Dollar General Corp

NYSE:DG

Earnings Call Transcript 2018-Q4

[Operator]

Good morning. My name is Sia and I will be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Fourth Quarter 2018 Earnings Call. Today is Thursday, March 14, 2019. 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.

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

[Jennifer Beugelmans, IR]

Thank you, Sia, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; and John Garratt, our CFO. After our prepared remarks, we will open up the call for questions. 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 will include forward-looking statements about our expectations, plans, future estimates and other non-historical matters, including but not limited to our fiscal 2019 financial guidance and real-estate plans, our long term performance goals, our planned investments, strategies, initiatives and capital allocation strategy, and related expectations and economic trends or future conditions.

Forward-looking statements can be identified because they are not statements of historical facts or use words such as may, should, could, would, will, believe, anticipate, contemplate, expect, assume, intend, outlook, estimate, guidance, plan, opportunity, focused on, long term, confidence, potential or goal and similar expressions that concern our strategy, plans, intentions or beliefs about future matters.

Important factors that could cause actual results or events to differ materially from those projected by our forward-looking statements are included in our earnings release issued this morning under Risk Factors in our 2017 Form 10-K filed on March 23, 2018 and in the comments that are made on this call. We encourage you to read these documents.

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

During today’s call, we also will reference certain financial measures not derived in accordance with GAAP. Reconciliations to the most comparable GAAP measure is included in this morning's earnings release, which as I just 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, Jennifer and welcome to everyone joining our call. We ended 2018 on a strong sales note with a 4% comp in the fourth quarter. While we certainly faced various challenges throughout the year, we believe 2018 was a great year for our employees, our shareholders as we remain squarely focused on taking care of our customers.

As we head into 2019, we are excited to have so many new opportunities ahead of us. During today's call, I will cover five main topics. I'll start with key highlights from the fourth quarter results. Then, I'll update you on our progress and outlook for our digital and non-consumable initiatives. Third, I'll lay out two new strategic initiatives we are excited to be launching. Fourth, I'll give you an update on the results we are achieving with our operating priorities. And finally, I'll finish with our operating plans for fiscal 2019. John will provide you with some 2018 financial highlights, guidance for fiscal 2019 and our perspective on Dollar General’s long term growth.

Turning to our fourth quarter and full year 2018 financial performance, we delivered a very strong top line in the fourth quarter with net sales increasing 8.5% to $6.6 billion compared to net sales of $6.1 billion in the fourth quarter of 2017. For the full fiscal year, net sales increased 9.2% to $25.6 billion compared to net sales of $23.5 billion in fiscal 2017. The strong net sales performance throughout fiscal 2018 was balanced between performance from both new stores and mature stores.

During 2018, we continued to gain market share in highly consumable product sales, which was a key driver of our strong sales performance. Syndicated data shows that we had mid to high single digit growth in both units and dollars over the 4, 12, 24 and 52 week periods ending January 26, 2019. For full year comp sales, we posted a 3.2% growth rate for fiscal 2018, marking our 29th consecutive year of same store sales growth.

Given the overall strength of the economy in 2018, this continued growth underscores our belief that our business model can perform well in all economic cycles. We’re proud to continue our legacy of serving the underserved by providing them with the value and convenience that they have come to expect from Dollar General.

As I mentioned, we finished the year with a very strong 4% same store sales growth rate in the fourth quarter. This growth resulted in our highest two year stack in 21 quarters and our third consecutive quarter of accelerated two year comp stack growth. The fourth quarter top line performance was driven by growth in both average transaction amount and customer traffic. This quarter's average transaction amount growth included expansion in average unit retail and increased units per basket.

Driving profitable traffic is paramount to the health of our business over the long term. This quarter, we took steps to continue providing our customers with terrific value and focus on promotional activities that allowed us to take share from multiple classes of trade. We believe we can sustain these share gains in 2019 and that these investments attracted customers who will continue to shop at Dollar General.

These actions were especially important in the fourth quarter, given the increased seasonal sales volume seen across retail industry during this time of year. We achieved our goals of growing traffic and market share and continue to broaden our overall customer base. We were also pleased to deliver another quarter of solid growth in non-consumables.

We were particularly excited about our performance in the home category, which led overall comp growth in the fourth quarter. The team is doing a great job in this category, which led to our best performance in home in many years. This is the first time in quite a while that we've seen a non-consumable category out-comp consumable growth.

During the fourth quarter, we believe same store sales benefited from the acceleration of February SNAP payments during the government shutdown. Based upon analysis of EBT sales, we estimated this created an approximate 70 basis points benefit for same store sales.

As we head into 2019, we believe we have compelling opportunities to gain more market share, drive profitable traffic to our conveniently located stores and deliver more the products our customer seeks at the value she needs. We remain focused on these opportunities and after John’s discussion, I look forward to sharing how we are targeting our efforts in 2019.

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

[John Garratt, CFO]

Thank you, Todd and good morning everyone. I would like to walk you through the financial results for the fourth quarter and full year and then I'll take a few minutes to discuss our fiscal 2019 financial guidance. I’ll also provide you with some thoughts on our long term business perspective. Unless I specifically note otherwise, all comparisons are year-over-year.

As Todd already discussed sales, I will start with gross profit, which as a percentage of sales was 31.2% in the fourth quarter, a decrease of 91 basis points. This decrease was partially attributable to higher markdowns. As Todd mentioned, this quarter, we proactively invested in promotional activity to drive traffic and market share and we believe we remain well positioned against all classes of trade and across all geographies where we operate.

