Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Second Quarter 2015 Earnings Call. Today is Thursday, August 27, 2015. [Operator Instructions] This call is being recorded. [Operator Instructions] Now I would like to turn the call over to Ms.

Mary Winn Pilkington, Vice President of Investor Relations and Public Relations. Ms. Pilkington, you may begin your conference. .

Thank you, Brandy, and good morning everyone. On the call today are Todd Vasos, our CEO; and John Garratt, our interim CFO. We will first go through our prepared remarks and then we will open the call up for questions. Our earnings release issued today can be found on our website at dollargeneral.com, under Investor Information, Press Releases..

Let me caution you that today's comments will include forward-looking statements about our expectations, plans, predictions and other nonhistorical matters, such as our 2015 forecasted financial results and capital expenditures, our planned fiscal 2015 and 2016 operating and merchandising initiatives, 2015 and 2016 store growth and prototype initiatives, our capital allocation strategy and expectations and expectations regarding future economic trends..

Important factors that could cause actual results or events to differ materially from those reflected in or implied by our forward-looking statements are included in our earnings release issued this morning, our 2014 10-K, which was filed on March 20, 2015, our 2015 second quarter 10-Q filed this morning and in the comments that are made on this call.

We encourage you to read these documents. You should not unduly rely on forward-looking statements which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call..

Now it's my pleasure to turn the call over to Todd. .

Thank you, Mary Winn. And thanks for everyone joining the call today. This morning, we announced our results for the second quarter of fiscal 2015. Once again, we delivered strong financial performance for the quarter.

I believe we have further opportunity to take significant steps to better execute our initiatives to serve our consumers and build on our strong foundation for future growth..

I am excited to say we have strengthened our leadership team with Jeff Owen, EVP of Store Operations and Jim Thorpe, EVP and Chief Merchandising Officer, rejoining Dollar General. Both Jeff and Jim have a proven record of driving results at Dollar General and know our company and our consumer extremely well.

Getting this team back together should strengthen our ability to move at an accelerated pace..

With that, let's now turn to our results for the second quarter of 2015. Second quarter sales increased nearly 8% to $5.1 billion. We received -- we've delivered, excuse me, same-store sales growth of 2.8% for the quarter. Same-store sales started out strong in May with June being weaker and sales strengthening in July.

It is my belief that this was reflective of the weak overall U.S. retail sales report for June and mirrors what you have heard from some other retailers..

Sales per square foot reached a record $225. For the 30th consecutive quarter-over-quarter, we increased both our customer traffic and average ticket. Gross margin expanded by 36 basis points to 31.2%, which follows our strong first quarter margin performance. For the quarter, diluted earnings per share increased 14% to $0.95.

During the quarter, we returned $265 million to shareholders through the repurchase of 2.6 million shares of common stock and the payment of a quarterly dividend..

Given our performance for the first half of the year, we are reconfirming our full year financial outlook. Our current expectation is that same-store sales will likely be closer to the lower end of our range of 3% to 3.5% growth. EPS remains in the range of $3.85 to $3.95..

We continue to grow transaction and item units in syndicated share data for the quarter. We experienced consistent mid-single-digit share growth in both units and dollars for the 4-, 12-, 24- and 52-week periods..

With that, let me now turn to an update on our key initiatives. As we shared with you last quarter, we are making targeted labor investments to grow market share in a competitive environment while providing for positive financial returns.

The labor hour investment in this select group of stores is designed to ensure we deliver on our customers' expectation in more competitive markets to enhance our in-stock position for a more convenient shopping experience.

Our goal is to further reduce the truck to shelf time for merchandise in these stores, providing our consumer with the right product, at the right time, at the right price..

For each phase, the store operations team has a specific metric and timetable for determining the financial return criteria for achieving results, based on a similar 2014 test and learn program. Currently, we have completed the first of 3 phases of the labor investments.

Our Phase 1 stores received the incremental labor hours during the second quarter. I am pleased to report that our Phase 1 stores are delivering on our return expectations. Specifically, the key metrics of same-store sales, transactions, average basket and consumer satisfaction scores are all showing significant improvement.

I believe these strong results are driven by a notably better in-stock position post the incremental store investments. With these solid results, we plan to accelerate our implementation of Phases 2 and 3 in stores in the second half of the year..

The second investment in labor comes from the realignment of our store operations management structure to optimize the scale of our divisions, regions and districts to improve accountability and maximizing training and teamwork, all while driving stronger, more sustainable results.

We have reduced the time our district managers spend driving so they can invest more time mentoring and coaching our store managers on developing and strengthening their teams. These changes have been in place since February. We expected that, over time, this would help both our consumer satisfaction and store manager turnover.

