達樂 (DG) 2016 Q2 法說會逐字稿

Good morning.

My name is Hope and I will be your conference operator today.

At this time, I would like to welcome everyone to the Dollar General second-quarter 2016 earnings call.

Today is Thursday, August 25, 2016.

All lines have been placed on mute to prevent any background noise.

This call is being recorded.

(Operator Instructions).

Now I would like to turn the conference over to Ms. Mary Winn Pilkington, Vice President of Investor Relations and Public Relations.

Ms. Pilkington, you may begin your conference.

Thank you, Hope, and good morning, everyone.

On the call today are Todd Vasos, our CEO, and John Garratt, our CFO.

After our prepared remarks, we will open up the call for questions.

Our earnings release issued today can be found on our website at DollarGeneral.com under investor information press releases.

Let me caution you that today's comments will include forward-looking statements about our expectations, plans and other non-historical matters including but not limited to our fiscal 2016 diluted EPS guidance, fiscal 2016 and 2017 store growth initiatives, capital allocation strategy and related expectations, our long-term financial growth model, and future economic trends or conditions.

Forward-looking statements can be identified because they are not statements of historical fact and use words such as outlook, may, believe, anticipate, expect, looking ahead, estimate, forecast, goal or intend and similar expressions that concern our strategy, plans, intentions or beliefs about future matters.

Important factors that could cause actual results or events to differ materially from those projected by our forward-looking statements are included in our earnings release issued this morning, our 2015 10-K filed on March 22, 2016, and our most recent 10-Q filed today and in the comments that are made on this call.

We encourage you to read these documents.

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 except as may be otherwise required by law or as described under the heading, financial outlook, set forth in our earnings press release issued today.

Now it is my pleasure to turn the call over to Todd.

Thank you, Mary Winn, and welcome to everyone joining our call.

For the second quarter, we are pleased with our double-digit earnings per share growth even as our same-store sales performance fell short of our expectations.

I'm particularly proud of the team's ability to effectively manage our gross profit margin and leveraging our selling, general and administrative expense as a percent of sales in what proved to be a difficult sales environment.

Key factors that negatively impacted our expected same-store sales performance included a greater than anticipated headwind from price deflation across key perishable items with retail prices down about 8% for milk and over 50% for eggs, our two largest products within perishables.

Second, a reduction of both SNAP participation rates and benefit levels.

Third, an unseasonably mild spring.

And lastly, an intensified promotional environment in select regions of the country.

We estimate that the headwinds from price deflation and the reduction in SNAP benefits negatively impacted our same-store sales for the second quarter by approximately 60 to 70 basis points.

As I will discuss in more detail later in the call, we are taking aggressive action across merchandising and store operations to address these factors and help drive same-store sales and we will continue to be very disciplined in our SG&A spending.

I am pleased with our overall financial performance and the team's ongoing focus on our long-term strategy despite the challenging retail environment.

Highlights of the second quarter of 2016 as compared to the prior year second quarter include net sales increased 5.8% to $5.4 billion and same-store sales grew at 0.7%.

Same-store sales growth was positive for consumables offset by decline in non-consumable category.

Gross margin was 31.2%, an increase of 2 basis points.

We leveraged selling, general and administrative expenses by 8 basis points as our zero-based budget initiatives continue to contribute to our results.

Operating profit increased 7% with operating profit margin expansion of 10 basis points.

Net income in the second quarter increased 9% to $307 million.

Diluted earnings per share increased 14% to $1.08.

Year to date through the second quarter, diluted earnings per share was 18%.

Cash from operations increased 36% year to date through the second quarter.

During the quarter, we returned over $294 million to shareholders through the repurchase of 2.5 million shares of common stock and the payment of a quarterly dividend.

We continue to grow market share as reported in syndicated share data for the quarter.

In the most recent syndicated data, we experienced relatively consistent low single-digit to mid single-digit growth in both units and dollar share for the four-, 12-, 24- and 52-week periods.

Now I will turn the call over to John to go through more details of the quarter.

Thank you, Todd, and good morning, everyone.

As Todd has taken you through the highlights of our second quarter, I will share more details on the rest of the quarterly financial results starting with gross profit.

Gross profit for the 2016 second quarter was $1.7 billion or 31.2% of sales, an increase of 2 basis points from last year's second quarter.

As compared to the prior year second quarter, higher additional markups on inventory purchases and lower transportation costs contributed to the gross profit rate increase offset by higher markdowns, a greater proportion of sales growth in consumables which carries a lower margin than non-consumables and higher inventory shrink.

SG&A expense decreased by 8 basis points over the 2015 quarter to $1.2 billion or 21.7% of sales in the second quarter.

The majority of the SG&A percentage decrease was due to reductions in administrative payroll costs, advertising costs and incentive compensation expenses.

Partially offsetting these items were our retail, labor and occupancy costs, each of which increased at a rate greater than the increase in net sales.