That said, pricing is always competitive in discount retail and we watch the environment very closely. In 2019, our strategy is to further optimize our promotional activities, as we focus on driving profitable sales and traffic growth. Gross margin in the fourth quarter was also negatively impacted by lower initial markups on inventory purchases, an increase in the LIFO provision, a greater proportion of sales coming from the consumables country, which generally has a lower gross profit rate than our other product categories, and the sales of lower margin products comprising a higher proportion of sales within the consumables category. Partially offsetting these items was lower inventory shrink.

SG&A, as a percentage of sales, was 21.6%, a decrease of 34 basis points. The decrease was driven by reductions in repairs and maintenance expenses, benefits costs and incentive compensation expenses and lower utilities as a percentage of net sales. Partially offsetting those decreases were approximately $11.7 million in hurricane related expenses due to two hurricanes, which occurred during the third quarter of 2018 as well as a $2.2 million year-over-year increase in other disaster related expenses, both of which were greater than anticipated in our original fiscal year 2018 forecasts. As a reminder, 2017 fourth quarter SG&A expense included costs related to accelerated store closures.

Moving down the income statement, our effective tax rate for the quarter was an expense of 21.2%. This compares to a negative 18.9% tax rate in the fourth quarter last year, which was a benefit. The benefit in the fourth quarter of 2017 was primarily due to the re-measurement of deferred tax assets and liabilities on the balance sheet, at the new lower federal corporate tax rates as result of federal tax reform. Diluted earnings per share for the fourth quarter were $1.84, which includes an approximate $0.04 negative impact of disasters, the majority of which was driven by hurricanes that occurred in the third quarter.

Turning now to our balance sheet, which remained strong at the end of fiscal 2018. Merchandise inventories were $4.1 billion at the end of fiscal 2018, up 13.5% overall and an increase of 7.3% on a per store basis over the end of the 2017 fiscal year. Inventory levels increased in the back half of fiscal 2018, as we brought in inventory to stock our new Longview, Texas distribution center. Additionally, as we discussed with you last quarter, we proactively made some strategic and opportunistic forward inventory buys, in part due to concerns over potential tariff increases. These buys aimed at keeping overall costs low contributed to the higher inventory level at year end.

As we noted in recent quarters, we have been successfully reducing shrink, while also increasing on-shelf availability. This dynamic is difficult to both achieve and maintain. In 2019, we are taking action to update our inventory replenishment cycle to support even higher levels of on-shelf availability for our customers every day, while continuing to take actions designed to further reduce shrink. We believe our inventory quality is in great shape and our goal remains to drive inventory growth that is in line with or below our sales growth over time.

Fiscal 2018 was another year of strong cash flow from operations, which totaled $2.1 billion, an increase of $341 million or 18.9%. Total capital expenditures for 2018 were $734 million and included our planned investments in new stores, remodels and relocation, continued investments in construction for two new distribution centers and spending related to the previously announced acceleration of certain key initiatives.

During the quarter, we repurchased 3.4 million shares of our common stock for $360 million and paid a quarterly cash dividend of $0.29 per common share outstanding at a total cost of $75 million. For the full year, we returned a total of $1.3 billion in capital to shareholders through the combination of share repurchases and cash dividends.

The remaining repurchase authorization at the end of the fourth quarter was approximately $346 million. And yesterday, our board approved an additional $1 billion in incremental share repurchase authorization. Our capital allocation priorities are unchanged and we are focused on financial returns. Our first priority is investing in high return growth opportunities, including new store expansion and infrastructure to support future growth.

We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly cash dividends, all while maintaining our current investment grade credit rating and managing to a leverage ratio approximately three times adjusted debt to EBITDA.

Turning now to fiscal 2019. This year, we expect our core business to continue to deliver strong growth and allow us to invest in our ongoing strategic initiatives as well as the two new ones that Todd will discuss in greater detail shortly. Overall, our long term financial performance goals remain squarely focused on delivering strong growth in net sales, comp stores sales, operating profit and diluted EPS, which is also supported by our financial strategies.

In some years, we will balance the decision to invest with delivering on our long term goal of double digit adjusted EPS growth. We believe that net sales, comp store sales, operating profits and diluted EPS are the core metrics that you should be focusing on in order to gauge our progress.

I will now provide you with our outlook on these metrics for 2019. For fiscal 2019, we expect net sales growth of approximately 7% and comp sales growth of approximately 2.5%. Moving on to profitability, I'd like to share a few insights with you. We are of course laser focused on operating profit and operating profit margins. In 2019, we expect to grow operating profit by approximately 4% to 6%. Our goal is to improve operating profit margin over time and we believe we are making the right operating decisions and investments to achieve this goal.

This year, this means that we will be making investments in strategic initiatives, including DG Fresh a supply chain initiative, as well as Fast Track, an in-stock productivity and customer service initiative. While both of these initiatives are still in the early test phase, we believe these investments will allow us to enhance our operating margin profile over the long term. The associated investments however will pressure SG&A rates in the near term.

With this as a backdrop, I’ll now provide you with a few other insights into overall gross margin and SG&A spend for 2019. First, the changes to our inventory replenishment cycle that I mentioned earlier will have an initial gross margin price tag, mostly due to the impact on product inventory mix. In addition, there will be a working capital outlay required. There is correlation between on-shelf availability and sales. And we believe these changes will position us to support and drive top line growth in fiscal 2019 and beyond.

Second on transportation. While we have seen some signs of stabilization in a more balanced marketplace, we anticipate that we could see continued transportation cost increases in 2019. Third, on tariffs, our guidance assumes that the government maintains current tariff levels and the guidance does not contemplate any increases in rates or any additional tariff and accidents.