We are pleased to see signs that this initiative is paying off. Our customer satisfaction scores are improving, and we are approaching our fourth consecutive month of declining store manager turnover rates..

Further, we are moving forward with a number of inventory management initiatives. For example, our sky-shelf program will be completely rolled out across the chain by the end of the third quarter to allow for placement of inventory directly above the respective categories.

This allows our teams to get product out of the back rooms to facilitate improved stocking and ultimately, drive labor efficiencies. Already, we are seeing encouraging results with our receiving room inventory down by about 20% based on the most recent store inventories..

During the third quarter, we anticipate concluding our multiyear rollout of our enterprise resource planning software for our supply chain. Our new supply chain solution provided by our vendors, Symphony EYC, is replacing our legacy system, which has limited capabilities to support our growth.

This technology platform represents a significant improvement with enhanced integration to allow for demand forecasting from vendor to shelf. Going forward, our new system is scalable to support our growth and configurable to support changes in our business.

Over time, we believe this project will benefit our inventory levels at the DCs and in the stores and our allocation of merchandise on a store-by-store basis..

Our overall in-stock position on the shelf should improve as well. This is a significant investment that will allow us to better service our stores and provide much better visibility into our business..

On a combined basis, we believe these labor investments and inventory management initiatives are significant steps to improving our in-stock position, which is a critical component of our overall customer satisfaction and a driver of sales performance..

On the merchandising front, we had positive same-store sales growth across all categories in the second quarter. Growth was generally balanced across consumables and non-consumables. This represents the sixth consecutive quarter for improvement in our non-consumable categories.

Strength in consumables was driven by candy and snacks, tobacco and perishables. In addition, we had broad-based strength across seasonal and home. Our ladies and accessory departments within the apparel group continued to exhibit strong performance, comping above the company average..

Affordability continues to play a key role as we expand SKUs across the store at the sweet spot of $1 to $5. For the second quarter, nearly 50% of our consumers' baskets contained at least one item priced at $1, and these baskets grew faster than our overall transactions..

Shrink improvement has been and continues to be one of our largest gross margin opportunities. We remain committed to reducing our shrink at store level. For the quarter, we are extremely pleased with our shrink improvement.

This progress was broad-based with shrink declining in 70% of the product departments and approximately 70% of our regions improving year-over-year based on store inventories performed so far this year. Going forward, our teams continue to be focused on leveraging our defensive merchandising tools, technology and training to reduce shrink..

Turning to the second half of the year, including the holiday season. We are capitalizing on our consumer insights to strengthen our merchandising offering across product categories. In turn, this will be supported by a robust print and digital marketing calendar. We continue to capitalize on new ways to wow our consumers.

We are focused on expanding high-opportunity categories and giving our consumer the trend-right products she wants at affordable prices..

For instance, we know licensed products resonate with our consumers as they are on trend and communicate value. As a result, we are broadening our reach across categories with more impactful licensed products. At the same time, affordability is as important as ever to our consumers.

For 2015, more than 40% of our holiday seasonal assortment is priced at $1..

From a real estate perspective, we remain disciplined and focused on financial returns. We continue to see our new store productivity at around 85% of our comp base, all while driving strong returns. We remain very optimistic about our new store outlook for 2015 and our pipeline is full..

The Dollar General stores in our 3 new states of Maine, Rhode Island and Oregon, continue to ramp up nicely. We have reduced the capital investment required for remodels, while also driving strong sales lifts of 4% to 5% and an improved return on investment in excess of 200 basis points..

In total, the team has already executed more than 1,000 projects across new store openings, remodels and relocations. This represents around 8 projects a day. The real estate team has continued to build upon its progress for the 2016 pipeline. The planned growth in selling square feet of about 7% translates to approximately 900 new store openings.

Our development pipeline is over 80% complete for planned 2016 store openings, and we expect to be 100% complete by the fourth quarter. Our strong track record of delivering exceptional returns in our new store program gives us confidence in our model going forward..

Now let me turn the call over to John. .

Thank you, Todd, and good morning everyone. As Todd has taken you through the highlights of our second quarter, I'll share more details on the rest of the financial results and our outlook..

We are pleased with our second quarter results given our strong gross margin expansion and our SG&A performance. Gross profit for the second quarter was $1.6 billion or 31.2% of sales, an increase of 36 basis points from last year's second quarter.

As compared to the prior year, the most significant drivers were higher initial inventory markups, improved inventory shrink rate and lower transportation costs. Partially offsetting these improvements to gross profit were increased markdowns..

SG&A expense increased by 9 basis points over the 2014 period to $1.1 billion or 21.8% of sales in the second quarter. Using disciplined cost management, we were successful in mitigating our SG&A deleverage.

