Jun 1, 2017
Executives
Mary Winn Pilkington - SVP, IR and Public Relations Todd Vasos - CEO John Garratt - CFO
Analysts
Vincent Sinisi - Morgan Stanley Michael Lasser - UBS Peter Keith - Piper Jaffray Matthew Boss - JP Morgan Karen Short - Barclays Stephen Tanal - Goldman Sachs Brandon Fletcher - Bernstein John Heinbockel - Guggenhiem Securities Paul Trussell - Deutsche Bank
Operator
Good morning. My name is Hope and I will be your conference operator today.
At this time, I would like to welcome everyone to the Dollar General First Quarter 2017 Earnings Call. Today is Thursday, June 1, 2017.
All lines have been place on mute to prevent any background noise. [Operator Instructions] This call is being recorded and instructions for listening to the replay of the call are available in the Company’s earnings press release issued this morning.
Now, I would like to turn the conference over to Ms. Mary Winn Pilkington, Senior Vice President of Investor Relations and Public Relations.
Ms. Pilkington, you may begin your conference.
Mary Winn Pilkington
Thank you, Hope, and good morning, everyone. On the call today are Todd Vasos, our CEO and John Garratt, our CFO.
After our prepared remarks, we’ll open the call up for questions. Our earnings release issued today can be found on our website at dollargeneral.com under Investor Information, News & Events.
Let me caution you that today’s comments will include forward-looking statements about our expectations, plans, future estimates and other non-historical matters including, but not limited to, our fiscal 2017 financial guidance and store growth plan; investments and initiatives; capital allocation strategy and related expectations; future economic trends or conditions and the pending acquisition of store locations. Forward-looking statements can be identified because they are not statements of historical fact or use words such as outlook, will, believe, anticipate, expect, forecast, estimate, plan, opportunity, continue, pending, focused on, looking ahead, or goal and similar expressions that concern our strategy, plans, intentions or beliefs about future matters.
No assurances can be given that the pending real estate transaction will be closed or will be closed within the expected timeframe or that the sites will be converted to the Dollar General banner within the timeframe anticipated. Any failure to close the transaction or a delay in such closing or in the conversion of the store sites to the Dollar General banner would impact the financial estimates and store count outlined in our earnings release and discussed on today’s call.
Important factors that could cause actual results or events to differ materially from those projected by projected by our forward-looking statements are included in our earnings release issued this morning under risk factors in our 2016 Form 10-K filed on March 24, 2017 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, except as may be otherwise required by law.
Now, it is my pleasure to turn the call over to Todd.
Todd Vasos
Thank you, Mary Winn and welcome to everyone joining our call. I’m pleased with the way the team managed through the ongoing tough environment across retail during the first quarter, successfully controlling what we can control.
Even as we lapped our most challenging sales and earnings results from last year, our earnings per share reflected solid management of the business. In the first quarter, we made progress on the implementation of our key initiatives for the year as we seek to capture growth opportunities over both, the long and short-term.
As we shared with you last quarter, our SG&A investments in 2017 are primarily focused on an increased compensation structure and additional training for our store managers as they play a critical role in our customer experience and the profitability of each store. The team is working to refine and execute our long-term strategy framework that we believe will help to differentiate us from the competition over time.
Let us recap some of the financial results for the first quarter of 2017 as compared to the 2016 quarter. First quarter net sales increased 6.5% to $5.6 billion; same-store sales grew 0.7% for the quarter; our same-store sales improved as we moved past the combined the effect of the delay in the income tax refunds and the timing shift of the later Easter holiday.
Both factors we mentioned on our last call. Same-store sales growth was driven by consumables and apparel, offset by declines in seasonal and home categories.
Operating profit was $474 million. For the quarter diluted earnings per share was a $1.02 including approximately $0.01 charge for the early retirement of debt.
We continue to increase our overall market share in highly consumables, growing mid single digits, based on the most recent syndicated data over 4, 12, 24, and 52-week periods ending May 6, 2017. We continue to believe, many of the headwinds we faced in 2016 and are continuing to face are transitory in nature such as the impact of average unit retail price deflation as well as customer behavior that we believe to be associated with changes to the federal SNAP benefits program.
Average unit retail price deflation from the combination of lower commodity costs and promotional activity along with the reduction of SNAP benefits continue to weigh on our same-store sales performance in the quarter. As we look ahead, we anticipate lapping some of these effects in the second half of the year.