We believe that the first quarter gross margins will be the most pressured on a year-over-year basis and that we will see improvements in the year-over-year comparison as the year progresses. Regarding SG&A, we will have startup expenses related to the two new initiatives in addition to ongoing investments in other strategic initiatives. In total, we expect to spend approximately $50 million on these strategic initiatives in 2019, the majority of which will be in our two new initiatives.

We expect these investments to pressure SG&A, particularly in the first half of the fiscal year. While these SG&A investments should improve gross margin and overall operating margin over time, they will move our SG&A leverage range above 2.5% to 3%. That said, we believe these investments will be accretive as early as 2020. Given these gross margin and SG&A expense factors, we expect operating margins to be more pressured during the first half of the year.

Based on these dynamics, we are providing fiscal 2019 diluted earnings per share guidance of $6.30 to $6.50. Our diluted EPS guidance assumes an estimated effective tax rate of approximately 22% to 22.5% in 2019. Overall, our capital spending in 2019 is expected to be approximately $775 million to $825 million, as we continue to invest in strategic initiatives and general business needs to drive and support future growth.

In terms of cash distributions to shareholders, yesterday, our board of directors approved a quarterly cash dividend of $0.32 per share, which is an increase of approximately 10% compared to the fourth quarter 2018 dividend. In fiscal 2019, we plan to repurchase approximately $1 billion of our common stock. We are pleased with our strong position, as we enter the year and we are very excited for our plans for 2019. 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 in initiatives for long term growth. We remain confident in our business model and our ongoing operating 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 back over to Todd.

[Todd Vasos, CEO]

Thank you, John. I'm proud of the team's execution that led to strong results this year and feel confidence that we're making the right investment and operating decisions that will allow us to extend our runway for profitable growth.

Now, I'd like to spend a few minutes providing you with an update on the progress we have made on our digital and non-consumable initiatives and outline two new transformational strategic initiatives that we're launching. Starting first with digital, in 2019, our digital strategy will remain focused on using technology to further enhance the in-store experience. We are confident that we can use technology to create a more personalized and convenient shopping experience for our customers.

In 2018, we launched the DG GO! app, which allows customers to use their phones to scan items as they shop, see a running total of the items in their basket using our card [ph] calculator and then skip the checkout line by using the DG GO! kiosk. The app has been popular with our customers and through the end of fiscal 2018, we had more than 140,000 downloads and exited the year with approximately 25,000 monthly active users, despite only having DG GO! kiosk in approximately 250 stores.

Pending performance data, our goal in 2019 will be to expand this offering to more stores. We have engaged with our customers to understand how they are using the app to learn how we might improve it further. One key learning is that our customers are using the card calculator frequently, even when they're not using DG GO! kiosks to check out. We believe they're using the card calculator to stay within their budgets and optimize their shopping dollars.

Based on this, we recently launched card calculator in approximately 200 stores. Throughout the first half of 2019, we intend to roll out this useful tool for our customers in the majority of our stores. We have invested and upgraded Wi-Fi to facilitate in store use of this and other digital tools.

Having a user friendly and helpful suite of digital tools is becoming increasingly important to our customers and therefore, to Dollar General. We know that our customers who more frequently engage with our digital tools tend to shop with us more often and check out with larger average baskets. In fact, their baskets on average are about twice as large as those of non-digitally engaged shoppers.

Currently, we have more than 15 million digital coupon subscriber accounts, and more than 900 million digital coupons were clipped in 2018. Our goals in 2019 are to increase our subscriber base and perhaps more importantly, the frequency of use. We want to make sure that users are engaged with our app more frequently to save time and money. This means that we will be launching digital marketing strategies, focused on customer acquisition, retention and engagement. Our goal is to use personalization to drive both sales and gross margin benefit over time.

Finally, as we continue to test and learn within our digital strategy, we plan to pilot buy online, pick up in store offering in the second half of fiscal 2019. We are in the early stages of many of these efforts within our digital strategy and we are excited about the potential and the opportunities that lie ahead.

Turning now to non-consumable initiative or NCI. In 2018, we began our test of a bold new and expanded assortment in key non-consumable categories of home, domestics, housewares, party, and occasion. With the amount of space dedicated to non-consumables that remains the same, we believe this merchandise strategy will drive greater sell through. The NCI offering was added to approximately 700 stores as of the end of 2018, and we plan to have it in approximately 2,400 stores by the end of 2019.

It is important to note that while it is still relatively early, we have now worked through multiple replenishment cycles and we like the momentum the reset is generating. We are seeing improvements in traffic and sales as well as meaningful improvement in category mix and gross margin within these stores. We believe this offering will continue to generate excitement for our customers, as it rolls out more broadly.

Today, I'm excited to introduce two new transformational initiatives that we are rolling out in 2019. The first initiative is one that we call DG Fresh. The DG Fresh initiative is a strategic multi phase shift to self distribution of perishable goods, primarily fresh and frozen. We believe this initiative will allow us to accomplish three key goals.

First, it will allow us to reduce product costs, which can have a meaningful impact on our gross margin in the coming years. Second, it will facilitate higher in-stock levels of these goods, which should help to drive sales. And third, it will allow us to control our own destiny in fresh foods, most notably by distributing perishables ourselves, we can carry more of the fresh products and brands our customers want.

These include better for you items and national brands. Today, there are many items we cannot cost effectively procure through our current model. In addition, self distribution will allow us to offer a wider selection of our own private brands to provide our customers with even more compelling value. Overall, we expect DG Fresh to allow us to do a better job of tailoring our product selection to fit the needs of our customers, particularly in rural areas.

