of sales, an increase of 183 basis points. This increase was driven by retail labor, including approximately $29 million of our targeted labor investment, as well as depreciation and amortization, repairs and maintenance, rent, professional fees, and other services purchased, including debit and credit card transaction fees. These were partially offset by a decrease in incentive compensation. Moving down the income statement, operating profit for the third quarter decreased 41.1% to $433.5 million. As a percentage of sales, operating profit was 4.5%, a decrease of 330 basis points. Interest expense for the quarter increased to $82 million compared to $54 million in last year's third quarter, driven by higher average borrowings and higher interest rates. Our effective tax rate for the quarter was 21.3% and compares to 22.8% in the third quarter of last year. This lower rate is primarily due to increased benefits from federal employment tax credits and an increased benefit from rate-impacting items caused by lower earnings before taxes for the third quarter. These benefits were partially offset by a higher state effective tax rate. Finally, EPS for the quarter decreased 45.9% to $1.26. Turning now to our balance sheet and cash flow. Merchandise inventories were $7.4 billion at the end of the quarter, an increase of 3% compared to last year and a decrease of 1.8% on a per-store basis. In addition, total non-consumable inventory decreased approximately 15% compared to last year and decreased 19% on a per-store basis. While the inventory growth rate has significantly moderated from its peak in the third quarter last year, and the quality of our inventory remains good, we continue to believe there is opportunity to optimize and reduce our inventory levels. We continue to review our markdown plans related to the previously announced $95 million investment, including associated costs to ensure we are maximizing the impact of these actions. We are focused on optimizing our overall inventory position to better support our customers, stores, distribution centers, and growth plans. Year-to-date, through Q3, the business generated cash flows from operations of $1.4 billion, an increase of 15.5%. Total capital expenditures through Q3 were $1.2 billion and included our planned investments in new stores, remodels, relocations, distribution and transportation projects, and spending related to our strategic initiatives. During the quarter, we paid a quarterly dividend of $0.59 per common share outstanding for a total payout of $129.5 million. As planned, we did not repurchase shares this quarter. Now I want to take a moment to provide an update on our financial outlook. We continue to expect the following for fiscal year 2023. First, net sales growth in the range of 1.5% to 2.5%. Next, same-store sales in the range of a decline of approximately negative 1% to flat, and EPS in the range of $7.10 to $7.60, or a decline of negative 34% to negative 29%. Our EPS guidance continues to assume an effective tax rate of approximately 22.5%. Finally, we expect capital spending in the range of $1.6 billion to $1.7 billion, and no share repurchase activity. Let me now provide some additional context as it relates to our outlook for the rest of 2023. While we continue to see a more constrained consumer and softer sales trends than we expected coming into the year, those trends were anticipated when we provided our guidance update in October. We have always been an all-weather brand, and aided by the actions that Todd outlined earlier, we are poised and ready to serve our customer in this challenging economic environment. In the near term, we expect continued overall pressure on the sales line, particularly in the non-consumable categories. Within gross margin, in addition to sales mix pressure in our previously announced markdowns, shrink has continued to be a sizable headwind, and we expect this will remain with us into next year as any shrink improvement typically takes at least a year from a store's most recent count to show up in our financial results. Partially offsetting these challenges, we expect benefits from greater distribution center capacity and performance, lower carrier rates, our private tractor fleet, and other distribution and transportation efficiencies. We also continue to expect realizing benefits from our initiatives, including DG Fresh and the DG Media Network. Turning to SG&A, we plan to make the remaining $50 million of our planned total labor investment of approximately $150 million in our stores during Q4. Overall, the investments we have previously discussed in retail labor markdowns and other areas to better support our customers, stores, and distribution centers are expected to total up to $270 million in 2023, which is consistent with our previous expectations. We are reviewing every aspect of these investments to ensure we maximize their impact for our customers and stores while driving the greatest return moving forward. Our capital allocation priorities continue to serve us well and guide us today. Our first priority is investing in our business, including our existing store base, as well as high-return organic growth opportunities such as new store expansion and our strategic initiatives. Next, we return cash to shareholders through a quarterly dividend payment. And finally, over time, and when appropriate, share repurchases. Although our leverage ratio is currently above our target of approximately 3x adjusted debt to adjusted EBITDAR, we are focused on improving our debt metrics in order to support our commitment to our current investment-grade credit ratings, which, as a reminder, are BBB and BAA2. With all of that said, cash generation is very important, particularly in this environment, and we are focused on maintaining and improving strong cash flow as we head into 2024. In summary, we remain committed to maintaining our discipline in how we manage expenses and capital as a low-cost operator with the goal of delivering consistent, strong financial performance while strategically investing for the long term. We are confident in our business model and our ongoing long-term 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 back over to Todd.
