Aug 27, 2015
Executives
Mary Winn Pilkington - Vice President of Investor Relations and Public Relations Todd J. Vasos - Chief Executive Officer & Director John W.
Garratt - Interim Chief Financial Officer
Analysts
Matthew Robert Boss - JPMorgan Securities LLC Dan R. Wewer - Raymond James & Associates, Inc.
John Edward Heinbockel - Guggenheim Securities LLC Peter J. Keith - Piper Jaffray & Co (Broker) Scott A.
Mushkin - Wolfe Research LLC David M. Mann - Johnson Rice & Co.
LLC Meredith Adler - Barclays Capital, Inc. Edward J.
Kelly - Credit Suisse Securities (USA) LLC (Broker) Stephen W. Grambling - Goldman Sachs & Co.
Taylor G. LaBarr - Stifel, Nicolaus & Co., Inc.
Michael Louis Lasser - UBS Investment Bank Daniel Thomas Binder - Jefferies LLC Matt Nemer - Wells Fargo Securities LLC Vincent J. Sinisi - Morgan Stanley & Co.
LLC
Operator
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.
All lines have been placed on mute to prevent any background noise. This call is being recorded.
Instructions for listening to the replay of the call are available in the company's earnings press release issued this morning. Now, I 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.
Mary Winn Pilkington - Vice President of Investor Relations and Public Relations
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 up 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 non-historical 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.
Todd J. Vasos - Chief Executive Officer & Director
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 delivered 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 transactions 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-week, 12-week, 24-week 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're 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 customer's 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 three phases of the labor investments. Our phase 1 stores received the incremental labor hours during the second quarter.
I'm 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 backrooms 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 vendor, 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 and candy and snacks, tobacco and perishables.
In addition, we had broad-based strength across seasonal and home. Our lady's and accessory departments within the apparel group continue 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 product 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 three 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 eight 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.
John W. Garratt - Interim Chief Financial Officer
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 cost, partially offsetting these improvements to gross profit were increased markdown. 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 generate 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 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 3 times 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 on 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 demonstrate, 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.
Todd J. Vasos - Chief Executive Officer & Director
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. Our 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 test, 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 consumers 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, skin care 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 fresh 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 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.
Mary Winn Pilkington - Vice President of Investor Relations and Public Relations
Okay. Brandy, we'll go ahead and take our first question, please.
Operator
Thank you. Your first question comes from Matthew Boss of JPMorgan.
Matthew Robert Boss - JPMorgan Securities LLC
Hey. Good morning, guys.
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.
Todd J. Vasos - Chief Executive Officer & Director
Yeah. 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 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 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 is a little bit slower on pulling the trigger on spending a little bit more money.
Matthew Robert Boss - JPMorgan Securities LLC
Great. And then just a follow-up.
As we think about gross margins, so two 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?
John W. Garratt - Interim Chief Financial Officer
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 had six 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.
Matthew Robert Boss - JPMorgan Securities LLC
Great. Best of luck.
Todd J. Vasos - Chief Executive Officer & Director
Thank you.
John W. Garratt - Interim Chief Financial Officer
Thank you.
Mary Winn Pilkington - Vice President of Investor Relations and Public Relations
All right, Brandy, we'll move to the next question, please.
Operator
Your next question comes from Dan Wewer of Raymond James.
Dan R. Wewer - Raymond James & Associates, Inc.
Thanks. So, Todd, when we saw, been out visiting stores, visiting competitors, 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 getting attention to your stores that are adjacent to see how they performed after they make that change. Are there any insights that you can give us?
Todd J. Vasos - Chief Executive Officer & Director
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'm 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.
Dan R. Wewer - Raymond James & Associates, Inc.
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?
Todd J. Vasos - Chief Executive Officer & Director
Yeah. Well, I can't exactly tell you why they left, because I'm sure they have 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 playbook, 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 executive management team.
Dan R. Wewer - Raymond James & Associates, Inc.
Okay. Great.
Thank you.