Similar to the last quarter, our zero-based budgeting initiatives were a key driver of our SG&A performance.

The team continues to actively work on a pipeline of additional future savings opportunities across the Company leveraging process improvement, procurement and prioritization to remove costs that don't affect the customer experience.

Moving down the income statement, our effective tax rate for the quarter was 36.8% as compared to 38% in the second quarter last year.

As in the first quarter, our effective tax rate was lower this quarter as compared to the 2015 quarter primarily due to the recognition of the Work Opportunity Tax Credit in the quarter in which it is earned given changes by Congress in December 2016.

Looking at a few items on our balance sheet and cash flow statement, merchandise inventories at second quarter end were $3.27 billion.

For the quarter, total inventory was up 8% and 1.6% on a per store basis.

We believe our inventory is in great shape and we are comfortable with the quality.

Our longer-term goal continues to be inventory growth in line with our sales growth.

Year to date for the second quarter we generated cash from operations of $793 million, an increase of 36% or $208 million compared to the 2015 second quarter as a result of both higher net income and working capital improvements.

During the quarter, we repurchased 2.5 million shares of our common stock for $224 million and paid a quarterly dividend of $0.25 per common share outstanding totaling $71 million.

Year to date to the end of the second quarter, we have returned cash to shareholders totaling $597 million through the combination of share repurchases and quarterly dividends.

From December 2011 to the second quarter of 2016, we repurchased $4 billion or 67.3 million shares of our common stock.

With today's announcement of an incremental share repurchase authorization of $1 billion, we currently have a remaining authorization of approximately $1.4 billion under the repurchase program.

We are pleased to note that during the second quarter, Moody's upgraded our senior unsecured debt rating to BAA2.

In mid-August, we implemented a commercial paper program with the goal to reduce our short-term borrowing rate as commercial paper rates are typically lower than rates under a revolver facility.

We remain committed to a disciplined capital allocation strategy to create lasting value for our shareholders.

Our first priority remains investing in new stores and the infrastructure to support our store growth.

While our second priority is to return cash to shareholders through anticipated dividends and share repurchases.

Underlying our capital allocation strategy is our goal to maintain our investment-grade rating by managing to a leverage ratio of approximately 3 times adjusted debt to EBITDAR.

Looking ahead, items to keep in mind that will impact our results during the second half of the year include the purchase of 42 former Walmart Express locations; the implementation of the Department of Labor changes to the overtime exemption under the Fair Labor Standards Act; and the calendar shift between the third and fourth quarters of this year.

As we look to relocate 40 Dollar General locations into these purchased sites, we anticipate taking a charge in the 2016 third quarter of approximately $0.02 to $0.03 per diluted share primarily related to closed store lease obligations.

For the FLSA implementation, we continue to prepare for the changes which are effective December 1 of this year by gaining experience with various test and learn scenarios.

We anticipate the incremental expense will be about $0.03 to $0.04 per diluted share in the fourth quarter this year.

Please keep in mind this is a higher run rate in fiscal 2016 than we would expect next year due to the 53rd week in the fourth quarter this year and because certain initiatives tended to offset the incremental impact will not be in place until next year.

Due to the calendar shift year-over-year between the third and fourth quarter, our third-quarter 2016 will be negatively impacted by the shift of two selling days prior to Halloween along with the timing of a key payday into the fourth quarter of 2016 as compared to being included in the third quarter of last year.

Turning to our outlook, recall that we stated that we intend to update our diluted EPS guidance for fiscal 2016 only if we no longer reasonably expect diluted EPS to fall within the 10% to 15% range outlined in the model included in our press release issued on March 10, 2016.

We continue to forecast diluted EPS for fiscal 2016 within this range of 10% to 15%.

Please keep in mind that the investments we are making across merchandising and store operations will take time to gain traction with our consumers.

We remain committed to focusing on long-term profitable growth, reinvesting in our business and capturing cost savings through our zero-based budgeting program.

We are investing in initiatives intended to drive same-store sales and build loyalty across our consumer base with prices that they trust from us.

With that, I will turn the call back over to Todd.

Thank you, John.

We have a track record of strong financial results and the team is taking steps designed to improve our sales performance but it will take time for our initiatives to resonate with our consumer.

As we have said consistently, we are committed to increasing market share by growing both item units and traffic and we will invest as we deem appropriate to meet this objective.

To that end, we are making aggressive pricing, labor and marketing investments in designated market areas that we see as opportunities to be proactive as we look to improve same-store sales and market share all while providing our consumers with affordability, value and convenience at a time when they need us most.

Our focus is on the consumable categories to drive traffic and units.

For example, we have taken retail price reductions on average of 10% on about 450 of our best-selling SKUs across 2200 stores representing nearly 17% of our store base.

We believe that these price reductions are meaningful and recognizable to our consumers.

We are committed to further price moves as appropriate over time.

We are being strategic as we look to proactively address our pricing actions across our store base.