As John will discuss later on the call, we’re confirming our 2017 diluted EPS guidance of $4.25 to $4.50. Our objective remains to provide our customers with affordability, value and convenience at a time when they need us most.
The team is focused on moving the business forward. During the quarter, we entered into an agreement to purchase 322 store sites located across 36 states from a small box multi price point retailer.
The transaction, which was approved by the Federal Trade Commission in April of 2017 is expected to close this month with conversions to the Dollar General banner completed by the end of November. Most of these stores are located in metro areas where we had anticipated future growth for Dollar General, and this pending transaction will allow us to expand in some of these markets at an accelerated pace.
After John reviews additional financial highlights for the quarter and our full year guidance, I will update you on our operating priorities and anticipated integration plans for the store sites that we expect to purchase in June. Now, let me turn the call over to John
John Garratt
Thank you, Todd. Good morning, everyone.
As Todd has taken you through the highlights of our first quarter, I’ll share more details on the rest of the financial results, starting with gross profit. Gross profit for the first quarter was $1.7 billion or 30.3% sales, a decrease of 34 basis points from last year’s first quarter.
The most significant drivers were higher markdowns, primarily for inventory clearance and promotional activities and greater proportion of sales of consumables which have a lower gross profit rate than our other product categories and the mix within consumables. These factors were partially offset by higher initial markups on inventory purchases.
SG&A expense increased by 34 basis points over the 2016 quarter to $1.2 billion or 21.8% of sales in the first quarter. The majority of the SG&A increase was due to retail labor, primarily our investment in store manager pay and occupancy costs, each of which increased at a rate greater than the increase in net sales; partially offsetting these items were reduction in advertising costs including improvements in our advertising efficiencies and lower waste management costs related to our recycling efforts.
Even if we made strategic SG&A investments in our business, we exhibited good underlying expense control discipline. Moving down the income statement, our effective tax rate for the quarter was 37.2% as compared to 35.4% in the first quarter last year.
Our effective income tax rate was higher this quarter due primarily to the recognition of a tax benefit of approximately $9 million or $0.03 per diluted share in the 2016 first quarter associated with stock-based compensation that did not reoccur in this quarter. Now, to our balance sheet and cash flow.
At quarter-end, merchandise inventories were $3.3 billion, an increase of 0.5% on a per store basis from the 2016 first quarter. We believe our inventory is in good shape and we’re comfortable with its quality.
We generated cash from operations of $510 million in the quarter, an increase of 26% or $107 million compared to the first quarter of 2016. While just over half this increase is due to the timing of income tax payment shifting from the first quarter to the second quarter as compared to 2016, we continue to have strong underlying performance in our cash from operations.
We remain committed to returning cash to our shareholders through our share repurchases and dividend programs while maintaining a disciplined approach to capital allocation and our investment grade rating. During the quarter, we repurchased 1.3 million shares of our common stock for $89 million and paid a quarterly dividend of $0.26 per common share outstanding, totaling $71 million.
Since December 2011 through the end of the first quarter of 2017, we repurchased $4.7 billion or 75.6 million shares of our common stock. As of the end of the first quarter, the remaining share repurchase authorization was approximately $845 million.
Looking ahead, I thought it would be helpful to share with you some key highlights of our anticipated store site purchase that Todd mentioned earlier. The transaction is forecasted to be modestly accretive to net sales and earnings in fiscal 2017.
We expect to incur charges and related expenses associated with the converging of acquired store locations to the Dollar General banner, which we anticipate will be completed by November 2017. These expenses will be primarily related to lease termination costs for a smaller number of overlapping store locations, as well as additional costs related to the pending store locations.
We currently anticipate the charge will be approximately $0.02 per share in the 2017 second quarter. Based on our expectations regarding the timing of both the closing of the transaction and the conversion of the site to the Dollar General banner, we estimate that the acquired sites will add about a 100 basis points to our fiscal 2017 net sales growth.
Please keep in mind the transaction is subject to customary closing conditions. Let’s now turn to guidance, which includes the anticipated impact of the pending transaction that I just discussed.
Net sales are forecasted to increase by approximately 5% to 7% as compared with our prior guidance range of 4% to 6%. Our forecast for growth in same-store sales is consistent with our prior guidance range of slightly positive to up 2%.
