Dollar General Corp

NYSE:DG

Earnings Call Transcript 2021-Q1

[Operator]

Good morning. My name is Mellissa. And I will be your conference operator today. At this time, I would like to welcome everyone to the Dollar General First Quarter 2021 Earnings Call. Today is Thursday, May 27, 2021.

All lines have been placed on mute to prevent any background noise. This call is being recorded. Instructions for listening to the replay of the call are available in the company’s earnings press release issued this morning.

I now like to turn the conference over to Mr. Donny Lau, Vice President of Investor Relations & Corporate Strategy. Mr. Lau, please begin.

[Donny Lau, VP, IR & Corporate Strategy]

Thank you. 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 & 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, priorities, opportunities, investments, guidance, expectations, or beliefs about future matters and other statements that are not limited to historical fact.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections, including but not limited to those identified in our earnings release issued this morning under Risk Factors in our 2020 Form 10-K filed on March 19, 2021, and in the comments that are made on this call.

You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call, unless required by law.

We also may reference certain financial measures that have not been derived in accordance with GAAP. 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 & Events.

At the end of our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one follow-up question, if necessary.

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

[Todd Vasos, CEO]

Thank you, Donny, and welcome to everyone joining our call. We are pleased with our strong start to fiscal 2021. And I want to thank our associates for their unwavering commitment to supporting our customers, communities and each other.

As a testament to their efforts, our first quarter results exceeded our expectations, reflecting strong underlying performance across the business, which we believe was enhanced by the most recent round of government stimulus payments. The quarter was highlighted by net sales growth of 16% in our combined non-consumable categories, a 208 basis point increase in gross margin right and double-digit growth in diluted EPS.

Despite what continues to be a challenging operating environment, we are increasing our sales and diluted EPS guidance for fiscal 2021, to reflect our strong first quarter performance. John will provide additional details on our outlook during his remarks.

As always, the health and safety of our employees and customers continue to be a top priority while meeting the critical needs of the communities we serve. And we believe we are uniquely positioned to continue supporting our customers through our unique combination of value and convenience, including our network of more than 17,000 stores located within five miles of approximately 75% of the U.S. population.

Overall, we are executing well against our operating priorities and strategic initiatives as we continue to meet the evolving needs of our customers and further positioned Dollar General for long-term sustainable growth.

Now let's recap some of the top line results for the first quarter. As we lapped our most difficult quarterly comp sales comparison of the year, net sales decreased 0.6% to $8.4 billion, driven by a comp sales decline of 4.6%.Notably, comp sales on a two-year stack basis increased a robust 17.1% which compares to the 15.9% two-year stack we delivered last quarter.

Our first quarter sales results include a decline in customer traffic, which was partially offset by growth in average basket size. And while customers continue to consolidate trips on average, they continue to spend more with us compared to last year.

From a monthly cadence perspective, comp sales increased 5.7% in February, despite a headwind from inclement weather across the country. For the month of March, which represents our most difficult monthly sales comparison of the year, comp sales declined 11.2%.

Importantly beginning in mid-March, and in-line with the timing of stimulus payments, we saw a meaningful acceleration in sales relative to the first two weeks of the month, especially in our non-consumable categories. Comp sales declined 4.3% in April, and while year-over-year growth in non-consumable sales moderated in comparison to March. They were positive overall despite a more challenging lap.

Overall, each of our three non-consumable categories delivered a comp sales increased for the quarter. Of note, comp sales growth of 11.3% in our combined non-consumable categories and 29.8% on a comparable two-year stack basis significantly exceeded our expectations. And speaks to the continued strength and sustained momentum in these product categories, enhanced by the benefit from stimulus. Once again this quarter, we increased our market share in highly consumable product sales, as measured by syndicated data.

Importantly, we continue to be encouraged by the retention rates of new customers acquired over the past several quarters. And are working hard to drive even higher levels of engagement, with more personalized marketing and continued execution of our key initiatives.

In addition, we recently published our third Annual Serving Others Report, which provides context related to our ongoing ESG efforts as well as new and updated performance metrics. And we look forward to continued progress on our journey as we move ahead.

Collectively, our first quarter results reflect strong and disciplined execution across many fronts. And further validate our belief that we are pursuing the right strategies to enable sustainable growth, while creating meaningful long-term shareholder value.

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

As a mature retailer and growth mode, we are also laying the groundwork for future initiatives, which we believe will unlock even more growth opportunities as we move forward. In short, I feel very good about the underlying business. And we are excited about the opportunities that lie ahead.

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

[John Garratt, CFO]

Thank you, Todd. And good morning, everyone. Now that Todd has taken you through a few highlights of the quarter, let me take you through some of its important financial details. Unless we specifically note otherwise, all comparisons are year-over-year. All references to EPS refer to the diluted earnings per share. And all years note refer to the corresponding fiscal year.

As Todd already discussed sales, I will start with gross profit, which we believe was positively impacted in the quarter by a significant benefit to sales, particularly in our non-consumers categories from the most recent round of government stimulus payments.

Gross profit as a percentage of sales was 32.8% in the first quarter. As Todd noted, this was an increase of 208 basis points and represents our eighth consecutive quarter of year-over-year gross margin rate expansion.

This increase was primarily attributable to higher initial markups on inventory purchases, a reduction in markdowns as a percentage of sales, a greater proportion of sales coming from our non-consumers categories, and a reduction in shrink as a percentage of sales. These factors were partially offset by increased transportation costs, which were primarily driven by higher rates.