These targeted price investments are in high household penetration fast-turning categories.

At the same time, we are investing in communicating these price breaks to our consumers through incremental store signage, ad circulars, digital coupons, email and digital media.

While it is still very early in making these investments, the results are on track with where we would like for the performance to be on increasing units and traffic.

We will continue to monitor our pricing actions and assess the opportunity for ongoing preemptive moves to enhance our competitive positioning.

We anticipate refreshing these price investments across items and categories as well as incremental markets as needed as we move through the coming quarters with the goal to drive traffic and units and capture additional market share.

As for our core consumer, we operate with the reality that it is always challenging for her to stretch her budget given the pressures on her income and spending.

We have seen an ongoing contraction in core consumer all outlet retail spending as reflected in the Nielsen panel data.

Given that our core consumer skews toward a lower income household, I believe the cumulative effect of macroeconomic factors such as a reduction in SNAP participation and benefit levels and increased housing and healthcare expenses are taking a noticeable toll on her spending.

Our goal is to be there for our customers when they need us the most.

We will do everything we can to provide them with the value and convenience they expect from Dollar General.

We remain committed to our long-term operating priorities.

First, driving profitable sales growth.

Second, capturing growth opportunities.

Third, enhancing our position as a low-cost operator.

And fourth, investing in our people as a competitive advantage.

Our first priority is to continue to drive profitable sales growth.

Over the long-term we believe our pricing, labor and marketing investments will pay off in trips and units through increased customer loyalty.

As we work through our category management process for 2016, we assessed the expansion of product groups that were most likely to drive traffic in our stores.

Through the first half of 2016, we have made great progress on expanding space allocation for perishables, health and beauty care and party and stationary.

These 2016 sales driving initiatives are being implemented across not just new stores, relocations and remodels, but also in our mature store base to a greater degree than in the last several years.

Implementation of these initiatives will be completed in the third quarter.

Year to date through the second quarter, we have added nearly 21,000 cooler doors to our mature stores to allow for an expanded offering of cold beer, more immediate consumption items and greater product selection.

Additionally more than 7000 existing stores have seen planogram expansions across health and beauty care, party and/or stationary with many of these stores receiving expansions in each of these product areas.

This initiative was completed in the second quarter of this year.

Our ongoing affordability initiative is front and center with an expanded $1 offering including a greater selection of national brands.

Increased penetration of national brands at the $1 price point gives us the opportunity to increase trial with our consumers which leads to brand acceptance.

Acceptance drives loyalty which tends to encourage trade up in package size and brands over time.

Currently nearly 49% of our baskets contain a $1 item.

In our new DG16 format, these baskets are nearly $3 higher than our average basket indicating these are incremental purchases.

Our private brand portfolio plays a key role in driving profitable sales growth as these items contribute to sales and enhanced gross margins.

Our consumers rely on the quality, value and affordability of our private brands.

Our private brands offer exceptional value to our core consumers and they offer lower opening price points which is especially important to our consumers.

We continue to have private brand opportunity as our customer penetration is below the average in the mass merchant and grocery segments.

We are actively engaging our store associates is private brand ambassadors.

In addition, we will continue to communicate with our consumers the unparalleled value our private brands offer.

In the first quarter, we launched a new private line named Heartland Harvest to expand our better-for-you offerings which really resonate with our millennials.

By next month, we anticipate offering over 15 new SKUs under this better-for-you brand.

This year we have also expanded our private brand offerings in health and beauty care.

In select Dollar General Plus locations, we initiated a test of limited assortments of the industry's best-selling fresh fruits and vegetables as we look to gain more experience with these products and capitalize on our consumers' continued desire for fresh options.

So far we are pleased with the early results.

Our Fast Way to Save digital coupon offering continues to gain traction since we first brought this innovation to the channel in September of 2014.

We are on track to more than double enrollment in the program by the end of this fiscal year allowing for greater shopper analytics and targeting of coupons.

The program provides consumers exclusive savings available only as DG digital coupons.

The compelling offerings which include national brands, private brands and instant savings are helping to drive enrollment.

Importantly, we are seeing a higher average basket when the DG digital coupons are utilized.

The store operations team is aggressively improving our on-shelf availability.

Across the board, we are seeing progress as our third-party audits indicate that our stores have reduced their core out of stocks by more than 20%.

Throughout the chain, our consumers are taking note of our improved in-stock position with recent customer satisfaction scores for our in-stock position at the highest level in two years based on comparable quarters.

In addition, we continue to optimize our labor investments in our more competitive markets and are pleased with the comp sales performance, operating profit gains and customer satisfaction scores.

Second, we are focused on initiatives to capture growth opportunities.

Our real estate program is the foundation of our growth with a proven high return low risk model.

As we previously announced, we are on track to accelerate our square footage growth in 2016 to about 7% with 900 new stores and increase this growth to 7.5% in 2017 with about 1000 new stores.

We continue to be very pleased with the strong results that we have gained through this program.

