Dollar General Aktie

Thank you, everyone, for joining us. It's my pleasure to introduce Dollar General and to moderate this fireside chat. Today, we have with us Todd Vasos, Chief Executive Officer; Emily Taylor, Chief Operating Officer; Donny Lau, Executive Vice President and Chief Financial Officer; and Kevin Walker, Vice President of Investor Relations. I'm going to turn it over to Kevin to read the safe harbor statement.

Yes. Thanks, Kate. So let me caution you that statements made during today's fireside chat will 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, 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 on August 27, under Risk Factors in our 2025 Form 10-K filed on March 20 and any later filed periodic report and in the comments made during this event. You should not unduly rely on forward-looking statements, which speak only as of today's date, and Dollar General disclaims any obligation to update or revise any information discussed today unless required by law.

Now it's my pleasure to turn it back over to Kate.

So thanks so much for joining us today. Todd, I wondered if we could start with you. You've led Dollar General now for a combined 10 years and are now more than halfway through your final year as CEO. So just reflecting on the past few years, what has maybe been your biggest learnings? And what are the most important priorities you hope to accomplish before the transition?

Well, first thanks, Kate. Thank you. First, I'll always bring Kevin for the filibuster, right, because it always takes a couple of minutes of time.

I didn't need as many questions today.

But no, but thank you. I would tell you, number one, I couldn't be more honored to have had the opportunity to lead Dollar General for, as you said, the past 10-plus years, but I've been with the company 18 years in total. And what I found is, this is a wonderful company and wonderful from the soul in to out. And what I mean by that is that this company lives the mission of serving others, and what better service than to serve the community that we serve, and that's a community that is disadvantaged in many ways, right, not only economically in many instances, but also in just having facilities to be able to go to and shop because of the rural nature of our business and who we have.

And the last thing I would say, Kate, is that I've always lived by the motto, you leave it better than you found it, right? And I want to say that we did that in '22 and definitely we'll be leaving it much better than we found it here in '27 when I buy out in January.

Great. And if I could just maybe close the loop on that, you could maybe talk a little bit about the CEO transition and how you're approaching this in order to get to the next chapter for the company?

Yes. We spent a lot of time, as you can imagine. The Board asked me to be directly involved as we chose my next successor in JJ Fleeman. We interviewed a tremendous amount of people. As you can imagine, there was a lot of interest, a great company, again, in Dollar General. And we landed on JJ for a few reasons. One, he knows the business. He's a student of the business. I don't want to take any thunder from him. I'm sure he'll introduce himself when the time is right. But grew up in the Ahold Delhaize steam, if you will, but not only grew up in it, but from a bag person and worked his way up to be the CEO of the U.S. operation. Very steep in -- what we looked for was somebody that was very steep in all parts of the operation, and we found that in JJ.

I've spent a lot of time with him since -- not only during the interview process, but even post-acceptance as we work toward his garden leave being finished and he coming in, in January. I committed to the Board that I would stay as a Senior Adviser and on the Board, at least until April -- 1st of April. And I will work directly with JJ to make sure that his on-boarding is very, very smooth. The last thing I'll also say is in the last couple of years, we worked tremendously hard on shoring up our management team internally. And I would tell you, in the 18 years I've been here, we've got the strongest senior management team that we've ever put on the field here at Dollar General and Emily Taylor and of course, Donny Lau being two of those folks that are sitting to my left.

Great. Thank you for that. Maybe if we can start with the health of the consumer. Obviously, this whole conference is kind of predicated on assessing the health of the consumer. We've heard a lot in this last 1.5 days about the K-shaped economy and how the lower income consumer is faring. And you have 21,000-plus stores in rural communities. So could you maybe talk a little bit about the changes you're seeing in shopping behavior as customers continue to navigate this inflationary environment we're in? And as you look to the second half, how are you thinking about the consumer and the broader demand environment?

We are -- we spend a lot of time, Kate, obviously, watching our core consumer, but watching all segments, including higher-income consumers. And what we've seen in this economy, and again, not a surprise probably to anybody in this room, is we've seen a customer across all cohorts of income levels being somewhat distressed, especially in sustained inflation outside of gas prices for a minute, just basics. And then couple gas prices, and we've always said here at Dollar General for our core customer that anytime that gas price gets anywhere close to $4 and then crest $4 a gallon, the customer changes their shopping behavior, stays closer to home, normally shops more often, but buys less on each occasion. And that's exactly how that core customer is faring.

But the interesting thing with this economy, because of the other sustained headwinds of inflation over the years that have passed, even that middle to upper middle is acting more like a lower-income shopper these days. And they have that same characteristic. And then high income for us is that $100,000-plus crowd. And I would tell you, we're hearing more and more from them is I don't feel like I'm higher income at $100,000 any longer, right, because of all of the headwinds that I just mentioned. So we believe at Dollar General, we're in a really good position to service all of the different demographics of what we have.

But even more so, all the work that we've done over the last few years to set ourselves up to be in a really good strong position to not only service that consumer, but also be able to retain that consumer when and I'm sure it -- everything goes in cycles when the economy gets better for certain classes of consumer. The last thing I'll mention is, and I'm sure you've asked this question, is the consumer is very resilient though, still through all this. And the biggest reason why, and it's no surprise is she is gainfully employed still. And as long as that holds, I think especially our core consumer figures it out, and I think other consumers do, but they need help, and that's exactly what Dollar General provides.

Great. And I know we didn't really talk about gas prices in the context of what you just spoke about. But do you think higher gas prices play any kind of role in the traffic you're seeing right now in the stores? Do you think you gain share at times when gas prices are higher given your vicinity to the consumer? And if so, this time around, how are you looking maybe to retain whatever new customers you are seeing?

Yes, I'll start and then Emily, I'll have you talk about the retention piece. I would say no doubt, there is some tailwind from those gas prices, not only due to not wanting to drive as far, but just what it costs to put fuel in the tank, but also food on the table. And between those, it has pinched the core consumer, those making $40,000, $45,000 and under. And again, as I indicated, even those making up to $100,000. And so when you think about that and crossing that $4 mark and now being sustained at that higher level, we are seeing that core customer come in more often, buy less on each occasion. And that's a little bit counterintuitive, right? Come in more often, but we're very convenient, right? We're close -- we're within 5 miles of 75% of the U.S. population. Many of our customers ride a bike to our stores or walk to our stores. That's how close they are. And those that drive obviously can drive a shorter distance.

But what she does is she doesn't know right now because of all of the other sustained pressure, what that next week is going to hold. So maybe instead of shopping twice a month, she's shopping 4, 5, 6 times a month with Dollar General because she can't go and shop on the come, if you will, right? If she's in week 2, I'm not going to shop for part of week 3. I'm going to come back in week 3 because who knows what's going to happen. And I don't have a lot of money put aside for even a flat tire at this point. So I've got to make sure I shop closer to need and be very discerning in that shop.

Yes. And then in terms of retention, what I'd say is we do -- we have been in similar, of course, economic times historically. And if you look at our track record of retaining the trade-in customer, we've done pretty well. So I'd point 2008, 2009, 2013, 2020 was a little different in terms of the dynamic at play, but still very high retention rates. And I think that ultimately comes from the fact that customers who may not be as familiar with Dollar General are surprised when they shop us in terms of the value. They're surprised when they shop us in terms of the breadth of assortment that we have available. And those things stick long after maybe the economic cycle changes.

I'd say that we've paired that even to a greater extent than we have historically with some of the new tactics and capabilities we have in marketing. So when we see those customers inside our store, we're able to target them with offers that aren't just generically good, but specific to what we see them doing from a purchase pattern, and that's even stickier. So I really like our opportunity to keep these customers as our customers moving forward.

Thank you. It's an interesting environment. Again, it's been very inflationary yet I think since the spring, we've heard a lot more about price investments, whether it be as a result of what's happening across the space in grocery or with tariff refunds, or the like. And I think in the second quarter, you did note that you've remained promotional and you've utilized targeted offers around holiday events. How should we think about Dollar General in the context of this very noisy pricing environment? How are you managing price gaps? How do you view the price gaps? And what do you think about the promotional environment going into the second half?

Yes, I'll start. As you know, Kate, we watch price very carefully. Obviously, our core consumer relies on Dollar General, not only from that convenience factor that I talked about being closer to home, but also that value equation. And those of you that have heard me over the years always talk about pricing is a fine balance between art and science. Those that maybe have leaned way too much on the science and forget about the art, and I won't name certain sectors, not even companies that have done that, things don't fare well.

So we've always taken that approach of between science and art, right, art and science and pricing. And the reason I bring that up is that we have a great everyday price that we put out in front of the consumer. Our price gaps to mass are unchanged over the many years, to drug and into grocery, right? And so really, when you think about it, we're the most competitive against drug, grocery within about 20 points. And what I normally say is anywhere between 2% to 4% of mass. One way or the other, by the way, sometimes better, sometimes a few percentage points worse.

The consumer usually tells a difference around 5 to 6 percentage points depending on the item, that's part of that science piece. But not only at a great everyday price, but also the consumer looks for a good promotional cadence and price as well. So we offer that to the consumer. And also the one thing that sets Dollar General apart and now more than ever is that $1 price point. Having 2,000 items at or below $1 is very meaningful for the consumer, always has, but especially in this environment. And not only are we cultivating that, but we're growing that, more in what we call -- we affectionately call Value Valley, but we've got an aisle that's dedicated to $1 price point. But we have price points at $1 throughout -- mix in our planograms throughout the store. And Emily and her team rolled out a $1 Frozen Door, a whole door of frozen goods recently at $1. We like that so much and the consumer has. We're actually going to put more of that in as we move through the back half of this year.

So pricing, again, art and science, everyday, great everyday price with the gaps being traditionally where they've been, a good promotional cadence, rational, but a good cadence and a great $1 offering to bridge those monthly pieces where that customer needs to be able to feed her family or give her family something that she needs.

The comps at that dollar price point have been extremely strong in the last several quarters. Do you anticipate much of a mix shift maybe more towards that dollar price point?

Yes. What's great is we're seeing growth in all areas, several areas of the business, which I'm sure we'll get into in more detail. But to your point, we quoted the Value Valley comp in Q2 at 16%. So just outstanding growth. Todd mentioned the over 2,000 items at $1. So our Dollar business is larger than even what we quote from a Value Valley perspective. The team has been actively increasing that. Todd mentioned our Frozen Door expansion plans, which we're really excited about. But we've also expanded the number of items inside that Value Valley section, and that's just merchants doing a great job of making sure that we continue to expand that option for our shoppers and really feed into the growth.

We've also added off-shelf display inside our store to capture more of that and present that to our customer in a way that shouts value that's very meaningful to them. And so we continue to look for areas. And then our Seasonal business, which we don't talk about as much, but we increased our Seasonal $1 assortment for the back half of the year by 40% compared to a year ago. So really great work making, just sure that we're driving that affordability and then continuing to make sure that the broader offering represents other price points as well that just support that growth.

I wondered if we could focus on the cost side for a little bit. Obviously, there are quite a few headwinds right now in the context of fuel and freight. So I wanted to make sure we touched on that and your view on that going into the back half and how you're managing that. But I think also what we wanted to talk about, too, was labor. I think for a little while anyway, Todd, especially when you came back, there was some concern that maybe there would need to be a lot more labor investment in the store. And you have made the investment in labor hours, I believe it hasn't necessarily been much more labor in the store. So maybe can you talk about the labor investment over the next couple of years? Do you feel like the business is approaching a more normalized level of staffing? Or do you still see more opportunities for incremental investment?

I'll start and you want to add any color. I would tell you that we feel really good right now where we are on the amount of hours per store. To your point, Kate, we invested in hours back in 2024 to ensure that we were able to service the customer the way we needed to. Since then, we have seen a very good stabilization of turnover. Our turnover rates are at numbers that we hadn't seen since pre-pandemic and are headed back toward pre-pandemic levels, especially around store manager as well. The other thing to keep in mind is that our rate and being able to attract and retain has been very high as well. So we believe that we've got the right amount of hours. We believe the rate of pay is now correct and has been that way for the last couple of years. But we'll always watch to make sure that we're able to get the work done and service the customer.

The other thing that we've done, though, in these last few years to help is we've done a lot of productivity work within our stores and our supply chain and have taken a lot of work out to be able to do that. And when you couple the amount of work we've taken out with the additional labor, that's why we feel like we're in a good spot, and we're in a good spot to go forward into the next few years with that. Now the other opportunity, and I'm sure others have talked about it, we won't go into great detail here, but AI presents another leg of opportunity to be able to dial-in that productivity piece, especially around supply chain and inventory levels and how the stores work. And so we're, I would say, waist deep, about to be neck deep into our AI journey as a company and are moving forward there. So more to come.

Maybe we can talk just on the subject of other long-term margin drivers in addition to shrink and damages, which you've done a very good job with. You've also called out DG Media, the nonconsumables merchandising, which you just mentioned on -- with regards to the dollar price point, supply chain productivity, category management and that all contributing to about 120 basis points in gross margin improvement over the next few years. With supply chain productivity, I think that's one of the bigger drivers of that 120 basis points. Can you frame what the longer-term opportunity is? We just talked a little bit about AI. But just what else can we expect to see there on the supply chain side?

Yes. So from a supply chain productivity perspective, really pleased to see the progress we're making. I think Kate, as you alluded to, from a long-term framework perspective, a lot of gross margin drivers in place. And the great news is we're delivering ahead of schedule or on pace with pretty much every single driver that we've communicated, whether it's shrink or damages, to your point, DG Media Network, category management, we're seeing a lot of growth in the dollar price point. Supply chain is just another building block to our margin target of 6% to 7% over the next 3 to 4 years.

On the supply chain side of the house, specifically, glad to see it was a pretty nice contributor to Q2, particularly. What I'll tell you is there's a lot of opportunity still to go on the supply chain side of the house, again, delivering pretty much on track with our expectations. But the way to think about the supply chain side of the house is we'll continue to get leverage on the fixed cost piece of it as we continue to grow comp sales and sales, which is obviously great. We're seeing a lot of productivity throughout the supply chain. IT is playing a role in that. But the other thing I would point you to that's probably a little bit more tangible is really the private fleet side.

And so as a reminder, about 50% of our outbound transportation needs are currently private fleet. Our expectation is we will continue to grow that over time. And the beauty of that is highly accretive, right, from a margin perspective and high returns there as well. And so on track, with contemplated long-term framework and a lot of confidence in our ability to deliver against our targets in the years ahead.

I wanted to make sure we talked about DG Delivery because I do think that has been a bright spot and has not taken a long amount of time, I think, to start to really contribute to your comp growth. So how should we think about the contribution from Delivery going forward? Can you talk a little bit about the subscription opportunity that you mentioned on the second quarter call? And does this kind of underscore what you're going to be able to eventually do with DG Media?

Yes, sure. I'll take that. So in Q2, our Delivery business contributed 40 basis points to our comp growth, which was great to see. So it was a strong contribution on top of strong brick-and-mortar performance. And to your point, we are still, I'd say, maybe early days of our Delivery business. We offer marketplace and first-party delivery and both really scaled last year. So we continue to expect outsized growth out of that piece of our business. And a piece of that from a first-party perspective will be subscription. So the business we've grown today, we don't have a subscription offering in the market. Our customers have told us specifically that they want to see an offering from Dollar General. So the team will be launching a pilot at the end of this year and looking to scale that really next year. So I do think that will continue to drive and accelerate our growth from a Delivery perspective.

I'll give you just a couple of other points that excite us about Delivery. Number one, it's the incrementality we're seeing. And so from launch, we've quoted above 80% incrementality, and we continue to see that. So for us, maybe a little different, right? Customers are able to use delivery and digital interaction as a way of being introduced to our brand and to our value. So excited about that. We've also seen over 1 million customers who were first introduced to Dollar General via our Delivery business, and now we see them shopping inside our stores from a brick-and-mortar perspective. So certainly, Delivery for us has an opportunity to drive traffic overall, even larger -- total company and even supporting brick-and-mortar growth as stand-alone also has the opportunity to increase basket size, which is what we see. So great results there. I expect it to continue to accelerate.

And then to your point, it will help support growth -- additional growth in DG Media Network. We are most mature in our Media Network business on our in-store component, and we do have digital offerings today. But as our digital engagement continues to grow, that will draw even more advertiser interest in the network that we have. And just as a reminder, we quoted our annual number at the end of last year, $170 million in volume from a Retail Media business. So it's a nice business already, but do expect that to continue to accelerate as well.

Thank you. Before we get into kind of our rapid fire questions at the end here, you've guided to a long-term algorithm of 2% to 3% same-store sales growth, a 6% to 7% operating margin by 2028. How are you thinking about that path to reach that longer-term algorithm today, just given the success you've seen in the last couple of quarters, which initiatives do you think have emerged as the most important drivers?

Yes. So really feel good about the long-term framework targets that we laid out, Kate. I think when I came back in October, one of my initial observations was, wow, the margin recapture opportunity at Dollar General, not only was it meaningful, but it was real. And the great news is we're delivering against the targets at a faster pace, as I alluded to a little bit earlier.

When we introduced the framework, just keep in mind we said, hey, we thought it'd be 270 basis points of gross margin expansion over the 3- to 4-year period. Last year alone, we delivered over 100 basis points of margin expansion. And so just to contextualize a little bit, last year, we guided to EPS of about $5.10 to $5.80, we delivered $6.85. Coming into this year, we guided to $7.10 to $7.35. Our guidance at the end of Q2 was $7.75 to $7.80. Obviously, that includes a $0.25 discrete benefit from tariff refunds net of reinvestments. But overall, I feel really good about the progress we're making.

To your point, all along, we said, hey, we thought shrink and damages would be more of a 2- to 3-year opportunity. A lot of the other margin drivers would contribute over time with DG Media Network being a little bit of a later term contributor. And the great news is when you think about shrink and damages in particular, we thought there was 80 basis points of opportunity on shrink, 40 basis points on damages, again, over a 2- to 3-year period. We delivered 80 basis points of shrink just last year, right? Damages are contributing on pace with our expectations. Coming into this year, we took our expectations up to 50 basis points remaining from shrink and damages. And so that's obviously nice to see.

From the other drivers, the great news is Non-consumables was a big piece of that. We set out a target of 20% sales mix from Non-consumables, up from about 18%, 18.2% today. The great news is a lot of proof points that we're delivering. We've delivered 6 consecutive quarters where Non-consumables growth has outpaced Consumables growth and feel really good about our plans balance of year and beyond on that piece of it. We talked about the $1 price point Value Valley. The great news there at a category level, margins were higher than other categories there, and you're seeing the growth that we're seeing there outsized 16% in Q2 alone from a Value Valley perspective. We talked a little bit about supply chain already. The contributions we're seeing. We feel really good about our plans to deliver against that over the next few years. And then obviously, DG Media Network is another contributor. So we feel really good about the pacing, I feel really good about the progress and a lot of confidence in our ability to deliver against those targets over the next 3 to 4 years.

Yes. And I think that's just to wrap up that point, it sounds like maybe there's even a little bit more than what you anticipated when you first gave the longer-term guidance. But as the company transitions leadership into '27, should investors think about -- how should investors think about the continuity of these priorities?

Again, I don't want to speak for JJ coming in, but I can speak for our management team, I can speak for our Board, and we're 100% aligned behind the priorities. They're tried and true, to Donny's point, have already delivered at an accelerated pace. And obviously, JJ has already been brought up to speed on much of those that we could so far. And I would dare say, I think he sees the same value, right? But every CEO will have different priorities, right? And we would hope that he does as well. But the great thing is, is that all the proof points are lined up pretty nicely, have already been proven in many instances and will continue.

I think the biggest piece that we have to look forward to, as you heard, was really the digital side and the media side that comes with that. And I have to say, though, the team has done a great job. If you think about we weren't even in the Delivery game 2 years ago. And we're already a meaningful player in that, and we'll continue to be. So I think there's a tremendous amount of opportunity that's not even baked in as we move longer term here.

Great. And just in these last couple of minutes, the four questions we're asking, Todd and Kevin, I know you've been through this a few times with us. Health of the consumer, we touched on a little bit at the beginning. Just what are your expectations for the environment in the second half of '26 versus your recent results?

Yes. Nothing points for the consumer that there's nothing points to the consumer coming out of the position she's in. And when I say that, there's nothing structurally that I see that is going to help her right now. So I think where we are is probably where we're going to be as we move further into the back half of 2026. As we look, though, things could change if gas prices led up a little bit. But if they don't, then we're probably going to see a sustained pressured consumer as we end the year and move into '27.

And then we talked about pricing a little bit in the context of what's happening in the environment. But do you expect prices or AUR to be higher, lower or the same in the second half of this year versus the first half?

Yes. We at Dollar General, watch that very carefully, obviously, to make sure that, that value is there for the consumer and the value being she's got to feed her family and be able to supply needs for her family. So we watch that very closely. We spend a lot of time with CPG companies to ensure that we're able to deliver that right price. But also keep in mind, we've got a great track record of -- we're a big company. We're in the top 5 with almost every CPG company in America, top 3 with many, top 1 or 2 with a few. And so with that, they want to grow with us.

But we're also a limited SKU retailer, meaning we don't have to carry everything. I always use the example in canned vegetables. We don't have to carry both Del Monte as a name brand and Libby's as a name brand with our private brand and other things. We usually take and pit one against the other to get the lowest price we can. And so if things start to move on an AUR basis, meaning cost of goods move, then we'll deploy a lot of things and price -- taking price is the very last thing that we do at Dollar General. So we've got a lot of levers to pull. We've been doing this for years, and we have a pretty tried and true category management system.

We talked about margins, so I'll skip that. But the one -- going back to AI for a minute. Do you expect a significant increase in efficiency as a result of AI in 2027 versus 2026?

