Dollar General - Earnings Call - Q4 2025

Executive Summary

• Net sales rose 4.5% to $10.30B, same-store sales increased 1.2%, while diluted EPS fell 52.5% to $0.87 due to $232M in charges tied to store portfolio optimization; gross margin was 29.4% and operating margin 2.86%.
• Management issued FY2025 guidance: net sales growth 3.4–4.4%, same‑store sales 1.2–2.2%, EPS $5.10–$5.80, tax rate ~23.5%, capex $1.3–$1.4B, and ~4,885 real estate projects; no share repurchases planned in FY2025.
• Long‑term framework targets operating margin of ~6–7% by 2028–2029 and adjusted EPS growth of 10%+ starting in 2026, driven by shrink/damages improvement, DG Media Network, and non‑consumable mix initiatives.
• Management highlighted a pressured core customer, tariff risk monitoring, and H1’25 deleverage from wage inflation (3.5–4%), normalized incentive comp (~$120M headwind), and D&A; shrink improvement is a tailwind throughout 2025.

What Went Well and What Went Wrong

What Went Well

• Underlying execution and top‑line were solid; market share gains in consumables and non‑consumables, with fiscal year sales surpassing $40B for the first time.
• Shrink mitigation delivered a 68 bps year‑over‑year improvement in Q4 and is expected to remain a tailwind through 2025.
• Digital and delivery initiatives scaling: DoorDash in >16,000 stores, SNAP/EBT enabled, DG home delivery expanding from ~400 stores to a goal of up to 10,000 by year‑end 2025; supports scaling DG Media Network.

What Went Wrong

• EPS and operating profit were sharply lower due to $232M in charges from store closures and pOpshelf impairments; EPS down 52.5% to $0.87 (−$0.81/share impact from charges).
• SG&A deleveraged 294 bps in Q4 (26.5% of sales) on impairments and higher retail labor, incentive comp, repairs & maintenance, D&A, and technology expenses.
• Discretionary categories remained soft (seasonal, home, apparel declines vs consumables growth), with traffic down 1.1%; non‑consumable mix at 18% has pressured margins versus rising consumable mix to 82%.

Transcript

Operator (participant)

Good morning. My name is Robert, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General Q4 2024 earnings call. Today is Thursday, March 13, 2025. 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'd like to turn the conference over to your host, Mr. Kevin Walker, Vice President of Investor Relations. Kevin, you may now begin your conference.

Kevin Walker (VP of Investor Relations)

Thank you and good morning, everyone. On the call with me today are Todd Vasos, our CEO, and Kelly Dilts, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News and Events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, long-term growth framework, strategy, initiatives, plans, goals, priorities, opportunities, 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.

These factors include, but are not limited to, those identified in our earnings release issued this morning, under risk factors in our 2023 Form 10-K filed on March 25th, 2024, and any later filed periodic report, 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. At the end of our prepared remarks, we will open up the call for your questions. To allow us to address as many questions as possible in the queue, please limit yourself to one question. Now, it is my pleasure to turn the call over to Todd.

Todd Vasos (CEO)

Thank you, Kevin, and welcome to everyone joining our call. We are pleased with our performance in the Q4, including solid execution and top-line results. As we reflect on the quarter as well as the full year, it is clear that our back-to-basics work has yielded positive results, positioning us well as we enter 2025 and look to the future. I want to thank our associates for their ongoing commitment to serving our customers and communities. Their dedication is on display every day in thousands of Dollar General stores and in our distribution centers, private fleet, and store support center as we all work together to fulfill our mission of serving others. On today's call, I will begin by recapping some of the highlights of our Q4 performance, as well as discussing the portfolio optimization actions we recently undertook for both Dollar General and popShelf.

After that, Kelly will share details of our financial performance, as well as our financial guidance for 2025, and we will conclude with thoughts on our long-term financial framework. I will wrap up the call with an update on some of our key initiatives that we believe will be important drivers of our performance in 2025 and beyond. Turning now to the Q4 performance, net sales increased 4.5% to $10.3 billion in Q4, compared to net sales of $9.9 billion in last year's Q4. With this solid finish to 2024, I am excited to note that for the first time in the company's history, we delivered fiscal year sales of more than $40 billion. This is a testament to the essential role Dollar General serves as America's neighborhood general store in more than 20,000 communities across the country.

We are here for what matters for the customers every day, and the relevance of our value and convenience offering is clear. During the Q4, we continued to grow market share in both dollars and units in highly consumable product sales, and also grew market share in non-consumable product sales. Same-store sales increased 1.2% during the quarter and was driven entirely by growth of 2.3% in average transaction amount. This included relatively even contributions from increases in average unit retail price per item and average items per transaction. This growth was partially offset by a decline of 1.1% in customer traffic during the quarter, which was impacted by ongoing financial pressures of our core consumer, as well as lapping the strong traffic increase of 3.7% from Q4 of 2023.

The comp sales increase was driven entirely by growth in our consumable category and was partially offset by declines in our seasonal home and apparel categories. From a monthly cadence perspective, all three periods were positive, with comp sales growth in December and January relatively even and both outpacing November. Our customers continue to report that their financial situation has worsened over the last year as they have been negatively impacted by ongoing inflation. Many of our customers report that they only have enough money for basic essentials, with some noting that they have had to sacrifice even on the necessities. As we enter 2025, we are not anticipating improvement in the macro environment, particularly for our core customer. In turn, we know our customers expect value and convenience more than ever.