While our initial focus is on distributing the types of fresh and frozen products we already carry, this approach also provides a potential path forward to expanding our produce offering to more of our stores in the future. We launched this initiative early in calendar year 2019 and we are currently distributing to approximately 300 stores in the northeast from a new Cold Storage Facility we own in Pottsville, Pennsylvania.

By the end of this fiscal year, our goal is to be serving as many as 5000 stores from up to four new DG Fresh distribution facilities. Beyond 2019, our goal is to fully implement DG Fresh initiatives chain wide within three to four years as an annual rollout phase similar to what you see in 2019.

As John mentioned, the startup costs for DG Fresh will be a headwind to SG&A this year. However, we expect this initiative to be meaningfully accretive to sales and operating margin over time. The transition to self distribution has been relatively smooth, which is a testament to the strong relationships we have with our vendors, the support of our distributors, and our proven ability to execute complex projects. We are excited about the potential for this initiative.

The second new strategic initiative we're introducing today is Fast Track. Fast Track is a two pronged approach to increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability. Driving our performance higher in these areas will be foundational to our ability to execute on our buy online, pick up in store pilot later this year.

In addition, we believe that our success with Fast Track over the long term can create significant SG&A savings. The first key component of Fast Track involves streamlining the stocking process in our stores, which we call one touch unloading. This new approach is designed to make stocking shelves simpler and faster, reducing the amount of labor needed to complete this task.

It will begin with fundamental changes at the distribution centers where we will make, which we will make processes even more store friendly with products and deliveries sorted by locations within the store. Our focus is on reducing the amount of time spent stocking the shelves following a truck delivery, allowing us to get products on the shelves more quickly. We also believe we can reduce the amount of time that our store associates spend restocking shelves in between deliveries.

The second component of Fast Track is self checkout option. This self checkout will allow customers to scan and pay for their items with little to no assistance needed from our associates. Dollar General is known for value and convenience and our customers have told us that speed at checkout is vitally important to their in-store experience.

Ultimately, Fast Track should help boost on-shelf availability and free up labor hours that we can dedicate to other in-store priorities such as customer experience. Our goal is to pilot Fast Track in several of our distribution centers and select stores during 2019. Following the pilot, we will determine the best plan for a broader rollout.

Like the DG Fresh initiatives, Fast Track will also have an upfront cost that will impact SG&A. At scale however, we believe this initiative will be accretive to our SG&A profile and well worth the investment. These are just a few examples of how we continue to be an innovative leader in our channel.

We're excited about these long term strategic growth initiatives, which are fully aligned with our ongoing commitment to our four operating priorities. As you will recall, our first operating priority is driving profitable sales growth. We have a robust pipeline of initiatives in place to drive growth in 2019. Our most impactful merchandising initiative continues to be our cooler door expansion. As we head in to 2019, this remains a significant opportunity. Coolers are a great traffic driver and they allow us to offer even more of the products our customers want. In fiscal 2019, we plan to install more than 40,000 cooler doors across our store base.

In 2018, we launched our Better For You initiative, which introduced healthier food options in more than 2500 stores. This offering was in direct response to conversations with our customers who told us they wanted healthier options at affordable prices. We are pleased with the initial customer reception and the performance of this product set. We intend to offer the Better For You products in approximately 6000 stores by the end of 2019.

Our new, good and smart private brand has gained traction with our customers and we are positioning it as a core product line in Better For You. In addition to good and smart launch in 2018, we had great success with the launch of Studio Selection, our aspirational health and beauty private brand. In 2019, we're planning a similar private brand launch in baby products.

I'm also excited to announce that we’ll be launching a new private brand and cosmetics in April. We remain dedicated to the beauty category at Dollar General and we believe we can continue to take share from all classes of trade. Having a premier private brand is an important part of our strategy. The new DG private brand will be called Believe and will include an inspiring lineup of attractively priced cosmetics that we think will be appealing to our customers.

This cosmetic line is just one part of our ongoing efforts to capture share in the health and beauty category. From efforts focused on the growing bath and body segment to enhancing the shopping experience in this section of the store with more intuitive signing and product placement, we have a lot of opportunity to drive HVA sales.

Across private brand, we continue to believe we can increase sales and penetration, which could have a meaningful impact on both gross margin and sales growth over the long term. In 2018, we conducted a holistic review of our private brand portfolio and are incorporating what we've learned into our 2019 go to market plan. In addition to sales driving initiatives, we continue to pursue opportunities to enhance gross margins.

In 2019, we intend to roll out electronic article surveillance units to approximately 3000 stores. We expect to complete this rollout by the end of the second quarter, bringing the total for the chain to approximately 13,000. Beyond this ongoing near term opportunity, I'd like to give you a brief update on other longer term gross margin opportunities.

First, within distribution and transportation, we have continued to execute our strategy to reduce stem miles. I am proud to note that our distribution center in Longview, Texas, began shipping in January and it is ramping up very quickly and we expect our distribution center in Amsterdam, New York to begin shipping later this year.

As at the end of 2018, we successfully expanded our private fleet to approximately 200 tractors, up from 80 at the end of 2017. In 2019, we plan to expand our privately fleet further. While this fleet remains a small piece of our overall transportation needs, we believe it continues to provide strategic flexibility.

Finally, foreign sourcing remains a long term gross margin opportunity. We are specifically focused on diversifying country of origin as well as growing overall foreign sourcing penetration. We believe there are many countries around the world where we can source goods at even greater value for our customers.