Yes. What I'll tell you is we feel really good about the progress we're making on the AI side of the house. I think from our perspective, I think it is one of those go a little bit slow to go fast, right, as we move forward on the AI journey. But more to come. I do think there's going to be opportunities for productivity unlocks as we move forward. And great news is if you think about our long-term framework, it doesn't contemplate right, any benefits from AI. And so that would be upside to anything that we would be thinking about from a long-term framework perspective.

Great. Well, thank you for being with us today. Appreciate all the time.

Thank you for having us.

Appreciate it. Thanks.

Thank you, everybody.

Good morning. My name is Rob, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General Second Quarter 2026 Earnings Call. Today is Thursday, August 27, 2026. [Operator Instructions]

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 Mr. Kevin Walker, Vice President of Investor Relations. Kevin, you may begin your conference.

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. [Operator Instructions]

Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, long-term financial framework, strategy, initiatives, plans, goals, priorities, opportunities, expectations or beliefs about future matters and other statements that are not limited to historical facts. 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 20, 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 in 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 5.2% 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 nonconsumable 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 at 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 4 merchandising categories delivered positive comp sales for the sixth consecutive quarter with the growth rate in nonconsumables once again outpacing consumable. 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 3 periods of the quarter were strong, led by both June and July. And while still early, we're 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 vulnerable 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 5 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 to 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're 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're 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'll now turn the call over to Donny.

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 costs, 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 continued 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're 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 our quarterly dividend payment and when appropriate, share repurchases. Finally, we remain committed to maintaining our goal of less than 3x adjusted debt to adjusted EBITDAR in support of our commitment to middle BBB ratings by S&P and Moody's.

Now with regards to shareholder returns, consistent with our capital allocation framework, I'm very pleased to note that we plan to resume our share repurchase program in the third quarter. More specifically, we plan to repurchase up to $700 million of our common stock in the second half, funded with cash on hand. This step reflects our strong cash and liquidity position, the progress we are making towards our long-term financial framework targets and our confidence in the future of the business.

Moving to our outlook. Given our strong first half performance and expectations for the balance of the year, we are raising our full year outlook. We now expect the following for fiscal 2026. Net sales growth in the range of 4% to 4.3%. And same-store sales growth in the range of 2.5% to 2.9%. And EPS in the range of $7.80 to $8, including the approximate $0.25 Q2 benefit from tariff refunds after related reinvestments. Our EPS guidance continues to assume an effective tax rate of approximately 24.5% and now contemplates up to $700 million of share repurchases in the back half of the year. Our expectations for capital spending and real estate projects remain unchanged from our previously stated amounts. In addition, our Board of Directors recently approved a quarterly cash dividend payment of $0.59 per share for Q2 2026.

Let me provide some additional context as it relates to our outlook. First, our revised outlook reflects the strength of our first half performance, underlying momentum in the business, the anticipated impact of tariff refunds after related reinvestments and our improved expectations for the remainder of the year. We believe the updated range appropriately balances our confidence in the business while also considering the evolving consumer environment.

In addition, despite much higher-than-anticipated fill cost, we expect gross margin expansion in the second half, supported by continued progress against our key gross margin initiatives, many of which remain early in their maturity curve. As a reminder, our initiatives include continued improvements in shrink and damages, growth in our DG Media Network, non-consumables merchandising, supply chain productivity and category management.

On the expense side, we continue to expect modest SG&A deleverage in 2026 as we continue to invest in key initiatives to support the long-term growth and productivity of the business.

Finally, with regards to tariff refunds, we received the majority of our anticipated total refund amount in Q2 and do not expect a material impact from tariff refunds after related reinvestments in the second half.

In closing, we're pleased with our second quarter results and the momentum we carried through the first half of the year. Looking ahead, we remain confident in our strategy, our business model and our ability to continue advancing toward the targets outlined in our long-term financial framework.

As we move through the back half, our focus remains on disciplined execution and continued progress across the key drivers of profitable sales growth, strong operating cash flow, healthy returns on invested capital and long-term shareholder value.

With that, I'll turn the call back to Todd.

Thank you, Donny. I'll take the next few minutes to provide an update on our 4 strategic growth pillars, which are supported by targeted initiatives to drive long-term sustainable growth and value creation.

As a reminder, these pillars include enhancing the customer experience, elevating our brand, driving greater enterprise-wide efficiencies and extending our reach.

First, we remain focused on enhancing the customer experience. We are working to do this in a number of ways, both in our physical stores as well as through our digital initiatives. Within our merchandising initiatives, our efforts to improve the nonconsumable product offering continues to resonate with the customer as evidenced by the 4.5% increase in combined non-consumable comp sales during Q2. This performance has continued to drive a positive mix shift impact within our gross margin as well.

Our nonconsumable growth was once again led by toys this quarter as our team continues to do a nice job offering an on-trend items and licensed products that are resonating with customers. Our brands and licenses are continuing to enhance the customer experience through a surprise and delight approach that offers exciting products at a compelling value.

Looking ahead, we're excited about our extensive plans to drive newness and build on this momentum in the back half of the year.

Beyond our in-store initiatives, we are also advancing our digital initiatives as we seek to further enhance the omnichannel customer experience at Dollar General. Our digital ecosystem is an important complement to our expansive physical store network and continues to be a key driver of incremental value and convenience for our customers.

As we look to drive future growth in this area, we are focused on scaling our delivery options, personalizing the customer experience and growing our DG Media Network. We continue to rapidly grow our delivery business through multiple avenues, including our myDG Delivery offering as well as through third-party partnerships of DoorDash and Uber Eats. These offerings are enhancing the convenient proposition for our existing customers as well as introducing new customers to Dollar General. In fact, we estimate that our collective delivery offerings are generating a strong sales incrementality rate of approximately 80%, along with high customer repeat rate.

Our delivery platforms are also becoming a more meaningful sales driver as digitally engaged and delivery customers are more than twice as productive as our nondigitally engaged customer. Importantly, we believe we have significant opportunity to continue growing incremental delivery sales, while also attracting new customers through digital engagement and ultimately, in our stores. In fact, we estimate we have already seen more than 1 million new customers first engaged through our delivery and then become an in-store shopper at Dollar General.

Looking ahead, we are focused on building the growth within our digital ecosystem while driving sales and customer growth and also support greater contributions from our DG Media Network. Our DG Media Network strategy is focused on accelerating on-site performance through improved search, sponsored products and stronger e-commerce experience while expanding our ability to capture offsite spend across social, connected TV and video. We are combining this approach with the opportunity for advertisers to participate inside our expansive footprint of physical stores, including our recently expanded in-store radio network, ultimately providing better connections between our digital and physical experiences.

Over time, we believe our media network will serve as a strategic lever to drive profitable growth, enhance the customer experience and strengthen loyalty across our digital ecosystem. Overall, our digital strategy is an important complement to our in-store customer experience and a key driver within our long-term financial framework.

Our second strategic growth pillar is elevating our brand. Our mature store base is a unique competitive advantage that enables us to serve customers in smaller rural communities across the country. We continue to make strategic investments in our store base, particularly through Project Renovate and Elevate remodel programs, which are positively impacting the customer and associate experience.

As a reminder, Project Renovate is our traditional remodel program, which impacts the entire store and includes adding or replacing coolers as well as upgrading to the latest store format. These projects are focused primarily on stores that are 7 or more years removed from opening or their last full remodel. While Project Elevate is designed to further grow sales and market share in portions of our mature store base that are not yet old enough to be part of a full remodel pipeline. These projects include physical asset enhancements, merchandising updates, product adjacency adjustments and category refreshes, all of which generally impact up to 80% of the total store.

We continue to expect to execute a total of 2,000 Project Renovate remodels and 2,250 Project Elevate remodels this year. We made significant progress on these goals in the second quarter and have now completed 1,324 Project Renovate remodels and 1,422 Project Elevate remodels through the end of Q2. We continue to target annualized comp sales list of approximately 6% in Project Renovate stores and approximately 3% in Project Elevate stores as we believe these projects can drive significant sales and profit growth.

Our third strategic growth pillar is driving greater enterprise-wide efficiency. We continue to pursue opportunities to drive greater efficiencies while lowering costs across the organization, including increased supply chain productivity, further simplification of our stores, inventory optimization and increased use of artificial intelligence. By focusing on controlling the things we can control and drive inefficiencies, we have been able to mitigate other cost pressures, including higher fuel costs.

Additionally, while we are still early in our AI journey, we are building agentic operating systems for the enterprise focused on reshaping and optimizing our workflows to improve productivity throughout the organization.

Our final strategic growth pillar is extending our reach. We continue to extend our unique combination of value and convenience in new communities across the country. In turn, this extension is helping attract new customers and support further market share gains. In Q2, we opened 125 new stores in the U.S. as part of our continued plan to open a total of 450 stores in 2026. Importantly, these projects continue to be one of the best uses of capital, delivering healthy returns while also expanding access for new customers and communities.

In addition to our new store growth in the U.S., we continue to test, learn and refine our strategy for incremental growth in Mexico. As part of our plans to open a total of approximately 10 stores in Mexico in 2026, we opened 1 Mi Super Dollar General in Q2, bringing us to a total of 22 stores in Mexico. While our core business proposition of value and convenience continues to resonate with customers in Mexico, we are leveraging our customer, real estate and merchandising insights to further extend our reach and capture more of these exciting growth opportunities.

Overall, we are pleased with the strong and steady progress we are making toward the goals laid out in our long-term financial framework. We are advancing each of our strategic pillars and are confident in our strategy to build on our progress and momentum.

In closing, we are proud of our strong Q2 performance and financial results. The business is performing well, and we are operating from a position of strength as we head into the back half of the year. We recently had approximately 1,800 leaders of the organization in Nashville for our annual field leadership meeting, and I was once again reminded of the talent, passion and commitment of our team.

I want to thank our more than 198,000 employees for the work they do to serve our customers and communities every day, and I'm looking forward to all that we will accomplish together in the second half of the year.

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

[Operator Instructions] And the first question is from the line of Rupesh Parikh with Oppenheimer.

Congrats on a nice quarter. So I want to start with gross margins. So I was hoping for more color on back half gross margins, including some of the key puts and takes you guys see out there and how you're managing through some of the transportation cost headwinds. And then related to that, how is your team thinking about the competitive promotional backdrop as others invest tariff refunds and there's more chatter out there on industry price investments?

Yes. Thanks, Rupesh. This is Donny. Maybe I'll start with your first question and then maybe hand it off to Todd to address your second one. But in terms of gross margin, I'd start with maybe just providing some color as it relates to Q2 because I think that does provide a little bit of context as we think about the second half.

So in terms of Q2 gross margin, what I'd say here is very pleased with the gross margin performance that we delivered in Q2. As you saw in the release, a 127 basis point improvement, that does include 81 basis point benefit from tariff refunds net of the reinvestment. But even when you set that aside, gross margin performance exceeded our expectations, and that's despite higher-than-anticipated field costs.

And so when you think about the primary drivers of our expansion during the quarter, obviously, the tariff benefit net of reinvestment played a role. But when you set that aside, really pleased to see nice contributions across many of our gross margin drivers. And so while there's supply chain efficiencies, which we called out, but also continued improvements in shrink and damages. And I'm very pleased with on the shrink side is we're lapping 108 basis points of improvement in Q2 2025. We touched on the transportation.

The one thing I'll note here is it was higher than anticipated cost in the quarter because it was more pronounced in Q2 just given the full quarter impact versus Q1. But overall, building and seeing nice momentum across our gross margin drivers.

And so when you think about the second half, we do expect gross margin expansion in the back half. Just a couple of things to note, we are lapping over 100 basis points improvement versus the prior year and fuel costs continue to be a little bit of a pressure point for us in the back half.

But from a tailwinds perspective, again, continued expectations to drive improvement across a lot of our gross margin drivers. We expect continued improvement in shrinking damages. We expect continued improvement in growth in our other gross margin drivers, including our DG Media Network, nonconsumables, merchandising, more supply chain efficiencies and category management, more specifically there on the Value Valley dollar price point private label side of the house.

And again, from a headwinds perspective, just higher fuel costs. We anticipate full costs will remain elevated for the balance of the year. The great news here is the team has done a great job so far offsetting these pressures within the base business. And the other thing I'd probably point out is just that the tariff landscape continues to evolve. Now our full year guidance today reflects current tariff levels that are in place today.

But like any quarter, lots of puts and takes in any given quarter, and we saw that in Q2 as well. But overall, continue to believe there are more tailwinds and headwinds and feel really good about our ability to drive continued gross margin expansion as we move ahead.

Yes. Thank you, Donny. And with that, Rupesh, I would tell you that as we exited Q2 from a pricing perspective, we feel very good about where we are on many levels. So we're in a great position on our everyday pricing position against all classes of trade. We executed, I believe, a very strategic promotional cadence in Q2 and expect that strong offensive execution of promotional cadences to be with us in the back half of the year as well.

And of course, a strong and growing $1 price point that you heard in my prepared remarks, both from Value Valley as well as over 2,000 items at or below $1 dollar. So when you think about where we are, I would say that from a promotional activity and such, pretty close to what Q1 looked like overall, not only at Dollar General, but across all classes of trade. And as we look to the back half of the year, we're positioned really well and have a lot of dry powder to continue to be there for the consumer, what she needs when she needs it.

And I think I would also point to you, Rupesh, and I know you know us well, we've got a real strong track record of investing in price over time, including everyday price, our promotional activity. But more importantly, we've got a real good track record once we do that of keeping that customer engaged at Dollar General even outside of those promotional time frames. We saw that in Q2. Actually, even when we didn't run additional promotional activity in Q2, we saw a very engaged consumer and a very sticky consumer.

Next question is from the line of Matthew Boss with JPMorgan.

Congrats on a nice quarter. So Todd, 3.5% comps in the second quarter, your best 2-year stack in 3 years. Can you speak to the cadence of comps that you saw in the quarter? And on the underlying momentum that you cited, where are you seeing the acceleration if you looked at the sequential trends from your core low-income customer versus trade down from middle and higher income customers?

And then Donny, can you speak to the reinstatement of share repurchases now for the back half of the year? It's earlier than your initial '27 plan. Or at 2 to 3 comps in the model now, how you see annual earnings growth as a go-forward baseline with the return of capital allocation?

Matt, I'll start. And then Donny, I'll pass it over to you. I would tell you, Matt, we're very pleased with our comp sales of 3.5%. It's a real testament of the back to basics plan we had put into place a couple of years ago. And now fast-forwarding all that work plus the work that we're doing around Renovate and Elevate, and all the work that the team has done on the merchandising side and upside of the business, really all coming together as we continue to add wins on the consumer side of the equation.

The customer is definitely seeing the differences not only in our stores, our in-stock levels as well as our pricing activity. And when I -- again, as I've mentioned, we are in as good a position as we've been in on everyday price against all classes of trade and feel very good about that momentum leading to the back half of the year.

A lot of the momentum you're seeing is very well balanced as well. We're on that sixth consecutive quarter of great momentum in our nonconsumable businesses. And again, a real testament to all the work that the teams have done there. And when you think about nonconsumables for a moment, you can also think about in the second part of your question is where we're seeing some of these gains, additional gains and trade in of the consumer, really coming from that $100,000 and above crowd, if you will, income levels. And as I've always said, that cohort a customer brings with them, additional discretionary income that she's able to spend on nonconsumables as well as consumable goods.

I think the important thing here to look at, Matt, as well, is the sustainability, we believe, of those comps as we move through the back half of the year. We're in a real good position both from pricing as well as promotional cadence, but also from the consumer standpoint. Inflation is still stubbornly high as well as fuel prices being [ volatile. ] And with that, the consumer needs us more every day, and we continue to be there for them. So we feel very good about our positioning and being able to deliver a good strong back half.

Yes. And Matt, to your question on -- Matt, to your question on share repurchases. I think what I'd say here is just very pleased with our announcement this morning that we now intend to resume our share repurchase program in the third quarter. Our plans are to repurchase up to $700 million of stock in the second half.

Just as a reminder, share repurchases have always been an important component and driver of our long-term financial framework. And as you alluded to, the framework did assume we would resume share repurchases at some point during 2027. But as we've noted for several quarters now, we're ahead of schedule versus some of the initial goals embedded in our long-term financial framework, and that includes progress towards strengthening our balance sheet and enhancing our liquidity position.

So really great to be in a position to restart the program, which is also now ahead of our initial long-term financial framework goals, which is great to see. And importantly, not only is this consistent with our capital allocation framework, but this step really does underscore, I think, the progress we're making towards our long-term financial framework targets as well as our confidence in the future of the business. And so as we look ahead, I'll tell you, no changes in terms of how we're thinking about the long-term financial framework.

The next question is from the line of Michael Lasser with UBS.

Has Dollar General entered a new era where it needs to use promotional activity such as $5 off a $25 purchase or $10 off a $40 purchase more frequently in order to drive the traffic? And this year, there's obviously going to be a variety of different offsets like the improvement in shrink and damages as well as some of the tariff-related ins and outs. But as next year approaches, those factors may not be here. And to the extent that this lever may need to continue to be utilized, how do you make sure that your gross margin maintains in an upward trajectory?

Michael, thanks for the question. I would tell you that we feel very good about the positioning of where we are on pricing, as I indicated.

Coming out of Q2, obviously, the customer is strained. We see that, and the customer obviously is feeling it every day. And we've always said, we reserve the right to go in and do what we believe is necessary for our core consumer as well as any trade down consumer that we see coming in.

We believe it was very prudent in the activity that we've taken. I would tell you that we don't see meaningful step-up in those promotional activities. We did anniversary some. We invested appropriately and very much on the offensive around key holiday times during Q2. Think about Memorial Day, think about 4th of July, where the customer has a little bit more money in their pocket or has the optionality to spend a little bit more. We were there for the consumer during those strong times. But the great thing is, even outside of those promotional times, the consumer hung with us and stuck with us. And we do a really good job on the backside of retaining those customers, and we've seen that.

The other thing that we don't spend a lot of time on, and I know that promotional activity gets a lot of airtime, but it's our strong everyday price that really brings the consumer in and keeps her sticky. And I would tell you that we are as good a price today as we've been against all classes of trade and feel very good about our everyday pricing as well. So when you think about that, we actually invested in Q2 and everyday price as well. And keep in mind, that takes a little longer for the customer to realize you've lowered an everyday price. And so that should be the gift that keeps on giving into the back half of the year.

So we feel we're doing the exact right thing for the customer at the right time from a position of strength and on the offense. And we have the ability to flex up and flex down and have enough dry powder in the back half to be there for the customer every day.

The next question is from the line of Seth Sigman with Barclays.

So when we look at the refunds this quarter, it looked like it was 81 basis points to the gross margin equates to about $91 million. I think the math on the operating profit suggests that the net impact was less than that, so perhaps there's offsets in SG&A.

Can you speak to that? Where are you spending within SG&A? And then just related to that, to your credit, SG&A seems quite low even with those investments, up only 3% per store. So just any other color on maybe how you're changing how you think about cost management? And how to think about that in the back half of the year?

Yes. No, I appreciate the question. So I think to your point about the tariff refunds, I think you're thinking about it the right way. We did receive and record the vast majority of the anticipated refund amount in Q2.

It did provide us with the opportunity to reinvest heavily as Todd mentioned in enhancing the customer value proposition. And some of that, to your point, was an incremental SG&A spend on customer-facing initiatives. And the one thing I'd point out is increased marketing spend, which we think is going to pay a lot of dividends as we move ahead.

And so I think from an SG&A perspective, you're right. In terms of -- as you think about the quarter, we did -- there was a little bit of reinvestment, so about 15 basis points is the way I would think about that math. And so it's flat versus here, but when you take that into account, it essentially delivers leverage in the quarter, which is great to see.

The next question is from the line of Simeon Gutman with Morgan Stanley.

Todd, when the going gets tough, I always want to ask you about the consumer as you understand [ she ] and trade down. Can you talk about what's happening there? And then I'll put the follow-up within it. The incrementality from here for some of the last mile services that you're using, is the incremental benefit building stable or beginning to lap or moderate against tougher compares?

All right. Thank you for the question. And I'll take the first half. And then Emily, I'll pass it over to you. Yes, the consumer obviously is strained. I mentioned earlier that stubborn inflation that is currently with that consumer hasn't subsided. And also the [ volatile ] fuel prices. We've always said here, if you go back years and years, any time it gets close to that $4 mark or [ crest ] $4, it puts an extra strain on the consumer. And we obviously have been there for the better part of Q2 and now as we move into Q3.

So that consumer is under a lot of pressure. Our core consumer, especially as it relates to feeding her family and being there for her family needs us more than ever. And we're seeing that inside of our numbers as well. And then that trade-in because of all the pressure that, that middle and upper middle income consumer is under, and that is usually that 100,000-plus crowd, if you will, that has been trading in the better part of a year now and has continued to trade in through Q2 and now into Q3, I would tell you, is looking for more and more value as time goes on.

She was trading in earlier on more sporadically, now on a more everyday basis, not only everyday goods, but as I mentioned earlier, she has been trading in for those nonconsumable goods as well.

The great thing about that all put together is we believe that core consumer will continue to be strained as we move through the back half of the year. And we're in a great position on pricing, promotional cadences and our $1 offerings as well as in my prepared remarks, our seasonal offering for the back half of the year is very strong with a very strong offering increased over last year in the dollar price point as well. So we feel very good about where we're headed in the back half and what's ahead of us to be able to deliver for the consumer each and every day.

Yes. And I'll take the delivery question. So from an incrementality perspective, it really is stable. I'll give just a little more color on the business overall. We were really happy with the business in the quarter. It was ahead of our internal plan. And delivery for us really is making sure that we are there to meet the convenience needs of the customer, which is, of course, incredibly important. At the same time, we're using delivery, of course, to reach new customers. And that's exactly what we're seeing.

