Dollar General Aktie

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.

Good morning. My name is Rob, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Second Quarter 2025 Earnings Call. Today is Thursday, August 28, 2025. [Operator Instructions]

This call is being recorded. [Operator Instructions].

Now I'd like to turn the conference over to Mr. Kevin Walker, Vice President, 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 Kelly [indiscernible], our CFO.

Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our 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

[Audio Gap]

The basket growth was driven by an increase in both average unit retail price per item and average items per basket. We were excited to see a second consecutive quarter of broad-based category growth with positive comp sales in each of our consumables, seasonal, home and apparel categories. From a monthly cadence perspective, we saw same-store sales growth above 2% in all 3 periods with our strong in June and July. We believe these strong and balanced top line results are a reflection of the hard work the team has done to improve execution and further enhance the value and convenience proposition for both existing and new customers. To that end, we're pleased to see growth with customers across all income brackets during the quarter. This includes our core customer who increased spending despite worsening sentiment. In addition, we continue to see trade-in growth with middle- and higher-income customers during the quarter, which we believe is contributing to the nice performance we've seen in our nonconsumable categories.

Ultimately, customers across all income brackets are coming to Dollar General as they seek value. As America's neighborhood general store in more than 20,000 locations across the country, we recognize and embrace our role in being here for what matters for our customers. This includes providing the items they want and need at prices they can afford. With that in mind, we are committed to delivering everyday low prices that are within 3 to 4 percentage points on average of mass retailers. While we are pleased that we continue to operate within the targeted price range, we are also focused on maintaining our substantial offering of more than 2,000 SKUs at or below the $1 price point.

We know this price point is important in helping our core customers stretch their dollar, particularly at the end of the month and when budgets are tight. In fact, our $1 value Valley merchandising set which is comprised of more than 500 rotating SKUs was one of our strongest performing areas in the quarter, with same-store sales growth more than twice the rate of the overall company. We believe this holistic approach to offering value will continue to be important for our customers, particularly in the back half of this year.

Now I'd like to provide a brief update on how we're thinking about tariffs. With the rates currently in place, we believe we will be able to mitigate the vast majority of the impact on our cost of goods. The proactive approach of our sourcing team, coupled with our relatively low direct import exposure has positioned us well to serve our customers with a quality assortment at tremendous value. While the landscape remains dynamic, tariffs have begun to result in some price increases, and we will continue to work to minimize them as much as possible.

Most importantly, we know this further amplifies the value within our communities, and we remain committed to serving our customers with the everyday low prices they have come to know and appreciating Dollar General. Overall, we're proud of our performance during the quarter and tremendous progress we've made throughout the first half of the year. Our actions are delivering an enhanced shopping experience for our customers and driving strong operating and financial results. We are further strengthening our value and convenient proposition for our customers, while making significant progress on our long-term financial goals.

Before I turn the call over for our financial update, I want to thank Kelly for her partnership as well as her leadership of our financial organization over the last few years. We wish her the very best at [indiscernible] and begins for a new chapter. I also want to note that we're able to welcome Don [indiscernible] back to Dollar General as ex-CFO beginning in October. He is highly regarded throughout the organization for his deep understanding of the business thoughtful strategic leadership and appreciation for our culture and values. We look forward to his leadership of our financial organization as we seek to drive excellence create long-term shareholder value.

With that, I'd now like to turn the call over to Kelly.

Thank you, Todd, and good morning, everyone. First, on a personal note, I want to express my appreciation to this team, our customers and our shareholders. This is a special organization with a unique mission, and I'm grateful for the time I've had to serve alongside them. Now that Todd has taken you through a few of the top line highlights of the quarter, let me take you through some of the other important financial details. Unless we specifically note otherwise, all comparisons are year-over-year, all references to EPS refer to diluted earnings per share, and all years noted refer to the corresponding fiscal year.

For Q2, gross profit as a percentage of sales was 31.3% and an increase of 137 basis points. This increase was primarily attributable to lower shrink, higher inventory markups and lower inventory damages. Our focus on reducing shrink has continued to produce positive results, including a healthy year-over-year improvement of 108 basis points in the second quarter. .

We're excited to be outperforming the shrink reduction educations contemplated then our long-term [indiscernible] growth framework in terms of both timing and magnitude. [indiscernible] results. We're optimistic about the potential for shrink reduction to contribute more than 80 basis points toward the operating margin goal of 6 to 7 completed within our long-term financial framework. In addition, we were pleased to drive a reduction in damages in the second quarter as our efforts in this area have begun to take hold as well. The gross margin increase was partially offset by an increased LIFO provision as was increased markdowns and increased distribution costs. Now let's turn to SG&A, which as a percentage of sales, was 25.8%, an increase of 121 basis points. The primary expenses that were a higher percentage of net sales in the quarter were incentive compensation, repairs and maintenance and benefits. Moving down the income statement. Operating profit for the second quarter increased 8.3% to $595 million. As a percentage of sales, operating profit increased 16 basis points to 5.6%. Net interest expense for the quarter decreased to $57.7 million compared to $68.1 million in last year's second quarter.

Our effective tax rate for the quarter was 23.5% and compares to 22.3% in the second quarter last year. Finally, EPS for the quarter increased 9.4% to $1.86, which exceeded the high end of our internal expectations. Turning now to our balance sheet and cash flow, where we continue to make great progress strengthening our financial position. Merchandise inventories were $6.6 billion at the end of Q2, a decrease of $191 million or 5.6% compared to prior year and a decrease of 7.4% on an average per store basis. The team continues to do a tremendous job reducing inventory while increasing sales and improving in-stock levels, which is having positive operational impacts in both stores and distribution centers. The business generated cash flows from operations of $1.8 billion during the first half of the year, an increase of 9.8% compared to the prior year. Our strong top and bottom line results along with our focused inventory management efforts continue to generate significant cash flow.

During the quarter, we returned cash to shareholders through a quarterly dividend of $0.59 per common share outstanding 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 our business, including our existing store base as well as high return growth opportunities such as new store expansions, remodels and other strategic initiatives. Next, we seek to return cash to shareholders through a quarterly dividend payment and over time and when appropriate, share repurchases. And while our leverage ratio remains above our goal which is below 3x adjusted debt to adjusted EBITDAR, we are making great progress towards reaching our target level. Importantly, we remain focused on improving our debt metrics in support of our commitment to middle BBB ratings by S&P and Moody's.

Overall, we're very pleased with our operating performance and financial results. Our strong performance has positioned us to raise our financial outlook for 2025. This update primarily reflects our outperformance in the second quarter and improved outlook for the second half of the year. while considering the potential uncertainty, particularly on consumer behavior as we move through the back half of 2025. With that in mind, we now expect the following for 2025. Net sales growth of approximately 4.3% to 4.8% same-store sales growth of approximately 2.1% to 2.6%, and and EPS in the range of $5.80 to $6.30.

Our EPS guidance continues to assume an effective tax rate of approximately 23.5% and and that we will not repurchase shares under our share repurchase program. Now I want to provide some additional context around our expectations. While we're not providing specific quarterly guidance, the low end of our sales and earnings guidance ranges allow for increasing pressure on consumer spending as we move through the back half of the year, with Q4 potentially more impacted than Q3. In addition, we expect shrink to be a continued tailwind throughout the remainder of the year though to a lesser extent in Q4 as we begin to lap the improvements we made toward the end of last year.

Turning to SG&A. Given our strong performance, we now anticipate incentive compensation expense to be a headwind of approximately $200 million.

Moving to the final portions of our guidance for 2025. We continue to expect capital spending in the range of $1.3 billion to $1.4 billion designed to support our ongoing growth. This includes our continued expectations to execute approximately 4,885 real estate projects 2025, including 575 new store openings in the United States and up to 15 Mexico, 2,000 project renovate remodels, 2,250 project Elevate remodels and 45 relocations.

Finally, as a result of our strong cash position, we are [indiscernible] cash on hand to redeem $600 million of our senior notes in the third -- earlier in the April 2027 maturity.

In summary, we're pleased with our Q2 results, and we're proud a team has done to strengthen our operating and financial position. This business is strong, and we believe Dollar General is well positioned to drive sustainable long-term growth on both the top and bottom lines while creating long-term shareholder value. With that, I'll turn the call back over to Todd.

Thank you, Kelly. I'll take the next few minutes to provide updates on 3 of the most important initiatives across the business, as we look to further advance our progress toward achieving our short- and long-term goals. I'll start with our real estate work as we continue to focus on driving sales and market share growth by expanding our unique real estate footprint he while also enhancing our mature store base.

We opened 204 new stores in Q2, primarily using our 8,500 square foot format in rural markets. Dollar General continues to serve as a vital partner, bringing value and convenience to communities across the country through new store growth. In addition to our U.S. growth, we opened 4 new stores in Mexico during the quarter, bringing us to a total of 13. Our team is doing a wonderful job serving those communities as we continue to test and learn and further develop that potential growth opportunity. We are also pleased with the progress of our remodel projects. As a reminder, in addition to our traditional remodel program, which we call Project [ RenOVAte ], we have introduced a new incremental remodel program called Project Elevate in 2025. This initiative is designed to drive sales and market share growth 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 investments as well as merchandising optimization, product adjacency adjustments and category refreshes, all of which impacts approximately 80% of the total store. We completed 729 project Elevate remodels in Q2 and an additional 592 project renovate remodels during the quarter.

