達樂 (DG) 2018 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Dollar General Second Quarter 2018 Earnings Call.

Today is Thursday, August 30, 2018.

(Operator Instructions) This call is being recorded.

Instructions for listening to the replay of the call are available on the company's earnings press release issued this morning.

Now I would like to turn the conference over to Ms. Jennifer Beugelmans, Vice President of Investor Relations and Public Relations.

Ms. Beugelmans, you may begin your conference.

Thank you, Jennifer, and good morning, everyone.

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

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

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 will include forward-looking statements about our expectations, plans, future estimates and other nonhistorical matters, including, but not limited to: our fiscal 2018 financial guidance and store growth plans; our planned investments and initiatives; capital allocation strategy and related expectations; and economic trends or future conditions.

Forward-looking statements can be identified because they are not statements of historical facts or use words such as may, should, could, would, outlook, will, believe, anticipate, expect, assume, forecast, estimate, guidance, plans, opportunity, potential, continue, focused on, intend, going forward, goal, over time, look forward, long term, scheduled to, or on track and similar expressions that concern our strategies, 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 under Risk Factors in our 2017 Form 10-K filed on March 23, 2018, 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 maybe otherwise required by law.

At the end of our prepared remarks, we will open the call up for your questions.

(Operator Instructions)

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

Thank you, Jennifer, and welcome to everyone joining our call.

We are very pleased with our strong second quarter results, which were driven by robust performance on both the top line and bottom line.

A key highlight of the quarter was our 3.7% same-store sales growth.

Both basket and traffic growth drove these results, demonstrating what we have long believed to be true: by providing the products, convenience and value that our customers want, we can continue profitably growing sales.

I also want to note that our second -- that our 2-year same-store sales stack for the second quarter of 2018 was the highest in 10 quarters.

Year-to-date through the second quarter of 2018, we posted 2.9% same-store sales growth driven by greater customer productivity.

Based on our performance in the first half and our outlook for the rest of the year, we are increasing our net sales and same-store sales guidance for 2018.

We are executing against our operating priorities and believe we are well positioned to deliver solid growth in the second half of 2018.

Now let's recap some of the top line results for the second quarter.

Net sales increased by 10.6% to $6.4 billion compared to net sales of $5.8 billion in the second quarter of 2017.

We're very pleased with the new store productivity and performance from our mature stores.

Our 3.7% same-store sales increase was led by our strong performance in consumables.

We're proud of this performance and believe we are well positioned against all classes of trade as evidenced by our market share gains in the 4-, 12-, 24- and 52-week period ended July 28, 2018.

These gains are measured by syndicated data.

Within nonconsumables, we also delivered solid overall positive comp growth driven primarily by strong sales in our seasonal category.

As we have discussed in recent quarters, overall, we continue to see rational pricing activity across the industry.

We know it's always competitive within the discount retail space, but we are committed to being price right for our customer every day.

As we continue to execute against our operating priorities, we believe we have opportunities to capture incremental market share.

We will continue to work to drive awareness of the value proposition that we offer.

After John's comments, I'll provide an update on our growth initiatives.

With that, I'll now turn the call over to John to provide you with more detail on our second quarter financial results.

Thank you, Todd, and good morning, everyone.

Now that Todd has discussed a few highlights in the second quarter, I will take you through some of the important financial details.

Unless I specifically note otherwise, all comparisons are year-over-year.

As Todd has already discussed sales, I will start with gross profit.

Gross profit as a percentage of sales was 30.6% in the second quarter, a decrease of 7 basis points.

This decrease was primarily attributable to the ongoing product category mix shift to consumables as well as higher sales of lower margin consumable products and higher markdowns.

Like many other retailers, our business continues to see the effect of increasing transportation costs due to the tight carrier market and higher fuel prices, among other factors.

This impact is reflected in the slightly lower gross margin we reported in the second quarter.

These factors were partially offset by another quarter of improved inventory shrink as well as positive contributions from initial inventory markup.

SG&A expense as a percent of sales was 22.2%, a decrease of 8 basis points.

The leverage in the second quarter of 2018 was primarily driven by: lower repairs and maintenance expenses; a reduction in lease termination expenses as we lap the acquisition of the Dollar Express stores in the second quarter of 2017; lower fixed asset impairment costs; and a reduction in retail labor expenses as a percentage of sales.

Partially offsetting those decreases were an increase in professional fees, primarily to support a variety of longer-term initiatives; higher incentive compensation expenses; and increased costs to support certain loss prevention initiatives.

We are pleased with the leverage we gained in SG&A and our ability to hold operating margin relatively flat this quarter.

And we would note that we achieved this margin despite the transportation headwinds we are facing and while continuing to invest in our current business model and opportunities for long-term growth.

Moving down the income statement, our effective tax rate for the quarter was 21.5%.

This compares to 37.2% in the second quarter of 2017.

This decrease is primarily attributable to the lower federal tax rate in the 2018 period as a result of the Tax Cuts and Jobs Act.

