達樂 (DG) 2019 Q4 法說會逐字稿

Good morning.

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

At this time, I'd like to welcome everyone to Dollar General's Fourth Quarter 2019 Earnings Call.

Today is Thursday, March 12, 2020.

(Operator Instructions) This is being recorded.

(Operator Instructions)

Now I'd like to turn the conference over to Mr. Donny Lau, Vice President of Investor Relations and Corporate Strategy.

Mr. Lau, you may begin.

Thank you, Robert, and good morning, everyone.

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

Our earnings release issued today can be found on our website at investor.dollargeneral.com under News and Events.

Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our strategy, plans, initiatives, goals, financial guidance or beliefs about future matters.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.

These factors include, but are not limited to, those identified in our earnings release issued this morning, under Risk Factors in our 2018 Form 10-K filed on March 22, 2019, and in the comments that are made on this call.

You should not unduly rely on forward-looking statements, which speak only as of today's call.

Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law.

We also will reference certain non-GAAP financial measures.

Reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which, as I mentioned, is posted on investor.dollargeneral.com under News and Events.

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

(Operator Instructions)

Now it's my pleasure to turn the call over to Todd.

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

We are very pleased with our fourth quarter results, capping off a strong year of performance across the company.

Notably, our full year results include our best sales comp increase in 7 years, and double-digit diluted EPS growth.

The quarter was highlighted by same-store sales growth of 3.2% despite the lap of an estimated 70 basis point sales comp benefit from the pull forward of SNAP payments into Q4 of last year, and double-digit growth in both operating profit and diluted EPS.

We're especially pleased that we delivered strong operating margin performance this quarter, even as we continue to invest in key areas, including our strategic initiatives to strengthen our competitive position and support long-term sustainable growth.

Overall, we are executing well against both our operating and strategic priorities, and believe we are well positioned to drive continued growth as we move forward.

During today's call, I'll first recap some of the top line results for the fourth quarter and full year.

John will then review our financial results in more detail as well as discuss our financial guidance for fiscal 2020.

Afterwards, Jeff and I will provide an update on our operating priorities and strategic initiatives, including some key actions we've taken that not only contributed to our strong results in 2019 but have also laid the groundwork for what we expect to be another solid year of performance in 2020.

In the fourth quarter, net sales increased 7.6% to $7.2 billion compared to net sales of $6.6 billion in the fourth quarter of 2019.

We are particularly pleased with the balanced nature of our sales performance once again driven by meaningful contributions across many fronts, including sustained positive sales momentum across new stores and mature store base, strong same-store sales growth in both our consumable and non-consumable product categories and another quarter of strong growth in customer traffic and average basket size.

Once again this quarter, we increased our market share in highly consumable product sales as measured by syndicated data, with mid- to high single-digit growth in both units and dollars over the 4-, 12-, 24- and 52-week periods ending January 25, 2020.

Importantly, our market share gains continued to increase at an accelerated rate throughout these periods, which we believe speaks to the underlying momentum of the business.

For the full year, net sales increased 8.3% to $27.8 billion compared to net sales of $25.6 billion in 2018.

Same-store sales for the year increased 3.9%, which, as I mentioned earlier, represents our best full year comp sales performance in 7 years and includes our highest increase in customer traffic since 2015.

Notably, 2019 marked our 30th consecutive year of same-store sales growth.

This underscores our belief that Dollar General's unique value and convenient proposition continues to resonate with our customers and speaks to the resiliency of our business model.

Collectively, we view these results as further validation that we are pursuing the right strategies to enable more balanced and sustainable growth by creating meaningful long-term shareholder value.

We continue to believe we operate in one of the most attractive sectors in retail and are well positioned to advance our goal of further differentiating and distancing Dollar General from the rest of the discount retail landscape.

Before I turn the call over to John, I want to note that we are following the coronavirus outbreak closely, and our thoughts are with everyone affected.

As compared to some retailers, our direct import sourcing exposure is relatively limited, although many of our domestic vendors also source from other countries.

We have limited insight into the extent to which our business may be impacted by this outbreak, and there are many unknowns.

But we currently do not anticipate a material impact on fiscal 2020 results from anything that we have experienced to date.

Of course, we are continuing to monitor the events closely.

We are also mindful of those who were impacted by the devastating tornadoes that struck Nashville and surrounding areas last week, and we are actively working to support our people and this community.

As I've said before, our business is built on people, and their health and safety will always be top priority.

With that, I'll now turn the call over to John.

Thank you, Todd, and good morning, everyone.

Now that Todd has taken you through a few highlights of the fourth quarter and full year, let me take you through some of the important financial details.

Unless I specifically note otherwise, all comparisons are year-over-year, and all references to EPS refer to diluted earnings per share.

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

Gross profit as a percentage of sales was 31.8% in the fourth quarter, an increase of 60 basis points.

This increase was primarily attributable to higher initial markups on inventory purchases and a lower LIFO provision.

These factors were partially offset by increased markdowns as a percentage of sales, a greater proportion of sales coming from the consumables category, sales of lower-margin products comprising a higher proportion of sales within the consumables category and increased distribution costs.

SG&A as a percentage of sales was 21.7%, an increase of 13 basis points.

These results were driven by increases in store occupancy costs, repairs and maintenance expenses and advertising costs.

These items were partially offset by a decrease of approximately $11.6 million in hurricane and other disaster-related expenses compared to the 2018 fourth quarter.

During the quarter, we invested approximately $20 million in SG&A expense attributable to our strategic initiatives.

We are very pleased with the progress on each and continue to believe these investments position us well to deliver meaningful benefits to the business over both the intermediate and longer term.