While still early, we expect to reach our goal of delivering first year annualized comp sales lifts in the range of 6% to 8% for project renovate stores and 3% to 5% for project Elevate stores. Importantly, we've seen significant improvements in customer satisfaction in these locations upon completion of the remodels. And we believe the improved performance and customer response in these stores paves the way to make project Elevate a key component of our real estate strategy in the years ahead. 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 as well as growing our delivery options and DG Media Network. We continue to expand the reach of our delivery options with solutions targeted both new and existing customers. Our DoorDash partnership, which now serves more than 17,000 stores continues to drive significant incrementality and sales growth. To that end, our Q2 sales through this platform increased by more than 60% year-over-year. Building on this success, we partnered with DoorDash to launch our own same-day delivery offering through our DG digital solutions late in 2024. We have now expanded this offering to nearly 6,000 stores.

We are also excited to note that we now expect to offer DG delivery from more than 16,000 stores by year's end compared to our previous expectation of approximately 10,000 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 have already expanded to approximately 4,000 stores with Uber and expect to be in approximately 14,000 stores by the end of Q3. Collectively, more than 75% of the orders through these offerings are delivered in 1 hour or less. Ultimately, we believe this suite of delivery options will introduce new customers to Dollar General and drive incremental sales growth while also further enhancing the value and convenient proposition for our existing customer base.

The linchpin of our digital initiative is our DG Media Network, which enables a more personalized experience for our unique customer base, while a higher return on ad spend for our partners. We continue to be pleased with the performance of DG Media Network, which is driving significant year-over-year growth in retail media volume as partners seek to access our unique customer base. [indiscernible] is an important component of our strategy to deliver on our long-term growth framework, and we are 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 nonconsumables growth strategy. As a reminder, we are focused on a few key growth drivers in our nonconsumable categories over the next 3 years.

These include brand partnerships, a revamped treasure hunt experience, and reallocation of space within our home category. During Q2, we were pleased to deliver positive quarterly same-store sales growth in each of the 3 nonconsumable categories for the second consecutive quarter. Notably, the magnitude of growth was broad-based with same-store sales increases in each of these categories of at least 2.5%. Our brand partnerships are resonating with customers, and we have been pleased with the strong sell-through in many of these sets. As a result of the success as well as our improved execution, our home products category saw its largest quarterly same-store sales increase in more than 4 years. In addition, our Pop shelf stores delivered another quarter of strong same-store sales growth.

We continue to be pleased with the performance of the new store layout in this banner, including a greater emphasis on categories such as toys, party, candy and beauty. The Pop shelf banner will also continues to produce learning that we are able to [indiscernible] to our nonconsumable categories in our Dollar General stores to further strengthen the offering for ITG customers. We believe our nonconsumable sales performance, both in Dollar General and Pop shelf stores also benefited from improved execution in our stores and supply chain as well as from the expanded trade-in shopping we've seen from middle and higher income customers.

These results, including strong sales performance and market share gains continue to demonstrate that our treasure hunt approach is resonating with the customer. In turn, we believe we are well positioned to serve them in these discretionary categories in stores across both banners, and ultimately drive further growth in both sales and gross margin.

In closing, we're pleased with our second quarter performance. Operationally, we are improving execution stabilizing our workforce through lower turnover rates, advancing our key initiatives and enhancing our position for sustainable long-term growth. Financially, we're delivering balanced sales growth, significant margin improvement and strong earnings while also strengthening our balance sheet and operating cash flow. With that said, we have ample opportunity in front of us to drive growth and further improve our operating and financial performance. And this team is laser-focused on delivering on these goals. As an essential partner and communities across the country, our customers rely on Dollar General in all economic environments.

Delivering on our mission of serving others continues to guide everything we do. and we are excited about our plans for the back half of 2025 and beyond. Lastly, I want to thank our more than 195,000 employees for their commitment and dedication, and I'm looking forward to all we can accomplish together in the second half of the year. With that, operator, we would now like to open the lines for questions. Thank you.

[Operator Instructions] And the first question is from the line of Michael Lasser with UBS.

Given that you are optimistic that shrink could contribute more than 80 basis points to your long-term financial framework, does that mean that you expect to be able to realize the 67% operating margin, maybe as soon as next year or alternatively, your long-term range should be recalibrated above 7%? Or are you seeing anything in the environment that might suggest you'll have to take some of this upside in shrink and other factors and reinvest it back in the business in order to drive the top line?

Yes. Thank you, Michael. Great question. So we are definitely optimistic that we could potentially outperform on shrink and get a little bit more than those 80 basis points over the mid- to longer term. But we're still targeting that long-term framework 6% to 7% on the operating margin. This quarter just solidifies the fact that we feel good about where we are.

Shrink is a big component of that, and we've got a lot of strategies and initiatives in place to achieving that long-term framework. And I think what's important for us is not only getting to that 6% to 7%, but also the sustainability of that operating margin as we go forward.

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

And Kelly, good working with you and then eventually, congratulations to Donnie. I'm going to ask 2 parts 2-part question. So first, if you take the gross margin in the second quarter and we hold that base, it does look like it steps down in Q3, but is there any reason why it should step down more than expected seasonally meaning is there anything temporal about the gross margin, that's not a good proxy? And then second, Todd, from when you came back in 2023, thinking about all the execution items, can you talk about what's left and what you've gotten done.

Yes. So I'll answer the gross margin question first. What we're seeing now is obviously just an outperformance on shrink. So 108 basis points of the 17 basis point improvement. As we think about cadence for the back half, we're certainly expecting a year-over-year improvement in both of the quarters. But what I would tell you is we actually have tougher laps in Q4 on the gross margin front. And so we would expect maybe a little bit less on Q4 as far as improvement over -- year-over-year. .

And then you didn't ask that SG&A, but I do want to call out just one thing on the SG&A front. We would expect more pressure in SG&A third quarter, and that's really around repairs and maintenance. It's kind of the season for repairs and maintenance as we get into hurricane season, and we're still kind of in that warm weather. But what's the big contributor there is we're also wrapping up our elevate and renovate projects mostly in the third quarter. And so that puts a little bit of pressure on Q3. .

Yes. And Simeon, I am very, very pleased with where we are with our back-to-basics work. I would tell you that the team has done a really good job from back of house, so our supply chain, our merchants to front of house, if you will, and that's in our stores and the execution. It really is paying off. You can see it in our top line, not only a strong 2.8% comparable sales number that we posted. But as you look at that sales number, it's very balanced, consumables and nonconsumables contributed very nicely to that 2.8%.

I would tell you that we're retailers. We always have work to do as it relates to a lot of what we've been working on. But again, if I was to step back and think about it in baseball terms and innings, I would say we're in the very late innings of this game. And then we're really into now sustainability of what we have worked on. And I would tell you, we feel really good about that as well from a couple of standpoints. Number one, we have done a really nice job in our turnover rates have come down. We've had some consecutive quarters of those decreases, and we continue to be happy with where we're at. I would tell you that our pipeline for folks coming into the organization is as robust as ever. And I'm very happy to say that our store manager turnover rates are down again this quarter. So a lot of what we've been working on to make life a at the store level is starting to really resonate not only with the customer, but our employee base, which is really important.

Our next question is from the line of Rupesh Parikh with Oppenheimer.

So I'm going to focus my comments just on delivery. So as you look at the DoorDash partnership, and I guess Uber still very early, but just any surprises or key learnings to date. And then as you've added Uber, like how do you think about the incrementality of that offering?

Yes, I'd tell you, our digital solutions in general, just in totality, we're very happy with where we are. very early innings, again, baseball analogy for you, very early innings on our digital journey. But as you know, and you've pointed out, DoorDash has been really the start of our digital journey, if you will, from a delivery perspective. We're up to 17,000 locations which is great to see. And I would tell you that we saw a 60% year-over-year increase on that platform.

And by the way, off of a pretty robust number to start with. So very happy with what we're seeing there. But the team isn't slowing down here because, again, we're in the early innings. You saw where we just signed a deal with Uber Eats. And we're happy with what we're seeing very early there in the partnership. 4,000 stores up and running. And by the end of the third quarter, we'll have 14,000 stores is what our goal to have up and running on that platform. And that just expands the reach to our consumer. And then lastly, on our delivery piece, our white label program that we stood up again, very early days, but we're seeing both incrementality there as well as larger baskets.

And these are larger baskets and some of them well north of $20 baskets for us would point to incrementality and would point to more of a fill up versus a fill-in. And with that notion, you would feel that -- and we feel that it is -- a lot of it is incremental to our base. The great thing about our delivery piece is have more and more stores up and running. We believe and we were great to be able to put out there 16,000 by year-end now. which is an acceleration from where we were.

And I think that's a real testament to what we've already seen so far. To use my terminology, we're going to put the pedal to the metal here. because we see some real opportunity ahead. And I would tell you, again, the platform across all the digital properties the linchpin of this is our digital media network.

And again, it has shown strong results this quarter. and continues to show strong results. So stay tuned there because I believe there is going to be even more incrementality that comes from that media network. We have a very unique customer base, as you know, being that 80% of our stores are in small town rural America. And it is hard for CPG companies and other companies to get a hold of clientele that is just in those areas, and we have all that data. And so that data will be used in our media network. And I would tell you that our partners are already very interested in that.

And then lastly, our secret sauce here, if you will, is that so far to date, we have seen that plus of our deliveries are in 1 hour or less. And I know you that, that is the fastest that we've seen out there across the spectrum so far, especially in rule America, where it is hard to reach many, many customers. So we believe that's a competitive advantage for us and will continue to be as we move forward.

Our next question is from the line of Matthew Boss with JPMorgan.