Finally, diluted earnings per share for the second quarter were $1.52.

We are heading into the back half of the year with a strong balance sheet and expect to continue our track record of generating strong cash flow from operations.

Merchandise inventories were $3.9 billion at the end of the second quarter of 2018, up 12.5% and up 3.9% on a per store basis.

We believe our inventory remains in great shape, and we remain focused over the long term on managing inventory growth to be in line with or below our sales growth.

Throughout the first half of 2018, we generated strong cash flow from operations totaling $1.1 billion, an increase of $311 million or 39.6%.

Year-to-date total capital expenditures were $371 million and included: our planned investments in new stores, remodels and relocations; continued investments in our 2 distribution centers under construction; and spending related to the previously announced acceleration of certain key initiatives.

During the quarter, we repurchased 2.1 million shares of our common stock for $200 million and paid a quarterly dividend of $0.29 per common share outstanding at a total cost of $77 million.

Through the end of the second quarter, we returned a total of $504 million in 2008 (sic) [2018] to our shareholders through our share repurchases and quarterly dividend payments.

From the inception of our share repurchase program in December 2011 through the second quarter of 2018, we have repurchased $5.5 billion or 85 million shares of our common stock.

At the end of the second quarter, the remaining repurchase authorization was approximately $1 billion.

Our capital allocation priorities remain unchanged as we continue to be disciplined and focused on financial returns.

Our first priority is investing in high return growth opportunities, including new store expansion and infrastructure to support future growth.

We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividends, while maintaining our current investment-grade credit rating and managing to a leverage ratio of approximately 3x adjusted debt-to-EBITDAR.

We are pleased with our position midway through the year, and we are excited about the momentum in the business.

Based upon our year-to-date performance, we are raising the outlook we provided on May 31, 2018, for both net sales and same-store sales.

For fiscal 2018, we now expect net sales growth to be in the range of 9% to 9.3% and our same-store sales growth to be in the mid- to high 2% range.

We continue to expect our fiscal year 2018 operating margin rate to be relatively flat as compared to our fiscal year 2017 operating margin rate.

We are reiterating our outlook for diluted EPS for the full year, which is $5.95 to $6.15.

As a reminder, our earnings outlook included the impact of increasing transportation costs, some continued mix pressures and continued investment in our longer-term growth initiatives.

Our diluted EPS guidance assumes our tax rate will be at the lower end of our 22% to 23% range that we provided.

Our outlook for fiscal 2013 real estate projects, CapEx and share repurchases remains unchanged.

For modeling purposes, I do want to take a moment and update you on some of the puts-and-takes in the back half of the year.

First, as we noted last quarter, in the second half of 2017, we opened 741 new stores driven by the acquisition of the Dollar Express location, which is a much higher number than our typical cadence.

As a result, in the second half of 2018, we'll have an unusually high number of stores rolling into the comp base.

The anticipated positive impact of these stores should help with the tougher comparisons we face as we move through the latter part of the fiscal year.

This expected positive impact is contemplated in our full year guidance.

Second, while we expect to see pressures mentioned on gross margins continue in the second half of the year, we are executing strategies that we believe can help mitigate the impact of these headwinds over time.

Despite the headwinds from transportation and our product sales mix, we are on track to deliver a relatively flat operating margin rate for the full year as we manage all the levers within gross margin and SG&A.

We feel good about our position today because of the actions we are taking to help mitigate headwinds and maximize our sales growth opportunities.

Turning to operating expense.

In the second quarter, we spent approximately $8 million to advance our strategic initiatives.

Our strong sales growth allowed us to invest in our future and deliver on the bottom line.

We expect to continue investing in these important initiatives that we believe will extend our runway for growth.

Finally, a reminder on interest expense.

Your model should include the impact of the bond refinancing we completed in the first quarter.

We estimate the net impact of 2018 financing activities to be about $9 million in annualized interest expense going forward.

As always, we are focused on carefully controlling costs even as we make targeted proactive investments.

We continue to be disciplined in how we manage expenses and capital, with the goal of delivering consistently strong financial performance, while positioning our business for long-term growth.

We remain confident in our business model and our ability to drive profitable same-store sales growth, drive healthy new store returns, generate strong cash flow from operations and create long-term shareholder value.

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

Thank you, John.

For the remainder of my remarks, I want to walk through how we are executing against our 4 operating priorities, which has served us well and placed us in a leadership position within our channel.

I'll also update you on the progress against certain strategic growth initiatives.

Starting with our first priority of driving profitable sales growth.

Our most impactful top line initiatives for 2018 revolve around merchandising and store operations.

These initiatives are designed to enhance the value and convenient proposition for our customers, offering them the trusted simple solutions they seek from us every day.

We continue to strategically invest in our mature store base.

As you know, one of our strategies is to increase the average number of cooler doors across the chain.

These types of projects drive high returns by encouraging our customers to make more trips and increase their basket sizes.

This year, our goal is to install more than 20,000 incremental cooler doors across our mature store base.