You heard earlier on the call that over 1 million customers found and shopped inside our stores for the first time after they first use delivery to find Dollar General. So that's really exciting results for us. But when you combine that with the fact that we continue to see a higher average basket from our delivery orders versus what we see inside our stores, it means that we're also seeing delivery broaden the way our customers are able to shop with Dollar General.

So of course, delivery supports both traffic and basket growth here at Dollar General and with the high repeat rates that we continue to see, it tells us the customers really value what we're doing in the space and it really encourages us in terms of potential for additional growth as we move ahead.

The next question comes from the line of Chuck Grom with Gordon Haskett.

Todd, Donny, great quarter. Can we spend some time on Value Valley and the dollar price point, strong comps here, high teens again, back to back quarters, I guess how can you capitalize on this going forward? You have a couple of thousand items in stores. Would it make sense to grow this to take advantage of the [ Trees ] multi-price move?

And then my follow-up is on SG&A. You guys are lapping, I believe, $200 million of higher incentive comp and the leverage is essentially neutral here in 2Q despite that 3.5%. So how do we think about the hurdle rate going forward? Is it still 3% or a cost in the business need to move higher?

Chuck, this is Emily. I'll take your Value Valley question. We were really happy with the 16% growth. And you heard us talk about the fact that now we're running over 600 items in this particular set inside our stores. That compares to about 500. So the team is doing an outstanding job of continuing to expand our assortment and the breadth of items that customers can get inside our store within that Value Valley space.

I think it's really important to call out that Value Valley for us doesn't represent all of the dollar items. You heard Todd referenced the 2,000 -- more than 2,000 items at $1 and below that we have throughout the store. And we're also growing in those areas. We have off-shelf space in 9,000 stores that we referenced, but working on getting those and see the potential to get those into all stores this year, which will be one source of growth.

We talked last quarter about our dollar door in frozen food. The customer response there has been very strong. And as you'd expect, the team is already looking at rapidly expanding that set as well.

And then from a seasonal perspective, Todd referenced, but just to give you a number, our dollar SKU count in the back half sets is going to be up 40%. So we continue to deliver that really important value for our customer and feel like we've got plenty of room to continue growing.

Yes. And in terms of your question about SG&A, I guess a couple of things. I think the first thing I'd say is I think the number you quoted in terms of the incentive comp, that's not a number I think we've necessarily disclosed. But to your point, we are lapping higher incentive comp from prior year. But what I would tell you is the business is performing, right? And so incentive comp for this year, the tailwind is going to be lower than we were anticipating, which is actually a really good thing from our perspective.

In terms of the leverage point going forward, as a reminder, the long-term framework always contemplated we would minimize deleverage at a comp of 2% to 3%. That's still our expectation as we move forward. And so the great news here is even with incremental reinvestment that was tariff-related during the quarter, right, SG&A leverage was essentially flat as we talked about leverage when you set that aside.

And so we feel really well positioned to really deliver against our target, outlining the long-term framework. I think the couple of things I'd point you to that actually gives us a lot of confidence is the accelerated remodel program should -- is expected to really mitigate future [ earnings and expense ], which should help. And in the meantime, we expect to drive additional efficiencies through our work simplification efforts.

And so overall, I feel really good about our efforts on this front. And as we've alluded to in the past, the long-term framework doesn't contemplate any potential benefit from AI. And we're still early days here, but feel really good about what that could mean for us as we move forward.

The next question is from the line of Zhihan Ma with Bernstein.

Circling back on the comp side of things, your full year guidance does imply some sort of a moderation compared to the really strong trends that we saw in Q2. Is there anything you can point to in terms of the Q2 drivers that's not sustainable going into the second half? And we think that on the delivery comp contribution side, we have seen some deceleration there from 80 basis points to 70 to, I think, 40 this quarter. So as you start to lap tougher comps there, are you expecting a smaller contribution from here?

Thank you for the question. Yes, I would tell you that there really isn't anything in Q2 that we don't -- from a top line perspective that we don't believe will continue into the back half of the year.

One thing to keep in mind, in Q4 last year, we are lapping this year a pretty big benefit as we called out at the beginning of this year from the winter storms last year. So Q4 has that embedded in it from last year. So the lap is pretty big. So keep that in mind as you think about it. But I would tell you, from our perspective, all of the fundamentals are very much intact on the top line. And actually, we believe that we have a real opportunity to continue to capitalize and make new friends, if you will. From a customer perspective, that will help propel the back half, but also into 2027. Emily?

Yes. And just from a delivery perspective, you heard my earlier comments, but just as a reminder, last year, we were scaling delivery to 18,000 stores, which we finished by year-end. I would just say that even with that in Q2, we did see outsized growth out of the delivery business, and it was great to see it add to really strong brick-and-mortar performance.

The next question is from the line of Spencer Hanus with Wolfe Research.

I just wanted to ask on tariff refunds and how you're thinking about the sales lift that you're going to get from those reinvestments that you're going to be making in the second half? And then given what your peers are doing from a pricing standpoint, do you think it's going to be harder to see that volume lift from the promos? And then just on Value Valley as the assortment expands there, have you seen any change in your value scores as people realize you get more of these $1 SKUs in the store?

Yes, I'll take that. Real quick, I would say, that when you think about where we are on pricing, as I mentioned earlier, we're in a real good spot. And I believe we're in a real good spot as we move into the back half of the year.

What we did in Q2 and where we invested, I believe, was from a position of strength and on the offense. And that was the idea. It was [indiscernible] holidays that I mentioned. But also, it was to continue to help this core consumer and the trade-in consumer bridge the end of the month and, well, quite frankly, all pieces of the month, but definitely bridge where she may fall short throughout the month at times.

And with that, and I think about competitors, and I mentioned earlier, Q2 looked a lot like Q1. And we feel that we've got plenty of dry powder in the back half of the year to be able to continue to do whatever we need to do for that consumer from a position of strength. We watch very closely all competitors no matter what classes of trade looking at price. Price is paramount for our customer. So as you would imagine, it's paramount for us as we put together our plans.

And everything that Donny laid out from a guidance perspective in the back half of the year contemplates all of those pieces to be able to deliver from a customer perspective, no matter what we believe that the competition does. Again, from a position of strength is where we're jumping into Q3 and Q4.

And then lastly, on the $1 price points and such. We feel, again, very, very good there and where we're headed, but also where we can leverage that with our consumers. And they are giving us credit. We're seeing it in our own data that comes back where the consumer is relying more and more on that $1 price point. And also, it's that whole halo effect on price, and she's given us credit for that as well.

The great thing is, though, as we see the trade-in come in, even in that middle and upper middle, they're actually moving to a lot of these $1 price points, too. We don't like to use the word magical, but it is a magical price point and we know that. We are leveraging that to our benefit, but also and foremost, the benefit of the consumer. And I would tell you that. And you heard from Emily as we move into the back half, but even more so into '27, we've got real plans to expand that $1 price point to offer even more value for the consumer.

The next question is from the line of Kate McShane with Goldman Sachs.

Just a quick question from us [indiscernible] how we should be thinking about [ ticket ] versus traffic in the second half versus what you see so far this year?

Yes. I would tell you, when you look at the traffic numbers and the ticket number, we feel very good about the balance. We've taken all that into account in the back half of the year. We see the momentum in the business. I feel good about the traffic number that we're already seeing here in early Q3, as I mentioned in my prepared remarks, we're off to a good start. And so we believe that a real good balance of traffic and ticket will continue into the back half of the year.

Now we don't take any of that for granted. Obviously, we are, from a position of strength, doing a lot of things to ensure that we solidify those traffic and overall sales numbers in the back half of the year. But the most important thing, I think, to think about here and the way we always look at it is really from the consumer lens and where the consumer is today and being there for her, if we're there on all of the elements that I talked about earlier from everyday price to promotional cadence and that $1 price point, we believe that delivering on all 3 of those promises every day will continue the momentum that we've seen.

And then lastly, I don't want to minimize also the execution level that this team is performing at, not only in our operating group, in our supply chain and in our merchandising group back here at our store support centers. We're hitting on all cylinders, and we're there for the consumer each and every day.

The next question is from the line of Scot Ciccarelli with Truist.

So I guess my question is you mentioned that the low-income consumer is increasingly strained and that you're seeing that in your numbers. Can you give us any data points or examples around that?

And then secondly, you had expected shrink and damage benefits to ease a bit this year. But I think they continue to outpace previous expectations. So like how much lower can shrinking damages go from where we are today?

I'll start that and pass it over to Donny. From our perspective, what we see from our numbers in that core consumer, so the low-end consumer is definitely still stretched.

Now I would tell you, and we say this quite often, as long as she's gainfully employed, she has money and can feed her family. But she is still gainfully employed, which is great to see. And she's seeing some gains in her income levels as well.

Unfortunately, that's been offset by the stubborn inflation that I mentioned and those volatile gas prices reaching $2, $4 or even above $4 a gallon, depending on what state you're in. So we believe we see that core consumer continuing to be under strain. She tells us that in all of our data. We see it very strong. But also, she tells us that she needs us more. And we see that in the traffic number as well. And so she continues to come. She comes more often but she buys less on each trip. And again, that's not dissimilar to how we see the core customer in times of distress because she really is watching every penny. She doesn't know what the next week is going to hold. So instead of doing even many stock-up trips, she buys less on each trip, but comes more during the month to ensure she can meet her family's needs. So we see that playing out. And with that, we're there for the consumer.

Yes. But in terms of your question on shrinking damages, obviously, really pleased to see continued improvement during the quarter. We continue to expect that shrink and damages will contribute about 50 basis points of incremental gross margin expansion of the 2025 base.

And again, that's on top of the over 80 basis points of expansion we've already achieved in 2025. And so as a reminder, and you touched on this, we were initially targeting 80 basis points from just shrink alone over a 2- to 3-year period. So the take away here is shrink is improving at a faster and higher rate than initially anticipated. And as I mentioned, we saw continued improvement in Q2, and that's despite lapping a 108 basis point improvement from the prior year, which is obviously, great to see.

In terms of damages, the improvement in 2025 was pretty much in line with our expectations, and the improvement in the first half is trending better than anticipated. So overall, also feel really good here and pleased with the progress we're making on this front.

The next question is from the line of Corey Tarlowe with Jefferies.

Great. I wanted to ask about any updates with the Retail Media Network. It seems like it could be a very tangible upside driver to the margin profile over the next several years as we march towards that 6% to 7% operating margin profile. So I'd be curious if you could maybe share any unique updates or insights as it relates to that?

Yes. I'm happy to give you a little color there. We aren't quantifying the quarter results. We did quantify it at the end of last year, it's $170 million in annual volume. And as you said, we are expecting that to grow meaningfully.

A couple of things about our media network. Just as a reminder, our network is unique that it offers advertisers access to an unduplicated audience that they otherwise wouldn't be able to reach. And we're able to deliver high returns for our advertisers using our network, and that really is helping us to drive growth in this space.

As we move ahead, we have a couple of levers that will really accelerate the growth. We are innovating in ways that are meaningful for our advertisers, increasing the number of opportunities that we have for investment. This is inside our stores as well as in our app and on our website. And then importantly, increasing the engagement in our digital platforms. This is an important one because as we continue to grow engagement, which we are seeing, that will continue to attract more advertisers. And those increases will be accelerated by some of the plans we have in place in our digital area of the business. That includes subscription and loyalty, which we will pilot at the end of this year, expect to roll that out fully in 2027. So we expect initiatives like that to not just support the growth in digital, but also help support the growth in our media network going forward.

Our final question will be from the line of Robby Ohmes with Bank of America.

I was hoping maybe just an update, a little more of an update on the new store format, which you guys have seen this quarter and opportunities you think it might be opening up and new categories? Just any more color on that would be great. And then also remind me, SKU rationalization, is that done? Or could you be doing more from here?

Yes, sure. I'll take both of those questions. So from a new format perspective, you're exactly right. We started this year rolling out a new format that we call our [ DGTP '26. ] And the work that the merchant team did there really was centered in customer insights to help influence the layout of that store. We opened up the front of the store. We improved sightlines for customers and employees in this new layout. And we made pretty significant adjustments to adjacencies to drive higher engagement across the store, and that's what we're seeing.

We created clear destinations for food and snacks, for health and beauty, which is generating great results, and then our home and seasonal product as well. So excited about what we're seeing early days. It's rolling out both in the form of new stores as well as part of our Renovate Project as well.

Yes, I'll take the last one. And as you look at SKU rationalization, I first want to step back and say, we're very, very pleased with our inventory levels today. We continue to make a lot of progress on inventory per store again, growing sales at or below our inventory growth levels, and we delivered again a very strong performance in Q2.

That has also assisted our stores in being more productive, and being more productive there means getting product to the shelf faster and being there for the consumer with the right amount of items and products that she's looking for as quickly as we possibly can.

And then as you think about, as we go forward, the team is looking at continued SKU rationalization albeit probably more surgical in nature as we move forward. We're already implementing some test and learns even in the back half of this year around lower volume store type planograms, taking a substantial amount of SKUs out of the mix where it may not be as productive. And also, again, in some high shrink locations where shrink is still a bit of a headwind in some of these stores and looking at SKU rationalization a little bit differently there. So probably as we move forward a little bit more surgical than we have been, but it is still our ultimate goal to grow sales at or below -- or sales at or above the rate of inventory growth overall.

Ladies and gentlemen, this will conclude our question-and-answer session and also concludes today's conference. We thank you for your participation. You may now disconnect your lines at this time, and have a wonderful day.

Good morning. My name is Rob, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General First Quarter 2026 Earnings Call. Today is Tuesday, June 2, 2026. [Operator Instructions]

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 Mr. Kevin Walker, Vice President of Investor Relations. Kevin, you may begin your conference.

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. [Operator Instructions]

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

Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, long-term financial 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 2025 Form 10-K filed on March 20, 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 in 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 teams in our stores, distribution centers, private fleet and store support center for their continued commitment and dedication to serving our customers.

Overall, we're pleased with our first quarter performance, particularly our EPS results, which exceeded our expectations as strong operating margin expansion more than offset the impact of severe weather and higher fuel costs.

For today's call, I'll start by recapping highlights from our first 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 first quarter performance. Net sales for the quarter increased 3.4% to $10.8 billion compared to net sales of $10.4 billion in last year's first quarter. We grew market share in both dollars and units in highly consumable product sales once again during the quarter in addition to growing market share in nonconsumable product sales. Importantly, in an environment where customers are feeling more pressure on their household budgets, we believe this market share growth reflects the essential role Dollar General serves, particularly in small town communities across America.

Same-store sales increased 2% during the quarter, primarily driven by customer traffic growth of 1.4% and supported by average basket growth of 0.5 point. Notably, this marks the fourth consecutive quarter of growth in customer traffic as our combination of value and convenience continues to resonate with customers.

In addition, all 4 merchandising categories delivered positive comp sales for the fifth consecutive quarter with growth rate in nonconsumables once again outpacing consumables. From a monthly cadence perspective, all 3 periods of the quarters were positive, led by March, which includes a benefit from the Easter holiday shift. And while winter storm activity, including periods of temporary store closures, negatively impacted results during the first 2 weeks of the quarter in February, we were pleased with our sales performance across the balance of the quarter. Looking ahead, we are confident about our plans to drive continued growth in sales and customer traffic.

Moving to an update on our core customer. While there are a variety of puts and takes on customer budgets during Q1, our core customer continues to be financially constrained as any benefit from tax benefits was largely offset by higher fuel prices and reductions in SNAP benefit payments. Importantly, while there has been a significant reduction in overall SNAP dollars distributed in 2026, we grew share of wallet with SNAP customers during Q1, further demonstrating the strength and relevance of our value proposition.

Notably, during the quarter, many of our core customers reporting cutting back on other household expenses, including food purchases due to rising gas prices. This pressure has been more pronounced on customers in rural communities as they work to minimize trip distance and make trade-offs in their search for everyday affordability and value. And with our expansive real estate footprint of more than 21,000 stores located within 5 miles of 75% of the U.S. population as well as our growing delivery presence, we are uniquely positioned to serve these customers as they further prioritize value and convenience.

From a value perspective, we continue to be pleased with our pricing position, which is within 3 or 4 percentage points of mass retailers as well as our extensive offering of more than 2,000 items across the store at or below the $1 price point. As part of our overall approach to this price point, we continue to emphasize and strengthen our Value Valley offering, which is comprised of more than 500 rotating items all at $1. Of note, this offering once again outperformed the chain average in Q1 with a comp sales increase of 18.4%, driven by broad-based performance across many sections and exceptional performance in health and beauty.

Beyond our Value Valley program, we also introduced several new $1 private label items during the quarter as well as a new frozen section, which now features a full door dedicated to new frozen items at the $1 price point. We believe this price point continues to be important to our customers and are excited about the opportunity to continue providing tremendous value through these offerings.

In addition, we are seeing customer penetration growth across low, middle and high-income segments as customers across all income cohorts seek value at increasing rates. Notably, across these cohorts, the largest increase in customer count came from the highest income segment, which earns more than $100,000 annually, contributing to a significant increase in trade-in customer households during the quarter. We know that value and convenience are always important to our customers, but even more so right now. And as America's neighborhood general store, we are well positioned to help customers across all income levels, save time and money every day.

Overall, our consistent and balanced top line performance with both new and existing customers further underscores our belief that Dollar General is a trusted partner in the communities we call home with significant opportunity for ongoing growth.

In summary, we are pleased with the start of the year and proud of our team's execution. We are committed to serving our customers while driving profitable sales growth and capturing growth opportunity.

With that, let me now turn the call over to Donny.

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 Q1, gross profit as a percentage of sales was 31.6%, an increase of 65 basis points. This increase was primarily attributable to higher inventory markups, lower shrink and lower inventory damages, partially offset by an increase in markdowns and transportation costs. Our strength mitigation efforts once again contributed to strong gross margin expansion in the quarter as we delivered a 28 basis point reduction in shrink versus prior year, even while lapping a 61 basis point improvement from Q1 2025. We were also pleased with the improvement in damages during the quarter, which exceeded our expectations and reflects strong in-store execution by the team.

Turning to SG&A, which as a percentage of sales was 25.7%, an increase of 25 basis points. The primary expenses that were a greater percentage of sales in the quarter include depreciation and amortization, utilities and property taxes, partially offset by lower incentive compensation.

Moving down the income statement. Operating profit for the first quarter increased 10.8% to $638.5 million. As a percentage of sales, operating profit increased 40 basis points to 5.9%, even with higher-than-anticipated fuel costs as we continue to build on our progress towards the annual target of 6% to 7%, as contemplated in our long-term financial framework.

Net interest expense for the quarter decreased to $47.2 million compared to $64.6 million in last year's first quarter. Our effective tax rate for the quarter was 24.9% compared to 23.4% in the prior year. The increase was primarily due to the expiration of the Work Opportunity Tax Credit on December 31, 2025, partially offset by lower stock-based compensation expense. Finally, EPS for the quarter increased 12.4% to $2, which exceeded the high end of our internal expectations.

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 Q1, essentially flat compared to the prior year and represents a decline of 1.6% 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 and higher in-stock levels going forward. Overall, we're pleased with our inventory position, and for fiscal 2026, continue to expect inventory to grow at a rate below our sales curve.

In Q1, we generated significant cash flow from operations of $716.2 million, 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 strategic initiatives.

Next, we seek to return cash to shareholders through our quarterly dividend payment and when appropriate, share repurchases, all while maintaining our goal of less than 3x adjusted debt to adjusted EBITDAR in support of our commitment to middle BBB ratings by S&P and Moody's.

Moving to an update on our financial outlook for fiscal 2026. Our update reflects our strong Q1 results and outlook for the remainder of the year, while also considering our efforts to mitigate ongoing inflationary pressures as well as the potential for continued uncertainty, particularly in consumer behavior.

With all of this in mind, we now expect the following for 2026. Net sales growth in the range of 3.7% to 4.2%, same-store sales growth in the range of 2.2% to 2.7%, and EPS in the range of $7.20 to $7.45, which compares to our previous range of $7.10 to $7.35. Our EPS guidance now assumes an effective tax rate of approximately 24.5%. Our expectations for capital spending in real estate projects are unchanged from what our previously stated amounts. In addition, our Board of Directors recently approved a quarterly cash dividend payment of $0.59 per share for Q2 2026. And while our guidance does not contemplate share repurchases this year, they remain an important part of our broader capital allocation strategy at the appropriate time.

Now let me provide some additional context around our updated outlook for 2026. Despite higher-than-anticipated fuel costs, we continue to expect gross margin expansion for the full year, driven by continued progress against our key gross margin initiatives, many of which are still early in their maturity curve.

As a reminder, our initiatives include continued improvements in shrink and damages, growth in our DG Media Network, nonconsumables merchandising, supply chain productivity and category management.

On the expense side, we still expect modest SG&A deleverage in 2026, even as we plan to accelerate investments in key initiatives, including AI, as we look to build on our momentum and progress towards the achievement of our long-term financial framework grow.

Finally, we have received a -- while we have received an immaterial amount of IEEPA tariff refund payments to date, our guidance does not include any impact from tariff refunds as the exact timing and amount of any future potential refunds remains uncertain.

In closing, we are pleased with our first quarter results and strong start to the year. Looking ahead, we're excited about our plans to drive continued growth while delivering against our long-term financial framework goals.

Overall, we're confident in our business model and approach to driving profitable sales growth, high returns on invested capital, strong operating cash flow and long-term shareholder value.

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

Thank you, Donny. I'll take the next few minutes to provide an update on our 4 strategic growth pillars, which are supported by targeted initiatives to drive long-term sustainable growth and value creation. As a reminder, these pillars include enhancing the customer experience, elevating our brand, driving greater enterprise-wide efficiencies and extending our reach.