Moving down the income statement.

Operating profit for the fourth quarter increased 12.9% to $721 million compared to $639 million in the fourth quarter of 2018.

As a percentage of sales, operating profit was 10.1%, an increase of 47 basis points, which reflects another quarter of operating margin expansion despite continued investment in our strategic initiatives.

Our effective tax rate for the quarter was 23% and compares to a rate of 21.2% in the fourth quarter last year.

Finally, EPS for the fourth quarter increased 14.1% to $2.10.

Overall, we are very pleased with the strong and balanced performance the team delivered during the quarter, which contribute to solid full year GAAP and adjusted EPS growth of 11.2% and 12.7%, respectively.

Turning now to our balance sheet, which remains strong.

Merchandise inventories were $4.7 billion at the end of the fiscal year, an increase of 14.2% overall and up 7.8% on a per store basis.

We continue to believe the quality of our inventory is in great shape and remain focused over time on driving inventory growth that is in line with or below our total sales growth.

For 2019, we once again generated significant cash flow from operations totaling $2.2 billion, an increase of $94 million or 4.4%.

As a percentage of sales, operating cash flow was 8.1%.

Total capital expenditures for the year were $785 million and included our planned investments in new stores, remodels and relocations; continued investments in construction of our Amsterdam, New York distribution center; and spending related to our strategic initiatives.

During the quarter, we repurchased 2.7 million shares of our common stock for $415 million and paid a quarterly dividend of $0.32 per common share outstanding at a total cost of $81 million.

For the full year, we returned a total of $1.5 billion of capital to shareholders through a combination of share repurchases and quarterly dividend payments.

At the end of the fourth quarter, the remaining share repurchase authorization was $1.1 billion.

Our capital allocation priorities continue to serve us well.

Our first priority is investing in high-return growth opportunities, including new store expansion and our strategic initiatives.

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

Moving to our financial guidance for fiscal 2020.

We expect another year of solid performance from our core business, fueled by a healthy balance of comparable sales growth and new store development.

In addition, we anticipate positive gross profit contribution from our strategic initiatives, specifically our non-consumables initiative or NCI and DG Fresh.

That said, we also expect continued investments in our strategic initiatives, in addition to the ongoing expenses associated with each as we continue to lay the foundation for long-term sustainable growth.

With all that in mind, we expect the following for fiscal 2020.

Net sales growth of 7.5% to 8%, same-store sales growth of 2.5% to 3%, and EPS growth of approximately 11.5% or approximately 10% compared to 2019 adjusted EPS and in line with our long-term goal of delivering double-digit EPS growth on an adjusted basis, while also continuing to invest for the long term.

As a reminder, 2019 adjusted EPS excludes a $31 million pretax impact related to significant legal expenses recorded in the second quarter of 2019, as discussed in today's earnings release.

Our EPS guidance assumes a fiscal 2020 effective tax rate in the range of 22% to 22.5%.

Capital spending is expected to be in the range of $925 million to $975 million as we continue to invest in our strategic initiatives and core business to support and drive future growth.

With regards to shareholder returns, as we outlined in today's press release, our Board of Directors recently approved a quarterly dividend payment of $0.36 per share, which represents an increase of 12.5%.

We also plan to repurchase approximately $1.15 billion of our common stock this year.

Finally, our 2020 outlook for real estate projects remains unchanged from what we discussed with you on our Q3 2019 earnings call.

Let me now provide some additional context to our current expectations.

As I noted earlier, we anticipate continued and meaningful investment in our strategic initiatives this year, including ongoing expenses associated with each.

We continue to believe these investments will improve operating margin over time, particularly as the benefits to gross margin continue to scale and ultimately outpace the associate expense.

NCI and DG Fresh are near-term examples of this dynamic, as we expect both will be accretive to operating margin in 2020.

That said, these investments will continue to pressure SG&A rates this year as we accelerate their rollouts.

With regard to tariffs, our guidance does not contemplate additional changes to tariff rates for products subject to tariffs beyond those which are currently in effect.

Finally, as Todd mentioned, we are closely monitoring events related to the coronavirus, including potential impacts on our business.

At present, although we anticipate delays on certain goods originating in China, we do not anticipate a material impact on our business or fiscal 2020 financial results and have not taken any such impact into account in our guidance.

In summary, we are very pleased with our 2019 results and excited about our plans for 2020.

As always, we continue to be disciplined in how we manage expenses and capital, with the goal of delivering consistent, strong financial performance, while strategically investing for the long term.

We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.

With that, I will turn the call over to Jeff.

Thank you, John.

I want to take the next few minutes to update you on our 4 operating priorities, including our plan for 2020.

Our first operating priority is driving profitable sales growth.

To that end, the team is executing against a portfolio of initiatives designed to drive continued growth, while keeping the customer at the center of all we do.

Let me highlight just a few.

Our cooler door expansion program continues to be our most impactful merchandising initiative.

Importantly, in addition to being a great sales and traffic driver, the expansion of our cooler door footprint over the years has provided the scale necessary to enable DG Fresh.

In turn, given our DG Fresh learnings and successes to date, we recently began incorporating higher capacity coolers into our stores, creating additional opportunities to drive higher on-shelf availability and deliver a wider product selection.

We expect to further capitalize on these opportunities with the plans to accelerate our growth of cooler doors in 2020.

In fact, we expect to install approximately 55,000 additional cooler doors this year, which is about 10,000 more than we did in 2019, the majority of which will be in higher-capacity coolers as we continue to build on our multiyear track record of growth in cooler doors and associated sales.