Todd Vasos, CEO
Thank you, Kelly. As we wrap up, let me just say again that we're laser-focused on getting back to the basics. As I mentioned in my earlier remarks, some of these actions will take a little bit more time to deliver the desired results. But we expect to demonstrate significant progress over the coming months and look forward to sharing more with you in the quarters ahead. This team is energized, and we are confident in the actions we're taking to drive operational excellence for our customers and employees and long-term value creation for our shareholders. I want to thank our approximately 185,000 employees for their commitment to doing the work necessary to serve our customers and communities every day. I am proud of this team and look forward to serving our customers together as we move through this busy holiday season. With that, operator, we'd now like to open the lines for questions.
Operator, Operator
Our first question comes from Rupesh Parikh with Oppenheimer.
Rupesh Parikh, Analyst
Welcome back, Todd. So I wanted to kick it off just with longer-term operating margins. Do you feel like you can sustain a 6%-plus operating margin level longer term? And do you think you can get back to 8%-plus, where you have historically operated? And then to get to that 8%-plus, where do you see potentially the bigger buckets of opportunity going forward?
Todd Vasos, CEO
Thanks for the question. I'll take the second part of that and then pass it over to Kelly. At Dollar General, we have gone back to the basics. You heard that in my prepared remarks, and I have to say, it has truly energized this company at all different levels. Everything starts and stops at the store with the customer. And what we've done is actually gone in and looked at every element of our business that touches our consumer from the lens of the consumer. Again, you would think that this is always an ongoing piece. But sometimes it's good to remind yourself and your organization. So we've done that. And with that, I won't go through all of that because you saw a lot of it in my prepared remarks, but really getting back to the basics, making sure that the labor we've already deployed in our stores and yet to come in the fourth quarter, the $150 million of additional labor is spent in the proper way. And again, that redeployment of money from the smart teams directly into our store where it touches our customer each and every day is important, and that's exactly what we're going to do. And as we do that, and I think it's very important to point out, it also helps the front end of that store. It helps on the sales line because we've got somebody to meet, greet, and ring up the customer. It also helps on the shrink line because you've got somebody at the front end of the store that is always there to monitor the front end of the store. And also, it helps on the convenience side because we had relied too much this year on self-checkout in our stores. We should be using self-checkout as a secondary checkout vehicle, not a primary. And so with all that, it's going to help. And when you focus on our supply chain, getting the right product at the right time to our stores or OTIF in full and on time, I would tell you that that's going to make a world of difference. Again, being an old operator that I am, there's nothing more disruptive in the store than not getting your truck on time and being able to get all the products onto the shelf when it comes in; and by the way, having the right items when you do put it on the shelf. And then lastly, really honing in this merchandising piece. We have probably one of the best merchant groups in all of consumable retailing. But at times, you have to step back and look at what brought you to the party may not always be exactly what you need to do to go forward. Sometimes you have to step back to go forward. And I would tell you that's the case here on a couple of levels. One being the number of SKUs we're carrying; SKU rationalization is always an ongoing piece at Dollar General. But I believe that it's time to really step back and energize that even more in 2024. And we've already actually gone deep here, turned off a lot of SKUs. There's going to be a lot more to come. The idea here is turning off or eliminating SKUs that are more in the secondary or tertiary type of line. So think about laundry detergent as an example. We may have five or six different variants of laundry detergent on the shelf today. We can easily drop one or two of those. The consumer is not going to know the difference and actually is going to make her life a little simpler when she goes to the shelf; it's going to make the store's life simpler to put products on the shelf. And also, what it's going to do is help our warehouses eliminate a lot of holding slots. So a lot of benefits to what we're going to do in SKU rationalization. And all of this, which is fabulous, I'll pass it over to Kelly, will actually start to move down to the bottom line, some faster than others. But again, being an old line retailer that I am, I know that these actions will fall to the bottom line and also help increase our top line as we go into '24. Kelly?