SG&A as a percentage of sales was 22%, an increase of 152 basis points. This increase was driven by expenses that were greater as a percentage of net sales. The most significant of which were store occupancy costs, disaster expenses related to winter storm Uri, retail labor and depreciation amortization.

Moving down the income statement. Operating profit for the first quarter increased 4.9% to $908.9 million. As a percentage of sales, operating profit was 10.8% an increase of 56 basis points. Our effective tax rate for the quarter was 22% and compares to 22.2% in the first quarter last year. Finally, EPS for the first quarter increased 10.2% to $2.82, which reflects a compound annual growth rate of 38% over two-year period.

Turning now to our balance sheet and cash flow, which remained strong and provide us the financial flexibility to continue investing for the long-term, while delivering significant returns to shareholders. Merchandise inventories were $5.1 billion at the end of the first quarter, an increase of 24.2% overall, and a 17.6% increase on a per store basis, as we cycled a 5.5% decline in inventory on a per store basis, driven by extremely strong sales volumes in Q1 2020.

In anticipation of a more challenging supply environment, we strategically pulled forward certain inventory purchases during the quarter, particularly in select non-consumable categories to better support the sales momentum we were seeing in the business. And while a lot of stocks remain higher than we would like for certain high demand products, we continue to make good progress with improving our in-stock position and are pleased with the overall quality of our inventory.

The business generated significant cash flow from operations during the quarter, totaling $703 million, a decrease of 60%, but which reflects a compound annual growth rate of 11% over a two-year period. This decrease is primarily driven by higher levels of inventory as a result of improving inventory positions, including the pull forward of certain inventory purchases I mentioned earlier.

Total capital expenditures for the quarter were $278 million and included our planned investments in new stores, remodels and relocations, distribution, transportation projects and spending related to our strategic initiatives.

During quarter, we repurchased 5 million shares of our common stock for $1 billion. And paid a quarterly cash dividend of $0.42 per common share outstanding at a total cost of $100 million.

At the end of Q1, the remaining share repurchase authorization was $1.7 million. Our capital allocation priorities continue to serve as well and remain unchanged. 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 three times adjusted debt-to-EBITDA.

Moving to an update on our financial outlook for fiscal 2021. We continue to operate in a time of uncertainty regarding the severity and duration of the COVID-19 pandemic, including its impact on the economy consumer behavior in our business. Despite continued uncertainty as Todd mentioned, we are increasing our full year guidance for sales and EPS due to our strong q1 outperformance which we believe was aided by the latest round of stimulus.

For 2021, we now expect the following: net sales in the range of a 1% decline to an increase of 1%; a same store sales decline of 5% to 3%, but which reflects growth of approximately 11% to 13% on a two-year stack basis.

And EPS in the range of $9.50 to $10.20, which reflects a compound annual growth rate in the range of approximately 20% to 24%, or in the range of approximately 19 to 23% compared to the 2019 adjusted diluted EPS over a two-year period, which is well above our long-term goal of delivering at least 10% annual EPS growth on an adjusted basis. Our EPS guidance continues to assume an effective tax rate in the range of 22% 23%.

With regards to share repurchases, we now expect to repurchase approximately $2.2 billion of our common stock this year, compared to our previous expectation of about $1.8 billion.

Finally, our 2021 outlook for capital spending and real estate projects remains unchanged from what we stated in our Q4 2020 earnings release on March 18 2021.

Let me now provide some additional context as it relates to our full year outlook. First, there could be additional headwinds and tailwind this year. The timing degree and potential impacts on our business of which are currently unclear, including but not limited to the potential impacts from legislation and regulatory agency actions.

Given the unusual situation, I will now elaborate on our comp sales trends thus far in May. From the end of Q1 through May 23, comp sales declined by approximately 7% as we continue to cycle extremely difficult prior year comparisons. As a reminder comp sales growth for the month of May in 2020 was 21.5% percent.

And while we are nonetheless encouraged with our sales trends, we remain cautious in our 2021 sales outlook, given the continued uncertainty that still exists, the unique comparisons against last year in the anticipation of fading tailwind from the most recent round of government stimulus. That said as you think about the comp sales cadence of 2021, we continue to expect our performance to be better in the second half, given a more difficult comp sales comparison in the first half.

Turning to gross margin. As a reminder, gross margin in 2020 benefited from a favorable sales mix and a reduction in markdowns. Including the benefit of higher sell through rates in more clearance sensitive non-consumables categories.

As we move through 2021, we expect pressure and our gross margin rate as we anticipate a less favorable sales mix, an increase in markdown rates as we cycle abnormally low levels we saw in 2020, and higher fuel and transportation costs. Also, please keep in mind, the second and third quarters represent our most challenging laps of the year from a gross margin rate perspective, following improvements of 167 basis points in Q2 2020 and 178 basis points in Q3 2020.

With regards to SG&A. While we continue to expect ongoing expenses related to the pandemic in 2021. Overall, we currently anticipate a significant reduction in COVID-19 related costs compared to the prior year.

Additionally, we continue to expect about $60 million to $70 million incremental year-over-year investments in our strategic initiatives this year, as we further their rollouts. This amount includes approximately $23 million dollars in incremental investments made during the first quarter.

However, in aggregate, we continue to expect our strategic initiatives will positively contribute to operating profit and margin in 2021. Driven by NCI and DG Fresh as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense.