Congrats on a nice quarter. So Todd, on your forecast for increasing pressure on the low-income consumer as the year progresses, what are you seeing in your survey work today across your income customer cohorts? And where do you see DG's value proposition as it stands today relative to opportunities maybe plan to amplify value? And Kelly, on the gross margin, where do you see shrink recovery in terms of innings today? And how best to think about additional drivers of gross margin multiyear from here?

I'll start, Kelly, and send it over to you. Right now, Matt, I would tell you that I would characterize the customer, number one, as resilient. And number two, seeking value and seeking value, we're seeing that in all cohorts of customers, meaning our core customer, mid- and high-end customers, all seeking value at this point. we're seeing it in our numbers. Our trade-in has been accelerating over the last few quarters.

We saw that again coming into and out of Q2. And what we're seeing from the customer is a good start to Q3. Our back-to-school offering was solid and in good shape. And I would tell you, our harvest and Halloween programs are off to a great start. And it really shows and what we see in our data is not only our existing customers, but those new customers coming in and those new customers coming in have a little extra money in their pocket to spend on that nonconsumable categories. And as you heard in my prepared remarks, and I mentioned earlier, we saw a really nice balance in our sales of both consumables and nonconsumables. But I would tell you, it's much deeper than that as well. as they seek value, we have a great proposition for them, right? So our everyday low price stands. We have never lost focus on that. We're as good as ever across all classes of trade on our everyday price and our customers resonate with that very nicely. We have a great promotional cadence that we use to continue to stimulate that consumer and especially stimulate these newer consumers as they come in to deliver value because they're not as familiar with that value proposition and what we offer them.

So that digital -- through digital properties, we're able to reach them. And so a nice promotional cadence as well. Here's the other value proposition that I think gets lost at times. And that is we still have and will continue to have at least 2,000 items at $1 or less every day on the shelf. Matter of fact, our Value Valley area, which I know you know, Matt, pretty well. We have over 500 SKUs in their rotating SKUs at that $1 price point still today with 2,000 overall inside the store.

And I would tell you, in Value Valley and across the store, the gross margin on those items are -- they exceed the category margins in each one of those items that they play in. So it's very sustainable for us. And by the way, when you look across the retail spectrum, it's a very elusive price point at this point. I would say we're one of the only ones that have really doubled down here and really push that $1 price point. So value to me, and I believe, as our consumers look at it, is multipronged here at Dollar General and is very sustainable.

On the gross margin side, I'll take it in a couple of pieces. So first, on the shrink side, again, we were just really excited to be outperforming the sheet production expectations that we contemplated in our long-term framework again and timing and magnitude. Shrink continues to build -- been the trend. And like I talked about earlier, we do anticipate it's going to continue to be a tailwind into 2025, even with the tougher laps in the second half and particularly in Q4.

If you don't mind, I'm just going to list out all the actions that we're taking because as you know, we've got a full team that sits on this shrink problem, and they are really producing results. The first thing was just the self-checkout conversion, and that's been a big tailwind. But we're also getting back to our operational excellence with strong in-store control environments. And we see that because we continue to see shrink improvement in stores that never had self-checkout. And so that's great to see.

All the inventory reduction and SKU rationalization work is contributing the improving retail turnover that you heard us talk about is certainly a contributor to this as well as just the expanded shrink incentive programs that we put in place. we're still utilizing the high-strength planograms. And then as you know, we've really worked at this end-to-end process enhancements so that we make sure that we're mitigating Shrink at all points of exposure. And I think what all of this combined gets us really excited because as you can remember, it takes a full year for benefits of any actions to truly show up in the P&L. And our work around shrink never ends.

So as we add continual actions, we should see improvement. So over the mid- to long term, we do feel optimistic that we would get more than the 80 basis points of shrink improvement. I think the other piece that we've talked about in the long-term framework and that we're starting to see improve is also around damages. So our goal going into 2025 for damages was flat to slightly favorable. We're still holding that in the back half, but I'll tell you that Q2 exceeded our expectations. And as you saw a call out of a good guy in our variance analysis in our earnings release. So really pleased to see that starting to take hold. And just like shrink, we've got a team after this. A lot of the things that help us on the shrink side also help us on the damage side which is the inventory reduction. SKU rationalization.

We're also having a full-court effort around product rotation, getting more precise in our inventory allocation, which helps us to mitigate future exploration damages. And then just that proactive investment in the repairs and maintenance through our 2 remodel program should also help us reduce cooler damages. So I would tell you, between the 2, overall, just feeling really good about the path to the improvement, that 80 basis point on shrink, the 40 basis points on damages that we identified in our framework that we rolled out in March. And then just on the initiative side, I think you've heard Todd talk all about the initiatives that we have in place to drive the 150 basis points around DG Media network, all the exciting things that we're doing with the delivery and the non-consumable initiatives as well. So we feel good about gross margin as we head into that mid- and longer term.

Our next question is from the line of Edward Kelly with Wells Fargo.

I wanted to follow up on the gross margin. Obviously, a very strong result this quarter, shrink a big driver. LIFO was an offset, and it does seem like there is, I don't know, roughly like 80 basis points in here of at the end that, I mean, I guess, it seems like a lot of it is initial markup. So can you just talk about what that is? And then just a quick follow-up. SG&A. There has been some retailers talking about increased higher liability claims. Just kind of curious, is that something that you are seeing sort of like where you are in the process there from like an actuarial standpoint, an assessment and if there's any risk things. .

Yes. Thank you for the question. So yes, on the LIFO, I would say year-to-date, Q2 reflects what we know as regards to current tariff rates as well as it contemplates any cost increases that we've gotten from any of our vendors. But if you step back and just take a look at the big picture, what I would say is of the 137 basis points, improvement in gross margin. We got 108 basis points of that in shrink. And then we're getting 29 basis points of tailwind from all of the other areas combined. So solid improvement on the gross margin front.

Do you want to address the workers' comp in those [indiscernible]

Yes, yes. Thank you, Todd. And on the general liability front, we we are seeing some impact. It's not material. Generally, we're seeing the trend towards claims being more expensive as we resolve those, but not a material impact to us right now. And any trends that we are seeing has certainly been contemplated in our guidance. .

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

I wanted to break down the comp sales performance a bit more in terms of you mentioned the trading benefit and also, of course, the better store operations driving more traffic. Can you help us better understand what proportion of the comp is driven by more macro-oriented trading versus more company-specific? And then going into next year, as we start to lap the tougher trading comps. What is going to be sustainable on the top line?

Yes. Well, I would think as we look at where we are today, let me address the first part, and then we'll get to that sustainability piece. We feel good about where we are, both from our core consumer as well as the trade and consumer. And I would tell you that a lot of the work that we did on Back to Basics has served us well. and, quite frankly, has set us up nicely for that trade in consumer. As that trading consumer came into the brand over the last few quarters, they've seen a better store, both from cleanliness in stock as well as friendly as well as having somebody at the front end to meet and greet them. So I would tell you that from all the work that the team has done organically has produced a nice outcome up of 2.8%.

I would tell you that as I look at the composition, as I mentioned earlier, being pretty balanced between consumables and no that the work the team has done on the merchandising side, our nonconsumable business has been phenomenal. All these brand partnerships that we've been talking about along with great execution at store level and the flow of freight from our distribution centers has all been very, very good to deliver that outsized comp that we saw in our nonconsumable businesses. We believe as we move to the back half of the year, we're well positioned. Think about it this way. Right now, as we look at the back half of the year, our value proposition is as strong as ever. Matter of fact, we've got our $1 SKUs for the seasonal piece for the back half of the year.

25% of the offering is at $1 or less.

So even in the face of tariffs, we've been able to maintain a $1 price point in our seasonal offering, we should resonate with the consumer. Matter of fact, 70% of the total offering is at $3 or less. So again, the team has done a great job. What that shows me and I believe will show in our results with our customer is that value is a lot in well at Dollar General and [indiscernible]. And they're seeing that as they trade into the brand. So I would say it's really both sides. It was some self-help, but also that consumer coming into the brand.

But without that self-help I'm not so sure that she would have stuck with us. So that really brings me to the second part of your question. And we do this very well. And that is being able to retain that trade-in customer. We've got a playbook that is very robust and dense -- we digitized it a few years back coming out of COVID. And what I mean by digitize it, we had a great playbook coming out of the -- great Recession, call it, that 2010, '11 time frame. We digitized it coming out of COVID in '21, '22. And now we're pulling that playbook back out. As a matter of fact, we've already started marketing to these new customers digitally to, one, continue to keep them engaged. And two, hopefully keep them on that Dollar [indiscernible] journey even if times start to get a little better or different for that core consumer. So -- or I'm sorry for that trade in consumer. So we're working on all angles as you would imagine from Dollar General. But the comp sales are lifeblood of this business, and we're pushing to deliver a comp at or above where we said we would be.

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

It seems like the only really missing ingredient here is getting the comp back above 3% and being able to do it consistently. I guess how are you feeling about that opportunity? And what are the drivers to get there? And then, Kelly, on the gross margin line, a lot of questions there. Can you talk about the interrelationship between shrink and inventory damages and maybe size up the damages opportunity relative to maybe where you were in the past couple of years.

Yes, Chuck, thanks for the question. In our long-term framework, as you probably recall, we feel very comfortable in that 2% to 3% to deliver that. Now we're retailers. You know me pretty well. You know this team well. We will strive for more to drive it above those numbers. .