Mary Winn Pilkington - Vice President of Investor Relations and Public Relations
All right, Brandy, we'll go to the next question, please.
Operator
Our next question comes from John Heinbockel of Guggenheim Securities.
Todd J. Vasos - Chief Executive Officer & Director
Hey, John.
John Edward Heinbockel - Guggenheim Securities LLC
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 year or two or three?
And then DG Market, now that you're in the top spot there, 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?
Todd J. Vasos - Chief Executive Officer & Director
Yeah. Those are great questions, John.
On the Smart & Simple side first, affordability is still and will be and continue to be front and center here at Dollar General and Smart & Simple plays a huge role in that. We doubled the SKU count so far in 2015.
And we see that pace continuing as we go into 2016. It really does give our consumer that price point that's magical in a lot of cases of $1.
And even though some items are over a $1 Smart & Simple, it is a tremendous value. So, we see that brand growing and we see it as a price fighter to a lot of different disciplines out there across grocery and drugs.
So we feel very good about it. And again, remember, our consumer looks to us first for value and price and that's what we deliver with that Smart & Simple brand.
So we're very excited about it. As it relates to DG Markets, we continue to use DG Markets as a test lab, continue to learn in those stores.
But also the great thing is, is a lot of the learnings from DG Market, we apply into our Plus stores and our traditional stores. And quite frankly, some of the pieces that you'll see in our new store prototype in 2016 was generated from the Market store concept and the Plus concept.
So we still see the Market store as a real viable kind of a store for us because of a lot of things: 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.
John Edward Heinbockel - Guggenheim Securities LLC
And then as a follow-up to that, if you're going to add more Smart & Simple, do you cut SKUs, and do you cut maybe branded SKUs, or do 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?
Todd J. Vasos - Chief Executive Officer & Director
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 and the consumer is it provides that affordability. And then for our consumer, it gives her trial and then from that 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.
John Edward Heinbockel - Guggenheim Securities LLC
Thank you.
Mary Winn Pilkington - Vice President of Investor Relations and Public Relations
Great. Brandy, we'll move on to the next question, please.
Operator
Our next question comes from Peter Keith with Piper Jaffray.
Peter J. Keith - Piper Jaffray & Co (Broker)
Hi. Thanks.
Good morning. Thanks for taking the question.
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 picking up here as we're getting into the back half of the year?
Todd J. Vasos - Chief Executive Officer & Director
Yes, (sic) Peter, I think if you look at it, we're very pleased with how our second quarter ended up. We 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 lower end of the range.
Peter J. Keith - Piper Jaffray & Co (Broker)
Okay. Maybe pivoting (32:43) a question to John.
Historically the company has talked about leveraging expenses at 3.5%. So I was wondering with some of the labor investments coming on in 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?
John W. Garratt - Interim Chief Financial Officer
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 investments in labor, you will see some deleverage from it on the front end.
This payback provides great returns longer term, but it does provide some deleverage to SG&A as it takes a couple quarters for it to pay back.
Peter J. Keith - Piper Jaffray & Co (Broker)
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?
John W. Garratt - Interim Chief Financial Officer
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 the model and see this labor investment as a near-term impact that will provide great returns longer term.
Peter J. Keith - Piper Jaffray & Co (Broker)
Okay. Fair enough.
Thank you very much.
Mary Winn Pilkington - Vice President of Investor Relations and Public Relations
All right. Brandy, we'll move on to the next question.
Operator
Your next question comes from the line of Scott Mushkin of Wolfe Research.
Todd J. Vasos - Chief Executive Officer & Director
Hi, Scott.
Scott A. Mushkin - Wolfe Research LLC
Hey, guys. Thanks for taking my questions.
I wanted to kind of go down the same path. I think I asked this last time and the last person was asking questions about, as we think of 2016 and expenses, I know you guys said you're deep in the 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're going to come in.
So I specifically want to understand a little bit about next year in labor expenses and how you guys are looking to maybe offset some of this pressure that seems out there.