The SG&A increase was primarily attributable to higher store asset impairments, incentive compensation, repairs and maintenance and fees associated with the increased use of debit cards. Our effective tax rate for the quarter was 38%..

Moving now to our balance sheet and cash flow. At quarter end, merchandise inventories were $3 billion, up 2.7% on a per-store basis. Year-to-date, we generated cash from operations of $557 million, an increase of $70 million or 14% compared to the same period last year. Total capital expenditures were $247 million..

During the quarter, we repurchased 2.6 million shares of our common stock for $200 million. We also paid a dividend of $0.22 per common share outstanding, totaling $65 million. Since the inception of the share repurchase program in December 2011, we have repurchased over $3 billion of our common stock.

We currently have a remaining authorization of approximately $489 million. We remain committed to our disciplined capital allocation strategy. Our first priority remains investing in new stores and the infrastructure to support our growth.

We aim to create lasting value for our shareholders through anticipated quarterly dividends and share repurchases, all while maintaining our investment-grade rating and managing to a leverage ratio of approximately 3x adjusted debt to EBITDAR..

Turning now to guidance. We are reconfirming our financial guidance ranges for 2015. Details of our guidance are included in our press release. Highlights include top line sales for the year are expected to increase 8% to 9%. Expectations for overall selling square footage growth remain at approximately 6%.

And as you model out the third quarter and fourth quarter, please keep in mind that the day of Halloween falls into our fourth quarter of 2015 as compared to our third quarter of 2014. We anticipate this could have a modestly negative impact in the third quarter due to the year-over-year comparison.

For the year, same-store sales are expected to increase 3% to 3.5%, with the expectation that it will be closer to the lower end of our range. Our expectation for diluted earnings per share remains $3.85 to $3.95 for the year..

As our long-term track record demonstrates, Dollar General is well positioned to serve our customers in a wide variety of economic conditions and in turn, deliver strong results for our shareholders over time..

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

Thank you, John. As I approach the conclusion of my first 100 days as CEO, I am as excited as ever about the opportunities ahead of us at Dollar General. I feel great about the team that we have in place, and I am confident that Jeff and Jim will play an important role in Dollar General's long-term success.

The team is energized and excited as we look to help our consumers Save time. Save money.

Every day!.

Looking ahead to 2016, the team is focused on driving profitable sales growth. We are deep into the planning process for this coming year. While it's still early, I would like to share with you some of our preliminary initiatives..

A new store prototype will be rolled out in 2016 for all new stores, relocations and remodels. The format will allow for a more customer-friendly shopping experience. And in this prototype, the consumer will be able to and have faster, more convenient checkout, an attribute that is a high priority for our core consumer.

We have value engineered the design to be capital-efficient and easier to operate for our store teams. Given the early results from our tests, we are encouraged about the prototype..

We have a significant opportunity to increase our cooler penetration across our store bases, perishables, drive trips and basket size with our consumer as she looks for a quick meal solution or a fill-in item. Across the chain, a basket with a perishable item is nearly 50% higher than the chain average.

This is a big opportunity that we know how to capitalize on as we have already increased the cooler count on average by just over 50% since 2008..

More and more our consumer is looking to DG for her health and beauty needs. Based on our customer insights, we will look to expand our offerings across segments, such as hair care, cough and cold and over-the-counter meds, skincare and nail care. We are well positioned to capitalize on this trend given our brand offerings and price relevancy..

Our ongoing affordability initiative will be front and center with the new refreshed approach. Our underlying principles are to keep the business simple, but move quickly to capture opportunities, control expenses and always be a low-cost operator..

All in, 2016 is shaping up to have meaningful initiatives to drive our performance. I look forward to sharing more details about our plans as we move forward..

Our long-term commitment to growth and shareholder value are unchanged. We have a business model that is proven and resilient. Our team is energized to seize growth opportunities.

Our business generates significant cash flow and we are in a position to invest in accelerated store growth while continuing to return cash to shareholders through consistent share repurchases and dividends..

My personal thanks and gratitude go out to all of the 112,000 Dollar General employees that fulfill on our mission of serving others by providing our consumers with convenience, value and service every day..

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

Okay. Brandy, we'll go ahead and take our first question, please. .

Your first question comes from Matthew Boss of JPMorgan. .

So Todd, can you talk to some of the drivers of the top line reacceleration in July, maybe what you've seen in August? And then more importantly, larger picture, just what's the best way to think about the lower gas prices, the wage increases? Have you seen any impact, and just the best way to think about it?.

Yes, Matt, sure will. When we looked at our sales, it really did mirror I think what the nation saw at retail out there.

What we saw was, once we got through the month of June and into July, the weather patterns normalized, the heat returned and those torrential rains in Texas and Oklahoma and other areas subsided, and we saw a return to a little bit of a normal pattern and where our consumable and non-consumable businesses both did very well as we moved into the weeks of July to the end of July.