In closing, we are very proud of the team's execution performance, which resulted in another quarter of exceptional results. 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 derive 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.

[Jeff Owen, COO]

Thank you, Jeff. Let me take the next few minutes to update you on our operating priorities and strategic initiatives.

Our first operating priority is driving profitable sales growth. We are off to a great start to the year and as our team continues to drive strong execution across our portfolio of growth initiatives. Let me take you through some of the more recent highlights.

Starting with our non-consumables initiative, or NCI. As a reminder, NCI consists of a new and expanded product offering in key non-consumable categories. The NCI offering was available in over 7300 stores at the end of Q1. And we remain on track to expand this offering to a total of more than 11,000 stores by year-end, including over 2100 stores and our light version, which incorporates a vast majority of the NCI assortment, but through a more streamlined approach.

We're especially pleased with the strong sales and margin performance we continue to see across our NCI product categories. Notably, this performance is contributing to an incremental comp sales increase in non-consumable sales of 8% in our NCI stores. And 3% in our NCI like stores as compared to stores without the NCI offering.

Given our strong performance to-date, coupled with the added flexibility of a more streamlined approach. Our plans now include completing the rollout of NCI across nearly all of the chain by year-end 2022.

Moving to our newest concept pOpshelf, which further builds on our success and learnings with NCI. pOpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience, delivered through continually refreshed merchandise, a differentiated in-store experience and exceptional value with the vast majority of our items priced at $5 or less.

During the quarter, we opened three new pOpshelf locations, bringing the total number of stores to eight. And while still early, we continue to be very pleased with the initial results, which have far exceeded our expectations for both sales and gross margin.

In fact, year one annualized sales volumes for our first eight locations are trending between $1.7 million and $2 million per store, with an average gross margin rate of about 40% which we expect will climb as we continue to scale this exciting initiative. As a reminder, this compares to year one sales volumes of about $1.4 million for traditional Dollar General Store and a gross margin rate of about 32% for the overall chain in 2020.

For 2021, we remain on track to have a total of up to 50 pOpshelf locations by year-end, as well as up to an additional 25 store within a store concepts, which incorporates a smaller footprint pOpshelf shop into one of our larger format Dollar General Market stores.

Importantly, we currently estimate there are about 3000 pOpshelf store opportunities potentially available in the Continental United States. And when combined with pOpshelf compelling unit economics, we remain very excited about the significant and incremental growth opportunities we see available for this unique and differentiated concept.

Turning now to DG Fresh, which is a strategic multi-phase shift to self-distribution of frozen and refrigerated products. The primary objective of DG Fresh is to reduce product costs on these items. And we continue to be very pleased with the savings we are seeing.

In fact, DG Fresh continues to be the largest contributor to the gross margin benefit, we are realizing from higher initial markups on inventory purchases. And we expect this benefit to grow as we continue to optimize our network and further leverage our scale.

Another important goal of DG Fresh is to increase sales in these categories. And we were pleased with the success we are seeing on this front, driven by higher overall in-stock levels and the continued rollout of additional products, including both national and private brands.

In total, at the end of Q1, we were delivering to more than 17,000 stores from 10 facilities. And now expect to complete our initial rollout across the chain by the end of Q2, which is ahead of our previous expectation of year-end as communicated on our Q4 call.

Moving to our cooler expansion program, which continues to be our most impactful merchandising initiatives. During the quarter, we added nearly 18,000 cooler doors across our store base. And are on track to install approximately 65,000 cooler doors this year.

Notably, the majority of these doors will be in high capacity coolers, creating additional opportunities to drive higher on-shelf availability. And deliver an even wider product selection. All enabled by DG Fresh.

In addition to the gross margin benefits associated with NCI and DG Fresh, we continue to pursue other gross margin enhancing opportunities, including improvements in private brand sales, global sourcing, supply chain efficiencies, and shrink.

Our second priority is capturing growth opportunities. Our proven high return, low-risk real estate model continues to be a core strength of our business. In the first quarter, we completed a total of 836 real estate projects, including 260 new stores, 543 remodels and 33 relocations. In addition, we now have produce in more than 1300 stores.

For 2021, we remain on track to open 1050 new stores, remodel 1750 stores and relocate 100 stores, representing 2900 real estate projects in total. We also now plan to add produce in more than 1000 stores, which compares to our previous expectation of approximately 700 stores.

As a reminder, we recently made key changes to our development strategy, including establishing two of our larger footprint format, which each comprise about 8500 square feet of selling space as our base prototypes for nearly all new stores going forward.

With about 1200 square feet of additional selling space compared to a traditional store. These larger formats allow for expanded high capacity, cooler counts, and extended queue line and a broader product assortment, including NCI, a larger health and beauty section with about 30% more feet of selling space and produce in select stores.

We're especially pleased with the sales productivity of these larger formats, as average sales per square foot are currently trending about 15% above an average traditional store which bodes well for the future as we look to grow these unit counts in the years ahead.

In total, we expect more than 550 of our real estate projects this year will be in these formats. As we look to further enhance our value and convenience proposition while driving additional growth.

Next, our digital initiative, which is an important complement to our brick and mortar footprint, as we continue to deploy and leverage technology to further enhance convenience, and access for customers. One such example is contactless payment, which is now available in the vast majority of the chain, further extending our convenience proposition, particularly for those seeking a more contactless shopping experience.

Overall, our strategy consists of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience. And we are pleased with the growing engagement we're seeing across our digital properties.