We are committed to providing the value they need and continue to feel very good about our everyday low-price position relative to competitors and other classes of trade. With regards to current tariffs that have been announced on products that we sell, we believe we are well-positioned to mitigate the impact in 2025. We were able to successfully mitigate the tariff impact in 2018 and 2019, though we did take retail price increases in some instances along with others across the industry. Given the already stressed financial condition of our core customer, we are closely monitoring these and any other potential economic headwinds, including any changes to government entitlement programs. Importantly, we remain focused on doing everything we can to deliver the value our customers want and need.

Before I turn the call over to Kelly, I want to share an update on our work to continue to strengthen our foundation for future growth. As we look to build on the success of our back-to-basics work, we have undertaken a thorough review of our business to identify opportunities to further strengthen our foundation. With this in mind, we conducted a real estate portfolio optimization review of both our Dollar General and popShelf banners during the Q4. As a result of the review of our Dollar General portfolio, we made the decision to close 96 stores. While this is less than 1% of our overall store base, those stores, many of which are in urban locations, have become increasingly challenging to successfully operate. These stores likely would have been closed in ordinary course of the store's lifecycle when their lease has expired.

However, we determined that closing these locations now will allow us to optimize our allocation of resources going forward. I also want to discuss the results of our popShelf portfolio review. After analyzing business performance and revised outlooks for our current portfolio of popShelf locations, we identified 51 store closure candidates based on financial and operational considerations from our test-and-learn phase. We plan to convert six of these 51 locations to Dollar General stores and close the remaining 45 stores. This will leave 180 stores remaining as part of the popShelf banner. As a result of these actions, as well as impairment charges primarily associated with popShelf go-forward stores, our Q4 financial results include a negative impact to operating profit of $232 million or approximately $0.81 in EPS.

As we enter 2025, we are optimistic about the popShelf banner and our opportunity to drive improvements in our sales results, as customers' feedback on the brand and shopping experience continue to be strong. Going forward, we plan to build on this strength to increase sales through a variety of initiatives centered around new brand partnerships and enhanced in-store experience, new and expanded categories, and a new loyalty and digital experience. As an example of these efforts, we recently implemented a new store layout with a heightened focus on toys, party, candy, and the beauty categories. While still early, we have been pleased with the results, as we have seen a nice double-digit sales lift across a broad array of our popShelf stores.

In addition to the opportunity to increase sales and ultimately realize further growth in the popShelf banner, we are also able to leverage learnings from this banner and apply them in our non-consumable categories in our Dollar General stores to further strengthen that offering for our DG customers. We are looking forward to the opportunity to improve popShelf results in 2025, and we will continue to evaluate the brand to ensure we are seeing the desired impact of these activities and optimization. In summary, while we never like to close stores before their lease expiration, we believe this portfolio review across both our DG and popShelf banners has further strengthened the foundation of this business as we position the company for the future. Finally, I want to take a moment to congratulate both Steve Deckert and Tracy Herrmann on their new leadership roles within the organization.

Steve has been a valued strategic leader at Dollar General for many years, and I'm confident he will serve the company well in his new role focused on expansion of the Dollar General footprint, process improvement, and leadership of our corporate strategy. Tracy's deep experience and connection with our field teams, along with her commitment to operational excellence, execution, and innovation, make her the ideal leader for our store operations team as we focus on delivering the best in-store experience for our customers and associates. Overall, we are proud of the continued progress we're making and are pleased with how it has positioned us to drive profitable sales growth and capture growth opportunities while creating long-term shareholder value. I will discuss more about our plans and initiatives to drive these results in a few moments.

First, let me turn the call over to Kelly to discuss our Q4 financial results, as well as our 2025 financial guidance and long-term financial goals.

Kelly Dilts (CFO)

Thank you, Todd. Good morning, everyone. Now that Todd's taken you through a few of the top-line highlights of the quarter, let me take you through some of the other important financial details. Unless we specifically note otherwise, all comparisons are year-over-year, all references to EPS refer to diluted earnings per share, and all years noted refer to the corresponding fiscal year. For Q4, gross profit as a percentage of sales was 29.4%, a decrease of eight basis points. This decrease was primarily attributable to increases in markdowns, inventory damages, and distribution costs, and a greater proportion of sales coming from the consumables category. These factors were partially offset by lower shrink and higher inventory markups. We continue to be pleased with the results of our shrink mitigation efforts, which drove a year-over-year shrink improvement of 68 basis points in Q4.

Shrink improvements have continued through the early part of the first quarter, and we anticipate this benefit should continue throughout 2025. Now turning to SG&A, which was 26.5% as a percentage of sales, an increase of 294 basis points. The increase reflects the Q4 impairment charges totaling $214 million related to the portfolio optimization review Todd discussed earlier. The other expenses that were a greater percentage of net sales in the Q4 were retail labor, incentive compensation, repairs and maintenance, depreciation and amortization, and technology-related expenses, partially offset by a decrease in professional fees. Moving down the income statement, operating profit for the Q4 decreased 49% to $294 million, including the negative impact of approximately $232 million associated with the charges resulting from the portfolio review. As a percentage of sales, operating profit was 2.9%, a decrease of 302 basis points.