But I would tell you, we feel very comfortable in that 2% to 3% range as we go forward. Now in saying that, we've got a lot of drivers, not only the self-help that we talked about, not only that great value proposition that we continue to have for our core consumer as well as these trading consumers. But what we also have is a plethora of initiatives. So when you start to think about our project renovate and elevate stores. Those are great comp drivers. As a matter of fact, our mature store base really threw off a very nice comp this past quarter. A lot of that driven again on all of the initiatives that we laid out, but also as you start to look at what projects elevate and renovate are doing.

They're starting to produce those comps of 6 to 8 for RenOVAte and starting to produce and working our way to 3 to 5 on the project Elevate stores. So those are all great mature store-based comp drivers. And we've got a long runway for that, as you would imagine, over the next few years with 20 -- almost 21,000 stores now in the portfolio, so we've got a great opportunity there. And by the way, the customer response has been overwhelming on these remodels. And as important, the our associates, our employee base has really loved the remodels because they're very proud because the customer is loving it.

And then lastly, we want to deliver a very balanced portfolio sales. And so those nonconsumable initiatives continue to be very important. And I would tell you that pop shelf is -- will continue to be important for us. as we continue to test and learn and then bring back to the mother ship, if you will, Dollar General, those learnings and then deploy those across the chain. We're doing that as we speak. And I believe that's been some of the comp drivers you've also seen on our nonconsumable businesses.

And then just as I think about shrink and damages, 1 thing I'd just like to say is seeing shrink and damages improved together is real positive. And so we've talked a lot about strength, and maybe I'll just give you a little bit more color on the damage side. Like I noted just a little bit earlier that we did expect damages to be flat to slightly favorable as we work towards that 40 basis points improvement of our mid- to long-term framework.

And we believe we're well on our way to that with Q2 exceeding our expectations there. And so -- as you're probably noting in your question, a lot of the things that improve shrink also improve damages, and we're seeing all of those things come to fruition. And so we feel good about our ability and our path to that 40 basis points of improvement.

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

I wanted to focus on SG&A. Q2 seemed unique because of the incentive comp returning. You talked about maintenance and repairs, I guess, in Q3, can you talk a little bit more about the path back to normal operating leverage in light of the 2% to 3% comps that you mentioned. I guess a lot of costs have come back over the last 2, including this year, year-to-date. Should we assume this is just catch up and then we enter next year with a more normal expense base. How do you guys think about that? .

Yes. No, that incentive piece is certainly a big headwind for us this year at mind so I think probably a more normalized rate is one that we would exit out of this year as we think about going into 2026. I will say there's just been a ton of work around just making sure that we're mitigating SG&A deleverage as we move forward as part of our framework that we called out. So that's a huge focus for us. specifically around simplifying work and driving efficiencies as well as as we think about the CapEx side and how it plays into depreciation, just optimizing CapEx to stabilize depreciation and amortization. And so working hard to make sure we're mitigating that SG&A deleverage. And then with all of the gross margin levers that we have in place, that's where we feel really good about getting to that 6% to 7% framework as we go over the mid- to longer term.

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

I wanted to dig into the comps on the discretionary side. It sounds like they were in that maybe 2.5% range. But can you unpack that between the price price/mix and units? And just help us understand what is in the plan in terms of inflation for those discretionary categories in the back half.

That's a great question. And I would tell you that the AUR was very similar year-over-year in those categories. Matter of fact, a lot of this is spring and summer during Q2 sales in our seasonal areas as an example. And a lot of the goods that we brought in prior to tariffs really were the drivers here. So tariff and price increases were not a real factor in our overall comp in nonconsumables.

And as I mentioned earlier, even with tariff numbers starting to flow into our seasonal home and other categories, we're still holding price points on many of them. And you heard me mention the 25% of our holiday assortment be at $1 or less. And as we look at 70% of our offering, still being at $3 or less. So I would tell you that the team has done a really good job of trading off items, and bringing in new items for the seasonal areas to keep price points pretty stable for our consumer overall, especially as we look at our nonconsumable businesses. So I feel as if the business is very stable but growing. And the reason I'm bullish there is we're seeing the takeaway early on our holiday especially in our harvest and Halloween areas.

And those areas again have tariff rates embedded in them. but again, very manageable for our core consumer. And then lastly, I would tell you that all of the work that the team has done in nonconsumables is really starting to come together and and start to generate this positive momentum we're seeing, to your point, each of the 3 major categories in our nonconsumable areas comped at 2.5 plus. Some of them -- a couple of them crossing the 3 mark. And I would tell you, feeling really good about that sustained momentum as we go forward with all the work that the team has done through brand partnerships as well as what the team has done at execution at store level. And I can't say enough about that. That is a very big component, especially for our trade-in consumer that's coming in to resonate with these items.

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

I was wondering if you had an early view on how the one big beautiful bill will have an impact on your core customer? And then maybe digging into that a little bit, it looks like Snap dollars will get cut starting in October. Maybe by about high single-digit percent. Is that something that's factoring the outlook? Do you think that will have any impact?

Yes. Let me take the first one first. Everything we know to date is factored into our outlook. Now we don't believe any snap things that are out there, especially those related to work requirements will be very impactful for us. .

As we went through this a few years ago, the work rule requirements was not really a factor for -- now as you look at the bill in totality, whether it's this year they won't recognize the income until tax time next year, things like no tax on tips, up to the levels. No tax on over time. the social security no tax pieces. All of that is very beneficial for our core consumer. And we believe we'll get our fair share of those benefits as we move forward. So a lot of positives, at least initially early.

Some of the headwinds, broader Snap cuts perhaps and a few other things that probably come more in late '26, '27, '28 we'll continue to watch for and see how they progress and what they look like. But overall, I feel really good about what our core customer initially will see from these tax benefits, we believe it really will be, including the child tax credits will really be a benefit for our core consumer.

Our last question is from the line of Robbie Ohmes with Bank of America.

Todd, can you just talk about what Dollar General, remind us what you guys are doing on the the fresh initiatives you guys are doing with DG market and maybe how you see competing with Walmart and I guess, maybe even Amazon at some point, trying to get more fresh food delivery into the rural markets.

Yes. Thank you for the question. We're really proud about the work that we've done in these fresh categories. And quite frankly, that work has been going on and accelerating for the last years here Dollar General.

As you -- as a reminder, we stood up our own fresh distribution network in 2021 and into early '22. And which has given us a real leg up and opportunity to get product to our stores timely and in full. We've gotten produce now in 7,000-plus stores we've got fresh meat and thousands of others. We are building our DG market concept and also putting produce in even outside of DG market concept and our in our Dollar General stores where it makes sense, especially as you mentioned, in rural America. And the great thing about our delivery pieces is that -- and we're already seeing it in rural America where folks are buying those fresh items, fresh, frozen, deli, dairy, produce, online and being delivered in an hour or less to our consumer base.

Believe, again, as I mentioned earlier, that to be a competitive advantage as we move forward. especially the speed that we're able to offer her and at the value team that she knows and loves for that Dollar General already. So we believe that it's a powerful combination that we will continue to cultivate in the years to come.

At this time, we've reached the end of our question-and-answer session, and this will also conclude today's conference. You may now disconnect your lines at this time. We thank you for your participation, and have a wonderful day.

RECONNECT

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 2025 Earnings Call. Today is Tuesday, June 3, 2025. [Operator Instructions] This call is being recorded. [Operator I] 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, 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 Kelly Dilts, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News and Events.

Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, long-term growth framework, strategy, initiatives, plans, goals, priorities, opportunities, expectations or beliefs about future matters and other statements that are not limited to historical fact. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.

These factors include, but are not limited to, those identified in our earnings release issued this morning, under Risk Factors in our 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 1 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 start of the year, including strong results that exceeded our expectations on both the top and bottom lines. We believe our efforts are resonating with a wide range of customers as they continue to seek value in our more than 20,000 store locations around the country. Our results are a product of the dedication of this team to serving our customers and communities every day. I want to thank each of them for their great work they continue to do in our stores distribution centers, private fleet and store support center to fulfill our mission of serving others.

For today's call, I'll begin by recapping some of the highlights of our Q1 performance as well as sharing some of our updated consumer observations and our current approach to tariffs. After that, Kelly will share the details of our financial performance as well as our updated financial outlook for fiscal 2025. I will then wrap up the call with an update on some of our key growth driving initiatives.

Turning to our first quarter performance. Net sales increased 5.3% to $10.4 billion in Q1 compared to net sales of $9.9 billion in last year's first quarter, contributing to the strong top line growth, we opened 156 new stores during the quarter as we continue to expand the number of communities we serve. We also continued to grow market share in both dollars and units in highly consumable product sales during the quarter in addition to growing market share in non-consumable product sales. Same-store sales increased 2.4% during the quarter, driven by growth of 2.7% in average basket including relatively similar increases in the average unit retail price per item and average items per basket.

Customer traffic slightly decreased by 0.3% during the quarter but remained strong on a 2-year stack basis as we lapped the 4.3% traffic increase from the prior year's first quarter. We are excited to see broad-based category growth during the quarter with positive comp sales in each of our consumables, seasonal home and apparel categories. With both our seasonal and home categories comping at or above 3% during the quarter. We were especially pleased to see our non-consumable product categories resonate with our customers, for the Easter and early spring seasons. From a monthly cadence perspective, all 3 periods were positive, led by April, which benefited from the later Easter compared to the prior year. We believe these top line results are a testament to our improved execution as well as the customers across multiple income bands seeking value.