So that's what gives us confidence in our guidance for the full year in sales because we've seen that our sales are -- have rebounded from that dip in June.

And to be honest with you, I think it's way too early to have seen, and we really haven't seen any indication that the consumer is spending anything more because she has additional wage money in her pocket.

But again, our core consumer is a little different in that before she starts to spend, she really needs to have confidence and see a sustained ability that income will continue to come her way. So she's a little bit slower on pulling the trigger on spending a little bit more money. .

Great. And then just a follow-up.

As we think about gross margins, so 2 quarters of pretty healthy expansion here, beyond thinking about the tougher back half comparisons, what's the best way to think about gross margins on a multiyear basis? And any headwinds that would prevent continued expansion as we think beyond this year?.

Well, we do feel great about the margin expansion in the first half with 45 basis points of growth in Q1 and 36 basis points in Q2. And as we look at it, it's very broad-based as we've utilized many levers. We continue to reduce shrink and see opportunity for further improvement there.

We continue to grow our non-consumables business, which helps our mix. We've had 6 consecutive quarters of growth with non-consumables. And we continue to effectively manage the other levers, including category management, private label and foreign sourcing. As we look to the back half of the year, we don't see this structurally changing.

We do see it moderating somewhat, and do bear in mind that we also always reserve the right to invest in EDLP as needed to drive units and transactions. .

Your next question comes from Dan Wewer of Raymond James. .

So Todd, when we saw -- been out visiting stores, visiting competitors, and one thing that we've seen is a lot of Family Dollar stores that are closing, as they're planning to transition to the Dollar Tree brand. I'm sure that you're giving attention to your stores that are adjacent to see how they perform after they make that change.

Are there any insights that you can give us?.

Dan, I think it's way too early to really know exactly what's going on. I think it's fair to say with the transaction closing in July, it's in the infancy stages. But what we're squarely focused on is controlling what we can control. And we are always out there looking to capitalize on opportunities as we see them.

But I am encouraged on the labor front where we have invested in labor in some of our stores where the product is getting on the shelf faster. And I can tell you that all of our consumer work in these stores are showing that the consumer is seeing the difference inside of our stores with our in-stock rates increasing.

So we feel very, very confident that in any way that we can capitalize, we will as we go forward. .

And then just as a follow-up. In your prepared comments and talking about Jeff and Jim coming back to the company, you used the phrase, getting the team back together.

One of the questions we've been getting from a lot of investors, why did they leave to begin with a couple of years ago? And what has changed that lead them to resume their career at DG?.

Yes, while I can't exactly tell you why they left, because I'm sure they had their own reasons, I think the interesting thing is that they saw an opportunity, as I do, here at Dollar General and returned.

And really, what I'm excited about is that return, because we have all worked together for many years prior to them leaving, and they know the play book, they know our customers, and they know how to move quickly and drive profitable sales growth.

So we feel very confident that in the quarters and years to come, they'll be huge contributors with the rest of the executive management team. .

Your next question comes from John Heinbockel of Guggenheim Securities. .

Two related questions, I think, Smart & Simple.

Where do we stand? And how much do you want to expand that, or expect to expand that over the next, I don't know, 1 year or 2 or 3? And then DG Market, now that you are in the top spot there, is it still -- do you kind of still look at that as an experimental lab? And are you learning a lot that helps you against Aldi and Save-A-Lot?.

One, driving top line sales giving the consumer a great value with expanded grocery and perishable; but also, because of that test bed that it provides the rest of the chain. So we feel good about it. .

And then as a follow-up to that. If you are going to add more Smart & Simple, do you cut SKUs and do you cut, maybe, branded SKUs? Or you just have less facings for what's out there? And then I assume, it would be nice to put traffic generating perishables in.

But I assume you're not going to play around with produce because you can blow yourself up pretty good expanding that, is that fair?.

Yes, that is very fair to say. Right now, we don't have anything on the horizon as far as the perishable side. But you know what, we're always looking. Again, in our market stores, perishables play a pretty important role in those, and we're learning a lot about that fresh side of the business on perishables.

But right now, no big plans to do anything there. As it relates to -- back to Smart & Simple, I think the best way to look at Smart & Simple for us is that what it really provides us is, and the consumer is, that it provides that affordability. And then for our consumer, it gives her trial. And then from the trial, she moves into acceptance of an item.

And then she trades in or trades down, so I think it's an important piece. Now as we start to put more and more of these Smart & Simple items on the shelf, I think it's fair to say that something has to go. And the great thing about Dollar General is we're very disciplined in our category management approach.