Our new store productivity remains in the range of 80% to 85% of our comp store base all while driving returns of 20% plus.

Our new DG16 store layout is being used for all new stores, relocations and remodels.

Through the second quarter, the team has already completed nearly 1100 real estate projects in this new layout.

The layout is designed to expand high-growth, traffic building categories in a more customer friendly format with faster checkout.

We believe this layout can drive both existing and new consumer trips to Dollar General as we place an even greater emphasis in the store on value, affordability and convenience.

The early results of this DG16 layout are encouraging.

For instance, we are seeing stronger perishable sales and a double-digit lift in our new front-end items.

Overall, sales performance in stores using the DG16 layout is exceeding our expectations.

Even more importantly, our customers are telling us they like it as our customer satisfaction scores are significantly higher for the DG16 layout.

In addition, we are utilizing a smaller footprint store that allows us to capture growth opportunities in more densely populated metropolitan areas.

To date, we are currently operating more than 80 of these new stores with selling space of less than 6000 square feet, about 20% smaller than our traditional store.

Based on the early results, sales productivity and returns of the small format stores are very encouraging.

This store footprint incorporates all of our strategic initiative but with edited assortment.

By eliminating less productive product segments and adding our expanding product assortment to meet the needs of our metro market consumers, we believe this smaller more flexible format store will allow us to have a higher capture rate for site selection.

We anticipate that this smaller format will work in rural locations with lower household count as well.

With this format, we have even greater confidence in our real estate strategy for metro sites and smaller, lower household rural sites.

In total, we anticipate we will have approximately 120 of the smaller format stores including remodels open as we exit the 2016 fiscal year.

In July, we announced the purchase of former Walmart Express locations that we intend to have operating as Dollar General Stores by the end of October.

40 of the 42 sites will be considered relocations of existing stores.

Each of these locations will have fresh meat and produce and 38 will have fueling stations.

The team is moving very fast to get these locations up and running to better serve these communities with the everyday low prices and convenience our customers count on from us.

We have an active remodel and relocation program designed to keep our brands relevant as we utilize our most current store layout and in-store communication of value to drive same-store sales and returns.

About 900 locations are expected to be relocated or remodeled in fiscal 2016 with a similar level of projects slated for fiscal 2017.

We anticipate expanding our footprint in 2017 into North Dakota, representing our 44th state of operations.

We are very optimistic about our new store outlook for 2017 as our 1000 store pipeline is already over 80% complete.

We remain disciplined and focused as our new store program continues to drive compelling returns with a low-cost to build and a low-cost to operate.

Third, we will leverage and reinforce our positioning as a low-cost operator.

As evidenced by our second-quarter performance, our zero-based budgeting process is working as we successfully leveraged our SG&A expenses on same-store sales growth significantly below our 2.5% to 3% SG&A leverage target.

Our underlying principles are to keep the business simple but move quickly to capture opportunities, control expenses and always be a low-cost operator.

Our fourth operating priority is to invest in our people.

We believe that our people are our competitive advantage.

Our strategy is focused on talent selection, store manager development through great on-boarding and training and open communication.

We continue to make improvements in our store manager turnover and are on track to have our best retention rate in several years.

To build on these improvements going forward, we have been focused on aligning our talent with the skill set required for success based on store characteristics in addition to revamping our store manager training.

We believe that continued improvements in store manager turnover will take time but the payoff is there through higher sales, lower shrink and improved store associate retention.

As I mentioned at the beginning of the call, we are clearly focused on providing our customers with value and convenience in the current environment as our customers need us more than ever to help stretch her household spending.

Earlier this month we had over 1000 field leaders together in Nashville to discuss our plans for the future.

As I engaged with the team, it was clear to me they are energized and excited about our plans.

We are acting with a sense of urgency across merchandising, store operations and supply chain.

Our long-term commitment to growth and shareholder value is unchanged.

I believe we are well-positioned for the future and are focused on capturing the long-term opportunities ahead of us.

Our business generates significant cash flow and we are in a position to invest in new store growth while continuing to return cash to shareholders through consistent share repurchases and a competitive dividend.

To the more than 119,000 Dollar General employees across our 13,000 store locations, distribution centers and store support center that fulfill our mission of serving others by providing our consumers with convenience, value and service every day, please accept my thanks and appreciation for all that you do as we gear up for the holiday selling season.

With that, Mary Winn, we would now like to turn the call open for questions.

Sounds great.

Hope, we will take the first question please.

John Heinbockel, Guggenheim.

So how did you come up with the 10% cut in price as well as the number of items?

How do you think about elasticity at that level in terms of kind of getting a payback?

Are there other items when you think about funding that, are there other items be it consumable or discretionary where maybe they are less visible and prices go up and that is partly a way to fund it?

John, as you know we are very focused on price here at Dollar General.

For our core consumer, price is everything along with the convenient factor that we offer.

And you also know from us that we don't do anything without fully testing it first.