To that end, we continue to feel good about our everyday low price position relative to other competitors and classes of trade. As a reminder, our goal is to be priced within 3 to 4 percentage points of mass on average, and we ended Q1 within our targeted range. In addition, we continue to carry at least 2,000 SKUs at or below the increasingly rare $1 price point as we seek to help our customers stretch their dollars. We believe this value offering will become increasingly more important to customers in the months ahead.

During our recent customer survey work, DG customers reported having less income than they did a year ago and nearly 60% of our core customers noted that they felt the need to sacrifice some necessities in the coming year. While our core customer remains financially constrained, we have seen increased trade-in activity from both middle and higher income customers. Our data shows that new customers this year are making more trips and spending more with us compared to new customers from last year, while also allocating more of their spend to discretionary categories.

We believe these behaviors suggest that we are continuing to attract higher income customers who are looking to maximize value while still shopping for items they want and need. To that end, in Q1, we saw the highest percent of trade-in customers we've had in the last 4 years. We are pleased to see this growth with a wide range of customers and are excited about our ongoing opportunity to grow share with them.

Before I turn the call over to Kelly, I want to provide an update on how we are thinking about the impact of the evolving tariff environment on our business. Our direct imports remain a relatively small percentage of our overall purchases with most years in the mid- to high single-digit range, while our indirect import amount varies. In recent years, we estimated amount to be approximately twice that of our direct imports. We have continued to diversify the countries of origin as part of our direct foreign sourcing strategies in recent years Importantly, we have successfully reduced our China exposure to less than 70% of our direct imports, and we estimate less than 40% of our indirect imports are sourced from China.

While we have relatively low exposure, we are working diligently to mitigate the impact of current tariffs on our business as much as possible, using many of the same tactics that we used successfully in 2018 and 2019. These actions include working with our vendor partners to reduce cost in a variety of ways, including negotiating cost concessions shifting manufacturing to other countries where possible, reengineering products or find substitute products. While the tariff landscape remains dynamic uncertain, we expect tariffs to result in some price increases as a last resort, though we intend to work to minimize them as much as possible. In turn, we believe our customers will continue to seek opportunities to save money, and we remain committed to serving them with the everyday low prices they have come to know and appreciate from Dollar General.

Overall, we are proud of our Q1 performance and the tremendous progress we continue to make in the business, including lower year-to-date turnover at all levels within our retail operations, an improved overall supply chain on time and in full rate, higher in-stock levels and lower inventory levels, all of which has contributed to an improved in-store experience for our customers and our associates. Our efforts are yielding positive results, and we believe we are well positioned to succeed in a wide range of economic environments. As we continue enhancing our value and convenience proposition for our customers with a focus on working toward our long-term financial goals, and creating long-term shareholder value.

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

Thank you, Todd, and good morning, everyone. Now that Todd has taken you through a few of the top line highlights of the quarter, let me take you through some of the other important financial details. Unless we specifically note otherwise, all comparisons are year-over-year. All references to EPS refer to diluted earnings per share, and all years noted refer to the corresponding fiscal year. For Q1, gross profit as a percentage of sales was 31%, an increase of 78 basis points. This increase was primarily attributable to lower shrink and higher inventory markups. Our shrink mitigation efforts have continued to drive positive results, including a year-over-year improvement of 61 basis points in the first quarter.

With regards to damages, the year-over-year change was slightly favorable, which was relatively in line with our expectations. The gross margin increase was partially offset by increased markdowns which were primarily driven by promotional activity during the quarter as we took this opportunity to serve our customers with targeted price markdowns.

Turning to SG&A which was 25.4% as a percentage of sales an increase of 77 basis points. The primary expenses that were a higher percentage of net sales in the quarter were retail labor, incentive compensation and repairs and maintenance. Moving down the income statement. Operating profit for the first quarter increased 5.5% to $576 million. As a percentage of sales, operating profit was relatively flat at 5.5%. Net interest expense for the quarter decreased to $64.6 million compared to $72.4 million in last year's first quarter. Our effective tax rate for the quarter was 23.4% and compares to 23.3% in the first quarter last year. Finally, EPS for the quarter increased 7.9% to $1.78 which exceeded the high end of our internal expectations.

Now turning to our balance sheet and cash flow, where we continue to make great progress in strengthening our financial position. Merchandise inventories were $6.6 billion at the end of Q1, a decrease of $344 million or 5% compared to prior year. and a decrease of 7% on a per store basis. The team continues to do a tremendous job reducing inventory while increasing sales and improving in-stocks which is having a positive operational impact in both our stores and distribution centers. The business generated cash flows from operations of $847 million during the quarter, an increase of 27.6% compared to the prior year.

This strong performance is a result of our sales results and ongoing inventory management efforts. Additionally, with a continued focus on strengthening our balance sheet, we were able to use cash on hand to repay $500 million of our senior notes in Q1, which was earlier than the November maturity date and ended the quarter with balance sheet cash of $850 million. During the quarter, we returned cash to shareholders through a quarterly dividend of $0.59 per common share outstanding for a total payment of $130 million.

Overall, we are very pleased with our cash and inventory positions and the progress we've made in strengthening our balance sheet. We're proud of our strong performance in Q1 and continue to position the business to deliver value for associates, customers and shareholders moving forward. With that in mind, I'd like to discuss our updated financial outlook for 2025. We believe our positive first quarter results are a testament to the importance of our value and convenience proposition for our customers. particularly in a time of continued uncertainty and a financially constrained core consumer.

Furthermore, our Q1 performance has positioned us well as we look towards achieving our guidance range for 2025. However, the tariff landscape remains dynamic and uncertain, and there is a higher degree of variability in potential outcomes around tariff-related impacts, including on consumer spending, cost of goods and the supply chain. With this in mind, we're updating our financial guidance for 2025 to reflect our Q1 outperformance, while considering a heightened level of uncertainty as we move through 2025. The updated guidance assumes current [indiscernible] rates remain in place through mid-August 2025, when the 90-day pause on increased tariff rates on the goods from China is set to expire. And we have plans in place to address the potential reversion to the tariff rates previously announced on goods from China on April 2, 2025.

Our financial guidance is based upon our best estimates and assume successful mitigation of a significant portion of the anticipated tariff impact on our gross margin but also allows for some incremental pressure on consumer spending. We believe this is the prudent approach to setting expectations at this point in the year, and we're excited about the potential for our business as we move throughout the year. With that in mind, we now expect the following for 2025. Net sales growth of approximately 3.7% to 4.7%, and same-store sales growth of approximately 1.5% to 2.5% and EPS in the range of $5.20 to $5.80. Our EPS guidance continues to assume an effective tax rate of approximately 23.5% and that we will not repurchase shares under our share repurchase program.

Now I want to provide some additional context around our expectations. While we're not providing specific quarterly guidance, we expect SG&A in Q2 to be pressured by a more significant year-over-year increase in incentive compensation expense than other quarters as we lap the prior year reversal of the incentive compensation accrual. I also want to note that for the full year, we now anticipate incentive compensation expense to be a headwind of approximately $180 million to $200 million. As we look at the top line for the remainder of the year, we expect the potential impact of tariffs on our core and trade-in customers could be more substantial if price increases take effect more broadly across retail.

Moving to the final portions of our guidance for 2025. We continue to expect capital spending in the range of $1.3 billion to $1.4 billion, designed to support our ongoing growth. This includes our continued expectations to execute approximately 4,885 real estate projects in 2025, including 575 new store openings in the United States up to 15 in Mexico, 2,000 project renovator models, 2,250 Project Elevate remodels and 45 relocations. Importantly, we believe that the tariff impact on our net CapEx will be minimal.

All of this aligns with our capital allocation priorities, which begin with investing in our business, including our existing store base, as well as high return growth opportunities such as new store expansion and strategic initiatives. Next, we seek to return cash to shareholders through a quarterly dividend payment and over time and when appropriate, share repurchases.

Finally, I want to provide a brief update on how we're thinking about and planning to communicate our adjusted debt to adjusted EBITDA leverage ratio. Going forward, we intend to speak to our target calculation using balance sheet lease liabilities in place of the more general 8x rent multiple that we have communicated historically. Using this approach, which aligns with the calculation more frequently used by credit investors and rating agencies, our leverage target is below 3x adjusted debt to adjusted EBITDA. While our leverage ratio remains above our goal, we are making good progress, reducing it closer to our target level, and we remain focused on improving our debt metrics in support of our commitment to middle BBB ratings by S&P and Moody's.

In summary, we're pleased with our Q1 results and our performance to begin the year. We continue to make progress against our goals. And while we have more work to do, we're happy to see our efforts translating into improved financial results. We're excited about the future of this business, and we're confident in the long-term approach, including our long-term financial framework. We believe this business model is strong and that we're well positioned to drive sustainable, long-term growth on both the top and bottom lines, while creating long-term shareholder value.

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

Thank you, Kelly. I want to take the next few minutes to provide updates on 3 of our most important initiatives across the business as we look to accelerate our progress toward achieving our goals. I'll start with our real estate work as we continue to execute a significant number of projects aimed at driving market share growth in new communities as well as in our mature store base.

As I mentioned earlier, we opened 156 new stores in Q1, primarily using our 8,500 square foot formats. Notably, the cost to build new stores has risen more than 40% since 2019, and these formats average approximately $500,000 to open, including both CapEx and inventory. Despite this increase, we continue to target healthy returns of approximately 17% on average for our portfolio. This team is working to further reduce cannibalization this year by focusing on new communities for Dollar Jennifer. In addition, we are increasing the number of operating weeks for new stores compared to prior years by pulling forward more projects even earlier in the year. As a result, we expect to open the vast majority of our new stores within the first 3 quarters of this year. We are also pleased with the progress of our remodel projects to begin the year.