Turning now to private brands, which continues to be a priority, as we pursue opportunities to further enhance our value proposition while also benefiting gross margin.

We are especially pleased with our ongoing rebranding and repositioning efforts, which contributed to our strong results in 2019, including our highest private brand sales increase in 6 years.

Standouts in 2019 included both our Studio Selection and Gentle Steps product lines, and we plan to expand each of these brands in 2020.

We also believe there is significant opportunity with other brands as well.

In fact, our plans this year include the rebranding of several additional product lines, including stationery, laundry, hardware, automotive, pet food and party.

Also, in 2020, we plan to execute a redesign of Clover Valley, our largest and most successful private brand, which generated over $1 billion in sales in 2019 as we seek to drive overall category awareness and even greater customer adoption.

In short, we're pleased with the continued momentum we are seeing across our portfolio of private brands and believe we are on the right track to deliver even greater value for our customers while continuing to drive profitable sales growth.

I also want to highlight our Better For You offering, which continues to resonate with our core customers.

As a reminder, this product line consists of a variety of Better For You options at low prices and is now available in approximately 5,600 stores, with plans to expand to more than 8,000 stores by the end of the year.

Next, a quick update on our FedEx relationship, which provides customers with convenient access to FedEx package pickup and drop-off services.

This service is currently available in more than 2,500 locations, with plans to expand to over 8,500 stores by year end, further advancing our long track record of serving rural communities.

Importantly, we continue to explore innovative opportunities to serve our customers and are excited to be able to leverage our unique real estate footprint to provide solutions for them in convenient locations across the country.

Beyond these sales-driving initiatives, we continue to focus on enhancing gross margin.

In addition to the gross margin benefits associated with our NCI, DG Fresh and private brand efforts, foreign sourcing continues to represent a significant opportunity for us.

Our goals include increasing penetration and diversifying countries from which we source, and we are pleased with our progress on this front.

In fact, we successfully reduced our direct sourcing exposure to China by approximately 7% in 2019 and are targeting a further reduction of an additional 7% in 2020.

We are currently sourcing product from over 35 countries, up from 9 countries at the end of 2018 and expect to further increase our countries of origin this year as we continue to lay the foundation for ongoing success in this area.

Additionally, while the team has made great progress in recent years, shrink reduction remains an important area of focus and opportunity.

During 2019, we added more than 6,000 additional electronic article surveillance units, completing our rollout to the entire chain.

Looking ahead, we plan to build on our success with EAS as we increase the number of products tagged, while further leveraging technology to drive even higher levels of in-store execution.

We also continue to pursue distribution and transportation efficiencies.

Reducing stem miles is an important contributor to these efforts and the successful opening of our Longview, Texas, and Amsterdam, New York distribution centers in 2019 is expected to drive additional efficiencies as we move ahead.

Our plans also consist of the continued expansion of our private fleet in 2020 as we look to further reduce our dependency on third-party transportation carriers.

Overall, we are pleased with the great work the team is doing across the business to further drive profitable sales growth and are excited about our plans for 2020.

Our second priority is capturing growth opportunities.

Our proven high-return, low-risk model for real estate growth continues to be a core strength of our business and enhances our ability to bring value and convenience to customers across the country.

As a reminder, our real estate model continues to focus on 5 metrics that have served us well for many years in evaluating new real estate opportunities, including new store productivity, actual sales performance, average returns, cannibalization and the payback period.

Of note, we continue to see very consistent performance across these metrics.

And with average returns of 20% to 22%, we continue to believe new store growth is the best use of our capital.

In 2019, we celebrated the grand opening of our 16,000th store and completed a total of 2,099 real estate projects, slightly more than we had initially anticipated.

For 2020, we expect to open 1,000 new stores, remodel 1,500 stores and relocate 80 stores, representing nearly 2,600 real estate projects in total, or an average of 7 projects per day as we continue to deploy capital in these high-return investments.

Importantly, we expect more than 1,100 of our remodels to be in the higher cooler count DGTP or DGT format, bringing our total number of stores in these formats to approximately 3,500 by year-end.

The remainder of our remodels will primarily be in the traditional format, many of which will include the higher capacity coolers I mentioned earlier.

We are also accelerating the expansion of our produce offering, which provides the top 20 items typically sold in traditional grocery stores and covers approximately 80% of the overall categories they carry.

Our plans now consist of adding produce in approximately 400 stores this year, up from a previous goal of about 250 stores, bringing the total number of stores with produce to more than 1,000 by year-end.

I am very proud of the team's ability to execute such high volumes of successful real estate projects, and we are excited about the continued growth opportunities ahead.

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

Over the years, we have established a clear and defined process to control spending, which governs our disciplined approach to spending decisions.

This zero-based budgeting approach, internally branded as Save to Serve, keeps customer at the center of all we do while reinforcing our cost-control mindset.

At the store level, our operational initiatives for 2020 consists of building on our recent success with Fast Track, which Todd will discuss in more detail as well as ongoing efforts to simplify our operations by reducing unproductive inventory and operating complexity.

As I highlighted earlier, we are also focused on improving distribution and transportation efficiencies, while at the store support center, work simplification and process improvement are ongoing initiatives to take costs out of the business.

In addition to generating significant savings to date, this process has also produced other meaningful initiatives such as our 2019 partnerships with Western Union and FedEx and the income associated with these service offerings.

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

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

2019 was a banner year in many ways, underscored by another record low in store manager turnover, following a record low the previous year.

In addition, we continued to be pleased with our strong applicant flows and the length of time it takes to fill open positions, which we believe further demonstrates that our commitment to investing in our people is resonating in the communities we call home.