We have had tests in place in a couple hundred stores for a very long time with a subset of these 450 items and in some cases as much as 500 items depending on the stores.

So we well tested these and know that these are the items that will actually drive additional foot traffic into our stores but more importantly, will give the value to our consumer that she needs in a very tough time.

And then lastly, what we see by these items, it helps round out that basket with non-consumables once she gets in the store and we get her to pick up the consumables, that basket rounds out pretty nicely because of our compelling non-consumable offering.

Okay.

Secondly, we talked about the Walmart Expresses and having fresh meat and produce.

So where does that take you going forward?

You are already testing produce in some of the DGs and do the DGs more into DG market?

Is DG market kind of dead as a growth vehicle or does that come back at some point where you could actually expand that more aggressively?

As you look at retail in general, it is dynamic, right?

And the great thing here at Dollar General is that we are very flexible and we look at every way we can to maximize our opportunities that lie out there.

At the same time in making sure that we service our consumers the way they need to be serviced in certain demographics in areas of the country.

In saying that, we see an opportunity especially with our millennial group but even our core customer on some more fresh opportunities and offerings for her.

Not only in the fruits and vegetable, some fresh meats that makes sense but also as I indicated in some of our better-for-you lines that we are now starting to put out.

Our core consumer is starting to gravitate to that and our next level up, our Best Friends Forever group in that millennial segment really resonate with it.

So I think this is a springboard quite frankly in the more to come as we look to what Dollar General Store, our basic Dollar General Store looks like in the future.

Okay, thank you.

(Operator Instructions).

Scott Mushkin, Wolfe Research.

Thanks for taking my question.

So I mean the elephant in the room obviously, Walmart is investing in price.

We were down in North Carolina and we actually didn't see your price investments that you are referencing.

We saw about a 13% gap in price between DG and in Walmart.

So I guess the question is what is the appropriate gap for you guys?

And if Walmart continues on their path and now we have seen Delhaize follow suit and obviously up their consumable aggressiveness in consumables -- Target referenced it.

We have Albertsons, Safeway being pretty aggressive in certain markets.

I guess take me forward in how you see this rolling through DG's numbers, how it ends well for most people that are selling consumables because everyone is saying the same thing, we've got to get aggressive, we've got to drive the traffic but it seems like we are just descending into a price war.

Thanks.

The way we look at this is we look at it a little differently in that first of all, the retail landscape is very aggressive right now.

There is no doubt about it.

But you know what, retail is always aggressive and there is always folks doing different things and we compete, we compete and have competed for many, many years with many retailers.

In saying that, the way we look at this is being proactive.

So what we are looking at in our 2200 stores that we have reduced prices on average of 10%, what we have done is a proactive approach to it, not necessarily chasing anybody but actually putting price where we believe we will best serve our consumer and best be able to capture market share.

As we continue to move forward and expand that whether it be other markets and/or other items, we will take that same tact of being proactive and not reactive.

Because you are right, if everyone is reactive then in fact sometimes it doesn't end well.

Lastly, the great thing about Dollar General is that we have the wherewithal to do this.

We have the wherewithal to do it within our P&L and others may or may not have that same luxury.

So we see it as a real advantage for Dollar General but we see it mostly as being there for our core consumer because she needs us the most right now.

That was all I had.

Thanks for the answer.

Paul Trussell, Deutsche Bank.

Good morning.

So I believe a quarter ago as we thought about the full-year guidance, it was indicated to be toward the higher end of the range whereas today I think it is just more kind of within the range.

Is it just the adjustments from the labor expense being added into the fourth quarter and the kind of [debt] and expenses associated with the stores that you acquired?

Or maybe you can just walk us through other puts and takes as we think about the full year in particular what is the comp guidance for the second half?

Sure, Paul.

I will reiterate what we said at the beginning of the call is that -- and we've stated this previously and it was in our earnings release that we were talking to the 10% to 15% range and are still forecasting to be within that range for full-year EPS but not otherwise updating any specific aspects of the guidance today.

What I also want to reiterate is that this team has a strong track record of managing all the business levers to deliver profit and cash growth and feel good about the first half performance at 18% year-to-date EPS growth and 14% in Q2 as well as the strong cash growth.

But what I will tell you is that we have headwinds in the second half.

We mentioned the charge associated with the 42 newly acquired stores; that will be about $0.02 to $0.03 earnings per share impact.

We also have the implementation of FLSA which is about $0.03 to $0.04 impact in Q4.

And I think it is important to note there that even though that is only over two months, you can't extrapolate that over the course of the next year given that we have a 53rd week at the end of the year as well as many of the actions that help mitigate that cost.

Next year it won't be fully implemented until next year.

But those two will have impacts on the balance of the year and then again bear in mind, we are focused on the long-term here, making the right decisions to be there for our customer when she needs us the most.

And with an eye on the long-term are making investments that we talked about earlier in the call.