Todd J. Vasos - Chief Executive Officer & Director
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 2016 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 could imagine, only our store managers are exempt today within our store from a salary perspective.
So while it will affect us, it'll be also an effect on everyone out in the marketplace. But I think again, it's still a little early, but rest assured, we are watching it very carefully.
Scott A. Mushkin - Wolfe Research LLC
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?
Todd J. Vasos - Chief Executive Officer & Director
Yes. I think for right now, again, because it's still 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.
Scott A. Mushkin - Wolfe Research LLC
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 – there is 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're really running in place.
(36:46) I mean, is some of your 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?
Todd J. Vasos - Chief Executive Officer & Director
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 the 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 has already started, our back-to-school comps are hitting and/or exceeding our expectation.
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.
Scott A. Mushkin - Wolfe Research LLC
All right. Perfect.
Thanks for taking my questions, and it's nice to have the team back. So I look forward to working with everybody.
Thanks.
Todd J. Vasos - Chief Executive Officer & Director
Great. Thank you.
Mary Winn Pilkington - Vice President of Investor Relations and Public Relations
Thanks, Scott. Next question, please, Brandy.
Operator
Your next question comes from David Mann with Johnson Rice.
David M. Mann - Johnson Rice & Co. LLC
Yes. Good morning.
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 yuan devaluation that might help that into 2016?
John W. Garratt - Interim Chief Financial Officer
Sure. Sure.
We don't see anything structurally changing in terms of the drivers from the first half, in terms of we (38:30) going into the 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 cost down the road.
David M. Mann - Johnson Rice & Co. LLC
And then as a follow-up, in terms of 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?
Todd J. Vasos - Chief Executive Officer & Director
Yes. We're, David, pretty bullish on that back half of the year in 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 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.
David M. Mann - Johnson Rice & Co. LLC
Thank you and good luck.
Mary Winn Pilkington - Vice President of Investor Relations and Public Relations
All right. Brandy, we'll move to the next question, please.
Operator
Your next question comes from Meredith Adler with Barclays.
Meredith Adler - Barclays Capital, Inc.
Hey, guys.
Todd J. Vasos - Chief Executive Officer & Director
Hi, Meredith.
Meredith Adler - Barclays Capital, Inc.
Hey. 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 cost 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.
John W. Garratt - Interim Chief Financial Officer
Sure. Great question.
We feel great about real estate. We have a phenomenal team that does a great job of finding great sites while holding down costs.
We've not seen a change and we've not seen a change to our great returns. We're still averaging about 20% returns on our new builds and less than two-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're targeting about 900 new units next year and we continue to see these new units perform at about 85% the comp base. And we continue to see them, as I said, deliver great returns.
So we feel very bullish about our returns going forward.
Meredith Adler - Barclays Capital, Inc.
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?
Todd J. Vasos - Chief Executive Officer & Director
Yes. 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.
Meredith Adler - Barclays Capital, Inc.
Okay, great. Thank you very much.
Mary Winn Pilkington - Vice President of Investor Relations and Public Relations
Yes, everyone, we just are hearing there's a little bit of technical difficulty on the sound. So please bear with us, and we'll try to have our speakers speak louder.
All right. Brandy, we'll go to the next question please.
Operator
Your next question comes from Edward Kelly of Credit Suisse.
Todd J. Vasos - Chief Executive Officer & Director
Hi, Ed.
Edward J. Kelly - Credit Suisse Securities (USA) LLC (Broker)
Hi. Good morning, guys.
So Todd, my 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 hear you guys say something to the effect that you reserve the right to invest in EDLP in the back half, if necessary.
Are you seeing anything out there that leads you to believe that you may need to do something like that?
Todd J. Vasos - Chief Executive Officer & Director
Ed, I have to say that the environment is still very rational. And when we look out, we don't see anything that's structurally – where that changes.
But as you know, anytime that we see it 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.
Edward J. Kelly - Credit Suisse Securities (USA) LLC (Broker)
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?