As a reminder, in addition to our traditional remodel program, which we call Project Renovate, we have introduced a new incremental remodel program called Project Elevate. This initiative is aimed at bolstering performance in portions of our mature store base that are not yet old enough to be part of a full remodel pipeline. These projects include physical asset investments as well as merchandising optimization, product adjacency adjustments and category refreshes impacting approximately 80% of the total store. In addition, while the cost of a project renovate remodel is approximately half that of a new store, a project elevate remodel costs significantly less.

Notably, we anticipate returns on both of these projects to well exceed the healthy returns generated by our new stores. We completed 668 project Elevate stores in Q1 and an additional 559 Project Renovate remodels during the quarter. As we focus on driving greater profitability in our mature store base, our goal is to drive first year annualized comp sales lifts in the range of 6% to 8% for Project renovate stores and 3% to 5% for Project Elevate stores. Between these 2 remodel approaches, we expect to touch approximately 20% of our store base annually and to significantly improve the shopping experience within our stores, while elevating the brand and driving greater top and bottom line contributions from our robust mature store base.

The next area I want to discuss is our digital initiative, which is an important complement to our unique 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 that is popular with our customers as well as our website growing delivery options and DG Media Network. Our delivery partnerships with DoorDash continues to exceed our initial expectations for both incrementality and sales. And our Q1 sales through this platform increased more than 50% year-over-year. We continue to seek ways to grow sales through this channel exclusive partnership including expanding the number of stores in the program to more than 16,000 and growing.

In addition, we are now processing both Snap and EBT transactions for our delivery orders, which contributed nicely to our sales growth in Q1. Moreover, our partnership with DoorDash has extended to the launch of our own same-day home delivery offering through our DG digital solutions. We launched with approximately 400 stores late in 2024 and have now expanded the offering to more than 3,000 stores as we continue to leverage customers and associates' feedback. We believe our expansive real estate footprint uniquely positions us to offer a compelling home delivery option and ultimately become the fastest delivery alternative for customers and our communities.

Further expanding their access to value and convenience that saves them time and money every day. The linchpin of our digital initiative is our DG Media Network, which enables a more personalized experience for our unique customer base while delivering a higher return on ad spend for our partners. We are excited about the potential for the DG Media Network, which grew retail media volume more than 25% in Q1 compared to Q1 of 2024. Over time, we believe we can leverage this offering 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 4 pillars of growth to drive sales in non-consumable categories over the next 3 years. These pillars include brand partnerships, a revamped treasure hunt experience and a reallocation of space within our home category. We are already beginning to realize benefits from these efforts and have seen particularly strong sell-through in SKUs associated with our brand partnerships. During Q1, we were pleased to deliver positive quarterly same-store sales growth in each of our 3 non-consumable categories. This performance was led by our seasonal category and a strong Easter selling season.

In addition, our pOpshelf stores delivered strong same-store sales growth during the quarter, exceeding our expectations and supporting our optimism in the new store layout, including a greater emphasis on categories such as toys, party, candy and beauty. We also continue to leverage learnings from this banner and apply them in non-consumable categories in our Dollar General stores to further strengthen that offering for our DG customers. We also believe our non-consumable sales performance, both in Dollar General and pOpshelf stores has benefited from the expanded trade in shopping we have seen from middle and higher income customers.

Importantly, our customer feedback, sales performance and market share gains give us confidence that our treasure hunt approach is resonating with customers and that we are well positioned to serve them in these discretionary categories in stores across both banners. In closing, we are excited about the business and the strong results we delivered in Q1. This team is working hard and is laser-focused on continuing to improve execution and implement our initiatives while building on our strong foundation. We are proud of the progress we've made, and we believe we have ample opportunity to continue to enhance the way we serve our customers.

And looking ahead, we believe this work continues to strengthen our position as we work to achieve our longer-term financial goals in the next few years. Our team is excited about the opportunity to serve, and I want to thank our more than 193,000 employees for their ongoing commitment to each other and our customers. I'm excited about our plans for the remainder of the year and all that we will accomplish together.

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

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

Congrats on a really nice quarter. So I have 2 related questions just on the top line. So I want to get a sense of your team's confidence in being able to sustain the complementum. And then during the quarter, was there anything that was surprising on the top line that you saw. And then just related to that, the guide for the full year -- the [indiscernible] full year implies a moderation at least at the midpoint in comparison to these. So I just wanted to get a sense of -- is that conservatism or just how you guys are thinking about the top line for the balance of the year?

Thank you, Rupesh. I'll take the first part and then pass it over to Kelly for that second part of the question. What gives us a lot of confidence on what we've seen on the top line or a few things, but I want to highlight, though, the biggest opportunity that we saw coming into the year and obviously for the past 18 months, and that was our back-to-basics work. And all the work that we have done over the last few months to set ourselves up for success has really benefited us.

So if you think about at retail, our store standards are much, much better than they've been in quite a long time. And every single quarter that goes by, continues to get better and better. Our service at store as well. Customer service continues to grow as well. And I would tell you that our customers are seeing that. We're seeing that in the data that we get back on customer satisfaction scores are rising each and every quarter as well. Turnover continues to reduce at store level. That's another initiative that we had that will add to the top line. Our turnover for the fifth straight quarter at retail has decreased. So again, we're very proud of that stat. And then obviously, shrink plays a part of this. I'm sure we can talk about that later, but shrink.

Overall, you heard in our prepared remarks, feels like we're on the right track. And the reason why we believe it adds to the top line is if it's there for the customer to buy and not being taken, then it will add to that top line. Very quickly on our supply chain, I feel really good about our on-time pieces, not only are we hitting our goal, but we have sustained hitting that goal now for more than 2 quarters in a row, which is a trend. So we feel good about that. And then in full continues to get better and better.

Our inventory at store level while down in total and same store, it's up in availability to the consumer and up in a pretty good way. So that just shows that our on time and in full is well on track. And then as you think about our merchandising pieces, and this is the heartbeat of what we do at Dollar General, SKU reduction has been a big win. And the reason being, while we have taken out 1,000 SKUs last year, and we're in the process of taking out more this year and as evidenced by the reduction in our inventory levels.

What we have been able to do, though, is make more room for what matters on the shelf to stay in stock on those SKUs that turn fastest. And that adds to our top line and gives us confidence. And then lastly, those discretionary initiatives that I laid out in my prepared remarks, have done very, very well at retail. We were really happy to see our discretionary comp where it was. It's the first time we've seen that in a while, and it gives us a lot of confidence. So all these things give us confidence. And then lastly, trade-in continues to play a part of this. We saw it start in Q3 of last year. It accelerated in the 4 now into Q1. Nothing that we've seen so far in Q2 would say that has slowed down. So we believe the trade-in is here, and we are primed to take advantage of that and retain that customer long term. So a lot of good things happening here at Dollar General. It gives us that confidence. But as you know, retail is dynamic. So we'll continue to work hard and drive that top line.

Yes. And Rupesh, in regards to your question just around the top line guidance, what might be helpful is for me to just go ahead and kind of walk through the P&L and just let you know how we're thinking about the guide. As you heard Todd say lots of things to like about the Q1 performance. So I would say that the top line guide really does consider the Q1 outperformance, but it also considers just the heightened uncertainty as we move through the year. And so it allows for some incremental pressure on that consumer spending on the top line.

As we think about gross margin, we are just really pleased with where shrink came in. We continue to believe that shrink is going to provide a tailwind throughout 2025, and so we feel really good about that for all of the reasons that we just talked about. But as we think about tariffs, there's certainly a lot of potential outcomes. Now we've got plans in place to mitigate certain tariff ranges. And I would tell you that would include both lower tariffs that we are seeing in the current rates, but also up to the reversion of tariffs on China going back to those that were previously announced on that April 2 date.

With that higher degree, I would say, of variability and potential outcomes and especially in regard to the various components that make up margin and the timing of those components. It's why we feel good about giving a full year guide, even though there could be some variability within the quarters. And so it does give us a chance to take whatever situation or reality ends up hitting as we move through the year, and it allows us to enact those plans over the years so that we can land that full year guide.

I would tell you on the SG&A side, I think it's just important to call out a couple of things really more around timing than anything else. Most of these you heard on the last call, first -- that first half is getting a little bit pressured by the number of projects that we're doing. So the initial expenses related to the Project Elevate and Project Renovate. As you heard us talk about on the last call, we really expect to execute more of those real estate projects in the first half of this year than we did last year. And we're trying to complete a vast majority of those real estate projects by the end of Q3. This really helps us maximize the number of operating weeks and it benefits not only 2025, but it starts that flywheel turning that is going to continue to benefit us as we move into 2026.

If we think about second quarter in particular, I just want to remind you that we did call out that headwind on incentive compensation of $180 million to $200 million for the full year. But Q2 is going to be the most impacted by that incentive comp headwind. And so what you'll see there is really the incremental incentive expense for the second quarter versus last year is expected to be almost double what it is for the rest of the quarters. And that's really because we're comparing against the 2024 accrual reversal that occurred in the second quarter. And with that, we expect EPS to decline on a year-over-year basis for the second quarter.