But again, the business fundamentals I will stress remain unchanged.

We are very excited about opening 900 new units this year, on track for 1000 next year.

As Todd mentioned, the pipeline is 80% full and we are still seeing the same compelling great unit-level economics as we open the stores with the productivity and the same great returns over 20%.

Okay.

I guess just going back to the comp, so no guidance in terms of the comp over the balance of the year.

Could you maybe just speak to the cadence of comps during the second quarter and the impact that you mentioned of 60 to 70 basis points from deflation in SNAP, do you expect a similar impact to be ongoing?

I would tell you that all periods in the second quarter were positive so we are very happy to have seen that.

As I look forward to the back half of the year, I believe many if not most all of the same headwinds we saw in the sales line continue to be there in the back half of the year.

Deflation as well as SNAP, that 60 to 70 basis points is a headwind that is not going to go away.

Now trying to counter that obviously will be our price investments.

Now as you know though price investments take time to resonate with the consumer and while we are very confident that it will drive units in traffic, it will take a little time for that initiative to take hold.

So we are doing everything possible here to ensure that we are giving the consumer the deal that she needs so that we can continue to have her come into our store and for us to continue to capture market share.

Appreciate it.

Thank you.

Good luck.

Dan Wewer, Raymond James & Associates.

Thanks.

Todd, I wanted to ask about the payback from the 21,000 coolers that you have added to mature stores and whether or not you are seeing any diminishing returns from the additional coolers?

And perhaps you could peg that to your experience with the DG plus cooler set?

Yes, that is a great question.

Everything we do here has a return attached to it and the cooler program is no different.

We track it each and every week because it is a big initiative for us.

Those 21,000, 22,000 cooler doors that we have put in are doing exactly what we thought they would do and actually in many cases exceeding our expectations.

But because of the headwinds we are seeing in deflation mainly in those perishable categories of milk and eggs, it is diluting those effects a little bit.

But I could tell you for the long-term and that's how we look at this business for the long-term, it is the exact right things to do.

And we are confident in that because and you mentioned it, our Dollar General Plus and market stores, these are just segments that have already proven in those stores to be very successful that we have moved into our traditional stores.

So we are very confident over time that those will pay big dividends to us.

Just one other follow-up, the drop in customer transactions per store, I believe that is the first time that has happened since the buyout back in 2008.

Where do you think that business shifted?

Was it to the mass merchants and perhaps they are able to take advantage of the lower gasoline pricing and their customers becoming more mobile as a result?

When we look at it, the headwind of SNAP for us really was a big deal and also our core consumer continues to be under a lot of pressure.

I know that when we look at globally the overall US population, it seems like things are getting better but when you really start breaking it down and you look at that core consumer that we serve on the lower economic scale that is out there, that demographic, things have not gotten any better for her.

And arguably they are worse and they are worse because rents are accelerating, healthcare is accelerating on her at a very, very rapid clip.

And now you couple that in upwards of 20 states where they have reduced or eliminated the SNAP benefit and it has really put a toll on her.

That SNAP benefit reduction and/or elimination happened in April.

That was the kickoff and you could see it immediately numbers.

So I believe those are the things that are affecting her today, again, our core customer.

And by the way, we have seen this play out before.

If you dial the clock back to October of 2013 and coming into November of 2013 when the last large SNAP benefit reduction happened, it happened almost exactly the same way on our comps and how we saw traffic.

Obviously we were up at a little bit higher level at that time but rest assured that our traffic slowed tremendously then, very similar to as it did now.

The difference here is we are going to take aggressive price actions to get that consumer back in the store.

She needs a little motivation to get back in.

We need to help her stretch her budget for a time period until she figures it out.

Our core customer is very resilient.

They will figure it out over time but they need a little help as they tend to now try to figure out how to make ends meet with less money during the month.

Okay, thank you.

Peter Keith, Piper Jaffray.

Thanks for taking the question.

Was curious on the price investment.

I presume that it is probably going to expand to more stores than the base of I think you said 17%.

How should we think about that dynamic on gross margin going forward?

With the pricing that is something that we are assessing as we go.

And as Todd mentioned previously, we test and learn with everything that we do and we are seeing benefits from the pricing actions that we have taken.

Bear in mind that this does take time to fully take traction with our consumers so really we will control what we can control, monitor the environment and take pricing on an as needed basis to make sure we are there for our customer when she needs us and to make sure we are making the right decisions for the long-term health of the business.

Now that will of course have an impact on margin as we do that but again, we are focused on the long-term payback from that.

Okay, thank you.

And maybe just a follow-up question on the discretionary category, so it looked like home and basic clothing were two areas of weakness and those have been historically a little bit better.

I wouldn't think those were impacted by the spring dynamic.

So maybe could you comment on what is going on there and any initiatives to improve those higher-margin categories?

The great thing about our non-consumable categories is the team has done a fabulous job -- the buying team -- over the many years that we have been working on this.