Kelly Dilts, CFO
Thanks, Todd. Our goal is certainly to get back to the historic levels of operating margin and profit that we're used to. While we're not going to give guidance for '24 today, I do want to give a little bit of color on '24 just around some near-term headwinds that we're seeing. The first of those is around lapping significantly reduced incentive compensation as well as stock-based compensation. And so that will just be a near-term headwind as we think about 2024. The other thing that we're looking at right now is we're expecting a higher effective tax rate, and that's really due to lower benefits around the stock-based compensation piece as well as we've seen historically just some higher state effective tax rates as we have moved through the last few years. So those are near-term headwinds, certainly not anything long-term that we need to worry about. The other thing is around shrink. And so as you know, shrink has been pretty significant for us for a while, and it's definitely going to carry into 2024. As I talked about in the prepared remarks, it just takes a while to start showing up in your financial results. And just to give you a little bit more color of kind of where we are with shrink on a year-to-date basis, shrink is actually a 100 basis point headwind for us. And then as we moved into Q3, it's actually running just a little bit higher than that. And so certainly a pressure near term for us, something that we're looking to hopefully mitigate along the way, and it'll show up in the financial results later in 2024. And then as we think about just our underserved customers, we're just making sure that we're watching her and whether she gains employment. All the actions that Todd just noted and getting back to the basics is certainly going to set us up nicely to be able to serve her, and it doesn't matter what economic environment. We've always been an all-weather brand, and we certainly will continue to be so as we move forward. So that's a little bit of color on '24. We're going to give you a lot more color in March and give you a little bit more holistic view there. But what I'll say is, overall, the fundamentals of this business are absolutely unchanged, and this model remains strong. On a longer-term basis, we believe that we're going to get back to the historic levels that this model is accustomed to delivering.
Operator, Operator
Our next question is from Simeon Gutman with Morgan Stanley.
Simeon Gutman, Analyst
Welcome back, Todd. When you rejoined, you talked about having an opportunity to revisit the financial profile of the business. And if there was a time to look back and reset and invest deeper, you could take that opportunity. As the business looks to be forming a bottom in margin and thinking about getting to 7% or plus in a reasonable time frame, do you have any updated thoughts on that? Does it make sense to lean in so that when you start building back, it builds back sustainably? Do you think the business needs a little more investment than you thought 1.5 months ago?