I'm also pleased to announce, for the ninth consecutive year, Dollar General was included in Training magazine's top 125 list, placing #1 overall for the second year in a row.

And while we are excited about these accomplishments, the team is already focused on additional opportunities to further develop our people in 2020, including enhancing our store manager training program to include even more hands-on learning, increasing the size of our assistant store manager development program and continuing to grow our private fleet driver training program, including the funding and facilitation of training for employees to obtain their commercial driver's license.

In addition, we continually strive to create opportunities for people to grow and develop at Dollar General.

As a result, more than 12,000 of our current store managers were promoted from within and internal placement rates remain strong across the organization.

We believe the opportunity to start and develop a career with a growing company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent.

In summary, we are executing well and making great progress against each of our operating priorities.

We have a robust set of initiatives in place for 2020 and are confident in our plans to drive continued growth in the years ahead.

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

Thank you, Jeff.

I'm very proud of the progress the team has made in advancing our key strategic initiatives.

Let me take you through some of the most recent highlights as well as our plans for 2020.

Starting with our non-consumable initiative, or NCI.

As a reminder, NCI consists of an enhanced and expanded product offering in key non-consumable categories.

The NCI offering was available in approximately 2,400 stores at the end of 2019, and our plans include accelerating the rollout to a total of about 5,000 stores by year's end.

We're especially pleased with the sustained positive sales and margin performance we are seeing across our enhanced non-consumable product categories.

We also continue to see a positive halo effect in consumable sales.

Overall, this performance is contributing an additional 1% to 2% increase in total sales comp compared to a typical remodel as well as a meaningful improvement in gross margin rate in these stores.

And while the NCI store count is still relatively small compared to our overall store base, we are realizing additional benefits by leveraging learnings from these stores.

Specifically, we are incorporating select NCI products and full planograms throughout the broader store base, resulting in positive sales and margin contributions across the entire chain.

Turning now to DG Fresh, which is a strategic multi-phase shift to self-distribution of our frozen and refrigerated goods.

These goods currently represent approximately 8% of our total sales.

The primary objective of DG Fresh is to reduce product cost on our frozen and refrigerated items by removing the markup paid to third-party distributors, thereby enhancing gross margin.

And while, as expected, this cost of goods benefit was more than offset by initial start-up costs and associated operating expenses in 2019, we continue to be very pleased with the product cost savings we are seeing.

In fact, as John mentioned, we expect DG Fresh will be accretive to operating margin in 2020, as the benefits begin to exceed associated expenses and grow in the years ahead as we continue to scale this transformational initiative.

Another important goal of DG Fresh is to increase sales in these categories by enabling the accelerated rollout of our higher-capacity coolers, increasing in-stock levels and eventually, expanding our overall assortment offering.

This could include a wider selection of both national and private brands as well as an enhanced offering of Better For You items.

And while produce is not included in our initial rollout plans, we believe DG Fresh could eventually provide a potential path forward to expanding our produce offering to more stores in the future.

In total, we are currently self-distributing product to more than 6,000 stores from 5 DG Fresh facilities.

Our goal for 2020 is to capture benefits from DG Fresh in approximately 12,000 stores or about double the current store count from up to 10 facilities by year's end.

In short, we're very pleased with the results we are seeing from this initiative and excited about the potential long-term benefits it can deliver for our customers and our business.

Next, our digital initiative, where our efforts remain focused on deploying and leveraging technology to further enhance the customer in-store experience.

Our strategy consists of building a digital ecosystem that is specifically tailored to providing our core customer with even more convenient, frictionless and personalized shopping experience.

To date, many of our efforts are centered on further enhancements to the Dollar General mobile app, which now includes digital coupons, a shopping list feature, our car calculator in-app shopping and budgeting tool, and DG GO!

mobile checkout, now available in approximately 750 stores, with plans for further expansion as we look to combine this feature with self-checkout in select stores as we move ahead, providing for even more convenient checkout solutions.

Our digital offering is clearly resonating as we added 1.5 million users to our monthly active user base on our mobile app, ending the year with 3,000 -- I'm sorry, 3.3 million monthly active users, an 83% increase over prior year.

Importantly, we know digitally engaged customers checkout with baskets twice as large as the company average.

We also recently launched a pilot of DG Pickup, which is our buy online, pickup in the store offering.

DG Pickup is currently available in approximately 30 stores, and we are well positioned to scale quickly, pending the outcome of our pilot results.

By leading our channel in digital experiences, we believe we can continue to drive in-store traffic, grow basket size and offer even greater convenience to both new and existing customers within our channel.

Moving now to Fast Track, where our goal will include increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability.

The first component of Fast Track is streamlining the stocking process in our stores through rolltainer optimization, which we have now completed at each of our distribution centers with even more shelf-ready packaging.

These efforts are designed to reduce the amount of time spent stocking shelves during the truck unloading and restocking process, and we're very pleased with the labor productivity improvements we are already seeing.

Importantly, we are also seeing increased sales, higher in-stock levels and lower store manager turnover in the initial stores that received optimized rolltainers, which positions us well to drive additional benefits as we move forward.

The second component of Fast Track is self-checkout, which we believe can further improve speed of checkout while also reducing the amount of labor hours devoted to the checkout activity.

We are currently testing self-checkout in a small sample of stores and are pleased with the early results, including positive feedback from both customers and employees.

We believe this offering will not only further enhance our convenience proposition for customers, but also drive even greater efficiency in the store.

To summarize, 2019 was a noteworthy year for Dollar General as we delivered strong results and made significant progress with our strategic initiatives, while further laying the groundwork for further initiatives and long-term sustainable growth.