Up until this quarter, we have had nine consecutive quarters of growth in our non-consumables.

And I would tell you that the slowdown there is directly correlated to that traffic slowdown that we have seen which is really I believe consumable-based.

And that is why we are taking the actions on price that we are and other things to ensure that we get that traffic back in the store as we move through the quarters to come.

Once that happens we are confident in our non-consumable merchandising and our pricing there.

And we have always said that consumables will drive the traffic and non-consumables will round out the basket and we see it no different as we move forward.

Okay.

Thank you very much and good luck.

Michael Lasser, UBS.

Good morning.

Thanks a lot for taking my question.

In the areas where you saw greater competitive competency, did your comp underperform the total and by how much?

I can tell you that we did not see an underperformance in any measurable amount in areas that we know that there has been some competition heating some things up.

We have not seen that.

We are very confident in our overall pricing strategy and structure to be honest with you.

Our consumers give us a tremendous amount of credit for pricing and the value that we offer.

How we are looking at these recently announced price reductions, we are more proactive in nature in the areas that we see we have opportunity to capture additional market share in areas that we may not be quite as good if you will from a traffic standpoint as we are in other parts of the country.

So we are proactively taking steps to ensure that we bolster those areas.

And then as we expand this program over time, it will be once again proactive in nature where we think the opportunity to steal share is best achieved as well as where our consumers need us most and a lot of them are within these 20 states that have recently cut SNAP.

So to reconcile some of this, so you are not seeing the stores in areas that are more competitive underperforming.

But are those the same places that you are going to be investing in price?

And how do you expect to fund those price investments?

Will that be on your P&L or do you expect to share that burden with your vendors?

There may be some overlap where there may be some other retailers doing some price initiatives as we speak.

But again, we are not focused on chasing any one competitor, we are more focused on what we can control and that is looking in areas that we know we can expand our market share in.

So while there will be some overlap, that isn't a driving factor for us behind where we go.

The other thing to keep in mind here is that we do have the wherewithal to do this as I mentioned earlier.

And we have great relationships with our vendor partners and rest assured that they are working with us hand in hand as we continue to drive units and traffic into our stores and into their brands.

If I could just add a follow-up, Todd, understood the issues with SNAP and deflation.

But is there a piece of this that is just related to the consumer job labor market getting better so the consumer is feeling a little bit better and they are trading up, is that not possible?

I'm not going to say it is not possible but we have not seen that in our data.

Once again remember that over 60% to 65% of our sales and consumer base is on that lower demographic area of the economic scale and when you keep that in mind, her life hasn't gotten any better.

And that is really that customer that we are serving the most and we are intent on making sure has enough money and enough product inside her house to be able to feed her families.

Okay, thank you so much.

Dan Binder, Jefferies.

Just on the same topic of price competition, can you be a little bit clearer in terms of which channel you are seeing the most activity out of?

Is it the discount channel?

Is it the supermarkets?

Is it the dollar stores, is it Family Dollar, those things under the Dollar Tree ownership?

Any color you can provide on that and particularly on the regions that you mentioned, any particular that stand out?

I think that some of the price reductions taken by other retailers have been flushed out pretty good out in the press.

So I believe everyone knows some of the retailers that are working price right now.

But as I mentioned earlier, we have seen that over the years and over time and we compete very well with mass merchant retailers, grocery and drug retailers.

And then the other thing is we again, our customers give us all lot of credit for where our prices are today.

We are some of the lowest in the marketplace with nearly being at parity with mass, 20% on average lower than grocery and 40% plus lower every day than drug on the shelf.

And when you think about it in those terms, we feel very confident that our pricing structure is well intact and this is all about everyday low price for our consumer.

She needs to have the confidence that if she walks in, she has an everyday low price, she doesn't have to wonder whether it is on sale or if she has to buy five or 10 at a time to get the deal.

She know she can walk in, buy one and get the deal that she needs.

Just as a follow-up, you cited some pressure with the consumer.

If we maybe look forward a couple of quarters or even a year if the comp store sales don't get back to 3% at some point and we kind of linger here in that 1% to 2% range, does that impact the way that you think about square footage growth?

I know you have got the 1000 store plan here set and that is probably likely to get executed but as you think beyond next year?

When we look at our new store program, it is doing exactly what it has been doing and what we thought it would do over time.

We are very happy with that.

We don't see that slowing down.

It is still opening -- the stores are still opening at 80% to 85% of our mature store base.

The returns are 20% plus on these new store locations and we have seen no difference this year than any other year in our new store openings.

As a matter of fact, we are indexing over 101% right now on our portfolio for 2016.

So when you look at all those dynamics and that low-cost to operate and low-cost to build, I can't think of a better place for us to reinvest our money than in that first in the business and then returning to shareholders second.

Okay, thank you.

Vinny Sinisi, Morgan Stanley.

Good morning.

Thanks very much for taking my question.

I wanted to ask, appreciate all the color you gave us around the details supporting the sales number.