As of the end of the quarter, we have installed approximately 16,000 cooler doors across the chain, and we are well on our way to reaching our year-end goal.

By the end of the fiscal year, we expect to have an average of 20 cooler doors per store, up from 10 in 2012.

During the second quarter, we continued to focus on driving impulse purchases.

One of the ways we do this is through our enhanced queue lines.

During the second quarter, we added the enhanced queue line to more than 400 existing stores, bringing our total for the chain to approximately 6,800 stores.

The queue line retrofit performance remains very strong.

We expect to have this enhancement in more than 7,500 stores by the end of 2018.

In June, we launched Phase 2 of our health and beauty initiative, which is in approximately 7,500 stores today.

The goal of this phase is to educate our customers about the high-quality products we carry, both national and private brands, as well as our low prices.

We are a well-known leader in value and convenience, but we believe many of our customers are unaware of the value we offer within health and beauty.

We are confident that we have the opportunity to take market share from other channels among existing and potential customers.

While it's still early, we are encouraged by the favorable response to this initiative, thus far.

We are also very excited about the early results from our Better For You initiative.

We launched Better For You just a few months ago, and already, the value proposition is resonating with our customers who are looking for healthier options at affordable prices.

Currently, we have more than 2,000 stores that are carrying, on average, 125 Better For You products.

Within this offering, we have now launched more than 40 items under the Good & Smart private brand with more in the works.

This brand offers our customers a variety of Better For You options at smart prices, and we are excited to bring -- to begin building brand equity and customer loyalty for this product line.

In addition to these initiatives, I have seen the fall season and Christmas lineups, and we're excited about the upcoming seasons and new products, which we believe will resonate with our customers.

In addition to these merchandising efforts, our store operations teams are also executing on multiple fronts with a focus on driving sales.

First, we continue to reach new heights in overall customer satisfaction.

For us, this means concentrating on store cleanliness, on-shelf availability, friendliness and speed of checkout.

By hitting our goals, we believe we can drive higher overall satisfaction and cultivate even more loyalty with our customers.

Also within store operations, we continue to focus on driving inventory shrink down even further.

Reducing shrink remains our largest near-term gross margin opportunity.

We're very excited about our progress, and we saw our seventh consecutive quarter of sequential improvement in the shrink rate.

Our improvements in the shrink rate have been supported by a variety of actions, including defensive merchandising tactics, leveraging technology and new store process controls and expanding Electronic Article Surveillance or EAS.

This year, we have doubled the stores using EAS technology to about 10,000.

One thing I want to highlight is that while we have continued to reduce shrink, we have also continued to improve on-shelf availability.

As students of retail, you will know how difficult it is to achieve both of these goals at the same time.

I am proud to say the team has delivered, as shrink and on-shelf availability both have continued to improve.

We also have other longer-term gross margin opportunities.

These include many distribution and transportation initiatives such as reducing stem miles, improving our load optimization, growing and diversifying our carrier base and expanding our private fleet.

With regard to our private fleet, we remain on track to expand from 80 tractors at the end of fiscal 2017 to approximately 200 tractors by the end of this year.

While this represents a relatively small percent of our current transportation base, we believe that, over time, this will give us added flexibility and health insulators from future carrier rate fluctuations.

We continue to make strides growing our distribution network as well.

The team has done a fantastic job driving this expansion and creating opportunities to further improve our efficiencies.

Our distribution centers currently under construction in Longview, Texas and Amsterdam, New York are both scheduled to begin shipping in the 2019 calendar year.

We continue to anticipate that we will see a relatively quick and positive impact on stem miles.

As always, we are continually evaluating opportunities to drive efficiencies and productivity within our distribution center network to support profitable sales growth.

I also want to note that not only is the team doing a great job finding quality sites for distribution centers, but they are quickly ramping up by hitting productivity goals.

For example, our Janesville, Wisconsin distribution center is our second newest DC and is currently the most productive in the chain.

We also have opportunities to drive gross margin with our global sourcing strategy, category management and private brands.

While we're excited about these opportunities to enhance our gross margin over the long term, we are also carefully watching the potential for new headwinds to develop, particularly around tariffs.

Our merchants and global sourcing teams have been working closely with our vendor partners to identify opportunities to mitigate the impact of current and potential tariffs on both our businesses and our customers' budgets.

We have long-standing relationships with many of our vendors, and we will continue to work closely with them to find ways to reduce cost.

We are keeping a close eye on the situation, and we will be looking at all opportunities.

As a reminder, our retail operations are solely domestic, and we purchase in U.S. dollars.

In addition to the tariff impact, we closely watch macroeconomic indicators that may affect our customers.

While the overall economy seems to be doing well, we know that rising fuel prices, concerns about health care and potential loss or reduction of government benefits may weigh on our core customers' outlook.

As always, we remain committed to serving our customers with the everyday low prices they have come to know and appreciate from Dollar General.

On our -- our second priority is capturing growth opportunities.

We have a proven high-return, low-risk model for real estate and a track record of successfully opening hundreds of stores every year that meet our strict return thresholds.