Todd J. Vasos - Chief Executive Officer & Director
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.
Edward J. Kelly - Credit Suisse Securities (USA) LLC (Broker)
Great. Well, thank you, guys.
Todd J. Vasos - Chief Executive Officer & Director
Thank you.
Mary Winn Pilkington - Vice President of Investor Relations and Public Relations
All right. Brandy, we'll move on to the next question, please.
Operator
The next question is from Stephen Grambling of Goldman Sachs.
Todd J. Vasos - Chief Executive Officer & Director
Hi, Stephen.
Stephen W. Grambling - Goldman Sachs & Co.
Hey. Good morning.
I was hoping you could first clarify a little bit on the back half margin guidance. The reiterated range is embedding declining EBIT margin.
Can you just walk through a little bit more the puts and takes between both gross margin and SG&A and I have a little bit of longer term follow-up, if I can?
Todd J. Vasos - Chief Executive Officer & Director
Sure. As we look at the back half, as I've mentioned previously, we do expect to continue to grow or expand our margins in the back half, but given the tougher lapse, we do expect that to moderate somewhat.
On the SG&A front, as we 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 deleverage pressure on SG&A in the back half, on the front-end of that investment.
Stephen W. Grambling - Goldman Sachs & Co.
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 focus consumers.
Is there any different trends that you're seeing there that you can call out? Thanks.
Todd J. Vasos - Chief Executive Officer & Director
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 seen is sustainable in her budget. And so, it takes a little bit of more time for her to let go of the purse strings a little bit more, but the great thing about Dollar General 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.
Stephen W. Grambling - Goldman Sachs & Co.
Great. That's it for me.
Thanks so much.
Todd J. Vasos - Chief Executive Officer & Director
Thank you.
Mary Winn Pilkington - Vice President of Investor Relations and Public Relations
All right. Operator, we'll go to the next question, please.
Operator
Your next question comes from Taylor LaBarr of Stifel.
Taylor G. LaBarr - Stifel, Nicolaus & Co., Inc.
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?
Todd J. Vasos - Chief Executive Officer & Director
Yeah. Taylor, we're very proud of what the team has accomplished in apparel and in non-consumables in general, but also our consumable business.
When we look out in the guidance that we've 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.
Taylor G. LaBarr - Stifel, Nicolaus & Co., Inc.
Okay. Great.
And then one follow-up actually on the private-label brands repackaging, is that pretty much complete? I know you're 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 the focus on affordability more broadly, but just any comments there.
Todd J. Vasos - Chief Executive Officer & Director
Yeah. 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 a lot of emphasis being placed there, and we'll continue to see that grow for us.
Taylor G. LaBarr - Stifel, Nicolaus & Co., Inc.
Okay. Sounds great.
Thank you.
Mary Winn Pilkington - Vice President of Investor Relations and Public Relations
All right. Brandy, we'll move on to the next question, please.
Operator
Your next question comes from Michael Lasser of UBS.
Todd J. Vasos - Chief Executive Officer & Director
Hi, Michael.
Michael Louis Lasser - UBS Investment Bank
Good morning, Todd. Thanks for taking my question.
How do you feel about the overall store standard and how they've tracked over the last four 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.
Todd J. Vasos - Chief Executive Officer & Director
Yeah. When you look out across our store base and the beauty of Dollar General is we got over 12,000 stores and working our way to 13,000 stores.
And as you can imagine, 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 on to something. And when you look at it, that's one reason we want to accelerate these labor investments as we get into Q3 and Q4.
As we go into the back half of the year, we think that there's a big opportunity for us. And to be honest with you, by the end of Q4, we should be approaching about a third 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.
Michael Louis Lasser - UBS Investment Bank
And on the labor investments, you mentioned seeing a lift in sales transaction, 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 profitability perspective?
Todd J. Vasos - Chief Executive Officer & Director
Yeah. 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 we'll roll those off the labor investments and reinvest those somewhere else.
So, we're squarely focused on making sure it returns.