As a mature retailer in growth mode, we are constantly evaluating what lies ahead for our customers and our business and continue to believe we are pursuing the right strategies to capture additional growth opportunities in an evolving retail landscape.

In closing, I am proud of the team's performance and our 2019 results, which demonstrates strong and disciplined execution across many fronts, including a multitude of complex projects.

And with the plans we have in place, including continued investment, we are excited about our ability to sustain this growth in 2020 and over the long term.

I want to offer my sincere thanks to each of our approximately 143,000 employees across the company for their hard work and dedication to fulfilling our mission of serving others.

As a team, we look forward to 2020, as we look to build on our strong performance from 2019.

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

(Operator Instructions) Our first question comes from Rupesh Parikh with Oppenheimer.

Congrats on another strong quarter.

So just with the coronavirus, just curious what you guys are seeing related to it in recent days?

And what type of changes in consumer behavior are you seeing in store currently?

Yes, Rupesh, we are, like probably other retailers, seeing a stock-up phenomenon happening over the last 1.5 weeks to 2 weeks, accelerated into this week a little bit more.

So we're continuing to watch that closely.

I'm really proud of our store teams with the additional volume, how they've taken care of our customers and our supply chain teams making sure that we have stock in the store for those customers that come in.

It is our hope, as we move through this, we're able to satisfy the customer need as they continue to shop with us.

We're watching it closely as well because like most stock-ups, there's always a backside to this.

So we're watching that as we continue to move through the next few weeks with the hope that this virus will diminish over time.

And obviously, we'll see the back end.

But we'll keep everybody posted as we move forward.

Our goal internally here, again, is to ensure we deliver for our core consumer.

Great.

And then one follow-up question.

So you guys, again, very positive commentary on some of the market share gains you're seeing.

Just given some of your initiatives with DG Fresh and the non-consumable initiatives, any shift in where you're seeing those share gains coming from versus recent quarters?

As you take a look at what we've been able to post in 2019 and, let's be honest, even in years prior, we're really taking share from across the board in many respects.

Obviously, DG Fresh has accelerated some of that -- those share gains coming from different disciplines as well that are out there.

But the great thing is that DG Fresh is scaling exactly where we thought it would.

Our teams have done a fabulous job.

As you can imagine, this is a very complex project to roll out.

But in true DG fashion, we're rolling that out at a very, very high level of execution.

So we're looking forward to additional gains in traffic and customer counts as we continue to scale that.

And then the NCI piece is another one that we're seeing some very good traction from on our non-consumable side.

We posted our best non-consumable sales last year that we've seen in the last 4 to 5 years, and a lot of it has to do with a lot of the work that the team has put in within our non-consumable initiative.

And the important thing here is scaling it very quickly up to 2,400 stores and soon to be 5,000 by year's end.

But the most important thing is we've been able to take the learnings from that and move it back to the entire chain so that we saw a great benefit as we move through 2019.

We expect the same in 2020.

Our next question comes from Matthew Boss with JPMorgan.

Congrats on a really nice quarter.

Todd, maybe to take a step back, can you talk to the current health of the low-income consumer, maybe what you're seeing in the competitive environment?

And just anything to consider in terms of the anticipated quarterly cadence of comps as we think about the progression of the year?

Sure.

As we see the core customer, as you know, we talk to her each and every quarter.

Leading into Q1, so coming out of Q4, our core customer was in really good shape and continues to be in good shape, probably not much -- not very different than what we saw her coming out of Q2 and into Q3.

Now, obviously, with the coronavirus setting in, we're watching that very carefully.

We'll be talking to our core consumers here in the next couple of weeks to understand exactly how she's feeling as she now moves through our Q1 and dealing with the coronavirus.

But I would tell you that everything was all systems go as far as we were concerned leading into this virus.

So we anticipate that our core consumer will be in pretty good shape.

And I think it really goes to show you the -- some of the stock-up sales that we've seen early on here, as I mentioned earlier, our core consumer is doing a lot of that, and she has the means to do it.

And I think that's an important note to take away is that in years past, she might not have had that luxury or that opportunity.

From an environment standpoint, I would tell you that the promotional environment is very, very stable, again, very much like we saw it all the way through 2019.

And we feel fabulous about where our everyday pricing is on the shelf.

We're in very, very good shape.

And again, probably some of the best that we've seen in -- really, since I've been here for over 11 years.

So we're in very, very good shape there.

So right now, we feel good about that customer, we're watching it closely.

And John, you may want to talk about the cadence.

Yes.

In terms of sales, I'll start by saying, we feel as good about this business as I've ever felt, I think Todd would agree.

The initiatives are firing on all cylinders.

So we expect strength throughout the year.

Now, obviously, there's some lapping differences.

As you move through the year, the lap gets a little tougher, Q3 in particular.

As Todd mentioned, Q1, obviously, over the last 2 weeks, we've seen the stock-up he mentioned.

But as he also mentioned, it remains to be seen whether that is just timing or whether that is permanent because we tend to see that average out over time.

So more to come on that.

But overall, anticipate a really strong year for sales and feel very good about the guidance provided.

Great.

And then just a follow-up, John, maybe on the gross margin.

Help us to think about some of the puts and takes to consider in 2020?

And any material difference between your first and second half of the year embedded gross margin assumptions?

Yes.

As you look at gross margin, I'll start by saying we're very pleased with where we're at right now, ending the year with 60 basis points expansion, 14 basis points of expansion in the year, coupled with strong comp in traffic growth.

