Dollar General Corporation Q3 FY2025 earnings call

Key Points - Todd Vasos:

• Q3 net sales increased 4.6% to $10.6 billion, with same-store sales up 2.5% driven by traffic. Grew market share in both consumable and non-consumable product sales. Customer count grew, with disproportionate growth from higher-income households.
• Congratulated Emily Taylor on promotion to Chief Operating Officer and welcomed Donnie Lau as new CFO.
• Discussed real estate plans for 2026, including executing ~4,730 real estate projects, 450 new store openings in US, 2,000 Project Renovate remodels, 2,250 Project Elevate remodels, and 20 relocations. Also mentioned digital initiative with expanded delivery options and DG media network growth.
• Highlighted non-consumable growth strategy with positive same-store sales growth in non-consumable categories for three consecutive quarters.

Donnie Lau:

• Covered Q3 financial details, noting gross profit margin increase, SG&A details, operating profit growth, and EPS increase.
• Spoke about balance sheet and cash flow, including inventory reduction, cash flow from operations, and plans to redeem additional senior notes.
• Shared updated financial outlook for fiscal 2025, including net sales growth, same-store sales growth, and EPS range. Mentioned capital spending and shrink expectations for Q4.

Net sales increased 4.6% to $10.6 billion in Q3 compared to $10.2 billion in last year's Q3. Same-store sales grew 2.5% driven by customer traffic. Gross profit as a percentage of sales was 29.9% in Q3, an increase of 107 basis points, primarily due to higher inventory markups and lower shrink. SG&A as a percentage of sales was 25.9%, an increase of 25 basis points. Operating profit increased 31.5% to $425.9 million, with operating profit as a percentage of sales increasing 82 basis points to 4%. EPS increased 43.8% to $1.28. Merchandise inventories were $6.7 billion at the end of Q3, a decrease of $465 million or 6.5% year-over-year. Year-to-date through Q3, cash flow from operations was $2.8 billion, an increase of 28%.

2025 Fiscal Year:

• Net sales growth expected to be approximately 4.7% to 4.9%.
• Same-store sales growth expected to be approximately 2.5% to 2.7%.
• EPS in the range of $6.30 to $6.50.
• Capital spending expected to be towards the low end of $1.3 billion to $1.4 billion range.
• Plan to redeem an additional $550 million of senior notes earlier than their November 2027 maturity, with about $9 million of incremental expense in Q4.

2026:

• Plan to execute approximately 4,730 real estate projects, including 450 new store openings in the US, 2,000 Project Renovate remodels, 2,250 Project Elevate remodels, and 20 relocations. Also plan to open approximately 10 additional stores in Mexico.

Risks:

• Consumer spending pressures and potential delays in SNAP payments could impact sales.
• Supply chain disruptions and inventory management challenges may affect operations.
• Competitive environment changes, including actions by other retailers, could impact market share.

Q: Good morning, and thanks for taking my question, and welcome back, Donnie. So I have a two-part question just on gross margin. So for Q4, it would be helpful to understand some of the puts and takes there you see on the gross margin line. And then from a longer-term perspective, we've seen significant progress this year on the gross margin front, including shrink. Just curious about your overall confidence in being able to deliver the next round of improvement, whether it's from retail media, mix shifts, etcetera, and on the damages front.