Todd Vasos, CEO
Thank you for the question. And you're 100% right. The first few weeks back on the deck here, I took a holistic view across not only our operations, but as you heard, our supply chain, and our merchandising areas, looked at everything holistically. But first, let me say before I click it off, is that I believe that the investments that have been already talked about this year, $100 million and $150 million in total labor investments, were the exact right thing to do. I don't believe, at this point, that I see a need that we need to make any other larger, outsized investments as we move into '24. I believe, as I indicated, that the right thing to do is make sure that the $150 million is being used appropriately and in the right areas that touch the consumer and help our stores be able to better serve our consumers each and every day. And that's exactly what we've done now over the last few weeks. And that's why I believe taking the smart teams out of the equation, taking that whole bunch of labor that was dedicated to that, and putting it directly in our stores to cover the front end of our stores more effectively each and every day, 100% of the time tethered to the front end for customer service and ringing up our customers. And then also one of the first for Dollar General, quite frankly, deploying some of that labor into work that ensures that we keep our perpetual inventory correct and ongoingly correct each and every day. Because once again, if the system doesn't recognize you need product, it won't send you product. Unfortunately, over the last year or so, our perpetual inventory numbers have gotten further out of whack. We are now in the midst of bringing those back. We've seen a lot of great traction, but the redeployment of hours of this $50 million coming out of the smart teams will really benefit. And again, this is a first for Dollar General, so it will be great to see that as well. And as I looked into other areas of the company, I feel fabulous about our pricing. The great thing when I step back in, our everyday pricing across all channels of trade, including our chief competitor, looks very good and in great position. As a matter of fact, our gaps are right where we would like to see them compared to historical levels. So very good there. Our promotional activity, while I still believe I would call it semi-rational across the spectrum, we have seen an uptick in recent weeks on promotional activity. We're watching that carefully. Is that because we're moving into the holidays or is that something that will sustain as we move into '24? So we're watching that carefully. But you know us pretty well; we're going to take whatever action is needed. We're going to take it quickly, and we'll make sure that our pricing stays exactly where it needs to be to service our customers. But at this point, I don't see a need to reinvest any large amounts in margin to do anything there. But again, we always reserve the right to be able to do it if that time arises. So right now, I think the investments we've already talked about over this past year are in the system. I believe they're appropriate, and they're now being used, I believe, very appropriately in all areas and are deployed the proper way. Now it's time for execution. And that's what we're doing. We're already starting to see a little bit of benefit, especially as we moved into November on some of our top line results both in consumables and non-consumables, quite frankly, as we move through November. So it's great to see it. But again, caution; it's very early in the quarter, and it's very early in this new look at how Dollar General is going to go to market. But rest assured, as Kelly indicated, we feel very good about the long-term prospects of getting back to historical levels here at Dollar General.
Operator, Operator
Our next question is from Matthew Boss with JPMorgan.
Matthew Boss, Analyst
Maybe, Todd, at a higher level. Could you just help elaborate on some of the recent changes in behavior that you're seeing from the low-end consumer? The traffic versus ticket trends that you cited, I think, are interesting. But maybe asked a different way, traffic is improving. What's constraining the comp through the third quarter? Did comps actually turn positive in November tied to some of these initiatives? And then just lastly, on the new stores and the mindset shift to maybe downshift a bit, could you just elaborate on some of those pieces that you walked through, occupancy costs, and some of the other moving parts? And just what you're seeing on the new store return to maybe just take a pause here?
Todd Vasos, CEO
As we review our results during the quarter, we noticed that while the periods were quite similar, there was a consistent increase in our traffic as the quarter progressed into November. I won't go into too much detail about November, but I can say that we observed an improvement in our comparable sales as we transitioned into that month, which was encouraging. This improvement was seen in both consumable and non-consumable products. However, there's still a significant amount of work to do to reach historical comparable sales levels at Dollar General. I believe that our foundational work will accelerate our progress as we move into the latter half of Q4 and into Q1 of 2024. It's crucial to ensure our stores are stocked daily so that customers can find what they need, and we have already noticed a marked improvement in our in-stock rates over the past few weeks, contributing to the better performance in November. While we are optimistic, we acknowledge there is still a lot to do. Regarding the opening of new stores, we have slightly scaled back this year. Upon my arrival, I examined this area closely and left no stone unturned, scrutinizing every aspect of the business, including our capital investments. The new store openings are still the best use of our capital overall, but I deemed it wise to reduce the pace. While some may argue that opening 800 stores is still a large commitment, I believe it was a sensible decision due to the rising costs associated with store construction, including higher interest rates. Our team has worked diligently to mitigate some of these costs, but we still have more to do. Taking a step back in new store development allows our teams to find ways to lower costs further during this phase. Moreover, this pause provides us an opportunity to focus on internal improvements, which is essential for our long-term success. Although this may not be a long-term trend, we currently see no reason why we shouldn't increase our new store openings in the future. There are still 12,000 locations available for Dollar General across the continental United States, and we have always excelled at quickly capturing those opportunities. So far, nothing appears to impede this goal. Kelly, you may want to briefly discuss the returns.