As you look across the year, the things that helped Q4 we expect to continue.

The biggest driver in Q4 we've called out with higher initial markups, and DG Fresh was the biggest driver of that.

And as Todd mentioned, with DG Fresh and NCI, we're very pleased with what we're seeing there, and we continue to see those benefits grow as we move forward.

And NCI has that added benefit of helping the non-consumables across the system as we take the best ideas and implement them elsewhere and again, having the best year this year in non-consumables that we had in 4 or 5 years.

We see other opportunities to expand our gross margin.

We're very pleased with what we saw in private brands this quarter, with the actions we've put in place.

We're getting traction in direct and foreign sourcing, on supply chain as the market has stabilized.

We've done a lot of great work there to take advantage of that and driven efficiencies there.

In shrink, with the investment we made in the EAS units in the latter part of the year, adding 6,000 units.

As we hit those inventories later in the year, that should help.

And then, of course, you have just the great relationships we have with our vendors and the scale we have with our low SKU model count.

So when you put all these together, we feel good about our ability to enhance our gross margin over the long term.

There's a lot of levers here.

Now we always reserve the right to invest in price when appropriate to drive share.

But currently, we're in a great spot on price and happy with results.

So feel good about where we're at.

We'll make trade-offs throughout the year, as we mentioned.

We are investing some SG&A to drive gross margin, but feel that positions us very well, not only for this year, but to drive that double-digit EPS growth we strive for over the long term.

Our next question comes from Michael Lasser with UBS.

Todd, I know you don't have a ton of stores in the Pacific Northwest.

But if you look at areas that -- where the coronavirus is spreading more rapidly or in areas where you saw that initial stock-up take place, are you starting to see a slowdown in sales in those areas, either because consumers are engaging in social distancing, or because that's stockpiling just pulled forward some sales?

And as part of that, you have a unique customer base and a unique value proposition where you're feeding fill-in trips and you have a lot of rural locations.

So do you think your customer, given those characteristics, might just -- you'll be less exposed because your customer either needs your store more often or will engage in less social distancing because they live in rural areas?

Yes, Michael, thanks for the question.

As we look at what's transpired over the last couple of weeks, we've seen a pretty good balance of shopping acceleration across the 44 -- 45 states now that we operate in, and really not specific to the Pacific Northwest.

Now as you indicated, though, we are less exposed out there just because of really just growing that store count in California, Oregon and Washington, obviously.

So we're less exposed out there, but seeing the sales really across the board.

As far as the social distancing is concerned, I think it is key to point out, and it's not lost on us, obviously, that we're within 5 to 7 miles of the majority of the United States, over 75%, if you will.

We are in all these rural communities.

But I think the most important thing here is that we're a small-box shop close to your home.

And I think in times like this where people are probably less apt to travel, we believe that we'll get our fair share of that consumer base because they just don't want to travel to the big box or don't want to travel great distances.

So we're watching that very closely.

And I think that phenomenon, if play out, we'll be probably in the upcoming weeks as we see this virus continue to unfold.

Okay.

Then -- and Todd, I know you have a lot on your plate, if that wasn't enough, one of your competitors has recently talked about being more promotional.

So do you expect to respond to this with increased promotional activity?

And what are the chances that there could be an extended period of heightened promotions within the small-box value discount retail sector?

Yes, Michael, we watch all retailers, whether it's directly in our space or in the other areas of drug, grocery or mass retailing.

I would tell you, and we track it closely, as you can imagine, we don't see a great deal of promotional activity across the board.

There's always a skirmish here or there, if you will, in certain DMAs but that's always there, right?

And we're squarely focused on controlling what we can control.

And we feel we're in a great spot on everyday price, on our promotional cadence that we have out there, and we continue to distance ourselves from our nearest competitors.

And that's really what we're focused on.

And I think we're delivering on that.

Our next question comes from Simeon Gutman with Morgan Stanley.

My first question is on implied EBIT margins.

They look down a little bit in 2020.

Is that fair?

And can you walk through some of the puts and takes?

And bigger picture, I'm a little surprised given that DG Fresh is going to be accretive, that the overall EBIT margin is going to be down.

So we can talk about -- so can we talk about some of the puts and takes, please?

Yes.

I think when you look at the guidance provided on the top line and the bottom line guiding towards the approximately 10% EPS growth, I think that suggests a pretty healthy operating profit or EBIT growth on top of a very healthy one this year.

And I would say, what we're focused on right now is striking a healthy balance between the near-term and the long term.

We are investing in SG&A, investing a little bit SG&A to save more gross margin over time.

And as we said, Fresh and NCI are going to be accretive this year, but we continue to invest in these initiatives as they scale.

But again, we think that's the right trade-off for the long term.

And as we come into the year, it's the beginning of the year, there are some uncertainties.

You have the uncertainty around coronavirus, election cycle and what that may mean to the macros.

But as Todd has said, we believe we're very well positioned in that event -- unfortunate event of a downturn.

Delivering 30 straight years of consecutive same-store sales growth, I think, it just shows the resiliency of the model.

And I think we're very well positioned to serve our customers, as he mentioned.

So feel good about the guidance provided and feel we're striking a healthy balance between the near-term and the long term with our eye on continuing to deliver sustainable double-digit EPS growth over the long term.

And my follow-up is also on DG Fresh.

If you think about the gross margin drivers for 2020, you're probably not going to quantify it, but does it make sense that DG Fresh would be at the top of the list in terms of initial markups, like it was in the fourth?

And then now that you have a little bit more learnings from the initial rollout, can you help or comment on sizing the long-term EBIT margin opportunity from it?