Going forward, our plans include providing more relevant, meaningful and personalized offerings, with the goal of driving even higher levels of digital engagement, and customer loyalty.

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 the customer at the center of all we do while reinforcing our cost control mindset.

Our Fast Track initiative is a great example of this approach, where our goals include increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability. We continue to be pleased with the labor productivity improvements we are seeing as a result of our efforts around both rolltainer and case pack optimization, which have led to the more efficient stocking of our stores.

The second component of Fast Track is self-checkout, which provides customers with another flexible and convenient checkout solution, while also driving greater efficiencies for our store associates.

Self-checkout was available in more than 3400 stores at the end of Q1, which represents more than double the store count at the end of Q4. And we are pleased with our results, including customer adoption rates, as well as positive feedback both from customers and employees.

Our plans consist of a broader rollout this year. And we are focused on introducing this offering into the vast majority of our stores by the end of 2022 as we look to further enhance our convenience proposition, while extending our position as an innovative leader in small box discount retail.

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 investing in our diverse teams through development, empowerment and inclusion. As a growing retailer, we continue to create new jobs in the communities we serve. And for those associates already on our team, this growth is resulting in numerous opportunities for career advancement.

In fact more than 12,000 of our current store managers are internal promotes, and we continue to pursue innovative opportunities to further develop our teams. Including our recent announcement to partner with a leading training provider to deliver more personalized training solutions to our employees. Importantly, we believe these efforts continue to yield positive results across our organization. And are important driver of our consistent and strong execution.

At the store level, we continue to be pleased with our robust internal promotion pipeline and store manager turnover which continues to trend below historic levels. We believe the opportunity to start and develop a career with a growing and purpose-driven company is a unique competitive advantage. And remains our greatest currency and attracting and retaining talent.

Overall, we continue to make great progress against our operating priorities and strategic initiatives. And we are confident in our plans to drive long-term sustainable growth while creating meaningful value for our shareholders.

In closing, I am proud of our team's performance. And we are pleased with our strong first quarter results which further demonstrate that our unique combination of value and convenience continues to resonate with customers and positions as well going forward.

I want to offer my sincere thanks to each of our approximately 157,000 employees across the company for their hard work and dedication to fulfilling our mission of serving others.

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

[Operator]

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from a line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

[Simeon Gutman, Morgan Stanley]

Hey, good morning, everyone. My first question is on the business. Look, maybe a year later, or one year after this COVID started, can you talk about the traffic? I know the rural store bases across retail seem to do well? Can you talk about how you're doing on the lap? And then anything changing in the basket that you're seeing in these, whether you're doing well and still in the consumables or how the basket may be evolving?

[Todd Vasos, CEO]

Yeah, Simeon. It’s Todd, thanks for the question. Yeah, we're very happy with what we're seeing now a year out of the pandemic, or again, lapping the pandemic maybe the better term.

When you when you look at it, what we've seen is those customers that we were able to bring in during the COVID crisis or the heat of it. We have retained a very large portion better than what we had anticipated doing. As you may recall, we launched a very aggressive -- back in that August-September timeframe, an aggressive campaign to not only retain, but keep her engaged at Dollar General. And that seems to be working very, very nicely.

But as we've indicated in the past, when we see that our core consumer has more money to spend, and stimulus has given her some of that tailwind, if you will. What she tends to do is contract on the number of visits, but spends a lot more. And that's exactly what we saw. We saw our basket size increased very nicely with our core consumer as well as with these trade-in consumers that we saw during the heat of the battle of COVID that we've been able to retain.

So it really sets us up nicely as we continue to move through this year. We feel very good about what we're seeing. And, we're staying squarely focused on what we can control here. And that's driving profitable sales growth.

[Todd Vasos, CEO]

And the two-year stack, I think if the math right, if I heard the numbers, right. I think it's running now 14 in May, if that's right. And what are the puts and takes to that? I think there's a little more stimulus coming. Do you think this could be the run-rate that you can hold going forward?

[John Garratt, CFO]

Yeah, in terms of -- you're right, in terms of the stack in terms of the case. If you look at the cadence of the quarter, it picked up nicely with the onset of the stimulus, where we're very well positioned to get more than our fair share. That you did see sequentially on a two-year stack basis, it moderating somewhat, but remained very strong. And very strong across the board when you look at two year stacks, both on the non-consumables, as well as the consumables.

But particularly when you look at the non-consumable, just a fantastic two-year stack, as we shared. And I think that really speaks to the strength of what we've done with the initiatives on both the consumer side of the business to provide that forward fill-in trip grocery shop, as well as on the non-consumable side to get a fair share of these folks coming in as we take share from specialty retailers.

We look ahead. The laps get actually easier in the back half of the year, from a comp standpoint. But we just feel fantastic about the fundamentals of the business.

[Simeon Gutman, Morgan Stanley]

Thank you. Good luck.

[Operator]

Thank you. Our next question comes from line of Matthew Boss with JPMorgan. Please proceed with your question.

[Matthew Boss, JPMorgan]

Great, thanks. And congrats on the performance.

[Todd Vasos, CEO]

Thank you.

[Matthew Boss, JPMorgan]

So Todd, maybe just take a step back. Could you speak to new customer acquisition that you're seeing and market share that you see driving the performance continuing? And maybe, on that taking a step back? How would you compare what you're seeing today, to maybe the time at which we were exiting the financial crisis as we think about customer acquisition, new household shopping Dollar General?

And then if you were to rank, where do you see market share opportunities by category from here?