Our second operating priority is capturing growth opportunities. As we enter 2019, our proven high returns, low risk model for real estate growth is a core strength of the business. We have a long standing track record of successfully opening hundreds of stores every year that meet our strict return thresholds. The flexibility of our model has allowed us to invest in new formats, store growth, and a remodel program, all with strong returns that contributes significantly to our growth.

Our store format innovation allows us to expand our addressable market opportunity as well. This innovation will continue to play a key role in 2019, as we plan to open 975 new stores to serve communities across the country. Our real estate model continues to focus on five metrics. These metrics help us determine that new store growth remains one of the best uses of our capital.

We continue to see great results with new store sales performing at nearly 100% of pro forma expectations and returns near the high end of our 20% to 22% goal. We are proud of our track record for executing successful real estate projects. In 2018, we completed a total of 2065 real estate projects, 65 more than we had originally anticipated.

For fiscal year 2019, we plan to remodel 1000 mature stores and relocate 100 stores. We expect approximately 500 remodels to be in the Dollar General traditional plus or DGTP format. We also expect to add produce to approximately 200 stores, the majority of which will be DGTP remodels.

As a reminder, our traditional remodel stores which have approximately 22 cooler doors deliver a 4% to 5% comp lift on average in year one and DGTP remodels with approximately 34 cooler doors delivers a 10% to 15% comp lift on average in year one. DGTPs with produce are at the high end of this range.

Over the past two years, we have conducted an exhaustive pilot of our DGX stores and during that time, we have refined and enhance the concept. We are now confident that we can drive profitability in this smaller box and we plan to open approximately 10 DGX format stores this year. DGX stores are about half the size of a traditional Dollar General and have a product selection that is tailored to vertical living customers, particularly millennials. We are excited about these plans for continued growth and innovation in 2019.

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. This process has served us well and the entire organization has embraced a cost control mindset. In our stores, we continue to manage expenses through the efforts such as optimizing product assortment, reducing operating complexity, and reducing product movement within the stores.

One of the reasons we are so excited about our Fast Track initiative is that we believe it has potential to be a significant and incremental driver of store level efficiency.

Our fourth operating priority is to invest in our people, as we believe they are a competitive advantage. Our ongoing dialog with our employees is critical and we learned from these conversations to reinforce our position as an employer of choice. In 2018, we greatly expanded our benefits to include those that resonate most with our employees, including paid parental leave for mothers and fathers, adoption assistance and day one access to healthcare benefits for store managers.

We also launched new training programs, including a private fleet driver training program for distribution center employees to complement other existing educational benefits such as tuition assistance and college course credits for store manager training. And I am very proud to announce that for the eighth consecutive year, Dollar General was named to Training Magazine's top 125 training list, ranking number one overall on this, the most recent 2019 list.

In 2019, we are expanding our benefits to include day one eligibility for telehealth benefits for all employees in our organization. Our part time employees told us they need help assessing affordable healthcare and we believe this will be a valuable benefit. We always monitor the wage environment carefully and believe we are well positioned across the organization, as illustrated by robust applicant flow at every level.

Our investment in store manager wages and training continued to pay dividends in 2018 and we finished the year with our lowest store manager turnover rate on record. We are also doing very well at the store level where we are seeing our time to fill open positions at all time best levels for the company. We think our competitive compensation and benefits package is compelling. But we believe that the opportunity to build a long term career with a growing retailer is the most important currency we have to attract and retain talent.

In 2019, we plan to create approximately 8000 net new jobs. This growth creates an environment where employees have opportunities to advance to higher paying and higher responsibility jobs in a relatively short amount of time. Being an employer of choice is a priority for us and we will continue to seek out opportunities to enhance our employee experience.

In closing, 2018 was a very good year for Dollar General. The business is in great shape as we enter 2019 and we're excited about the future. As John mentioned, our long term goal generally remains to deliver double digit adjusted EPS growth. To do this, we need to make smart business decisions that focus both on growing the top line and capturing incremental operating margin where and when we can. Today, I have highlighted how our progress on our initiatives and operating priorities contributed to a great 2018.

Looking ahead, we believe we are making the right long term strategic investments from a position of strength. With our business model that leverages our real estate acumen, low cost operating experience and our laser focus on delivering value and convenience to our customers, we believe that Dollar General’s business is differentiated from the rest of the retail landscape.

I believe we have the best team in consumable and I hold each person on my senior team accountable for delivering today and planning for tomorrow's growth. I am confident that no one on the team will be satisfied with anything less. I am proud of the team's innovative approach to retailing, the strategic initiatives they have put forth in motion and the financial performance we are driving, we continue to be the leader within our channel.

We believe we operate in one of the most attractive sectors of retail and we have confidence that our strategy and execution will allow us to continue to reach our goals. Finally, a heartfelt thanks to each and every one of our more than 135,000 employees for the hard work that they do every day, which allows us to fulfill our mission of serving others.

With that operator, I’d now like to open the lines for questions.

[Operator]

[Operator Instructions] The first question will come from Vincent Sinisi with Morgan Stanley.

[Vincent Sinisi, Morgan Stanley]

So just wanted to go, of course, to the incremental investments on the initiatives this year. With obviously still early stages around fresh and whatnot, can you just give us a little bit more of a sense, for that 50 million specifically, like how much at least directionally of maybe a lift to comps you think that could provide earlier on and then, how much of that may be recurring as you ramp some of these initiatives going forward? I guess, obviously, everyone kind of on the line today is just saying, kind of okay, a bit below the double digit growth algorithm for this year, but when can that maybe return if that’s of course helpful context?