Net interest expense for the quarter decreased to $66 million, compared to $77 million in last year's Q4. Our effective tax rate for the quarter was 16.2% and compares to 20% in the Q4 last year. This lower rate is primarily due to the effect of certain rate-impacting items on lower earnings before taxes. Finally, EPS for the quarter decreased 52.5% to $0.87, including a negative impact of approximately $0.81 per share associated with the charges resulting from the portfolio review. Turning now to our balance sheet and cash flow. Merchandise inventories were $6.7 billion at the end of the year, a decrease of $283 million, or 4% compared to the prior year, and a decrease of 6.9% on a per-store basis.

I'd like to recognize the great work the team has done to reduce our inventory position while increasing sales and improving in-stocks, while also providing positive operational impacts in both our stores and distribution centers. In 2024, the business generated cash flows from operations of $3 billion, an increase of $604 million, or 25%, which was driven by improved working capital management. In 2024, total capital expenditures were $1.3 billion and included our planned investments in new stores, remodels and relocations, distribution and transportation projects, and spending related to our strategic initiatives. During the quarter, we returned cash to shareholders through a quarterly dividend of $0.59 per common share outstanding for a total payout of $130 million. Overall, we're pleased with our cash and inventory positions and the progress we've made in strengthening our balance sheet over this last year.

These results are a testament to the strength of this business model, as well as the focused efforts on getting back to basics across the organization. With that in mind, I'd like to discuss our financial outlook for 2025. We plan to continue building on the progress we've made, and our guidance for 2025 contemplates continued investment and work to further strengthen the foundation of this business. Importantly, we believe these efforts will lay the groundwork for growth in the years ahead, which I'll discuss in just a moment. With that in mind, we expect the following for 2025: net sales growth in the range of 3.4%-4.4%, same-store sales growth in the range of 1.2%-2.2%, and EPS in the range of $5.10-$5.80. Our EPS guidance assumes an effective tax rate of approximately 23.5%.

We expect capital spending in the range of $1.3-$1.4 billion, designed to support our ongoing growth and which is aligned to our capital allocation priorities that continue to serve us well. As a reminder, our first priority is investing in our business, including our existing store base, as well as high-return growth opportunities such as new store expansion and strategic initiatives. To that end, we're excited to begin work on approximately 4,885 real estate projects in 2025, including 575 new store openings in the U.S., 2,000 full remodels, 2,250 Project Elevate remodels, and 45 locations, and up to 15 additional new stores in Mexico. In addition, we are investing in a number of technology projects, including a finance and HR modernization project, which is primarily focused on a new enterprise resource planning system that will be implemented over the next couple of years.

Next in our capital allocation priorities, we seek to return cash to shareholders through a quarterly dividend payment and, over time and when appropriate, share repurchases. To that end, our board of directors recently approved a quarterly cash dividend of $0.59 per share. We do not plan to repurchase common stock this year, although share repurchases remain an important part of our future capital allocation strategy. Finally, although our leverage ratio remains above our target of approximately three times adjusted debt to adjusted EBITDA, we are focused on improving our debt metrics in support of our commitment to our current investment-grade credit ratings, which, as a reminder, are BBB and Baa2. Now let me provide some additional context as it relates to our outlook for 2025.

While our guidance is centered around a macro-neutral outlook, the full range does recognize that there's still uncertainty both in the broader macro environment as well as for our core customer. We are currently anticipating continued economic pressure on our core customer, though at a relatively consistent level to what they were experiencing as we closed 2024. With regards to gross margin, we expect the most significant factor to be continued positive shrink results, which we anticipate will be a tailwind throughout 2025. Within SG&A, we're taking action to reduce controllable expenses throughout the business. That said, we expect to deleverage in 2025 at our current expected levels of sales and operating expenses. This pressure includes an ongoing headwind from retail wage rate inflation, which we expect to continue between 3.5%-4%.

In addition, we expect our operating leverage to be pressured by a return to normalized short-term and long-term incentive compensation after two years of significantly lower than average payouts. At target payout, this represents a headwind of approximately $120 million. Finally, we expect a continued headwind from depreciation and amortization, primarily as a result of higher capital spending and inflation in building materials in prior years. While we do not anticipate providing quarterly financial guidance, I do want to provide a couple of notes on our expected cadence of financial results in 2025. We expect the first half of the year to be more pressured by initial expenses related to our remodels, including Project Elevate, as we expect to execute more real estate projects in the first half of 2025 than we did in the first half of 2024.

Importantly, we are working to complete the vast majority of our real estate projects by the end of Q3 in order to maximize the number of operating weeks which will benefit 2025. In addition, we expect Q1 to be impacted by additional labor expense and labor expense headwinds compared to Q1 of 2024, when we still had self-checkout in a majority of the stores. Importantly, we believe our plans for 2025 will position us well to drive growth in subsequent years as we look to begin moving toward our medium and longer-term financial goals in the subsequent years. While the recent focus has been on back-to-basics actions and supporting the core business, we believe we are poised for future growth as we look to 2026 and beyond. With that in mind, I want to discuss our long-term financial framework.

We manage our business with a sharp focus on creating sustainable long-term shareholder value. Following a successful year of strengthening the foundation and as a part of our ongoing strategic planning process, we have updated our medium and longer-term financial framework, particularly for the next three to five years, and we'd like to share our updated perspective with you today. It's important to note that we are aiming to achieve some of these components of this model sooner than others, so I will note our specific goals as well as the respective targeted timelines. starting with net sales, we are targeting annual growth in the range of approximately 3.5%-4%, including approximately 2% new unit growth, both of which we plan to begin in 2025. Beginning in 2026, we're targeting annual same-store sales growth in the range of approximately 2%-3%.