Kelly Dilts, CFO
Yes. No, absolutely. An 18% return in this environment is fabulous, and Todd noted it; it's still a great use of capital. The new unit economics are still very strong as we move into '24. And it has a great payback period still of less than two years. The other thing that we haven't seen is any change in the cannibalization rate. The other thing I'd point out, and Dollar General is just fantastic at this, our real estate group is pretty amazing, and we have an extremely high hit rate of success, and you've seen that over the years. So we feel really good about the projects. We feel good about the 18% return, and of course, as Todd noted, while we're pleased with all of that in typical Dollar General fashion, we're going to work to improve it as we go through '24.
Operator, Operator
Our next question is from Seth Sigman with Barclays.
Seth Sigman, Analyst
I wanted to talk about inventory a little bit. Just in terms of the progress rightsizing your inventory position. Can you just give us a little bit more perspective on where you sit today with consumables versus non-consumables? And then is it your expectation to exit the year clean? Or do you feel like you're going to still need some incremental actions into next year? And then I'll just add a second part to the question around the top line. When you look at the improving trends over the last few months, to what extent has that been influenced by markdowns and clearance activity?
Kelly Dilts, CFO
Yes. No, inventory reduction is absolutely a priority of ours this year, and it will be a priority as we move into next year. I think the good news for us is that the quality of our inventory is good, but we've talked a lot in the past about the benefits of inventory reduction and just what that does as you reduce the complexities in both the stores and the distribution centers. So I would say our progress is on track in our reduction efforts, and you saw a little bit of that in the numbers today. The total inventory increase was 3% on a year-over-year basis. But if you look at it on a per-store basis, we're down 1.8%. I think the real story here is around the non-consumable piece. And so we are down 15% on a year-over-year basis there, and we're down 19% on a per-store basis. I think the other important thing to call out, and we've been calling it out every quarter, but this one is even more significant as we've seen a 58% decrease in our import receipts. And again, that's us buying around that product and making sure that we're selling through it. So we feel good about where we're headed for the end of the year. Just a little bit longer term, I'd say we have several work streams in place that are working on inventory reduction, but just as important, and this kind of goes to the top line, is inventory optimization and making sure that we're going where the customer wants us to go. So I would say with all of these things in place, we should feel pretty good about where we're landing at the end of '23, but we're going to feel even better as we see continued improvement in inventory levels as we move through '24.
Todd Vasos, CEO
Thanks, Kelly. And as you look at our results in Q3 and how that relates to any activity around clearing this inventory, I would tell you that I feel very good about the balance here. While there was some activity there, actually, some of the bigger activities are really slated for Q4, if needed. And a lot of that will be centered around our sell-through of holiday. So we're watching that very closely. But again, early results would say it's right in line with where we thought it would be right now. And actually, in some areas, a little bit better. So we're watching that carefully. But I would also say, as we continue to move forward, what we like and what I've seen since I've been back is I believe we've done exactly the right thing on moving through some of this inventory. But as I look at the quality of our inventory, it is in very good shape. And actually, as Kelly just indicated, a lot of what we have right now to deal with on an overstock basis is actually more in our core everyday goods. So this isn't about a bunch of screwdrivers and hammers or fashion-type items for holiday that we have to move through; this is about having a little bit too much of some basic paper, cleaning, food-type items, things like that, that will move through the system pretty naturally as long as we do the right thing with our supply chain and our stores. And that's exactly what back to the basics is meant to address. So feel very good about that and very good about what we see going into the back half of this year and '24.