These new store openings, combined with our successful remodels and relocations, have allowed us to extend our runway for long-term growth.

We are always looking for opportunities to grow the number of communities we serve using the lessons we've learned in other markets and from the performance of our various formats.

As a reminder, our real estate model focuses on 5 metrics to ensure that new store growth is the best use of our capital: first, new store productivity as a percent of our comp store sales, which continues to average in the range of 80% to 85%; second, in actual sales performance, which continues to track very closely to our pro forma model; third, average returns, which remain at the high end of our targeted 20% to 22% range; fourth, cannibalization of our new stores on our comp store base, which has remained relatively constant in our measurements; and finally, new stores have a payback period of 2 years or less.

We have consistently hit our overall goals for these metrics.

We are very pleased with our overall new store returns, and we remain committed to investing our capital effectively to drive strong financial returns.

This year, we plan to open 900 new stores, remodel 1,000 of our mature stores and relocate approximately 100 stores.

We are excited to be on track to achieve these goals by the end of the year.

During the second quarter, we opened 241 stores, remodeled 322 stories and relocated 31 stores.

Of our 322 remodeled stores, 121 were remodeled in the Dollar General Traditional Plus format, or DGTP, which is the traditional size store with expanded cooler count.

We included a fresh produce section in 31 of these DGTP remodels.

As a reminder, our remodel store delivers 4% to 5% comp lift on average, and a DGTP remodel delivers an average of 10% to 15% comp lift.

And when produce is included in a DGTP, it delivers comp, on average, at the high end of the 10% to 15% range.

We currently have more than 400 stores throughout the chain, which now carry produce.

This quarter, I had the opportunity to attend the 15,000th store grand opening celebration in Wilmington, North Carolina.

It is truly remarkable and reflects on 15,000 Dollar General stores serving communities around the country.

This milestone is a credit to the tremendous work of the team, and I remain very excited about the growth opportunities ahead of us.

Our third operating priority is to leverage and reinforce our position as a low-cost operator.

Over the years, we have established a clear and defined process to manage spending.

We continue to refine our process and have developed a culture where we are intentional about examining all of our costs and expenses.

All of our spending is filtered through 3 criteria: first, is it customer-facing; second, does it align with our strategic priorities; and third, how does it impact our risk profile?

At the store level, our operational initiatives for 2018 are centered on space optimization and efforts to further simplify our operations by reducing unproductive inventory, operating complexity and product movement within the stores.

These actions are designed to control cost and allow our store managers and their teams to provide better customer service as well as a fast, clean and in-stock shopping experience.

All of these actions correlate to higher sales.

We will continue to focus on our underlying principles to keep the business simple but move quickly to capture growth opportunities, control expenses and always seek to be a low-cost operator.

Our fourth operating priority is to invest in our people as we believe they are our competitive advantage.

Our investments in wages and training are well documented, and the returns on these investments continue to exceed our goals.

For example, in addition to our strong sales growth, store manager turnover is continuing to improve, and we remain committed to further developing this talent pipeline.

We are excited about these investments, and we believe they can continue to pay benefits over the long term.

I had the privilege earlier this month of spending a week with more than 1,500 leaders of the company at our annual leadership meeting.

I'm always impressed by their passion and commitment on display and reminded of the strength of Dollar General's culture.

During that week, our teams from around the country had the opportunity to engage and learn from each other as well as to work through various training opportunities under one roof.

Our goal is to provide our employees with training opportunities that enhance their career growth and drive improved customer service.

We believe that the opportunity to build a long-term career at Dollar General is the most important currency we have to attract and retain talent.

We believe the career opportunities, our competitive wages and the engaging environment we offer will allow us to remain an employer of choice and keep us well positioned to attract and retain talent.

Finally, before I open the call up for questions, I want to quickly update you on our recent progress executing against our digital and nonconsumable strategies of growth -- of our long-term growth opportunities.

Starting with our digital initiatives, in the near term, our digital strategy focuses on using technology to improve the in-store experience by offering customers even more personalization and convenience.

In 2018, we are bringing this focus to light with our DG GO!

app, which is now live in more than 100 stores.

Our goal is to roll out this functionality to an additional 150 stores by the end of the year with a goal to further expand in 2019.

As a reminder, the app allows customers to use their phones to scan items as they shop, and then skip the register by using the DG GO!

kiosk.

Our app also alerts customers to potential savings on the items they are purchasing.

So far, the feedback on this app has been very positive.

We intend to continue integrating even more helpful functionality that delivers on the promise of personalized and convenient shopping experience.

We know that our customers who more frequently engage with our digital tools tend to shop with us more often and check out with larger basket sizes.

We currently have 14 million subscriber accounts within our Digital Coupon program.

These subscribers have put more than 400 million digital coupons year-to-date in 2018.

Deploying innovative technology across our stores remains an incredible opportunity for us, and we are investing appropriately.

In fact, this quarter, we created a new Chief Technology Officer role to help drive our digital efforts.