So I can tell you, John, that what we decide to eliminate to put in Smart & Simple will be the exact right decision for our customer at Dollar General. .

Your next question comes from Peter Keith with Piper Jaffray. .

Could you just give us a perspective on the comp guidance range now it's at the low end, was it simply a result of a slow June? Or is there something that's maybe not up picking up here as we're getting into the back half of the year?.

John, I think you look at it, we're very pleased with how our second quarter ended up. We've delivered nearly 8% revenue growth and 14% EPS growth. So we feel very strong about it. And that's what gives us the opportunity, Peter, to work and look at the back half of the year and our full year guidance.

And it gives us the confidence that we'll hit that range, that lower end of the range. .

Okay. Maybe, attributing [ph] the question to John. Historically, the company talked about leveraging expenses at 3.5%.

I was wondering, with some of the labor investments coming on the back half of the year and the pickup in the store growth next year, does that leverage point begin to move up for the next couple of quarters?.

Yes, you're correct. The SG&A leverage point has been and is around 3.5%. What you will see as you move into the back half as we do accelerate our targeted investment in labor, you will see some deleverage from that on the front end.

This pays back, provides a great return in the longer term, but it does provide some deleverage to SG&A as it takes a couple of months, couple of quarters for it to pay back. .

And maybe you're not comfortable talking about 2016, but just on that store growth dynamic, too, next year.

Should we be thinking about that as well as another point of near-term deleverage?.

We'll be coming back to you later with 2016 guidance later in the year. But right now, we're comfortable with our guidance for this year and to model and see this labor investment as a near-term impact that will provide great returns, longer term. .

Your next question comes from the line of Scott Mushkin of Wolfe Research. .

I wanted to kind of go down the same path. I think I asked this last time and the last person was asking questions just about, as we think of '16 and expenses, I know you guys said you're deep into planning, but labor across your companies is becoming an issue as the labor markets tighten up.

Then of course, we have the overtime rule changes being proposed by the government, look like they are going to come in. So I specifically want to understand a little bit about next year and labor expenses and how you guys are looking to maybe offset some of this pressure that seems out there. .

Well, Scott, it's still a little early with a few of the things that are out there. Obviously, as we said before, we will always in markets pay a competitive wage to attract the right people and retain the right people. So we have been doing that for years, and we will continue to do that in '16 and beyond.

But it is pretty early on a few of the fronts, especially the non-exempt and overtime legislation that's out there, it's still in comment period. So we're waiting to see exactly how that affects us. But as you can imagine, only our store managers are exempt today within our store from a salary perspective.

So while it will affect us, it will be -- also an effect on everyone else in the marketplace. But I think again, it's still a little early, but rest assured, we are watching it very carefully. .

Do you actually think maybe, since you guys have done a lot of work, that it's an advantage to you just because it's just your store manager? Or should we not think of it that way that it's just going to affect everybody and you included, or do you think maybe it affects you guys a little bit less?.

Yes, I think, for right now, again because it's so early, I would think about it, it's going to affect everybody. But as this becomes clearer, as time passes, we'll have a better idea and get back to everyone on it. .

Okay. And then, not to kind of keep coming back to the sales trend. I know you've talked about June was soft, July picked up, pretty much everyone we've been talking to about August is saying things are a little, I guess, queasiness about August, and where that's really going to come in, we're not done with it officially yet.

But it does seem like we kind of just go up and down, up and down, and we really are running in place.

I mean, is some of you cautiousness -- cautious about the back half, maybe sales are going to be a little harder to come by even though gas prices are down, or am I reading too much into that?.

Yes, I think the way to look at it, Scott, is that the calendar shift has caused a little angst probably out there with the consumer only from the standpoint that Labor Day has been pushed back a week, as you know. And most states with schools, they sort of key off of that Labor Day date.

So in a lot of cases, what we've seen is that back-to-school has been pushed back in the calendar a little bit. Now the great thing here at Dollar General that we've seen is that where school is already started, our back-to-school comps are hitting and/or exceeding our expectations. So we feel very good about that.

But we have contemplated where we think we are here in August, and where we'll be at the end of the third quarter, and we've embedded that in that guidance that we've given you. We feel pretty confident about that. .

Your next question comes from David Mann of Johnson Rice. .

Question about the IMU strength that you've been seeing.

Can you give a sense on your outlook for whether that would continue in the second half? And any expected benefits from the one devaluation that might help that into '16?.

Sure, sure. We don't see anything structurally changing in terms of the drivers from the first half in terms of them going into second half. In terms of the devaluation, there's no immediate impact. The payments to our international vendors are denominated in U.S. dollars to reduce volatility. Of course, we're monitoring the situation.

And this could translate to opportunity for lower costs down the road. .

And then as a follow-up.