[Todd Vasos, CEO]

Matt, I'll try to leave all that in. But I would tell you that, we're very happy with what we see on that customer acquisition side.

Let me try to go to one part of your question that is financial crisis coming out of that compared to what we are seeing now, on the backside of COVID. A very similar from the standpoint that that consumer is still very engaged. I think the biggest difference here is the amount of stimulus that is in the system right now.

So our core shopper continues to be, have a lot more money than she normally would. And she's spending a great deal of that with us, which is great to see. And I think the other side of the equation is that that trade-in shopper is financially doing pretty well, as the economy opens back up. As we can see, it's opening up in a very robust manner.

And I think the difference of ’08 and now is that that consumer has more money to spend. And the great thing is she continues to come back to Dollar General, that higher income shopper and shop with us. And that's exactly what we saw in ’08, but in ‘08, she didn't have a lot of money. This time she is -- she does have money, but still continues to shop.

So I think that just speaks to the relevancy that we've built in this box, since that ’08 crisis. This box as you know, has transformed tremendously since then. So, we feel good about those trends and our core shopper trends.

As it relates to market share, we're seeing gains across the board. Drug continues to be our number one donor share, grocery is donating as well. As I think consumers start to go back to some normal shopping patterns, as relates to food at home. And we're seeing those come back to Dollar General in a nice way.

And then, even in our own space, we're taking share, which is great to see. So, it's really across the board. And I think it's a real testament to the initiatives that we put in place years ago. This isn't, just because it COVID, this underlying business, as I've said before, is as strong as I've ever seen it.

[Matthew Boss, JPMorgan]

Todd, maybe as a follow up to that. What inning would you characterize those key initiatives? If we think about DG Fresh NCI, private label. I think you have a laundry list that you've walked through. But what inning would you characterize, overall, these initiatives as we think going forward,

[Todd Vasos, CEO]

You heard Jeff's prepared remarks. But if I step back and take a look at NCI as an example. We'll be completely rolled out by the end of ‘22. So I would tell you, we're probably halfway through the game as we go through this year and then in the next, which feels really good.

In our cooler initiative, and DG Fresh just in general, I would tell you that we're in the -- we're still in the fourth inning, maybe closer to the bottom of the fourth inning but still in the fourth inning. We've got a lot of runway ahead of us there. And that's been the largest contributor on our initiative side that we've seen both on the top-line and bottom line. And the great thing is, is that we've got a lot of runway yet to go there.

POpshelf, I mean, we're just coming up to bat. We're really happy with what we're seeing there. And we supplied a little more color. Hopefully it was helpful. What we're seeing early on in our sales and margin coming out of there. And we're very, very encouraged there.

And I would tell you, as you know, Dollar General pretty well. As we start to see more evidence that this is a very good initiative, we can go very quickly. So stay tuned on that.

And, our digital side, this will be an ongoing initiative. But I would tell you, we're in the infancy stages, very early innings on our initiatives there in and around digital. So a tremendous amount of opportunity, both top-line and bottom line because these initiatives are aimed at both. And that's -- I think that the important aspect here is that we're controlling every line of that P&L.

[Matthew Boss, JPMorgan]

Great. Sounds like a lot of all still to play. Best of luck.

[Todd Vasos, CEO]

Absolutely.

[Operator]

Thank you. Our next question comes from line of Karen Short with Barclays. Please proceed with your question.

[Karen Short, Barclays]

Hi, thanks very much. I wanted to see if you could give a little color in terms of the May sales trends with respect to discretionary versus consumables? And I do have a question related to how you answer that from a bigger picture perspective.

[John Garratt, CFO]

Yeah, so if you look at May. We gave the May 23 comp sales were down 7%. But obviously, as we mentioned, the pretty strong two-year stack in the 14. There was a question also in terms of the debt -- month-to-date different from the full month and it didn't change much at all.

So strong performance continued. And we saw continued strength in our non-consumables, but also the consumables when you look at a two-year stack. So very strong performance on both sides of the box.

[Karen Short, Barclays]

Okay. So just the bigger picture, when I look at your mix in discretionary, you're up almost 200 basis points. Well, 200 basis points since 2018, in terms of mix shift and discretionary. And I guess, when you look at your overall gross margins, it seems -- and you talked to the fact that there were a significant opportunity on the gross margin front.

So I guess I'm wondering is looking maybe a year or two out what do you think the discretionary mix can be within your sales? And then how should we think about gross margins as we look into 2022? I mean, I realized ‘21 has some very tough comparison than 2022.

[Todd Vasos, CEO]

Karen, I think as you look at the non-consumables business, obviously there are some tailwind that you got from -- during the pandemic and from the stimulus. But I would just point to the ongoing strength that we've shown there. We've delivered comp growth in non-consumables for 12 consecutive quarters.

And I think that just really speaks to the relevance we've put into that piece of the box. And as you continue to see the share, we're taking how are outperforming others. We have noted that the lap does get tougher as we get into Q2. Your lapping sales growth in the non-consumables category of 40.8% last year, that's a tough lap, puts pressure on that. But I would tell you, we feel great about the non-consumables business as we look forward.

And as we continue to scale that, almost doubling that this year. And then taking the best of the best from that importing that across the chain. And then taking the learnings from that and putting that into pOpshelf. And then cross-pollinating the best ideas between the two. We feel fantastic about that business.

[Karen Short, Barclays]

Any thoughts on how -- what would be a normalized or not normalized, but how that -- how we should think about gross margins going into 2022?