I know you typically kind of rank order the factors in your release and just a couple of quick points of clarification.

Within the food deflation part of that which was listed first, can you give any further color around how much of that was strictly from the commodity price changes versus kind of increased competition within?

And also this might just be my own paranoia but I know it was kind of a separate sentence where you talk about the competitive environment.

So with the kind of expectations you had for the quarter, is it safe to say that that being kind of in the second sentence is kind of the last in rank order as well?

Yes, I think that is correct first of all.

Once again, we just don't see that competitive nature being the largest factor here.

What we see again is that SNAP reduction and that deflation being some of the biggest headwind and then second, third after that being just the overall macro environment for our core consumer.

When you look at the deflation, it is primarily due to commodity price reductions so cost reductions to us which we then pass on to the consumer at lower retails.

Predominately that is what we are talking about here.

And it is in big categories for us, in milk and eggs.

Remember we don't have the breadth and depth that mass grocery has in our perishable and food businesses so when that deflation hits in some of these key categories, it hits us a little harder.

So in those two but also beyond that in dry grocery, we still see sugar, grains, cereals, coffee, so some of our largest categories being affected by cost decreases which then in turn become retail decreases.

And as we all know, the consumers don't consume that much more just because the price is a little less expensive.

So that is really the impetus behind what we see as some of those headwinds and as I said before, those headwinds we anticipate seeing with us through the back half of the year.

Okay, that is helpful, Todd, thank you.

Maybe just a quick follow-up and this is more just kind of top look at the group and the consumer.

But like you said today, you are maybe even seeing some increased pressure on the low-end consumer and I think most of us on the phone kind of thought it was not a fantastic low-end consumer but more or less of a steady state.

So maybe if any kind of anecdotes from what you are seeing specifically in the baskets or how folks might be responding when you are proactively getting more aggressive, how should we kind of think about the overall low end in your opinion as we go forward here?

That consumer is a real special consumer.

We spend a lot of time in the stores.

I am out a couple of times a month with our head merchant, our head operator, and we see firsthand this consumer each and every time we are out.

And this core consumer I tell you has gotten no better as far as her economic well-being.

As a matter of fact, she tells us while we are out in the stores or even through all of our panel data that we do, that while things have gotten a lot worse as far as income coming in other than the recent SNAP decrease, my expenditures are going up at a very rapid rate.

Healthcare is one of the big ones because most of our consumers while she may be working doesn't have healthcare and we all know that she is having to now pay for this healthcare or be taxed on it.

So that is starting to really play against that low-end consumer right now and it will continue to play against her.

You couple that with those rents that we talked about, those increased rents are real.

And in many parts of where we serve our customer, the affordability and availability of rental units are getting more and more scarce which is driving up prices and we are seeing that.

Because most of our core customers cannot and do not own their own homes.

And when we are out in the stores and we drop prices like we do, I can tell you I have been out in stores in the middle of the aisle and heard customers come up to our store manager in tears and thanking them for being there and thanking them for the prices that we offer in a real convenient nature for her where she can walk to the store because she can't afford anything else.

When you hear that, that really brings home where this core customer is.

Okay, that is a helpful perspective.

Thanks very much and good luck.

Stephen Grambling, Goldman Sachs.

Thanks for taking the question.

Just one quick follow-up.

On your long-term guidance, I think you had outlined opportunities for margin expansion across both gross margin and SG&A.

I guess as we think about the price investments and those building blocks, do those change and are there other offsets whether that is through -- I think the earlier question on vendor funds, shrink or other areas?

Thanks.

Sure.

So as we said, we are really focused on looking at margin on SG&A in tandem and continue to see opportunity over the long-term.

This team has done a phenomenal job over the years managing the multiple levers within gross margin and you have seen that with six straight quarters of margin expansion.

And it continues to be the same levers in terms of shrink which we continue to see as an improvement opportunity over time.

We continue to drive expense control and efficiencies around DC and trans.

And the team continues to effectively manage the levers of category management, private label and foreign sourcing.

And we also work with our vendors to make sure that we can hit those price points.

On the SG&A side as you saw, we have had tremendous performance over the last two periods.

In zero-based budgeting, we have always had a history of lean cost management and zero-based budgeting has really taken hold and helped us get to that next level of savings and you have seen that in the results and the team is working on a pipeline of future savings focused on non-customer facing areas.

And the rigor is really becoming ingrained.

So we will continue to work those two over time.

As we have said, not every quarter is created the same and there are some headwinds in the near-term but we continue to see opportunity over the long-term in managing all these levers as we have in the past.

Fair enough.

Best of luck in the back half.

Thanks.

Hope, that will now conclude our calls as we've hit the top of the hour.

I know we are leaving a few people in the queue but I am around and Matt is around if we can help with any questions.

Thank you very much for being on the call today.

Hope, you can wrap the call up.

Thank you.

This does conclude today's conference call.

You may now disconnect.