A: Yeah. Maybe I'll kick it off and then hand off the second part of your question to Todd. But thanks, Rupesh. Good to connect with you again. Maybe I'll just start with Q3 gross margin. I'm especially pleased, right, that we delivered 107 basis points of expansion, and that's on top of 137 basis points in Q2. And from a Q3 perspective, that's also despite a 79 basis point headwind from LIFO. And so while we're very pleased to see continued benefit from some of our other key focus areas like lower damages, reduction in markdowns, and some of the other initiatives that Todd's gonna speak about, I think the outperformance and shrink was notable during the quarter. And so the way I think about it, Rupesh, is we're really building momentum on our key initiatives. The team's really doing a nice job in terms of balancing price and managing mix. We do expect another quarter of gross margin expansion in Q4. We expect to see continued improvement in shrink, as I alluded to in the prepared remarks, to a lesser extent versus Q3. And that's because we really are lapping outsized or, you know, more improvement in Q4 2024 to the tune of about 68 basis points. We're also lapping a discrete item from the prior year really associated with the optimization of our portfolio. And we also expect continued benefit from growth in private label and non-consumables and, you know, continued improvement in damages as well as supply chain efficiencies. The one headwind we'll note is just LIFO. Although we do expect to partially offset that with pricing through continued managing mix as well. And so, again, overall, on the gross margin line, let's say, I believe there's more tailwinds than headwinds, which is nice to see. And feel really good about the momentum we're seeing and building on this front. Todd Vasos: Yeah. And Rupesh, thanks for the question as well. As I think about the long-term gross margin opportunities, I feel very good. Actually, shrink improvement so far is actually giving us, myself and our team here, even more confidence in delivering on that long-term model on our gross margin line. If you think about it, you know, when I think about where we're at today with shrink, as Donnie indicated, the great thing about our shrink benefits so far is while we did take self-checkout out, which has been a nice contributor, the stores that never had self-checkout, about 6,500 of them, have seen very substantial decreases in shrink and increases in gross margin. So what that does, it gives us a lot of confidence that there's probably more gross margin opportunities than we even thought in that long-term model. So stay tuned for that as we go forward. And then, as Donnie indicated, boy, we still have a lot of great opportunities ahead. When you think of damages, we're just starting that journey. We've seen some nice damage clawbacks over the last couple of quarters, but we see even more without giving you any guidance for '26 yet. Even more as we move into next year and beyond. So, stay tuned there. I think you'll see us execute against that very similarly to how we executed very strongly against our shrink initiatives. And then lastly, mix and media network. Mix continues to be a good guy and will continue to be. All of the work the team has done, the merchants, our operators, our supply chain, on our non-consumable initiatives really has moved the mix number for us. And as you know, those hold a lot stronger gross margins, not only in our home, seasonal, and apparel categories, but also our HBA categories, which have outsized gross margin. So feel very good about the long-term prospects of that. And then lastly, our media network. We're in the second inning. We're just starting the media network piece. And I would tell you that we're off to a great start. Double-digit increases again this quarter. And as I look out to the long-term model, we see a lot of opportunity there as well. So stay tuned. We feel strong. We feel good about where we are. And very good about that long-term model.

Q: Thank you for taking my question. I have a two-part one on real estate. So a short-term one, I think, Todd, you mentioned that the remodels are generating about, like, the 3% to 6% sales lift, which I believe are at the lower end of the previous ranges you've given. So can you just talk about is there additional upside? What are some of the near-term dynamics you're seeing there? And then longer term, given some of the changes in your competitive landscape with Family Dollar no longer really in the picture, drugstores closing, how does that change your view on your real estate opportunities and the growth rate you're willing to pursue?

A: Yeah. Sure. You know, we're really happy with where the remodel program is. As you know, we really are just in year one. We haven't even cycled a full year yet of Project Elevate. And that's given us what we've seen so far has given us a lot of confidence. Matter of fact, as you heard in my prepared remarks, we're gonna do another 2,250 of those next year. So, you know, hitting right around 3% right now, but we're just getting started. So as we look to even enhance this program as we go into next year, we'll continue to look at ways to ensure we even get a better comp out of it. But 3% is very strong and is well within our guidance and our guidelines here to continue to move forward. It's a strong, strong return at 3%. And then on Project Renovate at six, again, we're just getting going good there. We've been doing, obviously, these projects for many, many years. As we continue to rationalize our SKU base, our coolers, we see real opportunity to continue to drive long-term sales growth in these, albeit probably closer to six than the 8% that we had seen in the past. But, again, I'll take a 6% comp any day of the week with the investments that we're putting forward on these. So again, gives us a lot of confidence to do another 2,000 of those next year. So, really feel good about each of those. But, you know, we're retailers. We're never satisfied with the comps that we put out, and we're gonna continue to push even harder. And then long-term on your second part of the question, I would tell you we still feel very good. We got 11,000 opportunities in the Continental United States to put a Dollar General Corporation store in. Obviously, as we said, we won't get all those. But your question pointed to the reason we're bullish on getting a lot of these is that, you know, our competition today is really not opening a lot of stores. And for that, we don't feel compelled to have to rush to open a lot of stores. So we believe that the right mix right now, 450 stores still very strong for the year. The right mix of remodel and new, we believe, is the right thing. Taking care of that mature store base as we go forward is also strong. But with still close to 17% returns on new stores, we feel very bullish about what the future looks like with that 11,000 opportunities. And when we feel it's appropriate, we have the opportunity and the capacity to step it up from there.