[Todd Vasos, CEO]

Okay, a couple of questions there. I'll start with the first one around the initiatives. As you look at the initiatives, as we said, we see these as being accretive as early as next year. The two new ones we talked about, our Fast Track and Fresh, we're very excited about both. As you look at Fresh -- we see both of them helping the top line and the bottom line.

As you look at fresh, the immediate impact we see from that is helping our gross margin, helping reduce our product costs. Now that does come with upfront expenses, particularly in SG&A and there's a trade off for SG&A for gross margins. But we're very excited about what that can do, not only to our costs, but then also our flexibility and longer term what that could mean in terms of, as we expand our fresh offering and in stock availability there, we think that can be a meaningful sales driver.

On Fast Track, that has two parts to that, you have the self checkout piece and then you have the one touch shelf stocking piece. The latter will have the more immediate impact and we're starting to do that now and we’ll scale that over the course of the year. The self checkout will take a little bit more time with the technology involved in driving the adoption on that. So, these are sizeable investments this year, they'll pressure the SG&A, but as we look out, we see them as being accretive as early as next year, having a meaningful impact on our overall operating margin, EPS growth and really positioning us with the long term in line to drive double digit EPS growth over the long term.

[Vincent Sinisi, Morgan Stanley]

And then if I could, last quarter, you guys had mentioned and we've been getting quite a bit of questions around it, just kind of your internal surveys, the confidence was looking a little bit shaky, potentially for kind of later this year, but it was nice to see of course in the release today, that ticket and traffic were both positive. So any updates there, any work, any thoughts around what you're seeing the basket around the house? That would be great.

[Todd Vasos, CEO]

Yeah, I would tell you, we talk to our core customer each and every quarter. And while she is feeling better about having a little bit more money in her pocket, she continues to tell us that it is definitely from productivity, meaning working more hours, and in some cases, multiple jobs. But what she is also telling us is that she is feeling a little less competent than she was at the middle of last year to the end of last year, which gives us a little bit of pause from the standpoint that we think that our core customer is starting to weaken a little bit, which obviously we do very well in all economic cycles. So we're positioning ourselves for the back half of the year for a little weaker consumer, as we move through the year.

[Operator]

The next question is from Matthew Boss with JP Morgan.

[Matthew Boss, JP Morgan]

So maybe can you speak to the proactive promotional actions that you took in the fourth quarter, any higher level changes in the competitive landscape that drove the change and just how best to think about markdowns in gross margin in 2019?

[Todd Vasos, CEO]

Yeah. I'll start and then turn it over to John for ‘19. We really went after some targeted markdowns in Q4. As you know, Q4 has the highest traffic counts across retail, not only Dollar General and we've got a track record here of working the price levers pretty well and we know which ones to work for the stickiness of the customer, meaning, we pulled some promotional levers in the fourth quarter that we believe will sustain that traffic growth in to Q1 without having to be nearly as aggressive. And we saw -- we went at it from a position of strength and we saw a real opportunity to take share, as we went through Q4. It did exactly what we thought it would do and positions us very well going into the first quarter here in 2019.

[John Garratt, CFO]

And as Todd said, with this helping drive traffic and picking share in our belief that we can retain these customers, we believe we're very well positioned going into 2019 to further optimize our promotional activity, while at the same time, driving profitable sales and traffic. So we feel we're very well positioned.

[Matthew Boss, JP Morgan]

And then just a follow up on the same store sales. So help us to think about the cadence this year relative to the 2.5% for the year. It sounds like we should anticipate the first half better than the back half, just given what you've seen in your surveys. But have you seen the momentum continue in the first quarter, despite tax refunds and some pressures that others have cited?

[Todd Vasos, CEO]

Yeah, I'd start by saying the fundamentals are very strong. We're really pleased with the impact that our initiatives are having and the share we're taking. There is a bit of a timing impact to start the year. We talked about the benefit from the acceleration SNAP payments from early Q1 into late Q4. That did have a bit of an impact on the beginning of the quarter, not necessarily dollar for dollar, but I would draw that timing to your attention. Other than that, it's a pretty smooth year in our minds and everything's firing on all cylinders.

[Operator]

The next question is from Rupesh Parikh with Oppenheimer.

[Rupesh Parikh, Oppenheimer]

So just going back to your commentary in the press release about generally double digit EPS growth going forward, is that more of a reflection that this year is going to be low 10% and you expect to get back to potentially next year and beyond. Or

is there something that changes your confidence in that metric?

[John Garratt, CFO]

The comment we made there and I'll start by saying we continue to see ourselves as double digit EPS growers over the long term. That comment just meant to say that we reserved the right in some years to make targeted investments to drive that long term growth and protect that 10% growth.

[Rupesh Parikh, Oppenheimer]

And then just on gross margins, I appreciate the color that you provided on Q1. So, it sounds like we should expect, as comparisons get easier that that decline versus what we see in Q1 should progressively get better as the year progresses, is that the right way you guys are thinking about the cadence?

[John Garratt, CFO]

Yeah, I think you're thinking about that the right way. We talked about a couple of pressures at the beginning of the year. One of the things we talked about is changes to inventory replenishment. We've seen a very high correlation between on-shelf availability and sales. And as such, we're making investments beginning of the year, bringing more inventory and to make sure we're right in stock. This will have a Q1 price tag due to the impact on product mix. But as we cycle through that, that'll normalize. The other thing is, as the year progresses, we expect to start to see some benefits from the initiatives we're putting in place like Fresh and others to enhance gross margin. So as you look at the year on a year-over-year comparison, we expect that to improve as the year progresses.

[Operator]

The next question is from Michael Lasser with UBS.