[John Garratt, CFO]

Yeah, obviously, we're not giving ‘22 guidance just yet. But what I tell you this. As you look at the performance in gross margin, we've delivered eight consecutive quarters of gross margin growth of 208 basis points this quarter, lapping49 basis points this quarter last year.

And when you look at the drivers of that, again, there were some tailwind from non-consumables from the stimulus. But when you look at the drivers, it's the strategic initiatives driving that. The top three, we've been talking about these top three for several quarters now is higher initial markups, that DG Fresh drive in that. And that is the gift that keeps on giving, as we scale that complete that across the chain and then drive efficiencies in that.

The next two we talked about were lower markdowns, and the mixed benefit. And again, you got some extra tailwind from the stimulus. But it's not consoles driving that. And that's been a consistent driver for some time now.

And then you look at shrink. Shrink was another benefit. Now, as you look at the near term, as I mentioned, we hit a very difficult lap around non-consumables with pressure that year-over-year mix. Even though we feel great about the non-consumables. And then as others have talked about it, we do see pressures this year associated with transportation costs. But we do believe that's more of a near term pressure, not something structural that will last forever.

And so as we push through those two pressure points, we feel good about what we've been doing in terms of driving gross margin, operating margin expansion. And our ability to keep doing so, not only with these strategic initiatives I mentioned. But then all the other drivers we talked about. Not just shrink, but private brand penetration for in-sourcing penetration, supply chain efficiencies, we continue to drive to mitigate the pressures that others are seeing, and so it's not as impactful to us.

And then we always talk about our buying power. And then last but not least, we will invest in price if needed, if warranted. But I can tell you, we feel like we're in a great pricing position right now and don't see the need to. So we feel good about our ability to drive it higher over time, both gross margin and operating margin overall.

[Karen Short, Barclays]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Edward Kelly with Wells Fargo. Please proceed with your question.

[Edward Kelly, Wells Fargo]

Yeah. Hi, guys, good morning. Nice quarter. Maybe first one turns out to be a little bit of a follow up now. But as it relates to product costs inflation, can you just talk about what you are seeing and what you're expecting from a product cost inflation standpoint, especially in consumables?

And then what are your expectations for pass through? And to what extent are you in the driver's seat? To what extent do you kind of need to follow what Walmart does? Are you seeing anything out there to suggest that you wouldn't be able to pass through higher product costs inflation, if that happens?

[Jeff Owen, COO]

Hi, Ed. This is Jeff, thanks for the question. Certainly on the product cost, the first part of that question. What I would tell you is that our merchants have done a fantastic job of partnering with our suppliers. And, this is where the model of Dollar General really performs well, in the sense that our scale and our limited skew assortment allows us the opportunity to really find innovative ways to protect that underserved customer. And certainly, find ways that we can mitigate the cost pressures.

But certainly, as many retailers have talked about, we have seen that. But again, real pleased with our pricing position. We feel really good about where we are. We talked about this before. We've made some strategic decisions last year to get in some of the best pricing position we've been in.

And so feel good about where we are. We'll continue to fight for that customer every day. As you know, here at Dollar General price and value are so important to her. And we're here to serve her.

So I'm real pleased with where they are. We'll continue to monitor that. But feel good about the team's performance to date on that front.

[Edward Kelly, Wells Fargo]

Okay, and then just one on labor cost here. Can you just provide some color on what you're seeing out there? I mean, obviously, a lot of companies that talked about challenges. You grow a lot. You're adding a lot of employees? Has it caused you to rethink wage levels at all? Do you see this as transitory? Just how do we think about the pressure there and how that's changing?

[Jeff Owen, COO]

Ed, we have seen some pressure, as many retailers have said. But you know what, I'm so proud of what our team has done to respond. And certainly, in April we announced our national hiring event, with a goal to hire up to 20,000 additional employees. And I'm very pleased that already we have beaten that goal by 50%.

So I think it points to the thing we've said all along. And that is, Dollar General is such an amazing place to start a career. And so again, we feel really good about the opportunity we can provide with over 12,000 store managers internally promoted. We've got a robust internal pipeline. We still be -- we're still able to attract. So we feel real good there.

And certainly, as we have always talked here at Dollar General, we're surgical in the way that we respond to different challenges. So the comments you mentioned, we're not seeing it widespread their pockets. And so we'll certainly tailor our solution to where it makes sense. We always pay competitive wages we have and we will continue to.

And still very pleased that our turnover rates that point to this opportunity here Dollar General to attract folks, provide a great growth opportunity. And so right now, we are certainly making progress mitigating these challenges. And I'm really pleased with the progress I'm seeing.

[Edward Kelly, Wells Fargo]

Great, thank you.

[Operator]

Thank you. Our next question comes from the mind of Michael Lasser with UBS. Please proceed with your question.

[Michael Lasser, UBS]

Good morning. Thanks a lot for taking my question. Your two-year compound annual growth for consumables grew 12% in the fourth quarter 12% in the third and fourth quarter last year. It's still lagging in the first quarter the total only by 100 basis points. How much of that slowdown would you attribute to consumers going back out to eat and so they don't need to visit Dollar General as often for those food [ph] trips?

Or how much is your expectation is some of that is due to consumers got $1,400 check at least. And so they might go into Walmart or Target or some other discretionary retailer and go buy a big ticket item. And while they are there purchasing other goods that's taking away the trip from Dollar General?