First, we remain focused on enhancing the customer experience. Our efforts to improve the nonconsumable product offering continues to resonate with customers as evidenced by the 4.6% increase in combined nonconsumable comp sales during Q1. This performance was led by strong growth in toys, including many on-trend items that are resonating with our customers. In addition, we continue to evolve and expand our successful brand partnerships during the quarter, launching 3 brands, including Holly Williams in our home category. These new brands have been popular with our customers, along with other brands launched last year, such as Dolly Parton as we continue to deliver compelling value while creating a sense of newness and excitement in our discretionary category.

Beyond our in-store initiatives, we are also advancing our digital initiatives as we seek to further enhance the omnichannel customer experience at Dollar General. Our robust digital ecosystem, which includes our popular DG app, and a suite of delivery offerings is an important complement to our expansive physical store network and continues to be a key driver of incremental value and convenience for our customers. As we look to drive future growth in this area, we are focused on scaling our delivery options, personalizing the experience for customers and growing the DG Media Network.

We continue to grow the reach of our delivery options available to customers and are now delivering from approximately 18,000 stores with our own myDG delivery offering as well as through third-party partners, DoorDash and Uber Eats. Collectively, these delivery options have significantly enhanced the convenience proposition for our customers with the ability to deliver from stores to their homes within minutes.

To that point, once again during the quarter, more than 80% of the orders were delivered in 1 hour or less with approximately half of those orders delivered under 30 minutes, further underscoring the strength of our convenience proposition. Our rapidly growing delivery platform are becoming a more meaningful sales driver as we continue to see larger basket sizes than an average in-store transaction and strong repeat visit rate. In fact, we estimate delivery sales contributed approximately 70 basis points to our comp sales growth of 2% in Q1.

Looking ahead, we are targeting continued incremental sales growth through customer experience enhancements, increased customer awareness and expanded loyalty opportunities, including the planned pilot of a delivery subscription program later this year.

Building on the growth within this ecosystem, one of the most significant components of our digital initiative is our DG Media Network, which enables a more personalized experience for our customers while delivering a higher return on ad spend for our partners. Our DG Media Network strategy is focused on accelerating on-site performance through improved search, sponsored products and a stronger e-commerce experience while expanding our ability to capture emerging off-site spend across social, Connected TV and video. We're also creating more opportunities for advertisers to participate inside our stores, including our recently expanded in-store radio network, ultimately providing better connection between our digital and physical experiences.

Overall, we believe this approach positions our advertising network as a strategic lever to drive profitable growth, enhance the customer experience and strengthen loyalty across our digital ecosystem. Overall, digital strategy is an important component to our in-store customer experience and a key driver within our long-term financial framework.

Our second strategic growth pillar is elevating our brand. We have a mature store base that uniquely enables us to serve customers in smaller and more rural communities. We continue to make strategic investments in our mature stores, particularly through our Project Renovate and Elevate remodel programs, which we believe can drive significant sales and profit growth.

As a reminder, Project Renovate is our traditional remodel program, which impacts the entire store and includes adding or replacing coolers as well as upgrading to our latest store format. These projects are focused primarily on stores that are 7 or more years [ removed ] from opening or their last full remodel. While Project Elevate is designed to further grow sales and market share in portions of our mature store base that are not yet old enough to be part of a full remodel pipeline. These projects include physical asset enhancements, merchandising updates, product adjacency adjustments and category refreshes, all of which generally impact up to 80% of the total store.

We continue to expect to execute a total of 2,000 Project Renovate remodels and 2,250 Project Elevate remodels this year. We made significant progress on these goals in the first quarter completing 659 Project Renovate remodels and 711 Project Elevate remodels. We continue to target annualized comp sales lift of approximately 6% in Project Renovate stores and approximately 3% in Project Elevate stores. These projects are not only enhancing the customer experience, but also our store associate experience. In turn, we believe we can continue to improve customer satisfaction, store manager turnover and sales.

Our third strategic growth pillar is driving greater enterprise-wide efficiency. We continue to pursue opportunities to drive greater efficiencies while lowering costs across the organization, including increased supply chain productivity, further simplification in our stores, inventory optimization and increased use of artificial intelligence. Within our supply chain, we increased productivity in both our distribution and transportation functions during the quarter, which helped us mitigate a portion of the substantial increase in our fuel costs.

Additionally, while we are still early in our AI journey, we are building an AI operating system for the enterprise, focused on reshaping our workflows to improve productivity and enablement. Overall, we are making meaningful progress advancing our AI goals, including creating shared enterprise-wide foundations and building momentum around new AI operating models. These steps have allowed us to accelerate adoption of high-value use cases, and we believe will improve how we engage with customers and how they shop with us as well as drive greater cost efficiencies throughout the business.

Our final strategic growth pillar is extending our reach. We continue to extend our unique combination of value and convenience to new communities across the country. In Q1, we opened 190 new stores in the U.S. as part of our continued plan to open a total of 450 new stores in 2026. Importantly, these projects continue to be one of our best uses of capital, delivering healthy returns while also expanding our access to new customers and communities.

In addition to our new Dollar General store growth, we continue to test, learn and refine our strategies for international growth in Mexico. As part of our plans to open a total of approximately 10 stores in Mexico in 2026, we opened 5 Mi Súper Dollar General stores in Q1, bringing us to a total of 21 stores in Mexico. While our core business proposition of value and convenience continues to resonate with customers in Mexico, we are leveraging our customer, real estate and merchandising insights to further expand our reach and capture more of those exciting growth opportunities.

Overall, we are confident in our strategy and excited about our plans to build on our progress toward these goals laid out in our long-term financial framework. And we are pleased with our Q1 performance and proud of the team's efforts to the start this year. Our people are our greatest strategic advantage, and I want to thank our approximately 195,000 employees for their ongoing commitment and dedication to serving our customers and communities every day. Looking ahead, we believe we are well positioned to continue advancing our progress while fulfilling our mission of serving others.

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

[Operator Instructions] And our first question is from the line of Matthew Boss with JPMorgan.

Congrats on the nice quarter. So Todd, could you elaborate on the consistency of comps despite the backdrop with positive comps? I think you cited in all 3 periods of the quarter. Have you seen any change in trends in May to kick off the second quarter? And just larger picture, how do you believe gas prices, if they remain elevated, will impact your results and opportunities you see to amplify value if we just use history as a guide for your business.

Thank you, Matt. Yes. So a couple of things. Let's concentrate real quickly on Q1 here. And I would tell you starting out, we were in the hole. We had 2 weeks of negative comp with thousands of stores closed at any given time, especially during week 1. And then as expected, and the team did a great job really in our transportation, warehousing group, our stores, what we saw for the balance of the quarter, so 11 of the 13 weeks was on the upper end of our range. And so that was good to see. And then as we entered and exited May, that trend continued. So here into Q2.

So really pleased with where we are on the top line. What we're seeing though is we are seeing an accelerated rate of trade-in. We have seen that the upper end, while all cohorts are trading in, we're seeing that the upper end is trading in the most, and we're seeing that as well. A reminder, that's, that $100,000-plus cohort that's trading in. And I believe that the pressures that had persisted prior to fuel prices. So sustained inflation and now those elevated fuel prices. And we've always said, Matt, that when that price hits that $4 mark and then process it and then sustains for a while, you start to see that trade in come in and you start to see that our core customer needs us most. This is exactly what's happening. So history repeats itself pretty well as you mentioned.

So what we do here at Dollar General is we try to capitalize on that because we're here for our customer, and that's the way we work. And so when you think about that, value convenience is paramount all the time, but during this time, especially. And what you're already seeing and what we're doing is we're actually working hard to ensure that value equation is front and center for not only our core customer, but those trade-in customers.

So when you think about that, think about things like our everyday price is very strong across all classes of trade. And then we have been targeting promotional activity, very targeted to drive additional traffic into our stores. And you're seeing that at an accelerated rate as well.

And then lastly, and I can't emphasize this enough, that $1 price point has turned out to be a real savior for our core customer and is really resonating with the trade-in customer, we're seeing that accelerate at a great rate, 18.4% comp in Value Valley. New entrances into the $1 price point across the store. And in my prepared remarks, you heard we talked about that frozen door that we put in, which is all exclusively $1 in the frozen food area, and it's been doing very well since launch.

So a lot to be proud about, but also a lot that we're doing to be here for our customer. Like we always said, when she needs us most, we step up, and that's exactly what we're doing.

And then lastly, I'll say that the team has already launched areas where we can ensure that we're grabbing that trade-in customer and actually marketing to her specifically to ensure that as things start to settle out, which they usually -- always do, we want to make sure we retain that customer. So all those retention elements that we know how to do pretty well is already in full bloom for that customer to make sure we continue to engage her as she trades in, but also think about Dollar General when time start to get a little bit better.

Our next question is from the line of Michael Lasser with UBS.

Todd, you just mentioned that you're being a little bit more promotional in order to support your overall traffic growth. There's a perception out there based on the commentary from some other consumable retailers that the overall environment in the broader space is becoming more competitive. And there's a prospect that the various players in the space are going to have to sacrifice some profitability in order to maintain or grow market share.

So, a, are you seeing any evidence of that? Is that what is driving your decision to be a bit more promotional? And b, how do you expect this to play out over the next couple of quarters, especially as your traffic comparisons will get a little bit more difficult, you may have to work the model a little bit harder in order to drive the top line. Sorry for all the words out there.

No, that's no problem. The crust of your question is the promotional piece. And I would tell you that our promotional activity, while increased during the quarter and will probably continue to increase, has been very targeted and by the way, very proactive, not reactive. So we're really being very prudent on where we promote, how we promote and the value that we're showing. And at this point, the consumer is definitely looking for value, seeking value, all cohorts. You can see it in the everyday business. And you can see it in our seasonal and our discretionary areas as well, which, as you saw, we really did a nice job balancing consumables and nonconsumables. As a matter of fact, nonconsumables is on its fifth consecutive quarter of nice growth.

So I think value wins all the time. And I believe that, yes, you'll see some others probably start to play catch-up a little bit because we're already ahead on value every day in really great shape. Now this nice cadence of promotional activity that we layered in should continue to move the needle and promote that traffic that we all look for. Very proud of that 1.4% traffic gain in the quarter. But also that $1 price point. Again, I can't emphasize enough how that is the anchor to a lot of our everyday pricing here at Dollar General.

Our next question is from the line of Zhihan Ma with Bernstein.

Shifting gears on the margin side of things. Could you help us understand as you start to lap some of the tougher shrink comparisons as the year goes on how to think about the cadence of margins from here? And longer term, I think your long-term algo implies a gross margin level that you haven't really achieved sustainably before outside of a quarter or 2 during COVID. So what gives you the confidence level that, that's going to be sustainable longer term?

Yes. No, very much appreciate the question. This is Donny. I'll take that one. I think maybe we'll start with the Q1 gross margin, I think that'll help contextualize a little bit about how we're thinking about the balance of the year and then a little bit from a longer-term perspective.

And so from a Q1 perspective, very pleased with our gross margin performance. As you saw in the release, 65 basis points of improvement versus prior year, which exceeded our expectations, and it's even with higher-than-anticipated fuel costs. And I think the primary drivers that we called out are markups as the team continues to do a really great job with category management.

I do think it's important to note here that on the markup side of the house, there really wasn't -- price really wasn't a meaningful driver in Q1. And shrink and damages also delivered really nice results better than anticipated, quite frankly. And so -- and Todd alluded to the fact also that we did lean in a little bit with the promotions in spite of all that or even with all that, really strong gross margin performance.

And so I think from a Q1 perspective, the thing I'm most excited about is it really does reflect another quarter of what I would say tangible proof points that we're building momentum across a lot of our key gross margin drivers. And that gives us a lot of confidence in our ability to deliver against our long-term framework targets.

As you look at Q2 and the back half, I'd say there's really not a lot -- anything I would call out from a Q2 versus back half specifically. From a headwinds perspective, the laps do get a little bit more challenging versus Q1. And we do anticipate fuel cost to remain elevated versus the prior year for the balance of the year. And we're watching the tariff landscape. Right now, our full year guidance reflects current tariff levels that are in place today. But from a tailwinds perspective, we expect continued improvement, a little bit more modest but continued improvement in shrink, which we talked about exceeded our expectations, continued improvement in damages, which was also a meaningful contributor in Q1. And continued growth across a number of our other gross margin drivers, including our DG Media Network, nonconsumables merchandising, supply chain productivity and category management.

And so overall, as we look at the back half or the balance of the year, I continue to believe there's more tailwinds and headwinds as we think about gross margin, feel really good about the momentum we're seeing across pretty much all of our gross margin drivers. And so I think when you look out to the long-term framework, our target of 6% to 7%. But what I would tell you is we continue to feel really good about our ability to deliver against our long-term operating margin targets. Again, a number of drivers in place that we expect will contribute to gross margin expansion over time. As we look further out, we continue to expect shrink and damages to contribute approximately 50 basis points of incremental gross margin expansion. And by the way, that's on top of the over 80 basis points of expansion we've delivered in 2025, just from a shrink side of the house. And so shrink continues to improve at a faster and higher rate than initially anticipated. And again, we delivered 28 basis points in Q1, which was better than expected, which is good news.

In terms of damages, what I'd tell you here is the improvement in 2025 was in line with our expectations. And as I just noted, Q1 improvement was better than expected. And so overall, we continue to be very pleased with the progress on this front. We also expect DG Media Network will be a meaningful contributor over time, 50 basis points of incremental margin expansion is what we're targeting over the next 3 to 4 years. And the great news is, even though it's still early innings here, we're continuing to build really good momentum here as well.

And then we have another 70 basis points of gross margin expansion that we expect from other gross margin drivers. Again, a few proof points. We're continuing to see growth in nonconsumables 5 consecutive quarters in a row, as Todd just alluded to. We're seeing greater efficiencies across the supply chain, a nice contributor to gross margin expansion in Q1 and category management initiatives continue to perform. And again, I'll point to the Value Valley comp of 18.4% in Q1. So again, strong proof points across all our gross margin drivers and feel really good about our ability to deliver against our long-term framework targets.

Next question comes from the line of Simeon Gutman with Morgan Stanley.

Todd, as you prepare to transition away from the business, do you think that the top line growth rate on comp to actually normalize closer back to 3% versus the 2%? And about puts and takes, something that we're noticing the contribution from the fulfillment of last mile step down a little. I know you're going to have tougher compares, but are you still seeing enough incrementality where that could be a unique driver?

Yes. Thank you for the question. And I'm very bullish on that top line and be able to continue to grow that top line. Our goal in the long-term framework that 2% to 3%, the business does very well in that range. And it's evidenced by the 2% comp that we delivered this quarter and the substantial bottom line growth that came with it.

So Simeon, I believe that the team has really done a nice job in setting up the future. As I think about the balance of consumables and nonconsumables, even in the face of a very tough macro backdrop, is a real proof point that the team is working hard to ensure that we're showing value and convenience every day to the customer. Now as you think about also the future, that delivery piece is pretty important. And Emily, you may want to just touch on that just a moment.

Sure. So we're excited about what we're seeing from a customer reaction and engagement in our delivery program. Of course, we're still within the first year of full deployment, in particular, on our myDG delivery portion of this business. And of course, for the quarter contributed 70 basis points, which is a nice meaningful contribution to the in-store growth that we saw in the quarter.

Just maybe a reminder, delivery for us, it's a highly incremental business, and it's a profitable business for us today. We see that when customers shop our delivery options, they buy a larger basket as part of that transaction versus what we see inside our stores. And in addition to that, we see that our existing customers use delivery to shop us more often. And at the same time, new customers are using delivery to find us. So highly incremental for us. And you heard again in the prepared remarks, 80% of our orders are delivered within an 1.5 hour of those. So 40% of our delivery orders make it to our customers within 30 minutes. And really, that's a function of the proximity of our stores to our customers. And it means that for us, delivery really is showing a very important convenience piece of kind of our proposition here, and it's unique for our rural customers in a very important and meaningful way.

The fact that we continue to see really high repeat rates tells us that our customers definitely see the value that we're bringing in this space, and I do see a continued pathway for growth for us. One of the important deliverables that we have this year is going to be that pilot on subscription. So more to come, but excited about bringing that to our customers as well. They tell us they're excited about that and would like us to offer a subscription offer. So I think that could provide additional growth as we move ahead.

The next question is from the line of Rupesh Parikh, Oppenheimer.

So as we look at the nonconsumables category for the balance of the year, just curious on the confidence in sustaining momentum there? And then would you expect nonconsumables to continue outpacing consumables even with some of the new macro headwinds out there?

Thanks for the question, Rupesh. Yes, we're confident in our ability to drive both consumables and nonconsumables here at Dollar General. We really prioritize that nonconsumable business. You heard us talk about it about a year ago and how we're going to lean in there and we have. And I would tell you that the team has done a great job.

When you think of the value in our nonconsumable business, which I'll talk about in a minute, but also the relevancy and right trend, is so important for not only our customer, but that trade-in customer that's coming in. So we're happy with what we're seeing there. And the value, I'll come back to that, is really the key here. And the value is not only like items that you can find and other retailers that were substantially lower in our retail prices, but also in that lower end $1 price point.

As you've heard us talk, Easter, as an example, a very large percentage of our Easter this year on the nonconsumable side was at $1. That trend continues in the spring and summer and will continue into the back half of the year. Again, I keep emphasizing, but I can't emphasize enough that, that $1 price point is so important to not only our core customer, but we're seeing great takeaway because of the value it shows in that middle and upper income as well.

So I feel really good about what we've done. We've got a lot of work to do, but I believe that it is very sustainable. And again, if you think about that long-term model, it does model out that we've been the trend on the percentage of consumables and the nonconsumable side of that business. And I believe that showing that we're on our fifth consecutive quarter of showing that bending of the trend, I think that's a nice string to be able to leverage as we move over the next couple of years.

The next question is from the line of John Heinbockel with Guggenheim Partners.

Todd, can you talk about when someone's got $1 item in the basket, so what happens to UPT? And I mean that might go up, what happens to basket size? And then with more $1 items, does that put any pressure on labor hours just in terms of kind of volume throughput on an item -- on a unit basis?

Thank you for the question. We watch the basket very closely. The great thing is we saw our ticket go up about 0.5 point in the quarter with transactions up [ 1.4. ] So feel really good about that even with the large comp in our Value Valley area and other $1 price points against that 2,000 items at or below the $1 price point.

We've never been very concerned here about the average basket size, the AUR. The concern is more can we give value to the consumer, can she see that value, and that halo effect of $1 and value is so important, not only to our core consumer, but that trade-in. And that's what we've seen as we've leaned into that $1 price point. The $1 price point, what we've seen traditionally has really been an add-on to the basket where they pick up that extra $1 item, especially at the first and the middle of the month. And then at the end of the month, that $1 price point actually fills a different role, and that is to balance our budget at the end of the month, right? Because our core customer, especially right now as we're facing large inflation and gas prices, runs out of money before the month runs out. And that $1 price point bridges that gap.

So it's really shopped 2 different ways during each period. And our goal to grow that, I think, is very, very important to the core customer. But again, I think as time goes on, will be very important to that trade-in customer as well.

The next question is from the line of Paul Lejuez with Citigroup.

You talked a bit about the trade-in customer in the $100,000-plus range. We hear a lot of companies talk about gaining customers trading down in that income level. I'm curious where you think your customer is coming from. And then would love to hear you talk a little bit more about what you saw specifically on the lower income consumer as we moved through the quarter as gas prices stay high or even increase?

Yes. Thank you for the question. I would tell you that the trade-in is really coming from the same areas that we've seen over the years at an accelerated rate right now. And that's really from the drug and the grocery side of the business is where we really see the most trade-in. That continues. As I indicated in my prepared remarks, we saw a very nice trade-in from that upper income that $100,000-plus. And that continues as we moved into Q2 at an, again, accelerated rate.

So when you think about that and then when you think about our core customer, the second part of your question, really, the core customer, obviously, is under a lot of distress right now with sustained inflation, now gas prices sustained at or above $4 for the most part, depending on what part of the country you're living in, has really now turned to Dollar General even more. But we're seeing what we normally see, right? And that is, she comes more often. So transactions go up, but basket sizes shrink with that core customer as she balances her budget.

Now she's very resilient. That's the other thing that we always have to remember about this customer. It takes her a quarter or so to figure out her budget. And we help with that as I indicated earlier with our value proposition, everyday great prices, the promotional activity that's very targeted to help that core customer, but also that $1 price point. And she figures it out over time. And the great thing is she looks to us to help figure it out, and you can see that in our results. So we'll continue to foster that trade-in, but also take care of that core customer.

The next question is from the line of Seth Sigman with Barclays.

A couple of clarifications. I guess first just on the guidance change. You raised it by $0.10. I just want to confirm, it looks like $0.05 of that comes from the tax rate, seems like the rest of that comes from the Q1 upside. But can you just confirm if and how you changed assumptions for the rest of the year?

And then specifically on the promotions being higher, I know there's a lot of talk about this on this call. I'm just curious, is that actually different than you planned or different than you expected? Or is it consistent?

Yes. So maybe I'll start off. This is Donny. I think the way you're thinking about the change in full year guidance is correct. I mean I think we're obviously very pleased to be increasing our expectations for EPS to a range of $7.20 to $7.45. I think to your point, a lot of it was driven by strong Q1 outperformance, outlook for balance of the year and reduction in the tax rate to about 24.5%.

So you're thinking about that right way in terms of half and half. I think overall, what I would tell you is it reflects the evolving macro environment as well as continued progress against our key initiatives and growing momentum across many aspects of the business. And just keep them on, we're well ahead of several of the goals contemplating in our long-term framework. So adding it up, feel really good about the guidance based on what we know today, but believe it's prudent just in spite of the evolving landscape that we're seeing today.

Yes. And as it relates to the promo activity, it isn't different than what we anticipated. Again, as I indicated, it's very targeted. It's not widespread. It's targeted at that low-end consumer to help her balance her budget but also targeted to -- for retention for that trade-in customer to continue. So very much planned and is very proactive on our part because we've got a very strong everyday price that really is -- that is the lead marker in value for our consumer, and that $1 price point. And that promotional activity is really targeted and planned very, very much each quarter. So that's how I would look at it, to answer your question.