And then finally, on SG&A, just as we think about the full year, we are considering that we will be pressured by this incentive comp for all of the quarters, as I said, particularly in Q2. We still continue to wage rate increases of 3.5% to 4%. And I will tell you, Q1 landed right in that range. still expecting headwinds around R&M utilities and depreciation. But as you heard us put together the financial framework. Last quarter, we have a lot of things in place to start to mitigate some of that deleverage around simplification so that we can drive efficiencies. The initiatives we have in place, particularly the remodels and how that can help some of the R&M expenses and drive towards those long-term goals that we laid out.

The increased sales guidance and the increase in the bottom end of our range, really, as Todd noted, reflect the underlying health of the business and just all of the foundational work that's been done, and it was great to see it show up in the Q1 results. But it is really early in the year, and there is a lot of potential outcomes from a macro perspective. So we just believe that this update is a prudent approach to setting expectations for the remainder of the year.

Our next question is from the line of Matthew Boss with JPMorgan.

So Todd, maybe on the components of your comp, how do you see traffic progressing through the year? And any change in comps in May that you've seen relative to the 2.4% comp in the first quarter? Or just any change in consumer behavior that you're seeing in this backdrop? And then, Kelly, just within the gross margin, can you speak to higher markdowns that you saw in the first quarter? Just any change in the competitive landscape that you're seeing? Or how best to think about markdowns in the second quarter and in the back half of the year relative to pressure in the first quarter.

I'll start out, Matt, and thank you for the question. Yes, on the top line, a 2.4% comp in Q1 was a real testament to all the work that this team has done over the many quarters. But I would tell you that what we saw coming into May give you a little bit of color. We're really happy with where we ended up May, so period 1 to 2 as well as our traffic turned positive in period 1. Now I just want to say, we got a lot of quarter left. But it's good to see that that's happened. And just as a reminder, I know our prepared remarks had it. But Q1 was our toughest lap both on the top line and the traffic. Traffic was a [ 4.3 ] positive last year. and just below flat this year at [ 0.3 ] negative.

So I would anticipate with all the work that we've done and depending on where the consumer falls, that we'll continue to see comp momentum and hopefully, traffic momentum as we move through the quarter and into the back half of the year. All the work again that we've done would line up with that thesis, not only from all the work that I laid out in Rupesh's question, but also when you think about the trade-in, we have seen trade income in at a pretty good clip during Q1 and nothing that -- nothing shows us so far in Q2 that has slowed down. And depending on where the macro environment goes, it should be very conducive to further trade in possibly as we move forward.

And then lastly, what we're working on right now, as you would imagine, from Dollar General is what does that future look like? And that is how do we retain this trade and consumer that we've been blessed with, if you will, over the last couple of quarters and how do we continue to keep them. So that's being worked on as we speak. We've got a nice playbook for that. but we want to make sure we continue to work that. And then lastly, I want to also talk about Project Elevate and renovate because they are 2 good drivers for that comp in that mature store base. And so as Kelly talked about, we see those 2 adding to our top line as we move through this year. And the great thing is accelerating them as far as getting done. So that most of that work is pretty well complete by the end of Q3 so that we can take advantage of that longer term. And then the last thing I think that we want to make sure we concentrate on is our ever-growing both our DoorDash partnership and our delivery partnership with now over 3,000 stores as of now up and running on delivery. We feel good about that. That's jumping up from just a couple of hundred at the end of Q4 of last year. So stay tuned. I think there's a lot to like, but there's a lot of year left, and we're squarely focused on delivering that.

Yes. And just to your markdown question, I would say it's really in line with our anticipation. So the increase on a year-over-year basis is really due to promotional activity. Now some of that's going to be related to the store closures that took effect in the first quarter, so a little bit outsized from what we would expect to see for the rest of the year. I think the good news here is we did get most of those promos covered. And so what you're seeing ultimately show up in the increase on the gross margin rate has a lot to do with the 61 basis points of shrink improvement that we saw. So from a promotional standpoint, we're expecting kind of normalized rates to last year. If for some reason, something changes and the outlook, obviously, we'll change with it, and we'll do what's right for the customer.

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

To what extent is Dollar General either willing or needing to make further investments in price in wage rates in order to sustain the comp momentum and I'm sure that it's not just a short-lived gain? And how do you factor that into the guidance? And how do the returns on these investments compared to the returns that you're now seeing on new stores, we do appear to be declining from what was 20% to now around 17%.

Yes, Michael, thank you for the question. I would tell you that, first of all, we're happy with the investments we've made over the last couple of years on both hours in our store and wage rates in our stores. At this point, again, we feel comfortable. We don't see a need to go outside of where we are today. And a lot of that is evidenced by a few things. One, what our employees are telling us through turnover and through our -- the pieces that we put in front of them that allows feedback to come back up to us. So we feel good about that, but also what the customer is seeing. And the customer is seeing a lot of good things at store level. And as we all know, a happy employee then translates into better store conditions and sustained store conditions. So I feel good about those investments.

What we've done now, Michael, is quite frankly, pivoted from those labor investments to now investing back into the mature store base with Project Elevate, renovate a lot of what we're doing to ensure that the physical plant is taken care of. as well as getting the freshest merchandising thoughts and execution inside of our stores. So that's where that has now moved, which I think is very prudent and appropriate. As it relates to price, we feel very comfortable. In my prepared remarks, we're right where we believe we should be on an everyday price basis. I've been here quite a while, as you know, almost 17 years now.

And I tell you I feel as good about my everyday price, as I always have. And we continue to watch that each and every week that goes by not just quarter. So we're very, very diligent to ensure that. Keep in mind, too, Michael, that we're probably 1 of the only retailers that can say this at this point, and that is we continue to invest in that $1 price point, and I would call it more and more, it's elusive out there, if you will, as far as trying to have that $1 price point. But we have over 2,000 items at or below price inside of our store, which when you look at it, equates when you only have about 12,000 items it equates to a nice percentage of your total inventory.

So we continue to foster that, which we believe is the right thing on price for our consumer, especially as she gets closer to the end of the month when that money runs out. So we continue to watch that. And I believe the environment overall on a promotional basis is about where it was in Q4. So we don't see that accelerating at this point, but we'll continue to watch as we move forward, depending on what tariffs do and where that consumer is. And we've always said, we reserve the right to be there for her if need be. But as Kelly indicated, we'll let you know if something changes.

Yes. And just around the new store piece. So we still feel really good about the IRRs on our new stores. Real estate investments are absolutely the best use of our capital. But as Todd talked about just kind of shifting those investment dollars, we're really excited about doing that with Project Elevate and Project renovate. And the long-term financial framework that we laid out last quarter assumes that we get more sales contributions from those mature stores. which we think will be benefited by these programs. And frankly, it's just a great way to leverage our current infrastructure. And so we're excited about the increase in these projects. including all of the expanded investment in our mature stores, as we talked about and just think this is a great allocation of capital, and it moves us towards just achieving those mid- and longer-term goals that we laid out.

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

Todd, as you think about margins reexpanding because your margins are depressed and I think you said [ 6% to 7% ] by 2028. How important is getting to the 3% comps in order to get there? It feels like your back to basics is working and putting less pressure or opening less new stores could be helping not hurting. And then separate unrelated, can you just tell us, Kelly, the shrink benefits that you got this quarter? Does that run rate can that get better from here? Or does that hold? Is that run rate, we hold that for the rest of the year and you get benefits year-over-year, but you don't step up from the rate that you've gotten to accrue in quarter 1.

Yes. Simeon, thanks for the question. And yes, we believe that a healthy traffic and top line is imperative. 3% might be a little strong level. We believe that a sustained comp over 2% gets you to where you want to be. But we always strive for more, and that's why that 2% to 3%, we felt very good about talking about in that long-term framework that we put out there. But I would say that overall, we can and should be able to deliver longer term on those pieces. Now there's a lot in front of us over the next few years. But I would tell you, this team is squarely focused. You could see the momentum building as we left Q4 of last year. You can see it now in these results in Q1.

And I would tell you that there's nothing in front of us that would say that momentum slows down. If anything, it starts to pick up steam as we get Project Elevate and Renovate in that flywheel that Kelly talked about as well as our non-consumable initiatives. That is a key because I think not only the 2% to 3% comp but also the composition of that comp is important. and us moving the needle on our non-consumable or discretionary areas is vital. And I would tell you, the team has done a really good job there, and we feel good about where that's at. And then lastly, at least for this foreseeable future, that trade in helps that as well because that trading customer comes with a little bit more disposable income. So she's seeing the value as she starts to come into -- for the first time or on a lab space is back into our stores.

Yes. And on your shrink question, we were just really pleased with the progress, and it exceeded our expectations this quarter at a benefit of 61 basis points. We do expect that to continue as we move through the quarters for the remainder of the year. So excited about that. I think there's some other things we're excited about as well. One thing that we did see is that the stores that didn't have self-checkout are also seeing similar levels of improvement as the stores that did have the self-checkout removal.

And that's just really a testament to the operational excellence that's occurring in the stores and that higher control environment is starting to take hold in those stores. And then as you know, we have lots of other actions that we're seeing, so around inventory reduction in the SKU rationalization. As Todd noted, the improved retail turnover always helps the shrink incentive programs that we have in place. just the utilization of the higher shrink planograms. And then again, kind of just looking at that end-to-end process, mitigate any shrinks at any point of exposure in that end-to-end process. So all of those are going to continue to take flight. And as you know, it does take a full year to see those benefits show up in the P&L. And so shrink improvement should be the gift that just keeps on giving here and dollar general, we're not going to stop working on shrink. We're going to continue to work on shrink as we go forward. But right now, we like the progress that we're making, and we are well on our way to improvements that will allow us to hit that mid- and longer-term target.