These ranges assume that our core customer, while always seeking value, returns to a more stable financial condition, and also that we will drive more of our same-store sales through our mature stores. Turning to operating margin, we're targeting expansion to begin in 2026 and then longer-term to continue expanding toward our goal in the range of approximately 6%-7% as early as 2028. We have a variety of gross margin and SG&A catalysts to drive this expansion moving forward. Specifically, within gross margin, we are working to drive improvement that will build over the next five years, centered around the following: first, expanding the contribution from our initiatives, particularly our DG Media Network, but also including other efforts such as our non-consumable merchandising strategy. Collectively, we believe the potential benefit from all of our initiatives, some of which Todd will discuss, is approximately 150 basis points.

Next, we're focused on returning to pre-pandemic shrink levels, which we believe represents a potential benefit of approximately 80 basis points, and also improving damages, which we believe represents a potential benefit of approximately 40 basis points. Within SG&A, we are targeting reductions over the next five years through initiatives aimed at simplifying work and driving efficiencies, reducing repairs and maintenance expense, and optimizing capital expenditures to stabilize depreciation and amortization expense. Much of the focus of Steve Deckert and his team will be centered around many of these areas. Ultimately, our goal with these efforts is to increase profitability and minimize SG&A deleverage on sales over the medium to longer term. Our capital allocation priorities will continue to drive our financial strategies. We are targeting annual capital expenditures to be approximately 3% of sales and expect to be in position to restart share repurchases as early as 2027.

We believe this long-term framework will enable us to continue investing in growth initiatives that expand our ability to serve customers with value and convenience while also returning cash to shareholders. Finally, beginning in 2026, our long-term financial framework seeks to deliver annual EPS growth of at least 10% on an adjusted basis. In conclusion, we're excited about the plans and the future of DG and are confident in our long-term approach. We believe the business model is strong and we are well-positioned to drive sustainable long-term growth on both the top and bottom lines while creating long-term shareholder value. With that, I'll turn the call back over to Todd.

Todd Vasos (CEO)

Thank you, Kelly. We're excited about our plans for both the near-term and long-term, and I want to take the next few minutes to highlight some of the most important initiatives across four areas of the business.

I'll start with some of the near-term actions focused on building on our back-to-basics work to further enhance the in-store experience for our associates and customers. We know that an essential part of convenience for our customer is the ability to not only reach the store easily, but also the quality and speed of their in-store experience. We are focused on retraining in our stores and asking our teams to recommit to creating a fast and friendly experience for our customers on every visit. To enable our associates to deliver on this effort and focusing on serving our customers, we are also working to further simplify the operating model by removing unnecessary activities and friction points from our stores. These efforts include a continued focus on inventory reduction and SKU productivity.

We believe these efforts, along with further assortment and allocation optimization, will contribute to the shrink and damage improvement contemplated in our long-term framework. We are also working on tasks upstream, such as sorting in our distribution centers and case pack optimization, to allow our teams to get products to the shelf even quicker with less touches. Finally, we are targeting completion of our next-generation point-of-sale rollout in the first half of the year, which will simplify the checkout process as well as other in-store activities. Ultimately, we believe these efforts focused on our core business will build on the progress we've made and allow us to better serve our stores and our customers. Next, I want to briefly mention Project Elevate, which we announced in December.

As a reminder, this is our new incremental remodel initiative aimed at bolstering performance in portions of our mature store base that are not yet old enough to be part of a full remodel pipeline. As we focus on driving greater profitability in our mature store base, our goal for Project Elevate stores is to drive first-year comp sales lifts in the range of 3%-5%, while also mitigating future expenses, particularly in repairs and maintenance. These projects include physical asset refreshes as well as merchandising optimization and will impact approximately 80% of the total store. When combined with our enhanced full remodel program, which we call Project Renovate, we expect to touch approximately 20% of our store base annually and to significantly improve the shopping experience in our stores while elevating the brand and driving greater top and bottom line contributions from our expansive mature store base.

The third area I want to discuss is our digital initiative, which is an important complement to our unique physical footprint as we continue to deploy and leverage technology to further enhance convenience and access for our customers. We are pleased with the growing engagement we are seeing across our digital properties, including our mobile app, website, delivery options, and the DG Media Network. We have a highly successful and incremental delivery partnership with DoorDash in more than 16,000 of our stores. We expect to continue growing sales through this channel exclusive partnership in 2025 as we continue to expand the number of stores in the program. In addition, we recently began processing both SNAP and EBT transactions through this program, which we believe will drive new customer acquisition and continue to drive incremental sales.

Importantly, the learnings from this initiative, along with our own customer work, have provided the foundation from which to launch our own delivery offering with our unique customer base. As we announced last quarter, we began a test of same-day home delivery from a handful of our stores in September. We have begun expanding this offering more broadly and are currently partnering with DoorDash to fully execute a delivery offering through our DG digital solutions from approximately 400 stores. While it's still very early, we have been pleased with the initial customer response to this offering, including higher average baskets than those in our brick-and-mortar stores.