Yes, I'll start by saying that you're correct in thinking that DG Fresh is the biggest -- as I mentioned, there's a lot of drivers to help gross margin, but DG Fresh is the biggest one to point to this year.

In terms of sizing that, I think a couple of data points we've provided is that it's about 8% of our business and it's a growing piece of our business.

And as mentioned, it was the leading driver of the leading item we called out in our gross margin expansion for the quarter.

So feel good about where we're at and feel good about what it can contribute, and not just on gross margins, but sales as well.

I think that's the other thing to point to is we see it as a sales driver as well.

As we remodel stores, add the coolers, that provides a very sizable sales bump.

And we think as we can improve the assortment, improve the in-stock, and as we said before, historically, our in-stock on the frozen refrigerated side of the business has lagged dry by 10 points.

There's a very strong correlation, as you know, between in-stock and sales.

And so we see that as a benefit as we close that gap as well as the ability to improve the assortment in the store, providing more Better For You options along with that, including produce.

We think, longer term, this is the unlock for produce.

So we think it pencils very well and is delivering exactly what we thought it would in terms of as we convert items in stores is delivering that sizable cost takeout that we targeted.

But longer term, we see it as a big sales driver, too.

Our next question comes from Christopher Mandeville with Jefferies.

John, just to kind of follow-up on the overall guidance here.

If I look at your comp guide of 2.5% to 3%, I could simply hold the 2-year or 3-year stack for that matter and come out above that range.

So I think you guys are talking about being in a position of strength and receiving momentum.

You've got 75 additional stores entering the comp base versus last year, additional cooler expansion, Fast Track and Fresh are already seeing improvements in on-shelf availability, and then you've got some near-term benefit from the coronavirus, so basically the consumables category.

Unless maybe we're missing something in terms of a temporary uplift in '19 from maybe competitive closures, can you just help us understand why we should only be looking for a 2.5% to 3% comp?

Well, I'll start by saying that we feel great where we're at right now, coming off a year with a 3.9% full year sales comp.

As we've said before, this model works very well with sales comps in the range of 2% to 4%.

We were at the high end of that.

Now obviously, as we come into the year, that's a tough lap, but I can tell you, as I said before, we feel as good as ever about the strength of the business model, the fundamentals and the initiatives.

But we also mentioned, there are some near-term uncertainties with what the coronavirus, election cycle may mean to macro impacts, but we're focused on controlling what we can control and delivering profitable sales growth and feel like we have great initiatives in place.

And with the guidance provided, we're comfortable with it, and it implies a quite healthy 2-year stack.

Okay.

And then I guess my follow-up would be as it relates to just operating expenses.

With the strategic initiatives, is there any way of framing up the start-up costs that we should expect in '20 versus '19?

And then just on distribution and freight, be it that they're in different line items, just given the notable decline in crude of late, is there any way of also kind of sizing up that potential benefit on the margin?

Sure.

I'll start with your question on SG&A.

And I think that's a fair comment that as we shift into scaling these, the cost shifts from start-up costs to ongoing operating costs.

And I think the perfect example of that is DG Fresh.

As we scale that, we have to continue to invest a little bit of labor in the stores to save a lot of product cost.

So it's a virtual -- it's a virtuous cycle as this grows, and it's accretive.

We expect it to be accretive this year and net benefit grows as we get more and more efficient.

You still do have some start-up costs and some inefficiencies as you start-up new DCs, as you remodel stores for NCI, as we work on digital.

But increasingly, it shifts more toward ongoing expenses, which I would really classify more as geography between gross margin savings and SG&A with gross margin exceeding -- gross margin savings continuing to pull away from the SG&A, providing more and more of a benefit as we move forward.

So I think that's the right way to think about that.

And it's a healthy trade-off.

In terms of distribution and transportation costs, there, too, is a little bit of geography.

If you look at our distribution costs, we called that out as a drag this quarter, not a significant one.

But really, the reason for that is as we incur additional costs, as we take over the cost of distributing fresh and frozen refrigerated goods.

But again, the product cost savings that comes out of that far exceeds the labor and the distribution costs.

So if you strip out the impact of taking that additional cost on, as a percent of sales year-over-year, our distribution and transportation costs were lower.

And what I would point to on that is several things.

The team has done a great job of expanding, diversifying our carrier base and as the market improved, has been able to take advantage of that with better rates.

We've also expanded our private fleet, and we'll continue to do so this year, primarily around the new Fresh DCs.

We just opened 2 new DCs, which helps the -- reduce the stem miles as well as other efforts to reduce stem miles, load optimization and warehouse efficiencies.

So when you strip out that extra cost that we're picking up, that net-net is favorable, the team is doing a great job to drive efficiencies on distribution and transportation.

Our next question comes from Paul Trussell with Deutsche Bank.

Great results.

A heck of the data report.

So let's maybe start with your real estate projects.

1,000 new stores, obviously, you've continued to have really good results out of the new boxes.

Maybe just touch a bit more on that.

And from your vantage point, how many years of additional 1,000 store openings do you kind of foresee?

And then on the remodel front, the majority of your remodels are going into that higher cooler count format.

How should we think about the opportunity there.

I think you mentioned about 3,500 by year-end.

What's the runway?

Yes, sure, Paul.

Yes, we feel very good about our real estate program.

It is one of Dollar General's core strengths, and we continue to execute at a very, very high level.

As you indicated, we're very pleased with the results we saw in 2019, and it was just another year of adding on to great results, even from past years.

We still see an opportunity to -- in the Continental United States to put a Dollar General in about 12,000 locations.

And so there's still a lot of runway there.