[Michael Lasser, UBS]

So if you're successful with some of the initiatives that you're rolling out this year, should we expect you to accelerate the rollout of them next year, such that 2020 would be another year of sub 10% EPS growth?

[Todd Vasos, CEO]

Michael, thanks for the question. As you know, here at Dollar General, we do everything very methodically and we make sure that it has a solid return before we move to a broad scale rollout. In saying that, we really like what we see from DG Fresh early on, and we have great confidence in our Fast Track momentum as well, especially around some of the digital efforts of -- that we have to include the self checkout option that will be coming.

In saying that, as John indicated, we believe that that these initiatives will become accretive as we move into next year. So should help offset some of those pressures, as we continue a broader scale roll out. A little bit of a pay as you go, if you will, type of a rollout schedule.

[Michael Lasser, UBS]

So just to clarify, you're looking at 2019 as more of a transitional year, returning to the algorithm over the longer run this next year.

[John Garratt, CFO]

As we indicated, there are startup costs associated with this, as we start to scale these as Todd said, it’s more as that pays for itself as it goes and we expect these to be accretive as early as 2020.

[Michael Lasser, UBS]

And then could you break down the gross margin from the fourth quarter in a bit more detail. You outlined the promotions, what piece of the gross margin drag was that and then initial markup, so now a drag on gross margin, how did that work?

[John Garratt, CFO]

Yeah Walking through last year, we articulated the specific Q4 drivers that I guess stepping back and taking a broader look, if you look at the full year, our gross margin was down 32 basis points, but we're very pleased with the results where we drove traffic. We took share, delivered very good comps. We did invest the margin in opportunistically and promotional activity at Todd mentioned, but this clearly resonates with our customers, allowed us to take share. There was a very high take rate here and help us deliver the sales and we believe that this will stick and we'll be in a position next year to rationalize these investments.

The other impact was with SNAP. While that did benefit our sales with that pull forward, there was a mix impact that came with, in general, lower mix of those additional sales. And then the team managed through the headwinds of tariff in transportation costs. As we go into this year, as we said, we believe we're very well positioned that we can throttle back, be even more targeted on our promotional activity, while still driving traffic and sales. We believe we have opportunities to increase margin over time with the new initiatives like DG Fresh and the NCI initiative. Shrink, where we've had nine quarters of year-over-year improvement and the other levers that we talked about. We think we're very well positioned.

[Operator]

The next question will come from Peter Keith with Piper Jaffray.

[Peter Keith, Piper Jaffray]

I wanted to dig into the comps that you're getting from new stores and from remodels. Historically, that's been in a range of 1.5% to 2%. But it's interesting with the DGTP acceleration and some of the fresh initiatives, it seems like there's an accelerated lift. I'm curious if you're starts with to the high end of that 1.5% to 2% range or even potentially above it, sort of a structural impact to your comp?

[John Garratt, CFO]

Thanks for the question. I would tell you that, we're very happy with not only our new store pipeline, but our remodel relocation pipeline as well. And I think you're thinking of it right in that because of the ramp up of our remodels, especially in the DGTP format to include produce in many of those stores, we’re closer to the high end. I wouldn't say that we have broken out of that range that we talk about, but we're more at the high end of that range with some of the work that we've done.

[Peter Keith, Piper Jaffray]

And I did want to dig into a little bit on how you're talking about the accretion benefits in 2020 from the growth initiatives. I guess in reality, when you look back at the last three years, the guidance for 2018, you really haven't been at 10% earnings growth for really any of the year, so if you exclude the tax changes, are you saying that you do think you will be at 10% plus by 2020 and that these overall initiatives, as a whole, will be accretive to next year.

[Todd Vasos, CEO]

Yeah. I’d just reiterate that over the long term, we see ourselves as double digit EPS growers. We're not giving specific guidance at 2020 at this point, but we do feel very good about the initiatives and their ability to be accretive next year. As you look at the fundamentals of the business model, we feel very good about what we're seeing from our new store growth with the great returns on the sales from those with what we're seeing on a comp basis with the performance of the initiatives and the comp we’re seeing.

We see, as we said, a lot of opportunities over the long term to improve our operating margin. We really look at operating margin overall. And we believe, we're making the right investments here to enhance that operating margin. It comes at a little bit of a cost now, but we believe this positions us better for the future. And we continue to generate a tremendous amount of cash which allows us to reinvest in these business as well, paying back significant amount to shareholders through share repurchases. So, we don't see the future differently.

[Operator]

The next question is from Ed Kelly with Wells Fargo.

[Ed Kelly, Wells Fargo]

I just want to start with the clarification, when you talked about the impact of SNAP in February, not having the same dollar for dollar impact, are you saying that the headwind in February was not as big as the benefit that you saw in January?

[Todd Vasos, CEO]

That's exactly what we're saying. We have not seen a dollar for dollar impact. I think that really goes to what I talked about earlier, some of those investments we made in markdown being very sticky and we know our customer very well. And when you get to change her shopping patterns, she sticks with that. And we saw that as we moved into Q1.

[Ed Kelly, Wells Fargo]

And then just curious as to, you only have a couple of weeks, but how March has looked, given that things kind of normalize there, refunds seem to be picking up and then just one other question about all those, did you mention that there is some conservatism built into the comp guidance around the back half of the year. I'm not sure if I heard that right.

[Todd Vasos, CEO]

I'll take the first one. But, we really are talking really much about Q1 right now, obviously, but I would frame it this way. We feel very confident in our top line sales, due to all of the initiatives that we have in play, including the investment we made in Q4. And just keep in mind, March has an Easter shift in it. I think that's important towards the end of the month, but for us, we’ll equalize as we move through April. So we're bullish about the quarter, but we have a lot of quarter left to go and John, you may want to address the other ones.