We believe our expansive real estate footprint uniquely positions us to offer a compelling home delivery option and ultimately become the fastest delivery alternative for customers in our communities, further expanding their access to value and convenience that saves them time and money every day. Looking ahead, we plan marketing to drive awareness of this opportunity in the current stores while also beginning to scale this offering more significantly with the goal of up to 10,000 stores by the end of 2025. The linchpin of our digital initiative is our DG Media Network, which enables a more personalized experience for our unique customer base while delivering a higher return on ad spend for our partners. With the expansion of our delivery offering, our multi-channel platform will enable us to accelerate the scaling of our media network in 2025 as well.

In turn, we believe we can further evolve the relationship with our customers, driving greater customer loyalty within the digital platform while ultimately increasing market share and driving profitable sales growth. The final initiative I want to discuss is our non-consumable growth strategy. Our three non-consumable categories, home, seasonal, and apparel, combined to deliver more than $7 billion in sales in 2024. Our customers have continued to respond favorably to the treasure hunt approach we introduced in our stores, as evidenced by our continued market share gains in these categories. However, as the overall discretionary shopping environment has softened, we have seen our consumable sales well outpace our non-consumable sales in recent years. As a result, the lower margin sales have pressured our overall gross and operating margins as consumable sales mix has continued to climb to 82%.

In conjunction with the financial framework Kelly laid out earlier, our goal is to increase non-consumable mix by at least 100 basis points by the end of 2027 and ultimately return non-consumable sales closer to approximately 20% of the overall sales mix over the next five years while maintaining our strong performance in our consumable businesses. To reach this goal, we have identified four pillars of growth to drive sales in non-consumable categories over the next three years. These pillars include: first, brand partnerships, where we look to build on the success of current programs to work with well-known brands to showcase quality and value for our customers. The second is a revamped treasure hunt, where we plan to upgrade our rotational home assortment to enhance the value equation for our customers. Next is the reallocation of space within our home category.

This pillar is focused on reducing less productive space in certain departments and reallocating to more productive and relevant offerings for our customers. The final pillar is focused on increasing productivity in non-consumable categories by injecting newness in core planograms and non-core space allocation, such as new programs in certain categories while leveraging category innovation in more established programs. We are implementing a multi-pronged marketing approach to showcase the breadth and quality of our assortment in these areas while amplifying the value message. Ultimately, we believe we can capture additional market share to drive significant top and bottom line growth in alignment with our long-term financial goals. In closing, we are pleased with our Q4 performance and the way we ended the year.

While 2024 had its challenges, particularly for our core customer, it was an important year for Dollar General to get back to basics and fortify the foundation of this great business. We are proud of the progress we made on this front, and it has positioned us to take the next steps forward in 2025. As Kelly noted, this work has also enabled us to lay the groundwork for our long-term financial goals over the next few years. Our mission of serving others continues to guide everything we do, and we are excited about our plans for 2025 and beyond. We were pleased to have the opportunity to spend time with more than 1,500 field leaders in various cities across the country in February.

From that time together, I can tell you this team is energized and confident in our strategy to restore operational excellence and deliver value for our customers and shareholders alike. I want to thank our more than 194,000 employees for their commitment to each other and to our customers. I'm looking forward to all that we can accomplish together in 2025. With that, Operator, we would now like to open the lines for questions.

Operator (participant)

Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. As a reminder, we ask that you please limit to one question. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Kate McShane with Goldman Sachs. Please proceed with your question.

Kate McShane (Analyst)

Hi, good morning. Thanks for taking our question. Your guidance today of getting to operating margin of 6%-7% by 2028. We were wondering if you can talk about what you expect the arc of the margin expansion to look like between now and then, and what do you think are the biggest structural changes in the business that are preventing you from getting back to historical operating margins?

Kelly Dilts (CFO)

Thanks, Kate, for your question. Maybe I'll just walk through a few of the assumptions as we think about that mid to longer term. It's not necessarily going to be a straight line, but we know we have a lot of action plans in place so that we are focused on hitting those targets and the timelines that we identified. I'll just start with sales. Most of our sales that we're expecting are going to be driven through that mature store comp. We're taking a lot of actions right now to drive that mature store base and really building on the back to basics and all the initiatives that we have here in 2025 that will get us ahead on that sales number. As you think about the gross margin piece, there's a couple of things. I think that the first thing that I'm excited about is both the shrink and damage lines are well in our control.

We've already started seeing improvement on the shrink side with the back to basic work there. Between those two, you've got 80 basis points of shrink and about 40 basis points of damages. It's good to see that we have a positive trajectory right now, and we're really already winning. Just as a reminder, the other things that we have in play are private brands. We still have great category management. We're working hard on inventory optimization. I'm sure you'll hear a little bit more about that today. Supply chain efficiencies, as well as just our approach to the safe-to-serve kind of cost control that we always have in place. I think the other important piece of this is really around the initiatives.

DG Media Network, the non-consumable mix, and all the other initiatives that we have in play may take a little while to get there, but we're certainly driving to the framework that we laid out.

Operator (participant)

Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question.

Simeon Gutman (Analyst)

Good morning, everyone. Todd, I wanted to ask if you can diagnose the consumer. It's obviously very fluid at the moment, and I don't normally ask about even quarter to date, but if you can bring us through the chronology of the last few months and as much as quarter to date as you're willing to talk about what the consumer is doing in terms of spend, number of trips, level of stress, all the above. Thank you.