Operator, Operator
Our next question is from Michael Lasser with UBS.
Michael Lasser, Analyst
Welcome back, Todd. Given everything that you outlined this morning, when is it realistic for us as outsiders to hold the team accountable to getting back to consistently producing a double-digit EPS growth algorithm like Dollar General has done in the past? And as part of that, Kelly pointed to a few factors that are going to weigh on Dollar General's profitability in 2024. Could you give more texture and timing around how large those factors are like incentive compensation and shrink?
Todd Vasos, CEO
Yes, thank you, Michael. As both Kelly and I have said, I don't see anything that gets in the way longer term to getting back to some of our historical ways that we return to our shareholders and our customers. We feel that we're on the right track with our back-to-basics moves here, both in our labor investments, in our inventory investments, as well as in our supply chain and merchandising. So we feel like we've taken the right appropriate actions now, and we're moving with speed and intent. As I said in my prepared remarks, some of it will occur and manifest itself faster, while some will take a little bit more time. But rest assured, we are hitting every single item, and we're monitoring every single item every week here to make sure it's on the right track. And if it happens not to move the way we want, we will then make an adjustment to ensure that it does. We are squarely focused on getting this company back to its historical returns that everyone is accustomed to seeing, and most importantly, our customers are used to seeing at the store level. Now as Kelly indicated, there are some near-term headwinds. As much as I would love to give you more color right now, we're not here to give '24 guidance. We wanted, though, to make sure that you can contextualize at least some of those headwinds as we start to move into 2024, but rest assured, we're going to give you more than you need in the components when we come back and give you the guidance for 2024 to make sure that you can build the models out the proper way. But again, I want to make sure you also understand, though, that we're not going to wait until '24. We're taking action now to continue to modify and also continue to ensure that we're addressing any of the gaps that are out there that are well in our control. There will just be a few things that may not be fully in our control in '24 that will probably be more of a one-time in nature that we'll address at the right time.
Operator, Operator
Our final question is from Kate McShane with Goldman Sachs.
Katharine McShane, Analyst
We were wondering how you would frame the risk of deflation across your box into next year? And how do you think about the puts and takes across the P&L as a result?
Todd Vasos, CEO
Yes, that's a good question. There's been a lot of discussion about deflation. We've noticed some deflationary trends emerging, particularly in our non-consumable discretionary areas. At this moment, we are not alarmed as we head into 2024. We see real opportunities to lower initial costs, especially for our import-related goods, including both factory costs and transportation costs. Ocean freight, fuel, and bunker fuel costs have significantly decreased over the past year, creating opportunities to cut costs. Some of these savings will be passed on to consumers, particularly in the commodity areas of our import business, which include some valuable items even in non-consumable categories. From the consumable standpoint, while there are fluctuations in commodity prices like milk, dairy, oils, and wheat, we monitor these closely. We track component pricing for both our national and private brands carefully. However, we haven't observed significant deflationary pressures in center store categories such as dry grocery or paper products. There has been a slight decrease in some dairy commodities and certain meat items, where we don't have a large presence, and in the produce category, our involvement is minimal. Overall, I can assure you that we do not see anything alarming that would negatively impact our revenue as we approach 2024, and currently, there is no evidence to suggest otherwise.
Operator, Operator
We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Todd Vasos for closing comments.
Todd Vasos, CEO
Thank you, and thanks for all the questions and your kind words for welcoming me back. As I said last year, serving this team at Dollar General has been the highlight of my professional career, and I feel the same sense of honor today. As you heard this morning, we have some hard work yet ahead of us, but we know what to do. We've done it before, and we are absolutely set on doing it again as quickly as possible. I'm excited about the opportunities in front of us and all that we've accomplished together over the years and will continue to do so for our customers, associates, and shareholders. Thank you for listening, and I hope you have a great day.
Operator, Operator
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.