Dollar General Corp. 2027 Q2 Earnings Call

Thank you, and good morning, everyone. On the call with me today are Todd Vasos, our CEO, and Donny Lau, our CFO. After our prepared remarks, we'll open the call up for your questions, and Emily Taylor, our Chief Operating Officer, will join us for the Q&A session. To allow us to address as many questions as possible in the queue, please limit yourself to one question. 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 financial framework, strategy, initiative, 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 2025 Form 10-K, filed on March 20th, 2026, 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 on this call unless required by law. Now, it is my pleasure to turn the call over to Todd.

Thank you, Kevin, and welcome to everyone joining our call. I want to begin by thanking our team for their continued dedication to fulfilling our mission of serving others every day in our stores, distribution centers, private fleet, and store support center. We are pleased with our second quarter results, including balanced top-line growth, healthy operating margin expansion, and strong double-digit EPS growth, each of which exceeded our expectations even before considering any impact from tariff refunds. For today's call, I'll start by recapping highlights from our second quarter performance. Donny will then walk through our financial results and outlook, and I'll close with an update on our strategic growth pillars. Turning to our second quarter performance, net sales for the quarter increased by 0.2% to $11.3 billion, compared to net sales of $10.7 billion in last year's second quarter.

Once again, during the quarter, we grew market share in both dollars and units in highly consumable product sales while also growing market share in non-consumable product sales. We were especially pleased to see our share gains accelerate in the quarter, which we believe demonstrates the strength and broad appeal of our unique combination of value and convenience, particularly in rural communities across America. Same-store sales increased 3.5% during the quarter, driven by customer traffic growth of 2% and average basket growth of 1.5%. Notably, this marks the fifth consecutive quarter of growth in customer traffic as we continue to build on the momentum in our business with both new and existing customers. In addition, all four merchandising categories delivered positive comp sales for the sixth consecutive quarter, with the growth rate in non-consumables once again outpacing consumables.

This broad-based category growth is a testament to the relevance of our offering and our position as America's neighborhood general store. From a monthly cadence perspective, all three periods of the quarter were strong, led by both June and July. While still early, we are pleased with the strong sales performance to begin Q3 and confident in our plans to drive continued growth in sales, market share, and customer traffic. Moving to an update on our customer. Our core customers continue to be financially constrained, with a variety of factors impacting their budget. Most notably, higher and more volatile fuel prices have forced customers to further prioritize purchases with a focus on value and affordability.

As customers have continued to reduce trips and shop closer to home, Dollar General is uniquely positioned to meet their needs, with more than 21,000 stores located within five miles of approximately 75% of the U.S. population. Our expansive store footprint continues to be a unique competitive strength and is complemented by our growing delivery presence, which contributed an estimated 40 basis points to our comp sales growth in Q2. In addition to our strong convenience offering, we remain committed to delivering exceptional value through our strong everyday low price position, which is within 3-4 percentage points of mass retailers, disciplined and strategic approach to promotional activity, and extensive offering of more than 2,000 items across the store at or below the $1 price point.

Within our $1 price point, we continue to emphasize and strengthen our Value Valley offering, which is now comprised of more than 600 rotating items, each priced at $1. During Q2, we expanded our $1 off-shelf display presence in more than 9,000 stores. We are encouraged by the early results, and these stores are already driving incremental comp sales greater than the rest of the chain. Notably, our Value Valley offering once again significantly outperformed the chain average in Q2 with comp sales increases of more than 16%. Looking ahead, we are excited about our plans for an expanded $1 presence in our fall and holiday set in the back half of the year. We know this price point is important to our customers, and we are excited about the opportunity to continue providing tremendous value through these offerings.

We also received tariff refund payments during the quarter and reinvested a substantial portion, primarily to further enhance the overall value proposition for our customers while helping them save money on everyday necessities. More specifically, we delivered additional savings through both targeted promotional activities, particularly around the important summer holidays, and lower everyday prices. Consistent with our overall approach to pricing, we took these actions strategically to serve customers while targeting sustainable share gains and sales growth over time. In addition, tariff refund reinvestments during the quarter included incremental SG&A spend on customer-facing initiatives, including increased marketing expense as we look to further enhance the customer experience and elevate our brand. For the quarter, we once again experienced strong trade-in across middle and high income cohort, while also driving productivity gains with our low-income customers.

Overall, we are proud of the consistency and balance of our top-line performance, which was enabled by strong execution and further demonstrates the essential role that Dollar General serves as a trusted partner in the communities we call home. Finally, as we continue to invest in the growth and development of our teams, we are pleased to see lower year-over-year turnover collectively in our stores, distribution centers, private fleet, and store support center, all of which is contributing to our improved execution and strong financial results. In summary, we are pleased with our Q2 performance and proud of our team's strong execution. We are confident in our long-term financial framework and excited about our plans to continue delivering value for our customers, associates, and shareholders. With that, I will now turn the call over to Donnie.

Thank you, Todd, and good morning, everyone. Now that Todd has taken you through the top-line results for 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 Q2, gross profit as a percentage of sales was 32.6%, an increase of 127 basis points. This increase was primarily attributable to the benefit from tariff refunds, a lower LIFO provision, and lower distribution cost, partially offset by increased markdowns and increased transportation costs. We are especially pleased with our gross margin performance during the quarter, even before considering the approximate 81-basis point benefit from tariff refunds after gross margin-related reinvestment.

We were also pleased with the continuing improvement in damages and shrink in Q2, which reflects strong in-store execution by the team. Turning to SG&A, which as a percentage of sales was 25.8% and flat year-over-year. The primary expense that was a higher percentage of sales in the quarter was depreciation and amortization, offset by rent, which was lower as a percentage of sales. Moving down the income statement. Operating profit for the second quarter increased 29.2% to $769 million. As a percentage of sales, operating profit increased 126 basis points to 6.8% and includes an approximate 66-basis point benefit from tariff refunds after related reinvestment. Net interest expense for the quarter decreased to $42.9 million compared to $57.7 million in last year's second quarter. Our effective tax rate for the quarter was 24.2% and compares to 23.5% in the prior year.

Finally, EPS for the quarter increased 33% to $2.48, including an approximate $0.25 benefit from tariff refunds after related reinvestments. Turning now to our balance sheet and cash flow, where we continue to make significant progress in strengthening our financial position. Merchandise inventories were $6.6 billion at the end of Q2, essentially flat compared to the prior year, and represented a decline of 2.7% on an average per store basis. Importantly, the team has done a terrific job reducing inventory to a level we believe is appropriate to support strong sales growth going forward. Overall, we are pleased with our inventory position and for fiscal 2026, continue to expect inventory to grow at a rate below our sales growth.

Year-to-date through Q2, we generated significant cash flow from operations of $1.5 billion, providing flexibility to reinvest in the business and return meaningful cash to shareholders, all while further strengthening our balance sheet and liquidity position. Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in the business, including our existing store base, as well as other high return growth opportunities such as new store expansion and our strategic initiatives. Next, we seek to return cash to shareholders through a quarterly dividend payment, and when appropriate, share repurchases. Finally, we remain committed to maintaining our goal of less than 3x adjusted debt to adjusted EBITDA in support of our commitment to middle BBB ratings by S&P and Moody's.