We look forward to sharing further updates with you as the year progresses.

Turning to our nonconsumable initiative.

In the second quarter, we began our test of a bold, new and expanded assortment in key nonconsumable classes of home, domestic, housewares, and party and occasions.

This initiative is focused on: first, offering a new, differentiated and limited assortment that will change throughout the year; second, displaying the new offering in high-traffic areas will improve adjacencies and increase focus on key class -- classes to enhance the in-store experience and create a sense of purchase urgency; and third, continue to deliver exceptional value by pricing the majority of the offerings at $5 or less.

While the amount of space in the store dedicated to nonconsumables remains the same, we believe this merchandising strategy will drive greater sell-through.

We have added this assortment to more than 300 stores and plan to have approximately 700 total stores up and running by the end of the fiscal year.

This is still in the early stages, but we're encouraged by the results in the test stores so far.

We believe that over time, this initiative can help meaningfully improve the trend on nonconsumable sales growth, drive traffic to the store and positively impact gross margin.

In closing, we delivered a strong second quarter and we are proud of our results.

We are excited about the business and believe we operate in the most attractive sector in retail.

We have a differentiated business model that leverages our real estate acumen and our low-cost operating experience with our clear focus on delivering value and convenience to our customers.

The economy is doing well.

Our customers seem to have a little bit more money in their pocket, and this is contributing to our strong results.

Remember though, our customers are always under pressure and looking to stretch their budget.

As we have always said, our results illustrate that our model works in good times and in challenging times as evidenced by 28 consecutive years of same-store sales growth.

We believe Dollar General's business is well positioned to continue to succeed over the long term in a variety of economic conditions.

I want to thank each of our approximately 134,000 employees across the company for all their hard work and dedication to fulfilling our mission of serving others.

The entire team is excited about our position and our outlook, and we look forward to building on our progress and driving solid performance throughout the rest of 2018.

With that, operator, we would now like to open the lines for questions.

(Operator Instructions) Your first question will come from Matthew Boss with JP Morgan.

So I guess, first question, John.

On gross margins in the back half, is it best to model a back-half gross margin performance pretty similar to the slight contraction that we saw in the second quarter?

I guess, just any help on the drivers of gross margin for the back half of the year maybe versus the second quarter, anything to consider would be helpful.

Well, I'll start by saying that we're very pleased with the first half performance, and as you look at the balance we struck with strong top line growth and gross profit expansion, we really focus on overall operating margin as we can manage all the levers within there.

And so we've guided folks toward that and said that over the course of the year, we see ourselves in a position to deliver relatively flat operating margin rate year-over-year.

There's a lot of puts and takes within there.

One of the things we mentioned was increased near-term pressure from carrier rates, which could get a little bit worse before it gets better as well as while we saw it lesson some in the quarter, we do have ongoing mix pressures.

But we have a lot of levers within gross margin to help counteract that.

We were delighted with the performance of shrink, 7 quarters of sequential improvement there.

And with the investments we've made, we see opportunity to continue driving improvement there.

The team continues to do a fabulous job with category management.

We see a lot of opportunity there.

We were pleased with the growth in nonconsumables this quarter, continue to see opportunity around private label and foreign sourcing.

And while there are headwinds on supply chain efficiencies, the team's doing a great job mitigating that and helping offset some of that with stem mile reductions.

We opened up more DCs.

There's 2 under construction right now.

They continue to drive efficiencies around load optimization, DC productivity, private fleet expansion.

And then we continue to expand and diversify our carrier base to help mitigate those headwinds.

So when you put it all together, we feel really good about our ability that we've done thus far and through the year to mitigate those headwinds to deliver relatively flat operating margin rate for the year while importantly investing in high-return, strategic initiatives that we think are going to drive the future growth of this business.

Great.

And then, Todd, just a follow-up.

On same-store sales, nice to see the return to positive traffic this quarter.

I guess, what do you think drove the improvement?

Do you see positive traffic as sustainable?

And maybe just touch on some of the performance that you're seeing from your more mature stores.

Yes, my hat is off to the -- our merchants and our operators.

They have done a fabulous job over the years to set us up for success.

And I think you saw that start to come together once again here in the second quarter.

When we look at our overall sales performance, we're very encouraged on our -- on all of our initiatives that we have in play, our cooler initiatives, our health and beauty initiatives as well as our new Better For You initiative that we've now got in thousands of stores across the country and more to come.

And then when you start to then look at even upcoming initiatives that are in the pipeline, we feel that sustaining positive traffic is exactly what we plan to continue to work toward for the back half of the year.

That is always the goal.

We know that traffic is key to long-term sustainability of comps, and that's where the team is really focused.

Your next question is from Vincent Sinisi with Morgan Stanley.

Wanted to ask -- we've gotten a question just from a couple of folks today.

Very strong sales, of course, this quarter.

We've gotten the question though, like, EPS, kind of maintained from a bottom line perspective.

So I guess, just how would you respond to that?

Is it more of, hey, we feel good, it's a decently wide range.