In terms of what your comment about the holiday value offering, the 40% comment that you made, what does that compare to, let's say, for last year's holiday offering? And will your overall holiday seasonal investment, how does that compare year-over-year?.

Yes, we're, David, pretty bullish on that back half of the year and holiday because of all the work that the team has done on category management. That 40%, I could tell you that it is an increase over last year. And again, that it was because of the success of holiday of 2015 where we saw our consumers gravitating to that affordability piece.

So we've had a full year to make sure that we deliver on the strong affordability for holiday 2016, and we're pretty excited about the lineup that we have coming. .

Your next question comes from of Meredith Adler of Barclays. .

A question about real estate. I have one company now they're based in -- a neighborhood shopping center, but one company that's talked about lease costs going up.

Obviously, your real estate is different, but maybe you could just talk a little bit about the real estate environment? And first, in terms of availability? And second, in terms of cost?.

Sure, great question. We feel great about real estate. We have a phenomenal team that does a great job finding great sites while holding down cost. We have not seen a change and we've not seen a change to our great returns, we're still averaging about 20% returns on our newbuilds, and less than 2-year payback.

So no change to that, and we feel great about the pipeline going forward. It's a very robust pipeline. We're going to open 730 new units this year. And we are targeting about 900 new units next year. And we continue to see these new units perform at about 85% the comp base. And we continued to see them, as I said, deliver great returns.

So we feel very bullish about our returns going forward. .

And based on those comments, it sounds like there isn't anything in the environment that would make you want to accelerate the pace of growth in markets that are most expensive.

I don't actually know how many stores you have in California now, but either like California or the Northeast, is there anything that says, "Gee, we've got a window of opportunity now that might not last?".

Meredith, this is Todd. When we look at it, we are definitely looking at all opportunities that are out there. But as you know us very well, we always take a very measured approach on how we accelerate growth and where we accelerate it.

And rest assured, because of that discipline we have in our real estate model, that one, we're looking for every opportunity, but also on the second side of that, we're making sure that we do it very measured. So as we go out, that we continue to outperform our expectations when we open these stores. .

Your next question comes from Edward Kelly of Credit Suisse. .

So Todd, a question for you on the competitive environment, can you maybe just talk a little bit in terms of what you're seeing there? And I did you hear you guys say something to the effect of you reserve the right to invest in EDLP in the back half if necessary? Or are you seeing anything out there that leads you to believe that you may need to do something like that?.

Ed, I have to say that the environment is still very rational. And when we look out, we don't see anything that structurally -- where that changes. But as you know, any time that we see necessary to drive units, we will invest in price to make sure that we protect and grow our market share.

So while we don't see anything that's immediate, we are always looking at opportunities to deliver further value to our consumers. .

Okay. And then just one follow-up to something you mentioned on the call, you talked a lot about improving in-stocks.

Could you maybe just provide more color on sort of, I guess, historically, what you think the issue may have been if there was even an issue? And what you think you were leaving on the table from a sales perspective to give us some sense as to what we should be looking for in terms of the benefit going forward?.

Yes. The fun thing about retail is that there's always opportunity to get better out there. And in-stock is one of those for us that we can get better. We've done a good job over the years on in-stock, but there's always room to improve.

And we think that improving in-stock, and we've proven it with these labor investments that we've done here in the second quarter, that the consumer reacts very quickly to those in-stock pieces and she sees the product she wants on the shelf, and we deliver a great price every day, we just got to make sure when she comes in that it's there for her and she can pick it up.

So I think between the labor investments that we've made and the ones upcoming as well as our supply chain solution that I talked about, as that now starts to really get fully integrated into the system, it should as well help our in-stock position. So we've got, in my mind, nowhere but up to go on in-stocks. .

Next question is from Stephen Grambling of Goldman Sachs. .

I was hoping you could first clarify a little bit on the back half margin guidance. The reiterated range is embedding a declining EBIT margin.

Can you just walk through a little bit more the puts and takes between both gross margin and SG&A, and then I have a little bit of longer-term follow-up, if I can?.

Sure. As we look at the back half, as I mentioned previously, we do expect to continue to grow or expand our margins in the back half. But given the tougher laps we do expect that to moderate somewhat. On the SG&A front, as we've mentioned, we're investing in labor, and that's ramping up.

And while that does provide great returns in the long term, it does deleverage in the near term. So that would put some deleveraged pressure on SG&A in the back half on the front-end of that investment. .

And then as you think about the health of the consumer, I know you've been able to segment the base into a couple of different types. I'm wondering what are you seeing in terms of either spending from the trade-down consumer or the value-focused consumer.

Is there any different trends that you're seeing there that you can call out?.

Yes, Stephen, we still continue to see the trade-down consumer gravitating toward Dollar General, which is great to see.