[Todd Vasos, CEO]

It was very difficult Michael to understand you and the question. But if I got some of the sense of it. Yeah, we feel good about our consumable and non-consumable businesses, where they're at. And as I mentioned earlier, we continue to take share from all different classes of trade out there.

So I feel better than I ever have on being able to continue to drive the top-line on both our consumables and non-consumable side of the business. And if I missed that question, or if you'd like to ask it again, I'm happy to answer it.

[Michael Lasser, UBS]

The question is your two-year compound annual growth rate for your consumables business slowed modesty from 4Q to 1Q. How much do you distribute that to people going back out to eat, so they don't need to fill in trip [ph] or if they got a $1,400 check, because now they're going to Walmart to buy TV, and while they're there, they're filling up their basket, which may also be taking away a fill-in trip from DG?

[Todd Vasos, CEO]

Yeah, I apologize, Michael. Thank you for repeating that. Yeah, I would tell you, it's definitely not the ladder that we've seen. It's probably more, the little slowdown that we have seen there was one such robust last year, and even into the fourth quarter. The economy's opening up a little bit.

So that consumer has the ability to go do some other things. And food away from home. I'm sure like yourself, a lot of people have wanted to get out and get out of the house. So I think that that definitely played into Q1.

What we're already seeing, though in early Q2, is that some of that food at home is being -- it looks like it's pretty sticky. And while I'm not ready to talk about Q2 right now. I can tell you that especially in those areas, like DG Fresh are perishable areas. We're seeing very, very nice sales, robust sales in there. So it really shows that that consumer still has the propensity to have food at home.

And I would tell you, just like anything, when things last more than a quarter or two or half a year. They become pretty ingrained. And I think food at home has become pretty ingrained. Now, that doesn't mean that they won't go out to eat. But I think they're going to be doing more food at home than they had prior to the pandemic. And we're already seeing that, as I mentioned, start to materialize here in Q2.

[Michael Lasser, UBS]

Got it. On the gross margin of 200 basis points, John, you did provide the order of magnitude. But could you put a quantification around how much of the gross margin was due to factors that have been driven by your initiative like DG Fresh and NCI, which should continue their 100 basis points over the next couple of quarters versus other factors that might be temporary? Is it mix for a lack of promotions within the environment?

And are you already starting to see more promotions come back. And so that could be a risk factor to offset those factors that you have within your control over the next few quarters.

[John Garratt, CFO]

Yeah, Michael, as you look -- as you pointed out, those are in the order of importance and the number one called out. And it was a good bit higher than the other two. Although all were quite impactful was higher initial markups. And that was DG Fresh and that is something I would say continues and actually improves as we scale that across the system and get the efficiencies.

As you get to the next to the lower markdowns, certainly a big piece of that was the higher sell through on the non-consumable. But if you recall, we were calling out lower markdowns even before that as we got tighter and tighter around promotional activity. And we've stayed tied up promotional activity. While I would say compared to last year is tough a little bit because last year, there was virtually no promotional activity. If you compare to 2019, it's down.

So we're not seeing that much more promotional activity. We're actually seeing a little bit less if you go back to 2019. There just was none last year. And so things remain pretty tame that way.

And then on the mix benefit, again, certainly got some extra juice from the stimulus. But again, 12 consecutive quarters of non-consumable comp growth. And when we're virtually doubling that initiative and putting the best of the best across the chain, we think that continues to help us. And again, shrink, that was a benefit not related to the current environment.

So it's certainly a mix. It's hard to when you look at non-consumables to untangle what was stimulus and what was what we did to make that piece of the box more relevant. I'd say we set ourselves up very well in that regard. And then again, I would like to think that the higher carry rates is more -- is not something structural, it's more of a supply and demand imbalance that should sort itself out later.

One of the things I'll mention that is a wildcard that's not in our guidance, and that is what impact the Child Tax Credits slab. And so while there's -- we've not assumed any more stimulus. We've not assumed any more Child Tax Credits, just given the number of potential macro puts and takes including the Child Tax Credits. But then, conversely what happens when the some of the enhanced benefits are removed. So that's another wildcard in the back portion of the year.

But as you look at the gross margin, I would tell you, a big chunk of this is structural as evidenced by the strong fundamentals driving it and the track record we've delivered. But as we mentioned, there's just some near term pressures over the next few quarters.

[Michael Lasser, UBS]

That’s very helpful. Can you clarify one point you mean that you're not -- you're seeing promotions better today than they were in 2019. So you're not seeing conventional grocery stores promote more, because their sales are undeclined as their consumers got even more.

[Jeff Owen, COO]

Yeah. We watch this very closely, Michael. And I would tell you, John, hit it right on the head. And that is, we're seeing a little bit more promotional activity that we did last year. Because there was absolutely none last year. But it is substantially lower than it was in 2019. And so I would tell you that that tame promotional environment that we've been talking about even prior to the pandemic, and through the pandemic, still persist, we have not seen that whatsoever.

[Michael Lasser, UBS]

Thank you so much. And good luck.

[Operator]

Thank you. Our next question comes from the line of Rupesh Parikh with Oppenheimer and Company. Please proceed with your question.

[Rupesh Parikh, Oppenheimer]

Good morning. Thanks for taking my question. So my first question is with the comp guide. I was curious how you guys are thinking about traffic for the balance of the year.