There's the -- kind of the freight, the mix, some of the initiatives that you guys called out as headwinds and it's only at 2Q.

Just wondering how you would respond to that question.

Yes, I think a lot of the things you say is the right way to think about that.

I want to echo that we're very pleased with the Q2 results with 41% EPS growth, double-digit operating profit growth.

We feel we're in a great spot.

We feel that range, $5.95 to $6.15, is the right range.

It's narrower than it used to be as we bought back shares and have a lower tax rate.

But there's a lot of puts and takes within there, and we do see some increased headwinds associated with transportation costs.

And again, the mix, while moderating, continues to be a bit of a pressure.

And the other thing we mentioned is we want to make sure that we're reinvesting in the business, making targeted investments in strategic initiatives that's going to drive high returns.

And we think this is the appropriate range based on all that.

I think that's the right tradeoff for the business.

Okay.

All right, cool.

And then if I could, maybe just going back to when you guys gave the initial outlook for this year.

One of, again, just investor questions that we had gotten was, with kind of normal course labor investments, given that you guys had gotten ahead of it several quarters before last year, is that something that's going to be able to kind of stick to the plan?

So I guess, in light of this last quarter, with a lot of other retailers kind of stepping that spend up, have you seen any changes?

Do you still feel good about kind of in line with your plan and where you are for the rest of this year on labor?

That'd be great.

Sure.

Vinnie, like many things, we got ahead of this and made sure that we did what was right for our business and, of course, our people last year as we invested over $70 million, as you recall, in both wages and training.

That gift is still continuing to give, if you will, in that we're seeing that our turnover rates are lower than last year even after we put this into effect.

It's been in effect now for well over a year.

And we're also seeing better sales, better shrink results.

And I want to also mention that on a percent basis, we have seen the lowest level in recorded history that we can find on a percent basis of open store manager positions across our company.

And that really goes to show you that the investments we made are doing well and are sticking very, very well.

And then when you couple that with our aggressive pay and our hourly wage that we've always stayed true to and made sure we paid very competitive wages against, we're seeing that applicant flow is the highest that we've seen.

And so as you start to see that, the pipeline is full and we have less open positions even at the hourly rate in our stores than we had last year.

So all that really goes to show us that we made the right decision on wages, and we continue to make the right decisions as we move forward.

Your next question is from Paul Trussell with Deutsche Bank.

Congrats on a very solid comp performance in 2Q.

Just also following up on the guidance comment.

I know you don't give specifics on a quarterly basis, but could you just help us think about some of the puts and takes in 3Q versus 4Q on overall revenues, comps and margins?

Just given the more challenging comparisons, the cycling of the hurricanes, the timing of the Express store openings, just what should we keep in mind as we model?

Yes, so a couple of things there.

We -- in Q3, we do lap the impact of the hurricane, which is obviously reflected in our guidance and I think most people have modeled that in.

And in Q4, we do lap the closure of stores last year.

But I think the other thing we've mentioned, as you look at the back half of the year, one thing that gives us confidence in the sales number we've put out there is not only the initiatives, the traction we're seeing in the initiatives and the performance of the mature stores as well as the existing stores, but also, one of things we mentioned as you get into the back half of the year, while the laps get more difficult, the benefit of the Dollar Express stores roll into that comp base.

As we opened an unusually large number stores in the second half of last year, that rolls into the comp base and we see the performance of those, that will help your comp and offset those tougher laps.

And I think the other thing we mentioned is just with transportation costs.

That's a bit of a wild card and who knows where fuel rates will go, but we are seeing, in addition to that, just a tightening, further tightening of the carrier base, which could make things a little bit worse before they get better around transportation costs.

So that's a headwind we wanted to point out in the second half.

And then the other thing we just talked about is the investments.

While we're making very targeted investments, we do want to make sure we're investing in what we see as very high return prospects for the business, the strategic initiatives, other initiatives.

And I think if we can -- when we deliver the EPS range that we've guided to here, we believe we can.

And while we're investing in the business, we think that's a fantastic EPS growth and operating profit growth for the year while investing in the future.

So we feel really good about our ability to mitigate the headwinds, invest in the business and deliver a great year.

That's helpful.

And then just to follow up, if you could just speak to the performance of the new stores and how you're thinking about the waterfall as stores mature.

And then separately, just the apparel performance.

I know you're working on some initiatives there.

But that was still lacking, I guess, apparel and home in the first half relative to how well you're performing in consumables.

Just how should we think about the timetable of getting the return on those strategic investments?

I'll take the first question with regard to new unit performance.

We continue to see great results out of our new units.

As we've mentioned in the past, we manage -- we measure a basket of metrics, including new store productivity, where we continue to see our new stores opening at 80% to 85% productivity range of mature stores.

We continue to see the actual sales track very closely to our pro forma model expectations.

The team does a phenomenal job picking great sites and projecting the sales of those and they continue to deliver.

We continue to see returns at the high end of our 20% to 22% range.