Our core consumer, which obviously makes up a big piece of our overall sales and profitability here at Dollar General, while she feels a little bit better, it appears, financially, what she tells us, and we knew this going in, is that, it takes her a little longer to start spending because she has to feel confident that what she's seeing is sustainable in her budget.

And so it takes a little bit more time for her to let go of the purse strings a little bit more, but the great thing about Dollar General is, is that through our category management work and through our field operators that we have out there, our store managers and their staff, we can deliver a great product to her when she's ready to spend.

And I think we've proven that over the years. .

Your next question comes from Taylor LaBarr of Stifel. .

Just wondering if you could discuss the apparel category a little bit. That's obviously been a big driver of the shift in non-consumables over the last couple of quarters. That is going to be against a tougher compare for the next year.

Just wondering if this kind of mid-single-digit growth rate is the range we should expect, and if that's part of the more conservative gross margin guidance for the back half. .

Yes, Taylor, we're very proud of what the team has accomplished in apparel and in non-consumables in general. But also, our consumable business. We are -- when we look out in the guidance that we provided, we feel good about both sides of those businesses. As it relates to apparel, it is a key driver of profitability for us.

And we see that even through the back half of the year going into 2016, our teams have got great products lined up, great values for our consumer. So that we really see that year-over-year, we're going to see and continue to see increases in our apparel businesses. .

Okay, great. And then one follow-up actually on the private label brands' repackaging. Is that pretty much complete? I know you were doing that throughout this summer.

And then have you seen a mix shift towards those private label brands? I don't know if you can tease out any impact from the repackaging versus a focus on affordability more broadly, but just any comments there?.

Yes, private brands are really important to Dollar General, very important. So we watch it very carefully. We're essentially complete on our rebranding, the repackaging pieces of it. But as you expect from Dollar General, we're always trying to improve everything we do.

So we're now going back to certain SKUs that may not have performed like we thought and are now tweaking those. So we're in Phase 2, I would call it, of the packaging. And right now, we're pretty happy with what we see. And again, private brands, Smart & Simple and the Rexall brands for us are extremely important as we go into 2016.

So lot of emphasis being placed there, and we'll continue to see that grow for us. .

Your next question comes from Michael Lasser of UBS. .

How do you feel about the overall store standards, and how they've tracked over the last 4 quarters? These labor investments, these inventory investments would suggest that you've seen something in the business that perhaps has been slipping and you need to address them, perhaps that's an opportunity for some sales improvement, especially as you've seen the Phase 1 performance?.

Yes, when you look out across our store base and the beauty of Dollar General is we've got over 12,000 stores and working our way to 13,000 stores. And as you could imagine, we've got, in some areas, we've got better standards than others, and we're always working to make sure that we better our standards.

And the great thing with the labor investments that you've mentioned is that we've seen betterment, if you will, on both top line sales as well as store manager turnover rates going down, not only in those stores but across the chain. So we're doing something right here. And we think we're onto something.

And when you look at it, that's one reason we want to accelerate these labor investments as we get into Q3 and 4. As we go into the back half of the year, we think that there is a big opportunity for us.

And to be honest with you, by the end of Q4, we should be approaching about 1/3 of the chain with these new labor investments and additional hours in there. So we feel very good about going into fourth quarter and taking that into 2016 with us. .

And on the labor investments, you mentioned seeing a lift in sales transactions, a reduction in turnover, but you didn't mention profitability.

So are you finding that you're getting a suitable return for these investments from a profitability perspective?.

Yes, when you look at it, here at Dollar General, the great thing about the disciplines that we've put in place over the years, we do nothing here that doesn't have a return. I can guarantee you this has return metrics in place, and they are delivering on those returns. Now, is every store delivering? Perhaps not, but that's the beauty of us.

We look at it by store, and we either get those stores to produce or it we'll roll those off the labor investments, and reinvest those somewhere else. So we're squarely focused on making sure it returns. .

Okay. And one last quick question. As the environment does get better and your consumers release their purse strings a little bit.

How do you feel about Dollar General's ability to capture that incremental spend? What's the possibility that, that customer is going to spend maybe in the mass merchant channel as the gas prices, fuel is cheaper, maybe make it cheaper to drive a slightly longer distance?.

The -- when you look at the beauty of Dollar General and the value that we create for the shopper as well as the convenience that we have, you couple that with probably the strongest category management disciplines that you can see out there.

And then with our store managers and their store teams squarely focused, we feel that we're in a great position, if not some of the best positions out there, to capitalize when she starts to spend. And on top of that, we're always looking at other ways past the consumer to capitalize.

And anything that we see, we'll make sure that we get our fair share here at Dollar General. .