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

Todd, just 2 related things. Number one, the trade-in, most of that has been organic, I think, to date, right, people finding you, is there a thought in tweaking marketing and customer acquisition, right, to do that less organically number one. And then number two, what's your current thought on pack size architecture in consumables, meaning small pack sizes in this environment is an advantage do you want to shift more or less to smaller pack sizes?

Thanks, John, for the question. I would tell you, I think overall, your assessment is correct on the trade-in. But I would tell you what we've really seen really in Q4 and Q1 in particular and everything that we've seen so far in Q2 also points to our DoorDash and our beginning of our delivery initiative as incremental customers. The incrementality on DoorDash has always been over-the-top phenomenal, but we're starting to also measure and see the incrementality on our white label or our delivery piece through DoorDash.

And with that, I believe those are both attracting a new and diverse customer base than what we normally have. And then as we continue to grow that, our media network points directly to what you're talking about. We're able to reach customers outside of our core with our media network as well. And that's been growing at a very nice clip. You heard in our prepared remarks, 25% increase. year-over-year. We believe that's going to continue to grow and should leverage a lot of those customers and reach those customers that we traditionally do not reach. And then as it relates to pack size, we've never given up on that smaller pack size matter of fact, even in the face of a lot of opposition through CPG and maybe other folks that talk about a smaller pack size I would tell you, it's exactly what the customer needs. I would argue, needs all the time, but especially where we are right now in her economic cycle.

She definitely wants to be able to afford those luxuries and/or just name brand products as evidenced by what she shops. But she needs it at a price point that she can afford. And at times, that means the ounces could be a little bit smaller than what you would find in traditional grocery or mass or even drug for that matter. But it really hits home for her because she can balance that with her monthly budget. And so more to come. We continue to work that. We work it hard. And I would tell you that our CPG partners over the years have come to realize that we were right all along when it related to what that customer wants at that pack size she needs. So we're the -- probably the leader there and the architect of that, and we'll continue to lead there.

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

I wanted to focus on damages. That's been one of the lingering issues here for some time. It seems like it could be at an inflection now. Can you talk a little bit more about what's changing how you're running the business differently now? And remind us of what that opportunity actually is. I assume that's both the sales and margin opportunity, but just any more thoughts there.

Yes. I can start that and then give it to Kelly to add any further color. Yes, I would tell you that as we continue to work all the levers around shrink and inventory, we will see continued success, we believe, in both shrink and damages. And let me explain real quickly. been around retail for 40 years almost here. And I would tell you that as goes inventory levels normally as go shrink. And as you've seen, our inventory levels continue to come down. And what I mean by that is that we are able to control inventory levels and get what the customer wants in these at the shelf when she needs it. And with that, inventory levels come down and then traditionally shrink will also follow that, but also damages.

Now we don't just rely on that. You heard from Kelly, along our back to basics work, and many of you heard me say this over the last 18 months or so. And that is we have gone back to really getting back to what we know how to do at store level and that is execute, execute, execute. We've got the game plan. We've had the game plan for years. We may have just moved off of it a little bit. And so what we've done now is really gone back and instituted what is tried and true around shrink control and damage control. Normally, shrink starts first and then damages follow. And that's why we believe that this is going to occur.

Now again, we're not taking it at face value. There's a lot of work being done right now. I won't go into all the detailed around controlling damages even further as we move through Q2 and into the back half of the year. And it's really about locking down more and more processes at store level to be able to ensure damages are well in hand, if you will, as we move through the back half of the year. So we feel good about the trajectory. We feel good about what's ahead but there's a lot of work. It's retail. And as Kelly indicated, shrink is always ongoing work and how I look at damages, it's really just known shrink, and we just need to control it the same way.

Yes. And I will tell you for this quarter, what we were pleased to see is that damages were relatively in line with our expectations. And while not big enough to call out, I'll say it was a slight improvement at basis points on a year-over-year basis, which is the first time that's occurred in a while. We are expecting for the full year that damages are flat to slightly favorable compared to 2024 as we make that progress. The size of the prize here is really what we laid out in our financial framework, which is 40 basis points of improvement as we think about the time of the midterm to longer term.

And some of those longer-term actions as we think ahead really are around continued improvement in inventory management, how we buy and how we allocate. We have done a lot of work and continue to do a lot of work on improvement and optimizing days of supply, which really helps to mitigate damages. The other piece is just the proactive investments that we're making in Project Elevate and Renovate. That helps mitigate not only the R&M side, but also as coolers go down, we have more damages. And so as we get stores optimized there, we should have fewer damages. And of course, we do have a team focused on damages as well. So we feel good about that path to improvement that we identified over that financial framework and think we'll achieve those 40 basis points in the mid- to longer term.

Our next question is from the line of Scott Ciccarelli with Truist Securities.

This is [ Josh Hong ] on for Scott. So it sounds like quarter-to-date comps have been solid so far with traffic turning positive, but it does look like you've had some heightened clearance activity lately. So just curious how much of a benefit to sales do you think that's been.

Yes, this is Todd. I'll answer that. No, we really haven't seen heightened clearance activity. We have some clearance around the stores that we closed. But to be honest, that really didn't add to the comp in any appreciable manner. So I would tell you, we feel very good about the construct of that of that comp, and we feel good about it. So what we really feel good about is well balanced between consumables and non-consumables. And as we indicated, all the work that we're doing in merchandising around the non-consumable categories, as well as that trade-in starting to come in at a heightened level. We believe that, that balance should continue as we move forward. But again, a lot of quarter left for Q2 and a lot of back half of the year. But everything lines up to show that we're well on our way there. And markdowns are well in check. But again, we know that this is a very tight environment for the consumer. So we'll be there for her when we need to be. But at this point, we see promotional activity, clearance activity at a very tame rate.

Got it. That's helpful. If I could just squeeze in a quick follow-up. So you had positive comps across all categories this quarter. So just curious how you're thinking about the sustainability of that, particularly on the discretionary side as we move to [ '25 ] here.

Again, all the work that we're doing around the back to basics work in merchandising, in particular, is really aimed at the balance of consumables and non-consumables. As you heard me talk about a few moments ago, not only the comp is important, but the composition of the comp is important, and we're squarely focused on that. through a lot of initiatives that are going on in merchandising in our discretionary areas, our partnerships that we talked about as well as even pop shelf as we looked in the quarter and we look as we move through Q2 and into the back half of the year, -- we see that continuing to do well. So it shows that we're on the right track with the right merchandise at the right value. But I think that's the key here is in a tight economic environment that our consumers are facing. It's going to be that fine balance, and it always is between value and convenience. And that value translates both from and into consumables and non-consumables. So squarely focused on both, and we want to be able to move the needle squarely on both of those metrics as we move forward.

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

Great. Todd, I wanted to ask about your thoughts around the competition and specific competitors calling out a willingness to lean into price potentially during times of uncertainty to drive market share gains and Dollar General's ability to respond to those actions and the willingness to get perhaps more competitive on price? And if so, which categories do you think that you could lean into a little bit more? And then secondarily, you talked in your prepared remarks about a balance between new communities and cannibalization as you think about building new units. Is there anything that's different about these new communities that you're going through moving into in terms of the demographics or cost structures?

Thanks for the question. I would tell you from a competitive standpoint, as I indicated, we see the competitive landscape at least right now on a price perspective, both everyday price and promotional activity to be about the same as it was coming out of Q4. heightened from years leading out of the pandemic. but definitely more in line with what we saw just prior to the pandemic. So when I look at it, it really isn't heightened from what normality looked like. The pandemic sort of drove everything be abnormal in many instances. So I think we're living right now in a pretty normal environment. But we've got great competitors out there. We've been competing with mass drug and grocery for our full existence of 85-plus years now and going.

And I would tell you that I would say in my 17 years here, we are as well positioned today on an everyday price that I've seen. And our promotional activity is well in line for where we thought it would be. But we always say, because we're usually the leader here is that the consumer needs us to heighten that activity, we will do so. But we just don't see a real need at this point to get -- to move a lot further into that promotional cadence. But as we continue to watch the landscape, we know tariffs could play a piece of this. We'll continue to watch it very carefully.

But to answer your second part of that first question, we believe we are well positioned to be able to do that. And the reason being is that we're a very large company. We are in the top 5 with most CPG companies in the United States as far as their volume and their hit parade. And with that, they are very willing to work with us and our customers to ensure that they continue to move the units that they need to move. And that usually translates into better prices for the consumer if it needs to be. And normally, CPG levers that up pretty well. So more to come. We're in a great position to be able to do that as we go forward.

And then lastly, on your second part of the question on new communities versus existing. I would tell you that when we talk about new communities, it really is still in our heartland, but where there's more white space than what we have normally looked at in the last couple of years. We have a strategy in the last couple of years of intentionally cannibalizing ourselves to ensure we took advantage of of great real estate out there. Well, when you think about that and think about how well penetrated we are in many of these areas, we took advantage of most of those opportunities over the last few years.

And so this now has led to where we can go further from our stores in states that we operate in today in a very meaningful manner. And understand how to operate in. And -- but yet not cannibalize the store as much. So it's really distance from existing stores that we're working from versus new states or states that were less penetrated in since we're pretty much in every lower [ 48 ] at this point. It's really about a distance from our current locations and reducing that cannibalization. We think we're in a good position to do that and off to a good start in Q1.

Ladies and gentlemen, this concludes our question-and-answer session. It also concludes today's presentation. We thank you for your participation, and this will conclude today's teleconference.