And again, bear in mind, that's after tax and includes the impact of cannibalization, which we also track closely and continue to see that to be as expected and consistent.

And we continue to see a payback period of less than 2 years.

So we're very pleased with the performance we continue to see in those new stores.

In terms of their contribution to comp, what we've said in the past is the impact of new stores, reloads, remodels and now cannibalization is in that 150 to 200 range, we continue to see that and with a great performance lately actually at the higher end of that.

And Paul, when you take a look at the sales initiatives, as we had mentioned, a lot of them are in and around consumables, but there are quite a few around nonconsumables as well.

And as you take a look at our longer-term strategic initiatives around nonconsumables, we're very pleased with our early results there.

We've got over 300 stores now that we've remodeled with the new nonconsumable look and feel, and they are doing very, very well.

So it gives us great confidence that the 700 that we've got planned into this year that they'll have the same results as we continue to move forward.

Now, these are longer-term initiatives.

So as we move into 2019, with this confidence that we're seeing in the sales, we'll be able to put that into more stores and stay tuned into 2019 on how many we do.

But at this rate, we believe we could do quite a lot of them in 2019 to help continue to move the needle in our nonconsumables.

But even past that, in all of our stores, I think our team has done a fabulous job in being very relevant on our nonconsumable offering and also continue to show the value.

And I think that showed, especially in our seasonal categories, in 2000 -- I'm sorry, in Q2 here that we just ended, where we had a very strong positive comp in seasonal, which drew a positive comp for the entire nonconsumable category as whole.

So we feel good about the back half in nonconsumables and we'll continue to push hard to balance that mix out.

Your next question is from Scot Ciccarelli with RBC Capital Markets.

So it looks like home and apparel -- the home and apparel category just still kind of comping negative.

Todd, with the retail environment that we have today, I guess, I would think that you'd have a bit more top line momentum in these discretionary categories.

And obviously, it sounds like you're making some merchandise changes as you previously described.

But do you have a view as to why even in this environment, it seemed to be such a struggle to drive positive comps in these categories?

Yes, I think as you continue to take a look at nonconsumables, a few things that we have done, we are making changes, to your point, in our current lineup.

And one of the changes we started to make even last year was a reduction in our apparel offering.

And that was very intentional to give more room for some consumable areas but also some other nonconsumable areas as like, for instance, in some seasonal categories, which you saw pretty good strength in.

So there is a trade-off there, we knew that going in.

But when you look in totality, you always have to remember, too, while the economy is doing very well, our core customer continues to struggle because normally, her expenses outstrip her wage growth.

And that's what we're really seeing here is that when you -- when you take a look at our core customer, the headwinds of rents as well as health care increases, that they are real for our core customer.

And she continues to buy a little bit more because she does have just a small amount of income more, but not a lot.

And we continue to offer her great values, both in consumables and nonconsumables.

And we're seeing the effects in many, many areas where she is buying more, but a lot of it is to benefit her family and to feed her family.

Your next question is from Michael Lasser with UBS.

If you look at the performance of your store base in this most recent quarter, were there themes or trends that you saw, whether it was from a geographic perspective, urban, rural, suburban, or from a competitive overlap perspective?

And the question really is to get at are you seeing some evidence that those discretionary -- incremental discretionary dollars that most consumers have at this point are flowing into some of your competitors and there may be a bit of a procyclical trade up, and you may not feeling as much of a benefit from that?

Yes.

Let me start by saying that we are very pleased with our sales overall.

That 3.7% comp was very strong.

And we saw benefit from all across the country, every division across the country benefited in that.

So that was great to see.

That really shows that not only the consumer has a little bit more money, but also, our initiatives in totality are really paying off.

Again, 3.7% comp is pretty strong.

And then, as you look at our customer segmentation, and that's the second part of your question, what we're seeing is that while our core customer, which we call our best friends forever, or BFFs, they continue to stay very solid and are very good loyal customers of ours.

The interesting thing here we're seeing is that some of our largest, on a percent basis, growth in customers is coming from higher income, which is very interesting.

So even though the economy's doing better, what it really shows us is that all the work that we've done with the offering inside of our box over the years is even more relevant than ever and is even more relevant to a higher end consumer.

Even in a good economy, she is still looking for value and convenience and she's finding it at Dollar General.

So that's great to see, and we have seen no sign of trade out or trade up from our core customers.

So that all adds up to that strong 3.7% comp.

And the higher income consumer, are they coming in mostly buying consumables?

Well, we can see them buying a little bit of both.

But consumables, especially in food, paper, cleaning categories and, by the way, one of the biggest growths that we've seen from that consumer base is in health and beauty.

And that makes a lot of sense to us in all the work that we've done around that.

And then just a quick follow up for John.

How much incremental transportation cost pressure have you factored into your guidance for the rest of the year?

And should we expect a wide variance in your comp between the third quarter and the fourth quarter?

In terms of carrier rates, we've factored in basically what we see on the horizon as the anticipated costs there.

That's all captured in the guidance.