The next question is from the line of Scot Ciccarelli with Truist Securities.

What percent of your $1 mix today is Value Valley or the $1 or less price point at this stage, just so we can better gauge the impact this initiative is having on the total business.

And then secondly, on the third-party delivery front, I would think seasonality probably led to the comp contribution decline from 80 basis points in 4Q to 70 in 1Q. But how do you expect your delivery growth to scale? If you can put any numbers around that, that would be really helpful.

I'll do the -- I'll answer the first part and then give it to Emily for the delivery side. But as we look at the $1 price point and especially Value Valley, consider that it's 500 rotating SKUs against the backdrop of over 2,000 SKUs across the store. And while it is a meaningful part of the overall $1 price point comp that we're enjoying, keep in mind that there's a lot of other areas, especially in our private brand areas that come with a $1 price point, that's very meaningful for our customer as well.

So it's a meaningful contributor. I think we'll leave it at that. We talk about it a lot, especially in the 18.4% comp that it contributed. But as we continue to move forward, we think it is an area where we can expand and continue to grow that $1 price point against the entire store.

Yes. And then from a delivery perspective, I would just say we do, as I mentioned earlier, expect continued growth out of that business. Now one thing I'll just remind you guys to have is the fact that we rolled out in scale delivery over 2025, and so that is a factor. But when you look at what we're doing to improve the shopping experience from a digital perspective in combination with new offers like the subscription program that will pilot this year, that will continue to drive growth really beyond -- this year and beyond.

The next question is from the line of Spencer Hanus with Wolfe Research.

Just on the Remodel program, I'm just curious how that's been tracking relative to expectations and what you've seen in the latest cohort of stores and also how you're thinking about the year or 2 lifts there? And then you just also mentioned the pilot for the delivery initiative. Just curious if there's any more color on that and what that's going to look like later this year.

Okay. So I'll jump in on Renovate and Elevate. And just for context, right, we've got the 2 elements of our remodel program. Renovate is our full remodel, touches 100% of the stores and we are planning 2,000 projects this year. We also have to Elevate, our lighter remodel project, touches about 80% of the store. And what we really like using these 2 projects in combination is that it puts us in a really great position to update our store base in an accelerated manner, which ultimately supports really a higher brand standard both for customers and employees.

So our target continues to be a 6% lift out of Renovate on an annualized basis, and a 3% annualized lift out of Elevate, and feel good about where we're tracking. From a 2-year perspective, we really started the Elevate last year. So we're early on in being able to read that. But our expectation is that this repositions the store and helps us to continue to drive accelerated growth out of our mature store base overall.

And then I think you had another question, that third piece? What I'll tell you about subscription is just a fact that we are excited about what we are hearing from our customers in terms of their interest level, specifically in subscription from Dollar General. And I think our team has done a really outstanding job of putting together the right value for that program that will include in our pilot, which combines benefits at Dollar General with other offers and other benefits for our customers that are specifically targeted and chosen for our customer base. So I'm really excited to be able to report on those results as we get a pilot up and running.

The next question is from the line of Peter Keith with Piper Sandler.

Nice results, guys. With the gas prices, you talked about the impact on the consumer. I was thinking more on the supply chain, if we're in an environment where gas prices continue to go higher. Donny, the gross margin outlook, it doesn't feel like it's changed. Have you contemplated higher gas prices, and perhaps if you have, are those being offset by other things that are perhaps coming in better than you expected on the gross margin line?

Yes, you're thinking about it the right way, Peter. I mean I think from a gas price perspective, we do anticipate fuel costs to remain elevated versus prior year for the balance of the year, but we'll look to mitigate any additional pressure above and beyond our forecasted rates.

But so far, the team has done a really nice job of being able to offset those pressures, particularly in Q1, and that's our expectation balance of the year as well.

The next question is from the line of Robby Ohmes with Bank of America.

I was hoping, Todd and maybe Emily, can you guys talk about the SKU reduction initiatives, where you guys are at in that? And what kind of benefits you expect to see from that for the balance of the year?

Yes, it's a great question. We continue to work hard on SKU rationalization. And as we have stated, we have moved out about 1,200 SKUs, maybe a little bit more at this point over the last couple of years to be more productive in the store.

I think the way to think about it is it's more productive in our DCs. It's more productive in our stores. It adds to gross margin in a very meaningful manner as well. And it helps the stores be able to manage freight and in-stock levels at a higher rate.

So we like the reduction. It is very methodical. It's done, making sure that trade-off to the customer is the right trade-off. And we've done, I believe, a very good job of that. And you can tell that in our comps that we've enjoyed since the reductions have taken place.

I think the way to think about it into the future, I think there's still opportunity the team is looking at. And that's why we're pretty confident that we'll grow sales at a rate above inventory growth, at least for this year and then looking at how we are targeted in our ability to reduce SKUs into the future as well because we believe that there's opportunity. And again, that grows both the top line, if you do it right, it helps mitigate expense at store in DC, and it adds to gross margin.

Our last question is from the line of Corey Tarlowe with Jefferies.

Great. Donny, I was wondering if you could talk a little bit about the margin cadence for the year. You comped a 2 in Q1 and EBIT margins leveraged about 40 basis points. The compares do get tougher and the revised guide would imply that Q1 would be the most substantial EBIT margin expansion in the quarter. Curious about kind of how you're thinking around that?

Yes. No, Corey, I appreciate the question. I think you're thinking about it the right way, Corey. I mean I think as I alluded to a little bit earlier, I think from a balance of your perspective on the gross margin side, you touched on it, the compares do get a little bit more challenging. We are anticipating, right, the higher fuel cost to remain elevated.

But again, we feel really good about the tailwinds, but it's early in the year, right? And so we feel really good about the gross margin drivers, how we're performing against them, for the most part, how a lot of them are delivering ahead of our expectations, but there's a lot of year left. And overall, we feel really good about the guidance we provided.

Thank you. This will conclude our question-and-answer session, and will also conclude today's call. We thank you for your participation. Have a wonderful day.

Good morning. My name is Rob, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General Fourth Quarter 2025 Earnings Call. Today is Thursday, March 12, 2026. [Operator Instructions]

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 Mr. Kevin Walker, Vice President of Investor Relations. Kevin, you may begin your conference.

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. [Operator Instructions]

Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, long-term financial framework, strategy, initiatives, plans, goals, priorities, opportunities, expectations or beliefs about future matters and other statements that are not limited to historical facts. 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 2024 Form 10-K filed on March 21, 2025, and any later filed periodic reports 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.

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 teams in our stores, distribution centers, private fleet and our store support center for all their work to serve our customers and each other in 2025. We are proud of these efforts and pleased with our strong operating and financial results for both the fourth quarter and fiscal year 2025. We have not only stabilized our core business, but we've laid the groundwork to drive meaningful growth over both the near and longer term.

For today's call, I will begin by recapping some of the highlights of our fourth quarter performance as well as sharing our latest observations on the consumer environment. After that, Donny will share the details of our financial performance, financial outlook for fiscal 2026 and updated thoughts on our long-term financial framework. I will then wrap up the call with an update on our strategy, including our strategic growth pillars.

Turning to our fourth quarter performance. Net sales increased 5.9% to $10.9 billion in Q4 compared to net sales of $10.3 billion in last year's fourth quarter. We grew market share in both dollars and units in highly consumable product sales once again during the quarter in addition to growing market share in nonconsumable product sales. Importantly, we believe our continuing growth in sales and market share demonstrate the relevance of our unique combination of value and convenience for our customers.

Same-store sales increased 4.3% during the quarter and included healthy growth in customer traffic as well as average basket size. The growth in average basket was driven by an increase in average unit retail price per item, partially offset by a decrease in average number of items. From a monthly cadence perspective, while January was the strongest period of the quarter and included a benefit from consumer stock-up activity ahead of winter storms, all 3 periods delivered comp sales growth above 3.5%. For the fourth consecutive quarter, we delivered broad-based category sales growth with positive comp sales in each of our consumables, seasonal, home and apparel categories.

Notably, sales in the combined nonconsumable categories outpaced a solid increase in consumable sales also for the fourth consecutive quarter. In addition, we finished 2025 with 3 consecutive quarters of meaningful growth in customer traffic, reflecting the essential role we play for our customer and communities as we help them save time and money every day. Customers across all income brackets continue to stress the importance of finding value as they shop, and we are meeting this need as we continue to grow penetration with households of all income levels. And while we continue to be pleased with our pricing position against competitors and other classes of trade, we know value is multifaceted, especially for our core customer.

As a result, beyond our goal of keeping prices within 3 to 4 percentage points of mass retailers, we continue to offer compelling value through our extensive offering of more than 2,000 items at or below the $1 price point. These items are clearly resonating with the customer as evidenced by the strong performance of our Value Valley offering, which is comprised of more than 500 rotating items, all priced at $1. In fact, during the quarter, this offering delivered a comp sales increase of 17.6%, once again outperforming the chain average. These results represent meaningful acceleration compared to prior quarters, further building on the strong results we've been delivering in this area.

In addition, $1 items in our seasonal business for the quarter delivered our highest sell-through rates, reinforcing the value our customers continue to place on this important price point. Our strong value proposition is complemented by the convenience of nearly 21,000 stores located within 5 miles of approximately 75% of the U.S. population and a robust and growing digital presence to serve a wide variety of new and existing customers, all of which has uniquely positioned us as America's neighborhood general store.

In summary, we're proud of our Q4 and 2025 results, which were well ahead of our expectations. We are well positioned to continue driving profitable sales growth and capturing growth opportunities while creating long-term shareholder value.

Now let me turn the call over to Donny.

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 Q4, gross profit as a percentage of sales was 30.4%, an increase of 105 basis points. This increase was primarily attributable to a reduction in shrink, higher inventory markups and lower inventory damages, partially offset by an increased LIFO provision. Our shrink mitigation efforts once again contributed to strong gross margin expansion in the quarter as we delivered a 62 basis point improvement in shrink versus prior year, even while lapping a 68 basis point improvement in Q4 2024.

For the full year, gross margin expanded by 107 basis points, driven by an 80 basis point reduction in shrink. Notably, this reduction positions us ahead of the goals embedded in our long-term financial framework, and we expect further improvement over time.

Turning to SG&A, which as a percentage of sales was 24.9%, a decrease of 165 basis points. The primary expenses that were a lower percentage of sales in the quarter include impairment charges, primarily due to the store portfolio optimization review completed in 2024 and retail salaries, partially offset by higher incentive compensation.

Moving down the income statement. Operating profit for the fourth quarter increased 106% to $606 million. As a percentage of sales, operating profit increased 270 basis points to 5.6%. As a reminder, our Q4 2024 operating profit includes an approximate $232 million negative impact associated with the impairment charges I just mentioned. Net interest expense for the quarter decreased to $52.3 million compared to $65.9 million in last year's fourth quarter. Our effective tax rate for the quarter was 21.8% and compares to 16.2% in the prior year. Finally, EPS for the quarter increased 122% to $1.93, which exceeded the high end of our expectations. Our Q4 2024 results include an approximate $0.81 per share negative impact associated with the impairment charges I mentioned earlier.

Turning now to our balance sheet and cash flow, where we continue to make significant progress in strengthening our financial position. Merchandise inventories were $6.3 billion at the end of Q4, a decrease of $379 million or 5.7% compared to the prior year and a decline of 7% on an average per store basis. Importantly, the team continues to do a terrific job reducing inventory while driving sales and improving in-stock levels. Overall, we're pleased with our inventory position and moving forward, we're focused on growing inventory at a rate below our sales growth.

In 2025, we generated significant cash flow from operations of $3.6 billion, which represents an increase of 21.3%. Our strong cash flow generation provides flexibility to reinvest in our business, while at the same time, further strengthen our balance sheet and liquidity position. In fact, as previously communicated, we redeemed $550 million of senior notes during the fourth quarter. This was well ahead of their scheduled November 2027 maturity and brings the total level of senior note redemptions in 2025 to $1.7 billion. We also paid a dividend of $0.59 per common share outstanding during the quarter for a total payment of approximately $130 million.

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, remodels and other strategic initiatives. Next, we seek to return cash to shareholders through a quarterly dividend payment and when appropriate, share repurchases, all while maintaining our goal of less than 3x adjusted debt to adjusted EBITDAR in support of our commitment to middle BBB ratings by S&P and Moody's.

Overall, we're pleased with our strong financial results in 2025, which were significantly ahead of our initial expectations for the year. These results are a testament to the strong execution by the team and the ongoing positive impact of key growth initiatives across the business.

I'd like to now discuss our financial outlook for 2026. Our current outlook reflects continued progress against our key growth initiatives. It also considers our efforts to mitigate cost inflation and the potential for continued uncertainty, particularly in consumer behavior. In addition, keep in mind that we entered the year well ahead of schedule on several of the goals initially contemplated in our long-term financial framework, which we introduced on our Q4 2024 earnings call last March.

Taking all of this into account, for 2026, we expect net sales growth in the range of 3.7% to 4.2%, same-store sales growth in the range of 2.2% to 2.7% and EPS in the range of $7.10 to $7.35. Our EPS guidance assumes an effective tax rate of approximately 25% and includes an anticipated negative impact of about 150 basis points from the expiration of the Work Opportunity Tax Credit on December 31, 2025, resulting in an approximate $0.13 reduction to EPS. We expect capital spending in the range of $1.4 billion to $1.5 billion, which is in line with our capital allocation priorities and designed to support ongoing growth. In addition, our Board of Directors recently approved a quarterly cash dividend payment of $0.59 per share for Q1 2026. And while our guidance does not contemplate share repurchases this year, they remain an important part of our broader capital allocation strategy at the appropriate time.

Now let me provide some additional context as it relates to our outlook for 2026. As a result of severe winter storm activity in the first 2 weeks of February, including periods of temporary store closures, sales results were negatively impacted to begin the year. Since that time, we've been pleased with the solid rebound in top line performance. With all of that in mind, we expect Q1 comp sales to be in the low 2% range.

For the full year, we expect continued gross margin expansion, though to a much lesser extent than 2025 as we lap the strong performance from prior year. We expect this improvement to be driven by our key gross margin drivers, which Todd and I will discuss in further detail shortly.

On the expense side, we expect modest SG&A deleverage in 2026. While we expect to benefit from a more normalized incentive compensation level, this benefit will be partially offset by continued investments in key initiatives, including remodels and IT modernization.

Overall, we're excited about our plans for 2026, particularly following our strong 2025 results, and we're confident in our strategy to deliver against our long-term financial framework goals. With that in mind, I will now provide an update on certain components of our long-term financial framework. I'll start with an update on how we currently see the path towards our 6% to 7% operating margin target over the next 3 to 4 years. Within gross margin, our plans include building on our efforts to further reduce shrink and damages. And while we have made significant progress on both fronts, particularly with shrink, we see opportunities for continued improvement as we move ahead. More specifically, we now anticipate shrink and damages combined will contribute approximately 50 basis points of incremental gross margin expansion as we continue to optimize our inventory position, improve in-store execution and reduce store manager turnover.

We're also executing against a combination of other gross margin drivers, including DG Media Network, nonconsumables merchandising, supply chain productivity and category management. Importantly, many of these initiatives are still early in their maturity curves. In total, over the next 3 to 4 years, we expect these combined initiatives will contribute at least 120 basis points of gross margin improvement, including approximately 50 basis points from our DG Media Network.

With regards to SG&A, we continue to target reductions through initiatives designed to simplify work and drive greater efficiencies, reduce repairs and maintenance expense and stabilize growth in depreciation and amortization. And while the goals in our framework assume a modest degree of SG&A deleverage, we're excited about the potential to deliver savings in these areas while supporting continued growth across the business.

Finally, we are pleased to continue to return cash to shareholders through our strong dividend. We are also looking forward to resuming share repurchases at the appropriate time. Overall, our framework is centered on driving strong top and bottom line growth and improving profitability while continuing to invest in high-return growth initiatives and ultimately returning significant cash to shareholders. Importantly, we are working to further strengthen and accelerate where we see opportunity, our path to achieving these goals.

In closing, we're pleased with our strong operating and financial results in 2025 and excited about our plans to drive continued growth in 2026 and beyond. We're confident in our business model and our long-term approach to driving sustainable growth while creating long-term shareholder value.

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

Thank you, Donny. As we look to build on our momentum in 2026, we're focused on 4 strategic growth pillars: enhancing the customer experience, elevating our brand, driving greater enterprise-wide efficiencies and extending our reach. I will take the next few minutes to discuss each of these and how we are working to accomplish our goals.

First, with the customer at the center of everything we do, we are focused on enhancing the customer experience. We believe we have a tremendous opportunity to gain additional market share with both new and existing customers as we look to drive trips with them both in-store and digitally. In store, we expect to further enhance the customer experience in 2026 with the introduction of a new store format and even more relevant merchandising programs, including our nonconsumable initiative.

We have reimagined our traditional store format by creating a new layout in response to what customers have told us they want from their shopping trip. This new format is designed to be more open and inviting, resulting in greater browsing and treasure hunt shopping as customers are exposed to more categories as they navigate the store. We tested this new format in a portion of our 2025 remodel projects and are pleased with the incremental sales lift and relative sales outperformance compared to traditional remodels. Ultimately, we believe this format will help drive both increased transactions and ticket as the store provides for an even fuller fill-in trip.

As we look to build on our success in 2025 and further increase penetration of nonconsumable sales, we have exciting plans to drive growth in our discretionary categories. More specifically, we're continuing to evolve and expand our offering. And following the highly successful brand expansion in 2025 with brands such as Dolly Parton, Kathy Ireland and others, we expect to launch at least 15 new brands in nonconsumable categories in 2026.

In addition, as we look to showcase even more value in nonconsumable categories this year, while continuing to drive profitable sales growth, we also plan to capitalize on a number of other exciting opportunities in these areas, including building on our proven closeout buying strategy, launching a loyalty program in key nonconsumable categories and growing nonconsumable sales through shoppable social marketing.

Notably, our goal is to increase nonconsumable sales penetration to as high as 20% by 2029. This would represent meaningful gross margin expansion and is an important component of our long-term financial framework.

In addition to the multitude of in-store initiatives in place, we are also advancing our digital initiatives as we seek to further enhance the omnichannel consumer experience at Dollar General. We have established a robust digital ecosystem in recent years with more than 7 million monthly active users on our DG app and a total of more than 100 million marketable customer profiles. Our digital offerings are an important complement to our expansive physical store network and a key driver of incremental value and convenience for our customers.

As we look to drive future growth, we are focused on scaling our delivery options, personalizing the experience for our customers and growing the DG Media Network. We have significantly expanded the reach of our delivery options available to customers and are now delivering customers through approximately 18,000 stores and with our own myDG delivery offering as well as through third-party partners, DoorDash and Uber Eats. Collectively, these delivery options have significantly enhanced the convenience proposition for our customers with more than 80% of the orders delivered in 1 hour or less while also extending our value offering to a wide range of new customers who were previously underserved by delivery options in their community.

As we continue to see larger basket sizes than an average in-store transaction and very strong repeat visit rates, our rapidly growing delivery platforms are becoming a more meaningful sales driver. In fact, we estimate delivery sales contributed approximately 80 basis points to our comp sales growth of 4.3% in Q4.

Looking ahead, we have ample opportunity to further drive incremental sales growth through customer experience enhancements, increased customer awareness and expanded loyalty opportunities, including a planned pilot of a subscription program.

As we see continued growth in our digital properties, one of the most significant components of our digital initiative is our DG Media Network, which enables a more personalized experience for our customers while delivering a higher return on ad spend for our partners. Our DG Media Network strategy is focused on accelerating on-site performance through improved search, sponsored products and a stronger e-commerce experience while expanding our ability to capture emerging off-site spends across social, connected TV and video.

We're also creating more opportunities for advertisers to participate inside our stores that are connecting digital and physical experiences. Over time, we believe this approach positions our entire advertising network as a strategic lever to drive profitable sales growth, enhance the customer experience and strengthen loyalty across our myDG ecosystem.

In 2025, as partners continue seeking access to our unique customer base, we delivered approximately $170 million in retail media network volume, which is highly accretive to gross margin. Overall, our digital strategy is an important component of our in-store customer experience and a key driver within our long-term financial framework.

Our second strategic pillar is elevating our brand. We believe we can drive significant sales and margin growth in this area through strategically investing in our mature store base while diligently executing on the basics of retail. In turn, we expect to deliver an elevated experience for both our customers and employees. Our mature store investments will be centered around 2 established remodel programs, Project Renovate and Elevate. As a reminder, Project Renovate is our traditional remodel program, which impacts 100% of the store and includes adding or replacing coolers as well as upgrading to the latest store format. These projects are focused primarily on stores that are 7 or more years removed from their last touch.

In 2025, we introduced an incremental remodel program called Project Elevate, which is designed to further grow sales and market share in portions of our mature store base that are not yet old enough to be part of a full remodel pipeline. These projects include physical asset enhancements, merchandising updates, product adjacency adjustments and category refreshes, all of which impact up to 80% of the total store. We continue to target annualized comp sales lift of approximately 6% in Project Renovate stores and approximately 3% in Project Elevate stores.

In addition to higher sales, customer surveys indicate that both projects have had a positive impact on customer sentiment, each scoring more than 100 basis points higher post remodel as compared to the rest of the chain. Our store employees are also excited about the enhancements and the positive impact on their ability to serve our customers. In fact, following project completion, both remodel programs have lower store manager turnover rates compared to the chain average. Importantly, these improvements contributed to an overall reduction of more than 375 basis points in company-wide store manager turnover in 2025. We have ample opportunity to continue elevating our brand through these projects and continue to expect to execute 2,000 Project Renovate remodels and 2,250 Project Elevate remodels.