[John Garratt, CFO]

Yeah. Other than the timing impact we mentioned, the overall year comp we guided to reflects our current view of the year.

[Ed Kelly, Wells Fargo]

And then Todd, just one quick follow up for you on DG Fresh, why now on this on self distribution and can you just help us understand the benefits, like what type of margin opportunity is here from known as yourself, like, why do in stocks improve with more frequent deliveries and what does it tell us about your plans for fresh?

[Todd Vasos, CEO]

Yeah, so why now? I think the best way to answer that is that we continue to expand our cooler program here. It's been one of the biggest traffic drivers and one of our biggest comp drivers that we've seen. We have a series of distributors out there today across the country and those distributors do a nice job for us, but it comes at a cost and that cost is very high as you can imagine in many cases a full service program. So, we see a real opportunity from a position of strength right now to take that in house and control your own destiny and the way we see sales and margin enhancements here is a couple of ways.

Number one on margin, not having to pay that very hefty upcharge, we're going to build a bank, the majority of that with a little labor that we're putting in the stores to help work the goods again coming off of the full service program, but margins will be very accretive with this program.

And then the second thing is sales. What you're going to see is our ability one to stay in stock, number two, longer term what you're going to find from us, as I mentioned in my prepared remarks, is going to be a different assortment that's going to really take into account a lot of our private brand offerings, which will help our margins and our sales, but also on items that we don't carry today because of the distributed network that we have. So we're very excited about this.

This is probably one of the biggest margin opportunities we’ll have shorter term to really move the needle here.

[Operator]

The next question will come from Scot Ciccarelli with RBC Capital Markets.

[Scot Ciccarelli, RBC Capital Markets]

I guess I'm still a little confused on some of the markdown commentary, so I know you guys have talked about the pricing environment being pretty benign and you're comfortable with where your pricing is. So can you help us understand a little bit better why you engage in that promotional activity that you did? Number one. Number two, how does it benefit 1Q, even as you pull back promotions? I guess I'm a little confused on that. Thanks.

[Todd Vasos, CEO]

Yeah, sure. So the way we look at customer and customer traffic again, as I mentioned, we talk to our customer every quarter. What she was telling us is that she was feeling a little weaker than she was middle of the year and we took an opportunity from a position of strength to take share. We saw where we could take share in many different DMAs across the country. And we thought the best way to do that which turned out to work pretty nicely was to do it on a promotional basis, because we feel very confident in our everyday shelf pricing that we have today.

And so we did it on a promotional basis and we know this customer very well, we know if we can change our shopping patterns, especially in the busy fourth quarter when we have her attention, it is, she's very sticky, she'll stay with us and I think we've seen some of that as we entered Q1, evidence by the not for dollar to dollar trade off back on SNAP as an example. So we believe that it did exactly what we thought and we've said in the past, we reserved the right to go in and make these investments periodically to continue to drive traffic and continue to take share and that's exactly what we did in Q4.

[Scot Ciccarelli, RBC Capital Markets]

And then just curious, was traffic positive kind of throughout the quarter?

[Todd Vasos, CEO]

Yeah. It was pretty stable throughout the quarter, the back half a little stronger than the first, but I would tell you, we're pleased overall with the traffic in Q4.

[Operator]

The final question will come from Robbie Ohmes with Bank of America.

[Robbie Ohmes, Bank of America]

Todd, I was just hoping you could talk a little bit more about the long term profit outlook of DG Fresh. So can you just sort of create a picture for us, if you do roll this out, over the next three to four years, how does the income statement change, are you expecting a sort of a secularly higher gross margin and kind of permanently higher expense ratio and what are the kind of long term assumptions about what store sales productivity levels have to be to make this all work on a large scale basis. And, you've mentioned some, how you're taking more of your distribution in house a little bit. I mean, does that have to accelerate more significantly to support being -- doing fresh on a very large scale basis, maybe just help us understand the three to five year outlook for how much this could change your entire store base, it's probably more complicated to operate this category as well. Thanks.

[Todd Vasos, CEO]

Yeah, that's a great question. And I would first start by saying that, as we look at the DG Fresh initiative, we see a real opportunity to drive both that top line and the margin. So I would look at it this way, it'll be a significant margin driver as we move into 2020 and beyond. And that's really driven primarily off of the distributor costs that we pay today which has a substantial up charge attached to it, substantial and as we work with our vendors, which we've got relationships with all of them, what we're finding in the first 300 stores and first DC that we put in were substantial reductions in cost of goods to move the product into our own DCs and distributed ourselves. So I think you would need to look at it that way.

On that top line, I think it'll be a meaningful top line contributor as well as we continue to be better in stock because we can -- we know how to distribute goods, fresh, shelf stable, whatever it may be, controlling our own destiny there gives us high confidence that we can execute at a much higher level than we were seeing across the country. We had some distribution voids, quite frankly, across the country. And we still do with our distributor network, because it is so complex and so large by taking into the house, we believe that will simplify our network and be able to execute that much better and as you continue to look out, we see opening these DCs about the same pace as 2019, so an average of 5000 to 6000 stores a year for the foreseeable future until we're built out. And, we believe that these fresh distribution centers, we will be able to leverage as well some of our dry goods that perhaps we can deliver out of there as well, taking some of the pressure off of our larger DCs, so we believe it's a win-win across the board, which should see substantial P&L ramifications on a positive side, as we move into 2020 and then beyond.

[Operator]

Ladies and gentlemen, we thank you for your participation in today's conference call. You may now disconnect.