Todd Vasos (CEO)

Yeah, sure, Simeon. It is fluid, as you indicated, but I would tell you that from our core consumer perspective, what we've seen is about the same here in 2025 as she was exiting really Q3 of last year. She's always strained, as we always say, right, because of her economic well-being. I would tell you that she is also resourceful. With that, we have started to see where she's getting her sea legs, if you will, on the additional inflation that's been very sticky out there. She's starting to understand her budgets even more. What has really become apparent, leaving Q4 and moving into Q1, is the trade down is back. Both the mid and upper end trade down, and as we moved into Q4, seems to be accelerating.

We'll know a little bit more as we poll Q1 here, but I would tell you nothing that we've seen so far would show that that trade down has slowed down. If anything, we may have seen it accelerate a little bit in the last few weeks. We'll know a little bit more in the next upcoming weeks as we poll our consumers, both our core as well as the upper end, if you will, or our non-core type of customer. The other thing I think to keep in mind is the initiatives that we have laid out and have been at work here have started to really play into what we've seen on the top line as well as the bottom line.

Again, not to reiterate, but I'm very proud of what the team has done on our back to basics work that has gotten us to this position and is going to really be that framework and foundation to let us deliver that long-term framework. We believe that everything is in our control. We just have to execute at a real high level. That's exactly what we're aiming to do as we move through 2025 and beyond and be there for that customer. We believe that's going to get even more fluid with some of the tariffs. We are watching that very closely as we move through the upcoming weeks.

Operator (participant)

Our next question is from Matthew Boss with JPMorgan.

Matthew Boss (Analyst)

Please proceed with your question. Great. Thanks. Todd, maybe first, could you recap learnings from your back-to-basic strategy in 2024? Just how would you rank incremental initiatives that we should consider for 2025? Kelly, just maybe what's the comp needed to leverage SG&A in 2025? Can you just recap? I think you cited some SG&A as well as gross margin puts and takes that we should just consider for the first quarter relative to the year.

Todd Vasos (CEO)

Yeah, Matt, I'll start and then pass it over to Kelly. Again, we're very proud of what the team has done here on that foundational work. That back-to-basics work was exactly what we needed here at Dollar General. We've been executing against it for the better part of 13, now about 15 months or so. I would tell you that some of the big takeaways, I would tell you, is, you heard from Kelly, shrink is starting to turn into a tailwind, which we knew would happen with all the work that we've done. We've done this before. We know exactly how to attack that shrink line. It's not easy work. It's pick and shovel work.

I would tell you the teams have done a really nice job. The great thing with that is it should be the gift that keeps on giving as we move into 2025 and even 2026. Stay tuned. A lot of work's being done as we speak around ensuring that the productivity of our stores is exactly where it needs to be.

We started that work on back-to-basics last year, but I would tell you that it is in overdrive starting in 2025 by moving Steve Deckert into that role where he's going to be squarely focused on productivity measures and being able to leverage what we do at a really high level. I know for sure that we're going to be working every single lever that we can to better our numbers as we move into 2025 here. We're already starting to see some of the effects of that. Inventory was the other piece that I want to highlight for 2025. When you look at our inventory levels and you see the work that's been done there with a 6.9% decrease per store in Q4, very, very strong.

A thousand SKUs have been taken out of the planogram, so the stores are much more productive and our DCs are more productive. I would tell you we're not finished. There'll be more SKU reduction in 2025, along with even more SKU optimization in 2025. Both of those pieces. As you take a look at that, the productivity that Steve is working on with our DCs is the other piece. That is where we can optimize what's coming into our stores through the retainer process and optimizing that. The less touches that the store has to do, the better off we'll be. Retainer sort's important. Planogram sort by delivery's important. That work was done in 2024, and we're starting to reap the benefits of that in 2025. I'm sorry, it was done in 2024. We're reaping that in 2025.

As you think about the next step, it's case pack optimization here. What that does for us is ensures whatever comes in goes to the shelf where the store does not have to touch it multiple times from the time they stock it to the time it gets put into the customer's bag. When you think about 20,000 stores across our network, if I can save a few touches per store per day, that adds up to very meaningful numbers at the end of the day. A lot to be proud of, a lot of work yet to do, but we're squarely focused on getting that done, Matt.

Kelly Dilts (CFO)

Yeah. If I can just jump in on that a little bit, before I go into the details, I think what I'll do, Matt, to kind of address your question on 2025 is just tell you what we're thinking about all the way through the P&L and then just some of the SG&A headwinds that we're seeing in 25 to talk to your leverage question. Before I go into all of that, I just want to reiterate, we're excited about our 2025 plans. We think that what we've done in back-to-basics sets us up nicely. All of the actions that Todd has been talking about are going to continue to drive growth in subsequent years, really moving towards that medium and longer-term financial goals that we laid out today.

Maybe I'll start with just kind of what is reflected in our 2025 guidance, especially from the consumer side of things. Currently, we're anticipating that there is continued economic pressure on that core consumer, though at a relatively consistent level as they were experiencing as we exited 2024. The guidance is centered around a macro-neutral outlook. I'll tell you that the full range really allows for some uncertainty on macro and our core customer about that low end and high end. There are a couple of things that are not contemplated in our guidance. One would be any changes to the tariff expectations from what we maybe do not know as of today. We also do not specifically contemplate any changes to SNAP or other benefit programs in our guidance.