Our third strategic growth pillar is driving greater enterprise-wide efficiencies. We are actively pursuing a number of opportunities to drive greater efficiencies and lower cost throughout the organization, including increased supply chain productivity, further simplification of our stores, inventory optimization and increased use of artificial intelligence.

Within our supply chain, we are committed to integrating technology that can enable improved execution and drive greater productivity while maintaining operational flexibility. In turn, we expect to see higher levels of employee engagement and lower employee turnover in our supply chain, which will further enhance productivity.

Regarding transportation, we continue to leverage our private truck fleet for approximately half of our outbound transportation needs across the network. A private fleet truck represents savings of approximately 20% compared to the cost of a third-party provider, and we believe continued growth can drive substantial savings in the years ahead. Ultimately, our supply chain initiatives can support greater execution and efficiency while contributing significantly toward the operating margin goal in our framework. These efforts can also support work simplification in our stores, along with a continued focus on case pack fit, which reduces the amount of time spent stocking shelves as well as SKU rationalization and inventory optimization.

Finally, while we are still early in our AI journey, we are building an AI operating system for the enterprise, focused on reshaping our workflows to improve productivity and enablement. We believe that over time, these efforts can improve our customer-facing applications while accelerating our value delivery, decision automation and continuous process improvement, lowering SG&A per unit of work and driving efficiency in processes throughout the organization.

Our final strategic growth pillar is extending our reach. We continue to extend our unique combination of value and convenience to new communities across the country. In 2025, we opened 581 new stores in the U.S. and we plan to open an additional 450 new stores in 2026. Approximately 80% of our stores are in rural communities of 20,000 or fewer people, and we see substantial opportunities to continue growing our store count and serving new customers for many years to come. Importantly, these projects continue to be one of our best uses of capital and are an important part of our growth strategy.

In addition to our new Dollar General store growth, we continue to test and learn and refine our strategy for international growth in Mexico. We had a total of 16 Mi Súper Dollar General stores at the end of 2025 and now expect to open approximately 10 additional stores in 2026. While our core business proposition of value and convenience continues to resonate with customers in Mexico, we are leveraging our learnings and customer, real estate and merchandising insights to further extend our reach and capture more of these exciting growth opportunities.

Finally, we are also pleased with the recent performance of our pOpshelf stores, which had strong comp sales that exceeded our plans in 2025. Importantly, we also continue to leverage learnings from pOpshelf and apply them to our nonconsumable approach in Dollar General stores, which has supported our strong growth in these categories.

Looking ahead, we remain excited about these concepts and its potential to be a meaningful contributor as we further extend our reach with customers of both banners.

Overall, we're excited about our plans for 2026 as well as our initiatives to drive long-term growth. We believe these strategic growth pillars provide even greater strategic focus and clarity as we continue to advance our progress toward the goals laid out in our long-term financial framework.

As I conclude my prepared remarks, I want to reiterate that we are pleased with our strong performance, confident in our business model and financial framework and excited about the tremendous opportunity that we have in front of us. I want to thank our approximately 194,000 employees for their great work in delivering strong results in 2025, and I look forward to all that we will accomplish together in 2026.

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

[Operator Instructions] And the first question comes from the line of Matthew Boss with JPMorgan.

Congrats on a nice quarter. So Todd, could you speak to the consistency of comps that you saw in the fourth quarter, drivers of acceleration in both the traffic and transaction and just elaborate on comp trends that you've seen in the first quarter outside of the impact from the storm?

And then Donny, on the bottom line, could you just walk through the puts and takes for operating margins that you've embedded in this year's outlook, notably, the drivers you see remaining with gross margin, just your confidence in the 6% to 7% operating margin by FY '28 plan.

Great. Yes, I'll start. And Donny, I'll let you jump in. Yes, Matt, our comps, we felt really good about them in Q4. Actually, when you think about Q4, as my prepared remarks talked or Donny's, we were 3.5% at least across all 3 periods. I think it's important, though, to note that November and January were the strongest. And December, again, still above or right at that 3.5%, but the weaker of the 3, if you will, if you call it, 3.5% weak.

So I would say that if you look past the storm impact in January, November and January were pretty consistent, quite frankly. So feel good about that comp. And I would tell you the drivers real quickly. Really, it's value, value, value at this point for the [Technical Difficulty] that we hadn't talked about leading up to Q4. But I would tell you, as she moved through Q4, value became even more important depending on the areas that she was shopping, not only in our consumable areas, but in our nonconsumable areas.

What I'm proud of on the drivers is nonconsumables outshined again a strong consumable sales number. And that for us is very important, but also for our consumer, and it shows that value is important to her.

Here's how I would line up the importance of the sales line for Q4 and quite frankly, as we move into Q1. Private brands, the $1 price point and a strong everyday low price. Those are the benchmarks for what our customer is looking for. On that $1 price point, Matt, we saw a very strong take rate across both consumables, nonconsumables, highest sell-through rates, excuse me, on our nonconsumable areas in the $1 price point. And I would tell you, that drumbeat has continued in Q1. In Q1, past the storm, we feel good about where the sales are, actually right back to where we thought they would be. So very good to see.

But that first couple of weeks in January, due to the storm, set us back just a bit. But we're right back in the game, feel good about it. And I think that consumer really needs a Dollar General at this point as we look ahead with all of what's ahead of that consumer, including the macroeconomic pressures that are out there and the geopolitical pieces that we're all watching very closely.

And Matt, in terms of the margin drivers for 2026, before we jump into that, I thought I'd just touch quickly on Q4 because I do think it sets a little bit of context as you think about 2026. And so from a Q4 perspective, especially pleased with the 105 basis points of expansion we saw during the quarter, and that's even with the 32 basis point headwind from LIFO.

As you saw, the standout was once again shrink followed by markups. And we liked what we saw in the damage line, which was a pretty meaningful contributor in the quarter as well. And I'll tell you, we're especially pleased with the 107 basis points of expansion for the full year, even with the 40 basis point LIFO headwind.

And so overall, for Q4, really pleased with the performance exiting the quarter and really pleased to see the momentum we're building against our key margin drivers, which positions us well as we move into 2026.

On the SG&A line, the primary drivers really here were the prior year lap of the impairment charge. And just to be clear here, though, the majority of that, we do consider discrete. Some of it is a little bit more normalized. And we are lapping or will be lapping next year higher incentive comp, so pretty outsized in 2025, lapping a below normal rate in 2024. So as we think about that setup -- as we move into 2026, we do expect another year of gross margin expansion to a much lesser extent or to a lesser extent than 2025, just we are lapping that 107 basis point full year improvement from last year.

In terms of tailwinds, we expect continued but more modest improvement in shrink. Again, we're lapping 80 basis points of improvement than the prior year. We expect continued improvement in damages, which again was a meaningful contributor in 2025 and continued momentum across our other gross margin drivers, which we touched on, including the DG Media Network, what we're seeing out of nonconsumables. We're seeing some nice contribution from supply chain and category management as well.

In terms of the headwinds, we are watching the changing tariff environment. We are watching the potential for the changes in higher gas prices. But overall, we do continue to believe there are more tailwinds than headwinds and feel really good about the momentum we're seeing on this front.

In terms of SG&A, we do expect modest deleverage on the SG&A line. We are lapping the higher incentive comp. So we expect more normalized incentive compensation levels this year, but we're also expecting continued investments in our key growth initiatives and IT modernization and remodels are a couple I would call out. But overall, I'd say our expectations for SG&A are pretty much in line with the annual targets outlined in our long-term financial framework.

The one thing I did want to touch on for 2026 is the tax. We anticipate a full year tax rate of 25%. That compares to 23% in 2025. As I alluded to in my prepared remarks, this includes about 150 basis point headwind from the expiration of the Work Opportunity Tax Credit at the end of 2025, and that will result in an approximate $0.13 reduction to EPS. And just as a reminder, the Work Opportunity Tax Credit, it's a federal tax credit available to employers who invest in job seekers or barriers to employment.

So think veterans, summer youth employees, SNAP recipients and residents of rural renewal counties. The good news here is Congress has extended the program 3 times in the past 10 years. And so while there are no guarantees they'll do it again, there is precedent. In all cases, that extension has provided for a full catch-up provision. So more to come here, but we're watching it closely.

And then just quickly, in terms of our confidence level in the op margin targets of 6% to 7%, what I'd tell you is we feel really good about our ability to deliver against that goal. I think one way to think about it, and Todd mentioned it in his prepared remarks, but we really do believe we've stabilized the core business in 2025. And while there's still work to do, one of the things that's most encouraging to me is when you look across many of our key operating metrics, including things such as in-stock levels and on-time deliveries and inventory per store, among others, we're seeing strong improvement versus 2023 levels. And in many cases, we're seeing sequential improvement quarter-over-quarter, which tells us we're really building momentum across the business. And I think that's what was reflected in our strong Q4 and full year financial results.

And so when you add it all up, seeing good momentum across many aspects of the business. We're ahead of schedule in some of the initial goals contemplated in our long-term framework. And importantly, we'll continue to accelerate our path to achieving these goals where we see opportunity. And one of the things that I think will be helpful as we move forward is as you think about our priorities for 2026 and beyond, they really are underpinned by the 4 strategic growth pillars that Todd alluded to. And in short, I think they're going to really help guide our decisions and investments as we move ahead.

And so overall, a lot of reasons to be optimistic as we move forward, and I really do believe we're well positioned to grow sales, enhance margin, increase profit and capture more share going forward.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

As a follow-up to that last question, if you put the margin all together, we just don't have the interest, but it looks like it's kind of flattish year-over-year, maybe up a little bit. So if you look at operating margin, if you can just speak to that. And then, let's say, your comp comes in, I don't know, 3% or so. Are you leveraging expenses at that level? Does it need to be a bit higher? I'm not trying to be cute with 3%, but just trying to think about what are the tiers where we start to see more meaningful SG&A leverage such that whatever you've built into '26 ends up being better?

Yes. No, thanks, Simeon, for the question. I think you're thinking about things the right way. As I alluded to, we do expect gross margin improvement, but to a much lesser extent versus 2025. And to your point, that will be partially offset by modest SG&A deleverage. And to your point also, the amount of SG&A deleverage will be somewhat dependent on our comp sales performance for the year. And more specifically, we do expect deleverage will occur until we're slightly ahead of that 3 points of comp.

All that said, what I'll tell you is we feel really good about the guidance we provided today based on what we know today and especially in light of the evolving landscape, including some of the uncertainties that I mentioned, whether it's tariff rates or gas prices or consumer behavior. But keep in mind, we're well ahead of several of the goals contemplated in long-term financial framework.

And just to contextualize, right, when we introduced the framework last March, we contemplated that the more meaningful contributors to gross margin in the first 2 to 3 years would be shrink and damages. So I think more operational in nature. And we expect the benefits from other gross margin drivers ramping throughout this time frame and contributing more over time. And that expectation hasn't changed.

What has changed is the margin recapture opportunity from shrink and damages has occurred at a much higher and faster rate than we initially contemplated. And the good news is we now expect even more benefit from these drivers than we initially thought. And the other gross margin drivers are progressing generally in line with our original expectations. And so in short, what's most encouraging for me is, as you think about 2025, we were able to capitalize on opportunities to really accelerate our progress towards our long-term goals, and we're going to continue to focus on opportunities to further accelerate where we can.

But overall, there's still a lot of year left, but I like how we're positioned coming into 2026. And again, I think there's a lot of reasons to be optimistic as we move forward.

And Donny, I would just add on that SG&A rate, in the long-term framework, AI is not contemplated within that framework. And we've got a nice jumpstart there. And more to come as we continue to unfold the AI initiatives here at Dollar General. But I would tell you, they're squarely focused on 2 big areas: One being the customer and driving more sales and profitability with the customer, but also number two, the efficiencies that will come through our supply chain, through our stores and, of course, all back of house with AI. So that should be a nice top spin as we move over the next couple of years as well.

Our next question comes from the line of Robby Ohmes from Bank of America.

Actually two, just inflation, can you talk about how much inflation helped in the fourth quarter? And then given the LIFO charges, maybe just walk us through what the inflation expectations are in consumables and nonconsumables and what's driving that for 2026?

And then the second thing would just be, I'd love to hear -- I know you guys started doing a lot of SKU reductions. What's been the benefit there? Is there more of that coming this year? And what are you -- how is that helping sales, comps, margins, et cetera?

Yes. Maybe, Robert, I'll take the first question. In terms of inflation, we are seeing inflation consistent with what others have referenced, so very low single digits as you think about consumables and nonconsumables. So pretty balanced there. I think in terms of the amount of inflation we're seeing, I mean, again, one way to think about that is a LIFO provision, and it was a $45 million impact in the fourth quarter, so essentially 32 basis points.

And so just as a reminder, LIFO reflects the cost increases primarily based on the current tariff rates as well as what's been absorbed by vendors. And so something we're watching closely, but that's -- our expectations are embedded into our full year guide.

And what I'll do is just quickly start, but I'd like to pass over to Emily Taylor to talk a little bit about the SKU reduction. But it's been the cornerstone of part of our stabilization of retail. And I would tell you that the team has done just a fabulous job over the last 2 years, quite frankly, in reducing inventory. And there's more to come.

So Emily, maybe if you want to talk about that a bit.

Sure. We've had aggressive SKU reduction plans really over the last few years. Over 1,500 SKUs have been taken out of the assortment. And I'll echo what Todd said. The team has done an excellent job of navigating that while also supporting growth in the business. We do have a net reduction plan for '26, and the team is well underway on getting that executed.

Some of the benefits that come from it, and Todd mentioned inventory reduction certainly has been helped with the SKU reduction in addition to a lot of other work that's gone around inventory optimization. But also, it ultimately supports a simplification effort that we've had, not just as it relates to our store activity, but also our entire supply chain. And I'll call out a couple of other things that have really helped that effort. The team has also reduced floor stands pretty significantly in stores, which has helped reduce the overall really clutter inside our stores, and that continues to be executed as done.

And then from a supply chain perspective, our DCs are executing more aggressive seasonal sorts, which helps to make sure stores are able to get product to the shelf faster, and we've seen great results there. Todd mentioned case fit earlier, that continues to be a focus of the team, which also supports overall SKU reduction inside the store. And it really does come together to support higher and better in-store conditions, which we're measuring in terms of clean, in-stock, recovered and engaged. And all metrics as it relates to that are up significantly versus prior year. So really excited about the results that the team has achieved and really believe it gives us momentum as we move forward to continue to drive these results.

The next question is from the line of Rupesh Parikh, Oppenheimer.

So two quick ones for me. So just from a modeling perspective, anything to highlight from a quarterly cadence perspective on the bottom line? And then with your nonconsumable efforts, just overall confidence in sustaining momentum, what's performed better than expected? And what are you assuming for trade-in this year?

Yes. So I'm happy to take the first question, Rupesh. I think not a lot to add versus what we've already talked about in terms of the margin side of the house, again, expect another year of margin expansion. We talked about the tailwinds and the headwinds. We talked a little bit about the SG&A and tax. The one thing maybe I will touch a little bit on is just overall, how we think about the headwinds and tailwinds for sales.

And so from a tailwinds perspective on the sales line, we are seeing great momentum across many of our initiatives, specifically what we're seeing out of remodels and nonconsumables. And as Todd alluded to, private label and digital, quite frankly. And all of this is really resonating with the customers. And I like the growth we're seeing with new customers and the trade-in customers and feel really good about our plans to retain a lot of them. And overall, spending remains pretty resilient from a consumer perspective. And also keep in mind, right, the OBBA (sic) [ OBBBA ], we do expect the tax relief to come in. We think that we'll be able to capture our fair share and hopefully more, and we're still early in the season there.

In terms of headwinds, as Todd touched on, we also touched on in our prepared remarks, we do expect a modest impact -- negative impact to sales just driven by the 2 weeks in [ Q1 ] by the winter storm activity, including temporary store closures. And consumer sentiment does remain cautious and stagnant and inflation remains sticky and the macro environment continues to evolve. And we touched on tariffs and gas prices already.

But overall, what I would tell you is really encouraged by our sales trends, feel good about the guidance we provided based on what we know today. And again, there's still a lot of year left. We'll see how things play out. But the goal is for us to be there for the customer, and we're really focused on delivering as much sales as possible.

Rupesh, thanks for the second part of that question. I'm also going to pass it over to Emily in just a moment. But we're really proud of that nonconsumable business that we have cultivated and grown over the years, but definitely refocused over the last year and now leading into '26 with a lot of great momentum. I would tell you that with value being at front and center and the cornerstone of what the consumer is looking for, there's no better place to shop than Dollar General when you think of that, especially in that nonconsumable world. And I would tell you that the customer is really seeing that benefit.

And then lastly, I would just tell you before I pass it over to Emily for some more detail is that our pOpshelf group has really done a nice job inside their stores, but also in helping inform our nonconsumable direction and businesses in the mother ship, if you will, or the Dollar General stores. So that has really helped and will continue to help on both sides of the equation.

Yes. And I would just say I'm very excited about the trajectory in the nonconsumable business. I mean Q4 is fourth consecutive quarter of positive same-store sales, fourth consecutive quarter of nonconsumables outperforming our strong results in the consumable area. And it really is a result of the great work that the merchant team has done to set up that area of our store.

We are offering more for the customer today, not just in terms of value in this space, but also in terms of newness, and that's really helping to drive the results. So we've talked a lot about our brand partnerships, really focused on Dolly, Kathy Ireland, both very successful launches for us in '25. But as we move forward, the team has much more aggressive plans in place, and we're excited to bring that to life. I won't take you through the whole list, but 15 brands will launch this year, and I think it will resonate very strongly with the customer, again, emphasizing that value component, but also the surprise and delight that the team has worked so hard to bring to life in this space.

In addition to assortment changes, though, I don't think it can be understated that launching shoppable social is a big game changer for us in this space. This is a brand-new way of shopping for a category that shoppers do tend to engage digitally more than with the rest of the store. And so bringing that to life through our delivery network that we've built out in the nonconsumable space really changes the way our customer can interact with this area of our store.

In addition to that, the team will keep working on making sure that we're bringing the right value to life, whether that's through direct purchase programs or through closeout buying. And the team looks at that closely. We think there's more opportunity on closeout, again, to drive even better value, but also find those surprise items, surprise brands perhaps that a customer wouldn't expect inside our store. So I think it all comes together to say, it helps explain the great trajectory that we're already on, but also gives us a lot of confidence in building on that as we move ahead.

The next question comes from the line of Kate McShane with Goldman Sachs.

We were wondering with regards to the delivery that you've been so successful at rolling out. It seemed fairly seamless. But we wondered what you've had to do on your end to ensure the customer experience has continued to be positive and if there's any kind of incremental labor that has been needed as a result of rolling this out?

Kate, thanks for the question. Great to hear from you. I would tell you that it has been fairly seamless. Now as you would imagine, with a company our size and scope that we were paddling pretty hard on the backside to make it look seamless. The important thing is for the consumer, they have loved the initiative so far. As you imagine, we're only a couple of years into this and last year being, quite frankly, a very strong year for us. And you heard that 80 basis points of our comp in Q4 was delivered through that delivery mechanism.

I would say that as I look forward, the great thing about the delivery program for me is that the customer is already resonating, and we're just getting started, right? And so we've been on the third-party journey for the last couple of years, but really just launched in earnest myDG delivery in 2025. And that's really where we'll get the majority of the leverage to include that media network, which has already contributed greatly to the gross margin and will continue to do so.

And Emily, you may want to give us just a couple of bullet points on delivery.

Yes, sure. So from a delivery perspective, really excited about it. I'll address some of the focus areas for us in delivery. I mean, certainly, in-stocks matter a lot as it relates to the ability to fulfill the delivery orders. And that's where our in-stocks in Q4 were up about 250 basis points above where they were same time period last year. So we'll continue that focus. And that, of course, helps our in-store business as well as delivery.

We're also very focused on the digital experience for the customer. And so we have enhancements that are coming out that I think our customers are going to be very excited about, including an improved and expanded search capability, which is very important for the customer. It's also important for the media network. But all in, excited about what we're seeing out of delivery.

I'll give a couple more points. We see our existing customers who use delivery shop us more often with this capability, which is exciting to us. We see new customers at a very high rate getting exposed to Dollar General through our delivery channels, and that's also very exciting. So what we really like is it's highly incremental to sales, and it is a profitable business for us.

And then just as Todd mentioned, it supports our efforts around media network as well. And this has really helped to drive the business to the $170 million that we quoted in the prepared remarks. And as we move ahead, we see continued opportunity there as well. Advertisers love that we offer a unique and unduplicated reach into the communities that we serve for them, and we have a lot of initiatives underway to help drive this business forward as we move ahead. And the expansion of media network, of course, grows as we're able to grow our digital assets and delivery certainly helps us do that. So it's very much conjoined with our strategic priorities going forward.

Yes. And the thing that probably excites me the most, everyone, is really -- I do believe this represents 2 incremental profit pools for us, right? So as Emily alluded to, delivery is highly accretive from a sales and profit perspective, right? Media network is highly accretive from a profit perspective. And the beauty of it is, right, they are self-reinforcing. And so as we continue to grow delivery, we'll continue to grow DG Media Network, which in turn should help fuel even more delivery growth. And so really excited about what this can mean for the business. And the great news is we're still early days, but a lot of opportunity as we move ahead.

Our next question is from the line of Kelly Bania with BMO Capital.

Just wanted to go back to the bigger picture of the margin discussion. It sounds like shrink, obviously, the outlook is 50 basis points higher than your prior plan from last year. Can you just talk about the processes or reasons of why that should go higher? I think you also commented that inventory should maybe start to grow, maybe less than sales, but albeit grow.