DG Fresh, honestly, opens up some runway for us as well because of being able to scale our cooler counts and associated product sales, including produce, so it opens it up.

And we, with all the metrics that we follow on our new stores, continue to run at a very, very high rate on the top of what we see as far as a return of 20% to 22%.

So again, very, very strong, and we see that 2020 should be the same.

And we've come out of the shoot very strong in the early days here.

As it relates to the higher cooler count, this is, again, just a continuation of how we see coolers and the associated sales with that.

As I've mentioned before, and I still truly believe, we're still somewhere in that fifth inning of a 9-inning ballgame on cooler counts and be able to really leverage that.

And again, DG Fresh will be a big, big unlock as we continue to roll that out.

These higher-capacity coolers can contain and will contain 25% more items and it holds, in totality, 44% more product.

So the holding power is greater and reduces out of stocks, which increases sales.

So again, we're very, very happy with our decisions to move to that, and I believe you'll start to see those benefits in 2020 and beyond.

So again, very, very happy.

The team has done a great job in executing and we see the same as we go into '20 here.

My follow-up is just on the Pickup test.

How is that working so far in the, I believe you mentioned 30 stores, that it's being tested in?

What are you looking for from a metric standpoint?

And when you say can scale quickly, what does that potentially equate to?

Sure.

Well, again, early days, Paul.

30 stores up and running.

But the great thing here is, our IT team and our operating teams collectively stood this up in less than 1 year.

And the app is very, very intuitive.

It's great.

I use the app myself, and I've seen others -- other competitors that have the app.

And I would tell you that ours is as good, if not better, than most of those.

Early on, we're seeing about what we thought we would see.

We're seeing some conversion from existing customers, but probably some new customers as well.

The great thing is our repeat customer, based on this, is at a very high level, much higher than we thought.

So that's a very good sign that, one, she enjoyed the experience; and two, in some of these newer customers, we're getting repeat newer customers as well.

So we're going to continue to monitor that very closely.

We think that's one of the key metrics, are we actually attracting a new customer overall?

And so we'll watch that as we go.

A couple of points just to think about here is the average items, as running about 7 to 8 to 9 items, somewhere in there, which is not too dissimilar to what a full checkout experience average is for our core consumer.

And the dollar amount is running about $3 to $5 more, depending on the transaction than our normal.

So again, we're a fill-in, as we've always mentioned, and she's using this DG Pickup, at least so far early on in 30 stores, as additional fill-in.

Now as it relates to scaling.

We've said this before, we're going to take this slow.

But if our consumers continue to resonate the way they have, we're going to be able to turn the dial up as quickly as we believe we should to scale this appropriately with the appropriate return against it.

But we're only going to go as fast as the consumer wants us to go, and also only as fast as our execution levels will allow us.

We're very disciplined along those lines and we'll continue to be.

But the great thing here is, we believe, is a real competitive advantage for us, especially in our channel.

Our final question will come from Karen Short with Barclays Bank.

Just one clarification.

I know this has kind of been asked in various different ways, but I just want to be clear.

You do believe that the gross margin benefit from all these initiatives will build throughout the year, correct?

But the idea is we have to keep in mind, SG&A will also be a little elevated, leading to the slightly negative EBIT margins.

Is that the right way to think about it?

Karen, that is the right way to think about that.

As we scale these, we see the benefit of DG Fresh, NCI continue to grow.

But again, that is partly as you have the investment cost associated with that.

But it continues to be more and more accretive as you move forward and you reach scale.

Okay.

And then so switching to the virus.

I mean obviously, every day is a new day.

But it does seem likely we'll be in a much weaker macro for potentially several quarters.

Could you maybe discuss how -- I mean, obviously, you are very resilient as a box.

And -- but can you maybe discuss how you might perform in a weaker macro today, and how it might differ from '08, '09?

I'd say in the context of comps, especially because I think there are many investors who are using '08, '09 as a proxy for how you might be comping in a weaker macro, and I think there's maybe a few issues with that as it relates to the comparability.

So anything you could talk to you on that?

Sure.

Obviously, we're watching the virus, as I mentioned earlier, very closely.

And if it does lead to a weaker macro environment, we feel we're very well positioned to capture those opportunities as they come.

As it relates to 2008 and '09 compared to today, well, we're a much different shop today than we were.

In '08 and '09, we were fixing the railroad, raising our gondola heights, doubling our SKU count, a lot of different things that drove those comps, probably to a little bit more of an outstretched comp than what you might see in a downturn in today's environment.

But in saying that, we still believe very strongly that we're well positioned in a downturn from the product offering that we have as well as the customer that we serve.

And also, we know from '08, '09, which we don't believe this will change is that trade-down customer will come into the box as well.

And the great thing about that is maybe she visited us back in '08 and '09, and some, obviously, may not have come back.

When she comes back, she's going to see a completely different box that's even more enhanced than she saw before.

So we'll watch it carefully, but we think we're well positioned as we move forward here.

Okay.

And then just my last question is, can you just give an update on the comp waterfall from new units and remodels.

Is it still kind of the 200 to 250 in range?

Or is it -- maybe just an update there?

Yes.

Just to clarify, what we've said is actually 150 to 200.

Now that is net of cannibalization, which has been very consistent as expected.

And so as you think about that 150 to 200 basis point range, we have been running at the high end of that as we've seen, not only great results from the stepped-up new units, but just see -- continue to see great results from the remodels, particularly where we have the extra cooler count presence.

So towards the high end of the 150 to 200 is the way to think about that.

This concludes today's conference.

You may disconnect your lines at this time, and we thank you for your participation.