The other thing would be any significant impact to consumer demand brought on by those impacts of tariffs has not been contemplated in the guidance as well. What has been contemplated as we kind of move through, if we think about margin, really the primary driver there is going to be the shrink improvement as we move through the year. On the SG&A side, I think this will probably talk to a cadence question that I'm sure that you all are wondering as well as to your headwind question. During Q1 and Q2, we are expecting the most pressure on a year-over-year comparison and are expecting EPS to be below last year for those two quarters. When we think about the first half, there's a couple of things that are going on. First, there are just initial expenses related to our remodels, including Project Elevate.

As we expect to execute more real estate projects in the first half this year than we did last year, you'll see some pressure on that. The goal here is really to complete a vast majority of our real estate projects by the end of the third quarter. That helps us maximize those operating weeks that can benefit us later in 2025. As I think about Q1 and Q2, there's another couple of callouts. Q1 obviously has the toughest comp lap to prior year, and that's going to pressure SG&A as a percent of sales. We do have some additional labor expense headwinds in Q1, and that's really related to self-checkout. We still had the self-checkouts in a majority of our store base before the conversions began in later Q1 of last year.

The other callout I would just say on Q1 with the store closures that we announced, we do expect to have costs associated with those in the realm of about $20 million in the first quarter. As you think about the second quarter, it is really SG&A is impacted by incentive comp headwinds. Last year, the accrual was lower than what we would expect in Q1 of 2025. That is really when we lowered expectations last year in Q2. Finally, I will just talk through kind of the full year. We talked about this in our prepared remarks, but just to reiterate it a little bit, we are expecting for the full year wage rate inflation of between 3.5%-4%. That normalized short-term and long-term incentive compensation at our target, it is about $120 million.

Depending on where we land with the guide, it could be less and could be more of a headwind as we move forward. Finally, depreciation, rent, utilities, R&Ms, the things that we've been talking about are presenting a headwind. The good news there is we have a lot of actions in place. They're going to help mitigate that deleverage as we move into 2026 and beyond. That's what's embedded in our framework. All that said, I think that 2025 is a year that's just going to position us well to drive that growth in subsequent years. You saw our callout of expecting double-digit EPS growth in 2026. We're looking forward to moving towards those medium and long-term financial goals.

Operator (participant)

Our next question is from Hye-yeon Ma with Bernstein. Please proceed with your question. Great. Thank you for taking my question.

Zhihan Ma (Senior Research Analyst)

This is Zhihan from Bernstein. I guess a follow-up on the real estate side. First of all, beyond the existing kind of 96 Dollar General stores, 45 pOpshelf stores, are you expecting more to be closed based on your portfolio optimization? Longer term, as you think about the IRR between new store openings, Project Elevate, and the store remodels, how would you compare the returns on those projects? How does that change how you think about the balance between the three going forward? Thank you.

Todd Vasos (CEO)

Yeah, thank you for the question. I'll start and pass it over to Kelly. I believe that we did exactly the right thing in taking a look at our full portfolio of stores.

We do that every year, but we did it with a little bit of a different eye this year and ensuring that we looked at both our Dollar General and pOpshelf locations. I have to say, while it's never easy to close stores, it was exactly the right thing to do. Ninety-six Dollar General stores, less than 1% of our fleet, if you will. It comes as no surprise, probably to you and maybe others. They were predominantly in urban and metro settings where it has become very, very difficult to run a profitable store for a lot of different reasons that obviously have been out in the news for many years. We continue to watch that. The great thing is, as we look at our prospects, we still see there's 12,000 seat points out there in the US

to put a Dollar General store, a pop shelf store. While we won't get all those, we still believe there's a lot of runway for growth within the continental United States, not to even mention Mexico, which we've committed to put in upwards of 15 stores this year in the ground in Mexico. As I think about pop shelf, they have done a really nice job. The customer is still very, very positive on the brand. We need a little economic help there, but I tell you, we're not waiting around. You heard in our prepared remarks, we've seen the vast majority of our go-forward pop shelf stores have some double-digit increases as of late on the top line. That's from all the work that the team has done to position that pop shelf brand exactly where the customer wants it. More to come.

I would call that we're in the very early innings of our test and learn with pOpshelf. By the way, when we closed 51 stores and obviously turning six of those into Dollar Generals, it was really centered squarely around our test and learn mentality. What I mean by that is we tested the outer limits and bounds in many instances to see what that elasticity would look like on different demographics to put a pOpshelf store. Some worked really well and some didn't work as well. We learned a lot there. Those are the ones that we're closing down. While we'll always watch and look at our portfolio, we believe this was exactly the right thing to do at the right time.

Kelly Dilts (CFO)

Yeah. Just to cover the financial side of all of that, what I would say is we're still very excited about the opportunities that we have around new store growth. We're seeing IRR still of 17%. We've got a payback period of approximately two years. We have a lot of locations left that we can go into. We're feeling good about the pipeline and just the ability to produce the results that we have seen historically. I think right now we've done a nice job of balancing the capital allocation between new stores and existing stores. As we think about that, maximizing the current store base is just really powerful as we work to gain that mature store comp. With Project Elevate, we're expecting a sales lift of between 3% and 5%.

The exciting thing there is we're going to cover about 20% of our stores this year. If you think about that in terms of the mature store base, that's actually about 25% of our mature stores. Very significant for us. On our traditional remodels, which we're calling Project Renovate, we still expect to see that 6%-8% lift. We're also going in and enhancing some of the things that we're doing specifically to work towards mitigating repairs and maintenance. All of what we're expecting, we have seen, and we're excited about how this is going to play out over the next couple of years in our framework.