And then on the flip side, I think it sounds like the DG Media contribution is maybe a little bit lower than what it was previously. Is that accurate? And can you just talk about what kind of digital penetration and growth you need in order to achieve the targets that you've outlined today?

I'll start, and Emily, you could fill in a little bit on the media network and what we're seeing there. I would tell you that we feel really good, Kelly, about where we're headed on that shrink side and damage side. This is nothing new for Dollar General. We know what to do here. I said that over a year ago, and I said that when I first came back into the chair in 2023. And we've executed very, very nicely. We believe that there's still more to come.

We were -- I wouldn't say conservative, but knowing that the macro environment had changed some since 2019, we leaned into that 2019 levels of shrink to be able to get back to. But we're starting to see where it could be back to 2017 type of levels even. And so -- the team has done a great job. But again, there's no big silver bullets there. It's really execution. It's taking the self-checkout units out, turning them into assisted lanes was a big win. Staffing that front end 100% of the time, big win.

And then inventory control is a huge opportunity, has been and will continue to be, especially as we move forward in the damage side of the equation. While shrink has moved a lot faster and the positive for us, damages have moved positive, but not at the same pace. We believe that '26 is -- the year '26 here will be the time for damages to move at that quick rate. Matter of fact, just out of the chute, yes, only one period in, in Q1, we're already seeing that on the damage line and happy about what we're seeing there. So more to come, more to like there.

And how I would think about that in totality is it gives us, and Donny mentioned, much more confidence in achieving even the higher ends of the framework that we put out there. So that's how I would look at it as an investor.

But Emily, you may want to just talk a little bit about the media network and all the great things that we've got there.

Sure. So just first, as a reminder, we started the media network here at Dollar General back in 2018. Team has done a really nice job building it into the $170 million business that it is today, but we do see a big opportunity as we move ahead to continue to increase that.

Some of the specific opportunities that we see would first be growth in owned and operated properties. So this is in our app, our website and our stores as well. From an app and website perspective, the search that I mentioned previously that matters so much to our customer is also very important to advertisers, and that is going to roll out this year, and we're excited to bring that to life. From an in-store perspective, we are rolling out new opportunities, including an in-store audio program this year. And in-store media overall, which is, of course, right at the point of purchase for our customers, really appeals to the advertisers that we have in the network because of the high returns that they see and because of the scale that we can deliver with our 21,000 stores.

And at the same time, as we're focused on growing owned and operated, we are expanding our off-site footprint as well, looking into more expanded social placements, connected TV and video. And as we roll that out, we do have in place closed-loop measurement for our advertisers so that they're able to see returns and of course, so that we can monitor and measure and help drive those as well.

So really a lot going on in the media network that gives us good confidence that we can continue to grow it. And as we said, growing delivery matters a lot as we increase our audience size. And so I do think that also gives us a tailwind as we continue to scale that business.

Our last question will be coming from the line of Seth Sigman with Barclays.

Great progress. I wanted to focus on free cash flow, which has increased pretty meaningfully over the last year again. A lot of things working. Can you talk a little bit more about that opportunity to further optimize inventory, but also payables, that's been a big benefit here. What's changing? How much more can that go? And then finally, related, how do you think about returning to the market for buybacks? How should we think about the time frame?

Yes. No, I appreciate the question. And maybe I'll just take a step back and talk a little bit more about capital allocation, which will kind of dovetail a little bit more into the cash flow generation ability of this business, which obviously is very substantial. As we alluded to in the prepared remarks, our capital allocation priorities really haven't changed there at Dollar General. But the goal is really we want to ensure ample liquidity. I think about it as maintaining a fortress balance sheet, but we also want to obviously maintain the investment-grade credit rating. We're going to invest in high-return projects. We're going to maintain the dividend. And then we want to return excess cash to shareholders through share repurchases, right, where appropriate.

That said, the focus has been on deleveraging of the balance sheet in order to really further improve our leverage metrics while continuing to enhance our flexibility. And the great news is, right, just given the significant improvement in cash flow this year, again, as a reminder, operating cash flow was up 21%, $3.6 billion. And so even when you exclude CapEx, the cash flow yield of the business is pretty substantial. Just given the strength of that, it did provide us the opportunity to redeem a total of almost $1.7 billion in senior notes in 2025. And the beauty about this is it helps to further strengthen the balance sheet, reduce future interest expense and provide even more flexibility going forward.

To your question on share repurchases specifically, while our guidance does not assume the repurchase of any shares this year, share repurchases are an important component and driver of the long-term financial framework. And the model contemplates we restart our repurchase program in 2027. And so more to come here, but feel really good about the progress we're making from a balance sheet and liquidity perspective.

And then in terms of cash flow, obviously, something we're very focused on. We think there's still opportunities to optimize inventory levels in our position. And we do expect continued AP leverage as we move ahead, but not to the extent that we saw in 2025.

Ladies and gentlemen, this will conclude our question-and-answer session, and will also conclude today's conference. We thank you for joining us today and for your participation. You may now disconnect your lines, and have a wonderful day.

Greetings, and welcome to the Dollar General Q3 2025 Earnings Conference Call.

[Operator Instructions]

As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Kevin Walker, Vice President, Investor Relations. Kevin, please go ahead.

Thank you, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; and Donny Lau, 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 financial 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 2024 Form 10-K filed on March 21, 2025, 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 the call up 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.

Thank you, Kevin, and welcome to everyone joining our call. We are pleased with our third quarter results, including another quarter of balanced sales growth as well as strong earnings results that significantly exceeded our expectations. I want to thank our team for their ongoing commitment to serving our customers, communities and each other. Our mission of serving others informs everything we do at Dollar General, and our efforts are resonating with customers as we continue to enhance our value and convenience proposition.

For today's call, I'll begin by recapping some of the highlights of our third quarter performance as well as sharing our latest observations on the consumer environment. After that, Donny will share the details of our financial performance as well as our updated financial outlook for fiscal 2025. I'll then wrap up the call with an update on some of our key growth-driving initiatives, including our real estate plans for 2026.

Turning to our third quarter performance. Net sales increased 4.6% to $10.6 billion in Q3 compared to net sales of $10.2 billion in last year's third quarter. We grew market share in both dollars and units in highly consumable product sales once again during the quarter in addition to growing market share in non-consumable product sales. This market share growth is a testament to our improved execution, compelling offering and broadening appeal with a wide range of customers. Same-store sales increased 2.5% during the quarter, driven by customer traffic. The average basket size essentially was flat. Within the basket, an increase in average unit retail price per item was offset by fewer items on average.

This traffic and basket composition is consistent with what we have historically observed when our core customer feels more pressured on their spending as they come in more often, but have smaller basket sizes. For the third consecutive quarter, we delivered broad-based category sales growth with positive comp sales in each of our consumables, seasonal, home and apparel categories. Notably, the comp sales increase in non-consumable sales once again outpaced a solid increase in consumable sales. From a monthly cadence perspective, all 3 periods were positive, led by August. September was the softest period of the quarter as we lapped significant hurricane activity in the prior year before rebounding to higher levels in the month of October.

And despite the delay in SNAP payments in early November, we are pleased with our strong sales performance to begin quarter 4. Overall, we are pleased with our top line results in Q3, which we believe demonstrate the important role we play in providing value to customers and our communities. To that end, we're pleased to see growth once again in our total customer count with disproportionate growth coming from higher income households. We remain focused on executing our proven playbook to retain a substantial portion of these customers. And with our unique combination of value and convenience, we believe we are well positioned to increase market share with customers across all income brackets.

With that in mind, we continue to be pleased with our pricing position, which remains within our targeted range of 3 to 4 percentage points on average for mass retailers. We also continue to see a substantial offering of more than 2,000 SKUs at or below the $1 price point as an important component of the value offering for our customers. For example, our Value Valley offering, which is comprised of more than 500 rotating SKUs at the $1 price point was once again our strongest performing sets in the quarter with same-store sales growth of 7.6%. With nearly 21,000 stores located within 5 miles of 75% of the U.S. population, along with our robust and growing digital presence, we are proud of our unique position as America's neighborhood General store.

We remain committed to serving our customers with low prices they expect on the products they need and as we help them save time and money every day. Overall, we're proud of our Q3 results and the significant progress we've made this year, improving our operating and financial performance. As we continue to invest in the growth and development of our teams, we are seeing lower year-over-year turnover in all levels of our in-store positions, which is also contributing to our improved execution and financial results. The progress we've made further supports our confidence in our long-term financial framework, and we are excited about the opportunities ahead.

Before I turn the call over for our financial update, I want to take the opportunity to congratulate Emily Taylor on her promotion to Chief Operating Officer. During her time at Dollar General, she has been a strong leader who has consistently enhanced the customer experience, both in-store and through our innovative digital offerings. She and her teams have elevated the Dollar General and pOpshelf brands while also improving operational efficiency, and we are excited to expand her responsibilities moving forward. I'm confident she is the right leader for this position and look forward to working with her in this new role.

I'm also excited to welcome Donny Lau as our new CFO. We are thrilled to have him back at Dollar General and look forward to working with him to further accelerate our progress and drive sustainable growth over the long term.

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

Thank you, Todd, and good morning, everyone. After almost 2.5 years away, I'm excited to be back at Dollar General, and I look forward to connecting with many of you in the months ahead. And while I've only been back a short time, it's clear there are substantial opportunities for growth and value creation. I'm especially excited about the progress we're making against key initiatives, which is contributing to strong operational and financial results. I look forward to working with the team to advance our strategic priorities as we look to build on our momentum, drive long-term sustainable growth and deliver strong returns on invested capital.

I'll now cover our Q3 results. Since Todd has taken you through the top line results for the quarter, my comments will cover 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 Q3, gross profit as a percentage of sales was 29.9%, an increase of 107 basis points.

This increase was primarily attributable to higher inventory markups and lower shrink, partially offset by an increased LIFO provision. Our ongoing efforts to reduce shrink once again contributed to strong operating margin expansion in Q3 as we delivered a 90 basis point improvement in shrink versus prior year. Notably, shrink continues to improve at a much higher and faster rate compared to the expectations contemplated in our long-term financial framework, and we expect continued improvement over time.

Turning to SG&A, which as a percentage of sales was 25.9%, an increase of 25 basis points. The primary expenses that were a higher percentage of sales in the quarter include incentive compensation, repairs and maintenance and utilities, partially offset by a decrease in hurricane-related costs.

Moving down the income statement. Operating profit for the third quarter increased 31.5% to $425.9 million. As a percentage of sales, operating profit increased 82 basis points to 4%. Net interest expense for the quarter decreased to $55.9 million compared to $67.8 million in last year's third quarter. Our effective tax rate for the quarter was 23.6% and compares to 23.2% in the prior year. Finally, EPS for the quarter increased 43.8% to $1.28, which exceeded the high end of our internal expectations.

Turning now to our balance sheet and cash flow, where we have made significant progress in strengthening our financial position. Merchandise inventories were $6.7 billion at the end of Q3, a decrease of $465 million or 6.5% compared to prior year and a decrease of 8.2% on an average per store basis. The team continues to do a terrific job reducing inventory while driving sales and improving in-stock levels. Overall, we're pleased with our inventory position as we enter this important holiday shopping season. Importantly, we believe there is opportunity to further reduce and optimize our inventory position, and we expect continued progress as we move ahead.

Year-to-date through Q3, we generated significant cash flow from operations of $2.8 billion, which represents an increase of 28%. As previously communicated, we redeemed $600 million of senior notes during the quarter, well ahead of their scheduled April 2027 maturity, further strengthening our balance sheet and reducing future interest expense. We also paid a dividend of $0.59 per common share outstanding during the quarter for a total payment of approximately $130 million.

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, remodels and other strategic initiatives. Next, we seek to return cash to shareholders through a quarterly dividend payment and when appropriate, share repurchases. And while our leverage ratio remains above our goal of less than 3x adjusted debt to adjusted EBITDAR, we are making significant progress towards reaching our target level in support of our commitment to middle BBB ratings by S&P and Moody's.

Moving to an update on our financial outlook for fiscal 2025. Our update primarily reflects our Q3 outperformance and improved outlook for Q4, while also considering the potential for continued uncertainty, particularly in consumer behavior. With that in mind, we now expect the following for 2025: net sales growth of approximately 4.7% to 4.9%, same-store sales growth of approximately 2.5% to 2.7% and EPS in the range of $6.30 to $6.50. Our EPS guidance continues to assume an effective tax rate of approximately 23.5% and that we will not repurchase shares under the existing share repurchase program.

Now I want to provide some additional context around our expectations. With regards to gross margin, we anticipate shrink will be a continued tailwind in Q4, though to a much lesser extent than Q3 as we begin to lap the improvements we made toward the end of last year. We also now expect capital spending to be towards the low end of our previously stated range of $1.3 billion to $1.4 billion. This includes our continued expectations to execute approximately 4,885 real estate projects in 2025, including 575 new store openings in the United States and up to 15 in Mexico, 2,000 project renovate remodels, 2,250 Project Elevate remodels and 45 relocations.

Finally, as a result of our strong cash and liquidity position, we plan to redeem an additional $550 million of our senior notes earlier than their November 2027 maturity. Our guidance contemplates about $9 million of incremental expense in Q4 in connection with this repayment.

In closing, we are pleased with our third quarter results and updated financial outlook for fiscal 2025. While we plan to speak more to our 2026 outlook on our Q4 call in March, we are confident in our long-term financial framework, and we are very pleased to be ahead of schedule on our progress. Importantly, we are working to further strengthen and accelerate where we see opportunity, our path to achieving these goals. We look forward to sharing our continued progress as we move ahead. Overall, we are confident in our business model and remain focused on delivering profitable sales growth, high returns on invested capital, strong operating cash flow and long-term shareholder value.

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

Thank you, Donny. I'll take the next few minutes to provide updates on 3 of our most important initiatives as we look to further advance our progress toward achieving our short- and long-term goals.

Starting with real estate, where we continue to enhance and extend our unique combination of value and convenience to new communities across the country. These efforts remain focused on driving sales and market share growth by expanding our unique real estate footprint while also enhancing our mature store base. We opened 196 new stores in Q3, primarily in our 8,500 square foot store format in rural markets. Importantly, we continue to accelerate our efforts and through the first 10 periods of the year, have substantially completed our planned new store openings for fiscal 2025. Outside the U.S., we've opened 7 new stores in Mexico this year, bringing us to a total of 15 at the end of Q3. We continue to test and learn in these stores and remain excited about the opportunity to serve these communities.

We also continue to make substantial progress with our remodel initiatives. As a reminder, in addition to our traditional remodel program, which we call Project Renovate, we previously introduced a new incremental remodel program called Project Elevate. This initiative is designed to further grow sales and market share in portions of our mature store base that are not yet old enough to be part of our full remodel pipeline. These projects include physical asset investments as well as merchandising optimization, product adjacency adjustments and category refreshes, all of which impacts approximately 80% of the total store.

We completed 651 Project Elevate remodels in Q3 and an additional 524 Project Renovate remodels during the quarter. While we have not yet reached the 1-year anniversary of the first stores in the program, we are on track to deliver an average first year annualized sales comp lift of approximately 3% in Project Elevate stores. And we continue to expect comp sales lifts of approximately 6% for Project Renovate stores. Importantly, we continue to see significant improvements in customer satisfaction in these stores upon completion of the remodels. These results have given us confidence to make Project Elevate a key component of our real estate strategy as we move forward.

Looking ahead to 2026, we are uniquely positioned to serve an underserved customer in rural America, where approximately 80% of our current store base serves towns of 20,000 or fewer people. We plan to build on that strength in 2026 with plans to execute approximately 4,730 real estate projects in total, including 450 new store openings in the U.S., 2,000 Project Renovate remodels and 2,250 Project Elevate remodels and 20 relocations. And we plan to open approximately 10 additional stores in Mexico.

With regards to new stores, as a reminder, we monitor several metrics of our portfolio, including performance against pro forma sales expectations, new store productivity compared to our mature store base, cannibalization, which overall has remained consistent and predictable, cash payback, which we expect in approximately 2 years and a new store return, which we expect to be in the range of approximately 16% to 17% on average in 2026. Overall, our new store projects continue to deliver healthy returns despite higher occupancy and operating costs.

Importantly, we're committed to mitigating these cost pressures where possible and continue to see significant runway for new store expansion with approximately 11,000 opportunities for Dollar General stores in the U.S. And while we've always said that for a variety of reasons, we don't expect to capture every opportunity, we're excited about our ability to significantly grow our footprint in the years to come. We anticipate that the majority of our new stores next year will be in one of our 8,500 square foot formats and will be predominantly in rural communities. And nearly all of our relocations are planned for one of our 8,500 or 9,500 square foot stores.

As a reminder, these larger footprint stores provide additional opportunities to serve our customers, including expanded cooler offerings and more health and beauty products. And while we currently offer fresh produce in approximately 7,000 stores, we anticipate bringing this offering to more than 200 additional stores in 2026.

We are excited about our real estate plans for next year and believe these projects will continue to deepen our connection with our current customers while better positioning us to attract new customers as well. Collectively, we believe these projects will further solidify Dollar General as the essential partner in communities in rural America, both in our physical store locations as well as with an expanding digital reach, all while strengthening our foundation to drive long-term sustainable growth.

The next area I want to discuss is our digital initiative, which serves as an important complement to our expansive store footprint as we continue to deploy and leverage technology to further enhance convenience and access for our customers. Our digital capabilities include an engaging mobile app and website that continues to be very popular with our customers and have expanded our delivery capabilities while growing our DG Media Network. We have significantly expanded the reach of our delivery options available to customers.

Our DoorDash partnership, which now services more than 18,000 stores continues to drive significant incrementality and sales growth. As a reminder, we partnered with DoorDash to launch our own same-day delivery offering through our Dollar General digital solutions late last year. We believe DG Delivery can drive great customer loyalty within our digital platform while ultimately accelerating growth and increasing market share. We significantly increased the penetration of this offering in Q3, and now DG Delivery is available through our app and website in more than 17,000 stores.

And most recently, we entered a partnership with Uber Eats to further expand the reach of our delivery capabilities as we provide value and convenience to customers on their platform. We are now live in more than 17,000 stores with Uber as well. Collectively, these delivery options have significantly enhanced the convenience proposition for our customers with more than 75% of our orders delivered in 1 hour or less, while also extending our value offering to a wide range of new customers.

We are seeing larger basket sizes than the average in-store transaction and a very strong repeat visit rate from customers on our delivery platform. Looking ahead, we have ample opportunity to further drive incremental sales growth through a variety of customer experience enhancements and increased customer awareness. As we see continued growth in our digital properties, one of the most significant components 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.

We are continuing to drive significant year-over-year growth in retail media volume as partners seek to access to our unique customer base. Our digital advertising business continues to see double-digit growth in 2025, driven by new DG Media network capabilities on our site and within our app. And we believe we are still in the early stages of the potential financial contribution from this initiative. The DG Media Network remains an important contributor to our long-term growth framework, and we're excited about its potential. Over time, we believe we can leverage our digital initiative to increase market share and drive profitable sales growth while further evolving our relationship with our customers and driving greater customer loyalty within the digital platform.

The final initiative I want to discuss is our non-consumable growth strategy. As a reminder, we are focused on a few key drivers in our non-consumable categories over the next 3 years. These include brand partnerships, a revamped treasure hunt experience and reallocation of space within our home category. During Q3, we were pleased to deliver positive same-store sales growth in each of our 3 non-consumable categories for the third consecutive quarter. This growth was led by our 2 largest non-consumable categories, seasonal and home, each of which delivered comp sales growth of approximately 4% in the quarter.

Our pOpshelf stores delivered another quarter of strong same-store sales growth in Q3. Our new store layout continues to perform well, and we continue to take lessons from pOpshelf and apply them to our non-consumable approach in our Dollar General stores as we further enhance that offering for customers. We believe our non-consumable sales growth, both in Dollar General and pOpshelf stores continue to benefit from improved execution and a more compelling assortment as well as from the expanded trade-in shopping we've seen from higher-income customers. These results, including multiple quarters of strong sales performance and market share gain continues to demonstrate that our treasure hunt approach is resonating with customers.

Furthermore, our focus on value continues to guide our efforts and drive our success in these categories. And with approximately 20% of our holiday sets priced at $1 and more than 70% at $3 or below, we are excited about our ability to serve customers across all income brackets during this important time of the year. In turn, we believe we are well positioned to continue driving sales and market share growth in these categories while also further increasing our gross margin.

In closing, I want to reiterate that we're pleased with our performance, proud of our progress and excited about the opportunities that lie ahead of us at Dollar General. We are laser-focused on furthering these efforts and accelerating our progress toward our goals over the short and long term. As we move through our busy holiday season, I want to again thank our approximately 195,000 employees for their commitment and dedication to fulfilling our mission of serving others.

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

[Operator Instructions]

Our first question is coming from Rupesh Parikh from Oppenheimer.

Welcome back, Donny. So I have a 2-part question just on gross margin. So for Q4, it would be helpful to understand some of the puts and takes there you see on the gross margin line. And then from a longer-term perspective, we've seen significant progress this year on the gross margin front, including shrink. Just curious about your overall confidence in being able to deliver the next round of improvement, whether it's from retail media, mix shifts, et cetera, and on the damages front.

Yes. Maybe I'll kick it off and then hand off the second part of your question to Todd. But thanks, Rupesh. Good to connect with you again. Maybe I'll just start with the Q3 gross margin. I'm especially pleased, right, that we delivered 107 basis points of expansion in Q3, and that's on top of 137 basis points in Q2. And from a Q3 perspective, that's also despite 79 basis points headwind from LIFO. And so while we're very pleased to see continued benefit from some of our other key focus areas like lower damages, reduction in markdowns and some of the other initiatives that Todd is going to speak about, I think the outperformance and shrink was notable during the quarter. And so the way I think about it, Rupesh, is we're really building momentum on our key initiatives, and the team is really doing a nice job in terms of balancing price and managing mix.