[Jeff Owen, COO]

Yeah. I think the way you think about traffic, we've been talking about this, there's been quite a bit of trip consolidation. So people have been coming in a little less frequently. They've been putting a lot more in their basket. Now what I would tell you, as we looked across recent periods, we've seen the traffic start to pick up. And so what we would expect, as the mobility picks up, the traffic will pick up the basket will come down somewhat. But our goal is to hold as much of that bigger basket that we gained.

It's pretty impressive when you look at the two-year stacks, on the growing basket on top of basket growth last year. Again, as we provide positioned ourselves for that forward fill-in trip. But what we expect, is that traffic to continue to pick up as people get out more?

[Rupesh Parikh, Oppenheimer]

Okay, great. And then maybe just one follow up on pOpshelf. So clearly very upbeat commentary in terms of what you guys are seeing so far. So I guess Todd, what is surprise you so far with the concept?

[Todd Vasos, CEO]

I'm sorry? What was the question?

[Rupesh Parikh, Oppenheimer]

It is on pOpshelf, you guys seen very strong results so far. So just curious, what is surprising so far, with the performance?

[Todd Vasos, CEO]

Yeah, I would tell you that, we're very happy with what we're seeing. I believe the biggest surprise probably was, when you launch a brand from ground zero. You don't normally see the amount of tread traction and sustained traction, that we are seeing and repeat customers that we're seeing.

The other thing that's really a surprise is the customer feedback that we're getting. We're getting promoter scores in the upper-80% and 90% range, which is unheard of. And so that's what gives us great optimist, if you will -- optimistic that we will continue to be able to grow this piece, stay tuned.

And as I mentioned earlier, because what we're seeing, not only on the sales line. But I think the other nice surprise was on that margin side at 40% margins. And I would tell you, the upsides of that is great, very great, quite frankly. Because we scale this.

So we think that, between those two, and you know as well, we'll move fast in store openings, once we get another few weeks behind our belt here.

[Rupesh Parikh, Oppenheimer]

Great, thank you.

[Operator]

Thank you. Ladies and gentlemen, our final question this morning comes from line of Scott Mushkin with R5 Capital. Please proceed with your question

[Scott Mushkin, R5 Capital]

Hey, guys, thanks for taking my questions. And seeing that pOpshelf is just an insane format, one of the best I've seen in about 20 years. So I look forward to hear more about it. But my actual question -- my actual question is on DGX, you guys didn't mention it.

Maybe not as much sizzle as the pOpshelf, but seems like it almost could supplant the normal convenience stores about 10,000 7-Eleven. And I look at that store and say, gosh, like why would I ever go to a 7-Eleven if there was a DGX in the neighborhood?

[Jeff Owen, COO]

Hey, Scott, thank you for the question. And, we are real excited about DGX. And certainly, as we talked before, during the pandemic, as you remember, DGX is situated to locate where you work and play. And certainly during the pandemic, we saw some pullback obviously, with so much remote work at home.

But we feel real good about what we're seeing now. We've talked earlier about how we're seeing the economy kind of open up, and folks get out more. And we're seeing that come back nicely in our DGX doors.

And so you're right, we're very excited. You’ll recall last conference call, we talked about the opportunity for 1000 possible DGX locations across the country. And then you know as well, if we find a concept that can work even better and increase that over time, we'll certainly try to do that.

But right now, the offering inside the DGX, we also have very high customer satisfaction scores like the pOpshelf brand as well. We are real pleased with what the customer is saying. And we're also pleased that the opportunity, so stay tuned. But that just gives us yet another leg of growth.

So you got pOpshelf, where we've talked about incremental 3000 opportunities, DGX, an incremental 1000 opportunities. And then our traditional fleet where we believe there's 13,000 additional opportunities. So 17,000 opportunities in total, gives us great confidence that we can continue to grow this great brand across the country. So we're real excited about what the future holds there.

[Scott Mushkin, R5 Capital]

And if I could have a follow up. I guess I get a follow up. On the pricing side, kind of taking that and turning it on its ear a little bit. I mean, if you look at what's going on in your business, you obviously talked about gross margin expansion possibilities, as well as labor efficiency possibilities and of course, the limited skews you guys offer.

Why wouldn't I think that you can use and we've seen this our pricing surveys kind of coming -- the gap coming down with Walmart. Why wouldn't we see that continuing? Like, if you have a lot of leverage to people?

[Todd Vasos, CEO]

We watch it very closely. As you know, is pretty well. And, pricing is, is one of my pet projects here at Dollar General. I'm intimately involved in it, because it's so important to our consumer. And I would tell you that and Jeff alluded to it again. We took 2020, and we quietly got in the best position we've ever been in.

We took advantage of that dislocation that was out there. And that that advantage continues today. And to your point, we've made inroads, even against all classes of trade, including mass. But also especially even in our class a trade here at discount. We've made the extreme moves as well.

So we're happy with what we -- where we are. Hey, we always reserve the right to continue to make sure our customer has the ability to shop what she needs. So if that that does need to happen, we have the wherewithal to do anything on price that we consider we need to do. But right now, we feel good. And as Jeff indicated, even in this environment where we're seeing some price pressure from CPG, like other retailers are. We have a lot of levers that are exposed -- at our disposal to make sure that we don't have to pass all that on to the consumer. And that's exactly what you've seen here in Q1 so far.

[Scott Mushkin, R5 Capital]

Terrific, guys. Thanks.

[Todd Vasos, CEO]

Thank you.

[Operator]

Thank you, ladies and gentlemen, this concludes our question-and-answer session and does concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.