Operator (participant)

Our next question comes from Rupesh Parikh with Oppenheimer. Please proceed with your question.

Rupesh Parikh (Senior Analyst)

Good morning and thanks for taking my questions. Two areas of focus. One is the latest on your store conditions at this point for your expectations, inventory and stock staffing, etc. Secondly, related to that, just curious on the opportunities you still see to further improve working capital from here.

Todd Vasos (CEO)

Yeah, I'll take that. Then Kelly, add anything you would like to. I would tell you that, again, our back-to-basic work has done exactly what we thought it would do. Exiting Q4, we're at 70% or better in our conditions in our stores, meaning 70% or better stores that will serve the customer very well. We still are working, like we always will work on some of those that we still have some pockets that we're working on.

I would tell you, with the recent move with Steve coming in and then Tracy moving to Head of Stores, her number one and only goal is execution, execution, execution for 2025. With that, we feel very confident that we'll make even further headwinds in our in-stock positions, which, by the way, are at some of the highest levels we've seen in years right now and getting better. I believe that that execution will also move over to moving that 70-plus % that we have today closer to the 80 range where we feel more comfortable in. We are moving toward that direction. I would tell you that the customers are already seeing it, feeling it, we're hearing it in our customer work, our customer surveys, and obviously seeing it in our sales.

I feel very good about what that looks like and where we'll continue to make good headway into 2025.

Kelly Dilts (CFO)

Yeah. To piggyback off of that, I just want to call out, I really think the team threaded the needle here on inventory in stock. Making significant reductions in inventory while increasing in stocks and having positive sales is just remarkable. To your point, Rupesh, it did play well with our working capital. We felt like we did manage that very well. Our cash flow from operations was up 25%. Free cash flow is up 144%. Good discipline around capital expenditures. We were able earlier this year to pay down debt to help our leverage there at $750 million.

As we look ahead in 2025, we have another $500 million maturing in the fall, but we expect to pay down that early and with cash in Q1. Making additional progress on that as well.

Todd Vasos (CEO)

Yeah. Last thing I'll say on that, Kelly, is that as we move into 2025, as I mentioned earlier, we're not finished with that optimization of inventory. There will be further reductions of SKUs and further optimization. More to come as we move into 2025.

Our next question comes from Seth Sigman with Barclays. Please proceed with your question.

Seth Sigman (Senior Equity Research Analyst)

Hey, good morning, everyone. I wanted to follow up on the long-term margin bridge to 6%-7%. When you add up the different buckets that you cited, it would seem to drive margins well above that target. I'm just curious, what is the offset there? It sounds like the message on investments is relatively stable outside of some of the early pressures here in 2025. Is that conservative or are there offsets that we should be thinking about?

Todd Vasos (CEO)

Thanks so much. Yeah, I'll start and then pass it over to Kelly. As we look at it, obviously, it's a long-term framework. We believe it strikes the right balance that we need to ensure that we continue to serve the customer the way we need to serve the customer and also serve our employee base the way we need to, and obviously serve our shareholders. In saying that, we always strive to do more and we'll do that. It wasn't lost on us that it does add up to a higher number.

Just would love your thoughts on what kind of environment you see any changes for this year versus 2024. Yeah, absolutely. Again, I have to say it's always a competitive market, so I'll start there. I would tell you it is fluid. You named some of the things that we're obviously watching and some of the competitors. There's been a lot of competitors closing, many not in our space directly, but some that were. For instance, with Party City moving out, that's one reason, and you heard in our prepared remarks that we went in and rebalanced the inventory in our pOpshelf stores, bringing in more party, more occasions, more toys, things that will go directly for that consumer that is probably left looking for a place to shop. I believe in the competitive closings, there are opportunities.

Drug continues to be our largest share donor as we look at our non—I'm sorry, our consumable share gains, which we're very proud of, and our non-consumable share gains, which we've been very proud of coming out of Q4 and now moving into Q1. I believe that there'll be further opportunity. For us, that's the reason we're squarely focused on ensuring that we have our best foot forward. When these customers come in our stores, they become sticky and continue to shop with us. The good thing is what we're seeing is that trade down or trade in, as we like to speak to it, has accelerated going through Q4 and into Q1. It's really nice to see that. That tells me that she likes what she sees as she comes in. We're going to deliver even more of that as we move forward.

As it relates to delivery, I would tell you that expanding our delivery up to 400 stores and then aiming to move to 10,000 by the end of the year is and should be a competitive advantage. The reason being is that there is no one out there today that can deliver to small-town rural America within an hour. We can do that. That is what we aim to do with our delivery initiative. I'm very pleased with how we've started the 400 stores. The basket is at a very large pace, a lot larger than our basket that obviously when people come in our stores.

A lot of the go-forward initiatives that would say continue to move forward are flashing green, and it's all systems go for us as we look to light up close to 10,000 stores or more as we move into the back half of this year. The linchpin there, and I have to say, is the Dollar General Media Network. The reason being is that it gives us the opportunity to be able to get more eyes on our apps, more on our website, all of our digital tools, which we then can turn around and work with our vendor partners to leverage that. As you may remember, we were one of the first to institute a media network years ago. We've got a really good track record of ensuring that we can maximize that. More to come.

There's a nice margin tailwind that's contemplated in our long-term framework around the media network. And we feel very confident able to get our arms around that and deliver that as well.

Operator (participant)

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.