In terms of Q4, we do expect another quarter of gross margin expansion in Q4. We expect to see continued improvement in shrink, as I was alluded to on the prepared remarks, to a lesser extent versus Q3. And that's because we really are lapping outsized or more improvement in Q4 of 2024 to the tune of about 68 basis points. We'll also be lapping a discrete item in the prior year really associated with the optimization of our portfolio. And we also expect continued benefit from growth in private label and non-consumables and continued improvement in damages as well as supply chain efficiencies.

The one headwind I will note is just LIFO, although we do expect to partially offset that with pricing and through continued managing mix as well. And so again, overall, on the gross margin line, I'd say, I believe there's more tailwinds than headwinds, which is nice to see and feel really good about the momentum we're seeing and building on this front.

Yes, Rupesh, thanks for the question as well. As I think about the long-term gross margin opportunities, feel very good. Actually, shrink is -- our shrink improvement so far has actually given us, myself and our team here, even more confidence in delivering on that long-term model in our gross -- on our gross margin line. If you think about it, when I think about where we're at today with shrink, as Donny indicated, the great thing about our shrink benefit so far is while we did take self-checkout out, which has been a nice contributor, the stores that never had self-checkout, about 6,500 of them have seen very substantial increases or I should say, decreases in shrink and increases in gross margin. So what that does, it gives us a lot of confidence that there's probably more gross margin opportunities than we even thought in that long-term model. So stay tuned for that as we go forward.

And then as Donny indicated, boy, we still have a lot of great opportunities ahead. When you think of damages, we're just starting that journey. We've seen some nice damage clawbacks over the last couple of quarters, but we see even more without giving you any guidance for '26 yet, even more as we move into next year and beyond. So stay tuned there. I think you'll see us execute against that very similarly how we executed very strong against our shrink initiatives.

And then lastly, mix and media network. Mix continues to be a good guy and will continue to be. All of the work the team has done, the merchants, our operators, our supply chain on our non-consumable initiatives really has moved the mix number for us. And as you know, those hold a lot stronger gross margins, not only in our home, seasonal and apparel categories, but also our HBA categories, which have outsized gross margin. So we feel very good about the long-term prospects of that.

And then lastly, our media network, we're in the second inning. We're just starting the media network piece. And I would tell you that we're off to a great start, double-digit increases again this quarter. And as I look out to the long-term model, we see a lot of opportunity there as well. So stay tuned. We feel strong. We feel good about where we are and very good about that long-term model.

Next question is coming from Zhihan Ma from Bernstein.

I have a 2-part one on real estate. So a short-term one, I think, Todd, you mentioned that the remodels are generating about like a 3% to 6% sales lift, which I believe are at the lower end of the previous ranges you've given. So can you just talk about is there additional upside? What are some of the near-term dynamics you're seeing there?

And then longer term, given some of the changes in your competitive landscape with Family Dollar no longer really in the picture, drug stores closing. How does that change your view on your real estate opportunities and the growth rate you're willing to pursue?

Yes, sure. We're really happy with the remodel program. As you know, we really are just in year 1. We haven't even cycled a full year yet of Project Elevate. And that's given us -- what we've seen so far has given us a lot of confidence. As a matter of fact, as you heard in my prepared remarks, we're going to do another 2,250 of those next year. So hitting right around 3% right now, but we're just getting started. So as we look to even enhance this program as we go into next year, we'll continue to look at ways to ensure we even get a better comp out of it. But 3% is very strong and is well within our guidance and our guidelines here to continue to move forward. It's a strong, strong return at 3%.

And then on Project Renovate at 6%, again, we're just getting going good there. We've been doing, obviously, these projects for many, many years. As we continue to rationalize our SKU base, our coolers, we see real opportunity to continue to drive long-term sales growth in these, albeit probably closer to 6% than the 8% that we have seen in the past. But again, I'll take a 6% comp any day of the week with the investments that we're putting forward on these. So again, gives us a lot of confidence to do another 2,000 of those next year. So really feel good about each of those. But we're retailers. We're never satisfied with the comps that we put out, and we're going to continue to push even harder.

And then long term, on your second part of the question, I would tell you, we still feel very good. We got 11,000 opportunities in the Continental United States to put a Dollar General store in. Obviously, as we said, we won't get all those. But your question pointed to the reason we're bullish on getting a lot of these is that our competition today is really not opening a lot of stores. And for that, we don't feel compelled to have to rush to open a lot of stores. So we believe that the right mix right now, 450 stores, still very strong for the year.

The right mix of remodel and new we believe is the right thing, taking care of that mature store base as we go forward is also strong. But with still close to 17% returns on new stores, we feel very bullish about what the future looks like with that 11,000 opportunities. And when we feel it's appropriate, we have the opportunity and the capacity to step it up from there.

The next question is coming from Matthew Boss from JPMorgan.

Congrats on a nice quarter. So maybe 2-part question. Todd, first, how would you assess current health of your low to middle income customer, maybe leveraging your latest survey work? And what's the traffic versus basket interplay that you've historically seen in similar economic backdrops?

And then for Donny, if you could maybe just touch on any puts and takes to consider as it relates to next year, just relative to the target to return earnings growth to 10% at 2% to 3% comps and tying in the moderated real estate plan for next year?

Okay, Matt, yes, thank you. I'll start out. Yes, as we exited Q3, I would tell you that, that low middle end consumer continues to be stretched. She is definitely being very mindful of where she shops and what she shops for, making trade-off at the shelf in many instances. The great thing about Dollar General is that we offer extreme value here with a very convenient place to shop. And that is obviously resonating with the consumer with a 2.5% comp for the quarter. And I believe most notably, much different, by the way, than our competitors have put out there a 2.5% traffic number.

And if you think about it, when you think about traffic, we've always said here, traffic is the real measuring point, right, because that's the sustainability of the comp as we go forward. And we can leverage that additional traffic that we're seeing into long-term sustainable growth here at Dollar General. So stay tuned for that. We know how to also go after these customers. We've already started that retention program to ensure that we continue to keep the customer -- the new ones that we're seeing into the brand, both from the middle and the high end.

And then lastly, on that low-end consumer, when you think about where we sit in price, we have a very -- we feel very good about our everyday price, very good positioning there, a solid and balanced promotional cadence, which is always important for that low-end consumer. But the most important that she continues to tell us through our survey work, Matt, is that we've got over 2,000 SKUs at $1 or less every day inside of our stores.

As a matter of fact, the team did a great job this year, leveraging that low-end consumer work with our holiday performance. And as you think about holiday this year, we have 20% of our SKUs are at $1. We have 70% of the entire mix of holiday at $3 or less. So it's going to resonate pretty well. And I will tell you that we're off to a very nice start here in Q4.

Yes. And then in terms of your question on 2026 and long-term framework, Matt, we'll plan to provide more formal guidance on our Q4 earnings call in March. But overall, based on where I sit today, I do think it's fair to say that we're tracking towards the time lines contemplated in our long-term financial framework. And if you just take a step back at a high level, I feel really good about our ability to deliver against the long-term financial framework targets. I'm especially excited about the progress we're already making against some of the key targets. And so the way I think about it, Matt, is given all the great work the team has accomplished around our Back to Basics strategy, we've essentially stabilized the core, right? And the business is once again on really strong footing.

Obviously, a lot of work to do still, particularly around sustainability, but we're now able to execute better against certain, what I would call value drivers. And the great news is we're making great progress across many of these drivers. And I think that was reflected right in our strong Q3 operational and financial results. And so when you add it all up to me, we really are building momentum across many aspects of the business. We're ahead of schedule versus some of our initial targets that we laid out, and we'll continue to accelerate where we see opportunity. And so overall, I think there's a lot of reasons to be optimistic as we move ahead.

Your next question today is coming from Seth Sigman from Barclays.

My question is on digital and the incrementality that you mentioned. Can you talk about the value proposition? What is appealing about your offering for the consumer for delivery today? And if you can, maybe frame the contribution to total comps growth from delivery. How is that starting to help? And then just taking a step back, how does this change the economics of the business over time? Obviously, it's an important part of the long-term margin story. And so I think it would be helpful to sort of lay that out.

Yes, I'll take the first part. I'll let Donny talk briefly on the economics. But Seth, we're very proud of where we are on our -- in our digital journey. Again, as we talked about our media network being in the very early innings, the second inning, I would tell you, our digital journey in totality is probably just in the second innings. So we're really just starting our journey. But I would tell you that we're off to a really nice start. It was a very nice contributor again this quarter.

But as I step back and think about our digital piece and what it looks like, when you think about the proposition for our core customer and quite frankly, for the customer just in general, what we're seeing early on is still very high incrementality rates of shoppers in the digital program, over 70% incrementality on how we're measuring it, which is a very, very strong piece, getting new customers. We're seeing much larger basket sizes through our digital properties, which really does, again, show that it's a different type of customer than our core, but also that we're starting to see more signs of a stock up versus what we normally see inside of our brick-and-mortar of fill-in. So we feel good about that incrementality piece, good about the extra piece.

Our real opportunity here is to continue to deliver to rural America. I think that's our value proposition at this point. And I believe we are off to a great start there. And by the way, we have a unique opportunity. We own rural America out there across the United States. And today, even in the second inning that we're in, over 70% of our orders that are done are delivered to an individual's front door in an hour or less, even in rural America. And that is a strong proposition that no one's been able to touch. And we'll continue to foster that and look at ways to even gain momentum across those properties.

Yes. As Todd alluded to, we're especially pleased with the incrementality. I think the other way to think about that is we're introducing new customers to the Dollar General brand, right? And the great news is, as they engage with us, they engage more across our digital properties, right, which makes the DG Media Network even more attractive to our brand partners, which is fantastic. And so what I'm really excited about is we're seeing good growth here, and it is sales and profit accretive, which is obviously fantastic to see.

Next question is coming from Michael Lasser from UBS.

Donny, welcome back. My question is on the comp. You've now settled into a few quarters in a row of 2% comp. Is this as good as it's going to get? And does it provide enough margin of safety looking forward to next year when SNAP could become a headwind and other factors are going to be at play in the overall environment? And if that's the case, might you have to become more promotional, do more things like offer $5 off of $25 basket in order to drive the comp and you'll have to sacrifice the margin in order to drive the top line?

Thank you, Michael. I'll start out and have Donny wrap that up. But we feel great about the 2.5% comp. As I indicated in the earlier question, the comp was strong at 2.5%. We've been well over 2% now a few quarters in a row. And as I think about Q4, we feel very good about the numbers we put out for full year guidance that would also portray a stronger comp in Q4. And as I think about the comp, the composition is so important, Michael. You know that. You've been with us on this journey for quite a while now, many years. And any time we can turn a 2.5% comp into a 2.5% ticket -- I'm sorry, traffic number, that is a very strong showing, and it bodes well for what the future holds in comp.

We're retailers. We're never satisfied with where we are. And I would tell you that we strive to turn even higher numbers. But the great thing about how I look at this business is that we always look for sustainability, not a quick win on the comp side. And I believe that's how we've put this together and what we're seeing as we go forward.

And then lastly, I would also tell you that from a promotional cadence perspective and what we see in the future, we believe we're uniquely positioned today and rightfully positioned. We don't see that changing at least in the near term into next year, we don't see a need to be more promotional. We think the way we have approached this with a great everyday price, a good balance of promotional cadence opportunities that we already have in place. And again, that very, very important $1 price point that we continue to offer the consumer puts us in a really unique position to drive comps.

Yes. And the only thing I'd add, too, Michael, is I also have -- we have a lot of confidence, right, in the 2% to 3% growth over the time period that we've outlined in the long-term framework. I think the great news is we're able to deliver against our long-term framework targets within this range. And I think the other thing to point out is the new stores and the remodels, they're expected to contribute about 150 to 200 basis points of that, right? And then on top of that, you layer in the growth we're seeing in new customers, trade-in, higher income, the playbook we have to retain them. I'd tell you, overall, we feel really good about our plans to build on our sales momentum balance of the year and beyond. And then we touched on this earlier, too, but on the margin line, overall, I'd tell you, I think we have more tailwinds and headwinds as we move into 2026 and beyond.

Next question is coming from Simeon Gutman from Morgan Stanley.

My question is on getting back to 6% plus margins. Can you think about the construct? Should there be linearity to it? It sounds like retail media will be a big piece of it, but maybe not in the immediate year or so? Or is that the wrong way to think about it?

Yes. Maybe I'll let Todd touch a little more on the media network. I think we touched on it earlier. But at a high level on the margin side, Simeon, I'll tell you, I feel really good here also in terms of our ability to deliver against that margin target. We talked -- we touched on this a little bit, but there are a lot of drivers we have in place that we expect will contribute to margin expansion over time. I do want to note that while the focus is on the op margin line, right, gross profit obviously is expected to be the more meaningful contributor to margin expansion over this time period.

Within gross margin, we do continue to expect shrink and damages will contribute at least, right, 120 basis point expansion. We talked about this, but the great news is shrink is already improving at a faster and higher rate than we were initially anticipating a lot of reasons to think. We can deliver continued improvement over time on that front.

In terms of damages, right, they're trending in line with our expectations. Overall, really pleased with that progress. On the DG Media Network, as Todd alluded to, kind of early days. We do think it's going to be a meaningful contributor over time. The great news is we're just beginning to really build momentum against our initiative here. And just remember, there's a lot of other drivers in place that we expect to contribute as well, whether it's further reductions in kind of markdown risk and greater efficiencies across the supply chain, continued growth in the non-consumables business. We're seeing good growth coming out of private brands. And so overall, I'd tell you I just feel really good about our ability to drive continued gross margin expansion as we move ahead.

Yes. And Simeon, I would tell you that is we do believe the media network as we go into the outer years of our long-term framework will be a substantial contributor. And the reason that we feel that way is we already are seeing nice large double-digit gains quarter-over-quarter or year-over-year. And I would tell you that as we pick up momentum on our native myDG digital platform, as those start to grow even more, what we start to see there is more first-party accounts, which then translates and we're able to monetize that with our vendor partners.

They see a lot of value in that because, again, uniquely positioned here because we own the data for lower end to middle-end consumers in rural America, where it is very difficult, if not almost impossible for anyone else to have replicated what we know about that customer and then how we monetize that over the long term. And for us, we believe that uniquely positions us to be able to deliver on that long-term framework as it relates to the media network.

Yes. And then just quickly, too, Simeon, just because we haven't really touched on this, but in terms of SG&A, right, just as a reminder, the goal here is to really minimize the deleverage. And I think we're really well positioned to deliver against this target as well. Just briefly, as a reminder, for this year, we do expect outsized incentive comp of approximately $200 million this year. So that should benefit next year as we -- I think it's fair to expect for us to plan for a more normalized rate there.

But in addition, right, the accelerated remodel program is expected to mitigate future R&M expense. In the meantime, we do expect to drive additional efficiencies through our work simplification efforts. And so overall, we feel really good about our efforts on the SG&A front as well.

And the one thing we really haven't spoken about at all is really AI, right? And I do think this provides a potential opportunity to maybe drive greater efficiencies and more sales as we move ahead. In fact, we recently hired a new Head of AI to accelerate our efforts here. And in the meantime, in the background, we are laying the foundation to enable AI at scale, right, with our IT modernization efforts. And importantly, what I would say is these additional efficiencies and potential opportunities for more sales growth that are associated with AI aren't captured in the framework today.

Next question is coming from John Heinbockel from Guggenheim Partners.

Todd, 2 related questions. Where do you think the greatest opportunity is on labor productivity? Because I don't think financially electronic shelf labels work in the Dollar Store setting or correct me if I'm wrong with that.

And then secondly, do you think you can get shrink down to 1% or so without adversely impacting sales? Or there has to be a natural floor that you don't want to go below?

Yes, John, thanks for the questions. Yes, I would tell you, I'll start when you think about the shrink numbers, we feel good about where we're headed here. We had set our sights on around the 2019 levels of shrink. We felt really good about that. We are recalibrating to a better number because we're seeing even more opportunity. And I think you're leaning toward and I think importantly for me to point out is that our SKU rationalization efforts have really produced some of this outsized shrink opportunity on the good side that we've seen so far. And it should be the gift that keeps on giving because we believe that as we move into '26 and stay tuned as we talk about '26 when we come out with our fourth quarter results.

But rest assured that SKU rationalization and just inventory in totality will still be very top of mind in 2026. And with that, we believe that there's opportunity for even lower shrink numbers as we go forward. That's why I mentioned earlier that I feel that in that long-term framework, we can benefit probably from even better shrink than we had first anticipated. And if nothing else gives us great assurances that we can deliver on that long-term framework. But stay tuned, a lot of time ahead of us, but we feel good about that.

Next question is coming from Scot Ciccarelli from Truist Securities.

And Todd, I think you started to touch a little bit on this, but you've had almost 2 straight years of inventory declines. Obviously, there's a major working capital benefit. But I have a 2-part question. One, can you guys size the positive margin impact that the lower inventory levels have had on both markdown activity and shrink? And then two, at what point do you need to start rebuilding your inventory levels?

Yes, I'll take that. We're not going to quantify it, but I would tell you that what we've seen is -- and you mentioned it, we've intentionally gone out with SKU reduction. We've reduced over 2,500 everyday SKUs over the past couple of years. We've got more to go. And I would tell you that any good retailer does this over time. We don't believe there's a need to rebuild current inventory levels. We believe we're in many categories at optimal levels, but we also believe there's a lot of categories that we can still optimize. And that's what we'll be going after in '26 and beyond. So stay tuned and should benefit us on the shrink line and most importantly, on the damage line as we go forward.

The great thing I think we can all agree upon at this point is all those efforts have not hit us on the top line. As a matter of fact, we've continued to produce fill rates that are at some of our highest levels that we've seen in years here for the consumer. And obviously, you see the 2.5% comp this quarter and the traffic number. And that traffic number is a real good indication that she has a lot of confidence to continue to come into Dollar General and find what she needs. So we feel good about where we are. We don't believe for a moment that we're finished and more to come. We think that it's a real opportunity for us and a strong opportunity on that gross margin line, probably even more so as Donny indicated, than we even had first contemplated in that long-term model.

Next question is coming from Chuck Grom from Gordon Haskett.

Welcome back, Donny. I have 2 questions, just one near term, one long term. On the near term, Todd, can you just amplify on the strong start to November and the more positive outlook for the fourth quarter? How much of that's traffic driven? Have you seen any improvement in ticket?

And then longer term, there's a lot of concerns out there about Amazon and Walmart+. Can you talk about some of the key tenets of your competitive moat in the rural landscape and how you can compete more effectively?

Yes, Chuck, thanks for the question. Yes, I would tell you, while we're not going to give you a ton of color on Q4, I would tell you we are off to a good start, a great start, quite frankly, we feel very good about that. Even in the face of some of the SNAP benefit holdbacks due to the government shutdown. I'll give you a little color around that, which I think is important because SNAP as we go into next year may have some headwinds to it, but we still see OB3 as a complete in totality, a tailwind for us.

And here's one reason on the SNAP side is what we saw was the consumer still needed to feed her family. She still has to do that. And she used cash as a tender with us in the -- during the shutdown time where she didn't get her benefit. And then as those benefits flowed in, we also then got the SNAP benefit on the second part of the month. So quite frankly, it was a net positive for us as we move through November. And not only in those areas, but she also bought a lot of the non-consumable categories. And holiday is off to a really good start as well. So feel bullish, but always keep in mind, a lot of quarter still left ahead of us with the important Christmas holiday selling season upon us at this point. But we feel, as Donny indicated, we have a fair amount of momentum heading into that holiday season and into next year.

And then lastly, your question around our competitive moat. I'd tell you, we feel good about the competitive moat. We have spent years, Chuck, and many, many dollars, as you know, not only building but strengthening that competitive moat in rural America. And with 80% of our stores in those small towns across America, very, very difficult to replicate, whether it be brick-and-mortar or whether it be on a digital basis. And again, we didn't sit back. We moved swiftly once we saw that our core consumer was starting to venture into her digital journey. We've always said our core customer, she's a fast follower. She'll get there, and she's starting to move that way. So we moved that way.

And the great thing is we moved that way with a lot of intentionality and that intentionality was really centered around rural America and be able to deliver that customer in an hour or less, where no one else can touch that at this point. We feel that's a very strong competitive moat, and we'll continue to do that, but also build on our ability to have a very strong and sustainable brick-and-mortar business as well as that digital business as we go forward.

Our final question today is coming from Spencer Hanus from Wolfe Research.

I just wanted to circle back on the remodel program. The updated lifts you provided was helpful. But just curious what you think the tailwind could be in year 2, if there's any tailwind coming. And then just in terms of the price gaps, you called out that 3% to 4% gap versus [ mass ]. Have you seen any change there and how you guys are coming in from a pricing standpoint versus some of these other guys out there?

Yes, I'll take those. I would tell you on the pricing piece that we feel very good about where we are, as I indicated earlier, not only our everyday price still falling within the bounds that our core customer looks to us to be able to provide her, but also around those promotional cadence, our TPR program, temporary price reduction program and our ad program, all deliver solidly to our core consumer and it's evident by those traffic numbers that we're seeing.

And then lastly, and I keep emphasizing this because it is such an important component to the low-end consumer, and that's that dollar price point is so, so important to that consumer. And with that, gives her a halo effect on price in totality within the Dollar General organization. So I would tell you that our price perception numbers through what we see in our consumer data is on the increase, while others may not be. And we feel very strong about that positioning as we go forward.

And then our programs around our new store programs, our remodel programs, we again feel very strong about where we're headed and the long-term possibilities that those hold, including our pOpshelf in Mexico banners. We feel good. We're in test and learn mode on those 2, but we're seeing very nice sales gains. The customer is resonating with each of those brands, but more to come there as well.

Thank you. We reached the end of our question-and-answer session. And ladies and gentlemen, that does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.