And as mentioned, we do anticipate that getting a little bit worse before it gets better and have factored that in, but again, have a lot of mitigating actions that we've also played in to help counteract the impact of that.

So that's all played in.

In terms of sales comps, we don't get into quarter-by-quarter.

But would say that the impact of what we see from the large number of units rolling into the comp base helps counteract some of the laps to smooth it out somewhat over the back half of the year.

Your next question is from John Heinbockel with Guggenheim.

Todd, so 2 things I wanted to get into.

First, produce.

When that brings the remodel benefit up to 15%, is that evenly split between traffic and ticket, the incremental piece you're getting from produce, number one?

Two, how many stores do you think ultimately can have produce?

And then what's your shrink experience with that?

Yes, those are all great questions, John.

And those are the same questions that we continue to monitor here at Dollar General as we continue to learn more about selling produce outside of our market stores and now into some of our, call it, traditional and/or DGTP stores.

But as you look at it, you can definitely see an increase in both ticket and traffic across these remodels, and you can see an even larger traffic increase when you have produce because you're at the top end of the 10% to 15% scale of increase.

So it's great to see that it helps drive both traffic and ticket.

And to your point, what we're managing right now is these are live goods.

This is different than selling cans of corn as we all know.

And so we're continuing to learn how to manage this in the stores.

Our operators have done a great job in working through new processes.

So the shrink is probably a little bit higher than where it will end up being, but I think you know us pretty well over the years, we won't do anything that isn't very accretive at the end.

So we're pretty bullish about where those gross margins in produce could end up as we get more and more developed.

And then your last question, well, how many could you do, well, we're not prepared yet to say, but we believe that there could be thousands of stores that could have this lineup.

And we'll continue to work toward that as we learn more and more about produce.

And then one last thing, this obviously is the first holiday season without Toys "R" Us.

So -- and you can do a lot of business in toys.

How do you think about what you want to do differently, without giving your playbook, this year versus past years?

And is that -- do you think that's a very significant opportunity to acquire new customers?

I believe that overall, that our category management team has done a fabulous job in our seasonal categories and especially in our toy categories.

And we continue to make progress there.

And we're seeing benefits right now from that progress.

Is some of it from a competitor that's no longer with us?

That could be some of it.

But I do have to say that our category management team in and around toys has done a great job.

And I've seen the lineup for holiday, and it's very, very strong.

Your next question is from Chuck Grom with Gordon Haskett.

Most of my questions have been answered, but just on the acceleration in traffic here from 1Q to 2Q, just wondering if you could unpack that for us across the chain.

And then on the pricing front, how are you guys feeling about your positioning vis-à-vis Walmart?

Based on our work, it looks like you're pretty tight.

Do you agree with that?

And given that you are in a position of strength and given that you do have some advantages on the margin line, how are you thinking about the ability to chase units and to invest more in price given your positioning today?

Yes, as you look at, we're, first of all, very happy with the 3.7% comp and very happy to see both traffic and ticket on the positive side.

As you take a look at traffic, obviously, our consumable business drove a lot of our traffic gains and that's by design.

We've always said that our consumable business will drive the traffic and our nonconsumable business will continue to enhance the basket and enhance our margin, and that's exactly how we saw Q2 unfold.

And we believe that over time, that's how we'll continue to drive both traffic and ticket within our store.

And as you look at our prices, we are as good at price today as we ever have been.

I've been saying that for multiple quarters now, and we're looking very, very good across all classes of trade.

And it's really evidenced by our market share gains and if that -- those market share gains are across all classes of trade and across the 4-, 12-, 24- and 52-week period.

So this isn't a new phenomenon.

We've been stealing share for quite a while.

And it's again, I believe, because of that competitive box that we've put together.

And I believe we've got the best execution at retail that's out there when you go across 15,000 stores and the ability to execute at the high level that we do.

So those are all very additive for us as we look to continue to drive sales and comps in the future.

And then lastly, in price, we've always said we'll continue to work the price lever where we believe it's necessary to continue to drive traffic and/or where our consumers are feeling the pinch.

And so we continue to do that today.

We're working the price lever in many different parts of the country today to continue to engage our consumer and to continue to have her shop with us more often, and just -- you'll continue to see that as we move forward.

That's part of the playbook and has been for as many years as I've been here, Chuck.

Okay, great.

And then just one quick one for John.

Just on the comp here in the quarter.

Can you frame out on how the comp trended by the month-by-month?

And then in terms of August, anything you'd like to share on the start to the third quarter?

What I would say is we just feel very good about the balance we saw in the quarter.

Each one of the periods was strong.

And as we mentioned, we saw a good balance across consumables and nonconsumables, too.

So I think it was a very balanced performance for the quarter.

And we feel great where we are right now with the initiatives in place, firing on all cylinders and building momentum.

Thank you, ladies and gentlemen.

This does conclude today's conference call.

A replay of today's earnings release will be available shortly.

Instructions for listening to the replay are available in the company's earnings press release issued this morning.

This does conclude today's call.

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