Michael Louis Lasser - UBS Investment Bank
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 a mass merchant channel as the gas prices, fuel is cheaper, maybe make it cheaper to drive slightly longer distance (52:59)? Thank you so much.
Todd J. Vasos - Chief Executive Officer & Director
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.
Michael Louis Lasser - UBS Investment Bank
Okay. Thank you so much.
Mary Winn Pilkington - Vice President of Investor Relations and Public Relations
All right. Brandy, we'll go to the next question, please.
Operator
Our next question comes from Dan Binder of Jefferies.
Todd J. Vasos - Chief Executive Officer & Director
Hi, Dan.
Daniel Thomas Binder - Jefferies LLC
Hi. Good morning.
Thanks for taking my questions. You've 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?
Todd J. Vasos - Chief Executive Officer & Director
Yeah. 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.
Daniel Thomas Binder - Jefferies LLC
I apologize if I missed this, but are you able to quantify the Halloween shift between Q3 and Q4?
Todd J. Vasos - Chief Executive Officer & Director
Yeah. 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 two days, so the day before and the day of the event.
So it's a significant piece of our business the day of the event.
Daniel Thomas Binder - Jefferies LLC
Okay. Thanks.
Mary Winn Pilkington - Vice President of Investor Relations and Public Relations
All right. Brandy, we'll go to the next question, please.
Operator
Our next question comes from Matt Nemer of Wells Fargo Securities.
Todd J. Vasos - Chief Executive Officer & Director
Hi, Matt.
Matt Nemer - Wells Fargo Securities LLC
Hi. Good morning.
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?
Todd J. Vasos - Chief Executive Officer & Director
Yeah. 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 normalized.
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.
Matt Nemer - Wells Fargo Securities LLC
Okay. And then, secondly, you mentioned the impact of markdowns to gross margin, and I think that was a fairly sizeable 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?
Todd J. Vasos - Chief Executive Officer & Director
The markdowns were promotional driven and really ordinary course, nothing unusual with those during this quarter. 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 form of promotional, but the majority of our reinvestment in the price comes at an everyday low price value on the shelf.
Matt Nemer - Wells Fargo Securities LLC
Great. Thank you so much.
Todd J. Vasos - Chief Executive Officer & Director
Thank you.
Mary Winn Pilkington - Vice President of Investor Relations and Public Relations
All right, Brandy. Go to the next question, please.
Operator
Our next question comes from Vinnie Sinisi of Morgan Stanley.
Vincent J. Sinisi - Morgan Stanley & Co. LLC
Hey. Great.
Thanks very much for taking my question. Good morning.
Wanted to ask about shrink. You guys mentioned it a few times throughout the call this morning.
It sounds like you've been continuing to make some nice improvements on that end. But can you give us maybe a little bit more color around maybe some of the specific initiatives and some of the categories that you are doing.
And it sounds like it still is an opportunity going forward, maybe with some of the things that you're doing on the labor investment front. That would be helpful.
Todd J. Vasos - Chief Executive Officer & Director
Yeah. 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 months to 18 months on reducing shrink. And I could 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. As a matter of fact, we are putting more ammunition of 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 this 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.
Vincent J. Sinisi - Morgan Stanley & Co. LLC
Okay. Thank you.
And maybe just a quick follow-up on the prototypes for the 2016 class of stores. Should we except either just visually looking at the store or in terms of the level of investment that's been needed on a per-store basis with improving checkout, coolers, et cetera, can you give us any further clarity around that at this point?
Todd J. Vasos - Chief Executive Officer & Director
Yeah. We're going to come back to you with a little bit more detail, but just 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 and other areas, but rest assured that our team has looked at ways to pull costs 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.
Vincent J. Sinisi - Morgan Stanley & Co. LLC
All right. Great.
Thanks very much.
Mary Winn Pilkington - Vice President of Investor Relations and Public Relations
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.
Todd J. Vasos - Chief Executive Officer & Director
Thank you.
Operator
Thank you. That does conclude today's conference call.
You may now disconnect.