Our next question comes from Dan Binder of Jefferies. .

Talked a little bit about the in-stock opportunity.

I'm curious if you could comment a little bit about where you've been, what the goals are, and what you think that translates to in terms of a comp benefit if you achieve those goals?.

Yes, again, Dan, when you look at it, we've got opportunities just like everyone out there. And our opportunities, the nice thing about Dollar General, because of the disciplines we have, those opportunities that present themselves, we feel very confident.

And as we put programs in place, as we've done now with in-stock, we feel that we can capitalize quickly on it. While I don't want to give you the exact metric around it, rest assured that the focus, the attention and any capital that we're throwing at this will have a return. And we'll definitely make sure that it returns to the consumer.

And that's really what this is all about, is making sure that our consumer is satisfied when she leaves our store every time. .

I apologize if I missed this, but did -- are you able to quantify the Halloween shift between Q3 and 4?.

Yes, for us, we haven't really quantified it, but we know internally, obviously, what we expect on that Halloween Day. And because of our convenient nature as a retailer, the holiday is always late, right? So it's always those last 2 days, so the day before or the day of the event. So it's a significant piece of our business the day of the event. .

Our next question comes from Matt Nemer of Wells Fargo Securities. .

I wanted to follow up on an earlier question on the apparel category. Your sales growth slowed from about 10% last quarter, I think it was around 11% in the fourth quarter down to 5%.

Is there anything in particular going on there? Is it mostly a comparison issue?.

Yes, it is a little bit of a comparison issue. When you look at it, it was seasonally driven. And when we saw the return of the warm weather in the July month and now into August, we saw things normalize. We feel very good about where we are on a sell-through percentage rate, it is right on target. So we don't think there's anything structural there.

It was just a little bit of a blip. .

Okay. And then secondly, you mentioned the impact of markdowns to gross margin. And I think that was a fairly sizable headwind in the second quarter of last year. So I think, you had an easy comp on that front.

Can you just square that with your comments that the competitive environment has been rational?.

The markdowns were promotional driven and really ordinary course, nothing unusual with those during this quarter. .

Yes. And as you look at it, as far as the competition is concerned, we, again, really want to deliver value to our consumer. So where we think we need to invest in price, we do. And in some cases, it may come in the form of promotional. But the majority of our reinvestment in the price comes at an everyday low price value on the shelf. .

Our next question comes from Vincent Sinisi of Morgan Stanley. .

Wanted to ask about shrink. You guys mentioned it a few times throughout the call this morning. Sounds like you've been making or are continuing to make some nice improvements on that.

But can you give us a little bit more color around maybe some of the specific initiatives and some of the categories that you are doing it? It sounds like it's still is an opportunity going forward. Maybe even maybe with some of the things that you're doing on the labor investment front, that would be helpful. .

Yes, shrink continues to be one of our biggest gross margin levers that we have. And the team has been squarely focused over the past 12 to 18 months on reducing shrink.

And I can tell you that, that between the use of our tools that we have available to us, which I think are world-class, our defensive merchandising, and just the complete refocus at retail on shrink has given us the benefit that we're seeing. We don't see that slowing down.

Matter of fact, we are putting more ammunition and tools and abilities for our stores, our district managers to reduce shrink, and we'll continue to do that as we move through the rest of the year and into next.

The good thing about shrink, and the bad thing, quite frankly, but the good thing for us is shrink has a tail to it and anything that we work on now pays dividends down the road and into next year. So we feel good about where shrink is headed, and we'll continue to work it hard because it is a big, big opportunity for us. .

Okay. Maybe just a quick follow-up on the prototypes for the 2016 class of stores. Should we expect either just visually looking at the store or in terms of the level of investment that's going to be needed on a per-store basis with improving checkout, coolers, et cetera.

Can you give us any further clarity around that at this point?.

Yes. We're going to come back to you with a little bit more detail. But just to a tad bit of color, the store will visibly look different to the consumer. They will definitely see a difference as they walk in the store. The checkout area is a big, big difference and a departure from where we've been, but really is consumer-centric.

And I could tell you that all of the work that we've done around this and as you can imagine here at Dollar General, we don't do anything without bringing our consumers along with us. She loves that new front end, that new prototype. And the investments will come in areas like cooler expansion in other areas.

But rest assured that our team has looked at ways to pull cost, though, out of the build as well as the investments inside the box to help offset that. So we feel very confident in maintaining the returns that we currently see today as we go into our 2016 pipeline. .

Operator, I know we're at the top of the hour, so we'll go ahead and cut it off here. We may have left a few people in the queue, but Matt and I are around all day, so please give us a call. And thank you for joining the call today. That will conclude our call. .

Thank you. .

Thank you. That does conclude today's conference call. You may now disconnect..