We continue to forecast GAAP diluted earnings per share for fiscal 2017 to be in the range of $4.25 to $4.50 including modest net accretion from the pending store site acquisition I discussed a moment ago. Capital spending is forecast to be in the range of $715 million to $765 million, an increase of $65 million from our previous outlook.
This increase is related primarily to the conversion of the pending acquisition site. Taking into account the pending acquisitions site for 2017, we now plan to open about 1,290 new stores and to reduce our total fiscal 2017 remodels and relocations by about 140 sites to a total of 760 stores to allow for organizational capacity to execute the incremental new store growth anticipated to result from this transaction.
In total, the team expects to execute about 2,050 real estate projects in 2017. Our share repurchase guidance for fiscal 2017 remains unchanged at approximately $450 million.
As you model the balance of 2017, please keep in mind the following. While the sales environment for retail continues to be choppy, we are working aggressively to improve our customer traffic and we believe that we will see positive traffic in the second quarter.
We anticipate the mix shift of sales to consumables and the negative mix within consumables that we experienced in the first quarter to continue and modestly accelerate in the 2017 second quarter. We believe that our customer will require sustained improvement and our economic outlook before she is going to increase her spending on discretionary non-consumable items.
As you look at the quarterly cadence, both our margin and EPS comparisons to the prior year’s comparable periods begin to ease in the 2017 third quarter. In closing, we will continue to focus on the things that are within our control, including managing our working capital and always striving to be a low-cost operator.
We will also be financially disciplined in our capital allocation. Now, I would like to turn the call back to Todd.
Todd Vasos
Thank you. As John mentioned, we remain focused on capturing long-term opportunities ahead.
In March, I went into some detail on the work that we did to advance our business through a comprehensive strategic review. We’re refining and executing on the plans that resulted from our strategic review of the business, focusing on the actions that we anticipate will have the greatest potential to drive shareholder value over the longer term.
We are well into the process of staffing the strategy group along with the dedicated business leaders and teams that will execute on the initiatives. These plans are a very exciting part of evolving our business, and we believe they will help us remain well-positioned to capture market share in a changing retail landscape.
We continue to believe we operate in one of the most attractive sectors in retail. Our ongoing operating priorities remain, first, driving profitable sales growth; second, capturing growth opportunities; third, enhancing our position as a low cost operator; and fourth, investing in our people as a competitive advantage.
Our first priority is to continue to drive profitable sales growth. In spite of the challenging retail environment, we look to attract and grow new customers and trips and capture share with existing customers.
This includes expanding the merchandising initiatives in our existing stores, to drive traffic into those stores, and improve same-store sales. Merchandising initiatives across all four product categories are being executed in a select group of stores to provide consumers with more of the products and brands they want and need to save time and money, every day.
The vast majority of this initiative for fiscal 2017 are either completed or expected to be completed by the end of the second quarter. For those that we have completed, the initiatives are performing at or above our expectations.
One of the most exciting merchandising changes that we have made is in health and beauty where we have a significant opportunity to increase our share of wallet with our customers through trial and conversion. In beauty, we have redesigned the cosmetic area in the vast majority of our stores to showcase the breadth of on-trend products that we offer at compelling price points.
While this reset has recently been executed across nearly 12,000 sites, we’re seeing improvement in our same-store sales. More planogram changes and visual excitement will be coming to our health categories as well as we look to increase our offering of value-added differentiated products with a focus on health and wellness; nutrition and personal care.
Across merchandising categories, we believe that our planogram changes should continue to build momentum as we move through the year. The remodeling of about 300 traditional stores based on lessons learned from the conversion of acquired sites last year is on track as well.
The remodels include increasing the cooler set to 34 doors, an increase of about a 160% on average from the existing cooler footprint for these locations. This allows for a greater perishable assortment which helps drive trips and basket size.
Additionally, across about a third of these locations, we are testing an assortment of fresh produce. While it’s still very early, initial remodels are yielding strong same-store sales improvements.
We are strategically investing in the portion of the existing store base that has been open for five years or more that we often refer to as our mature store base. We’re particularly focused on stores that have fewer than 10 cooler doors which in relative terms are expected to drive the highest returns.
By the end of 2017, we anticipate that across our store base we will have an average of 17 cooler doors, up from 10 in 2012. Year-to-date, more than 11,500 cooler doors have been installed across the chain to these locations.
We are seeing an improvement in transactions. On the customer side, we are seeing continued opportunities to improve engagement and build loyalty through further integration of our traditional and digital media mix.
Our plan is to reach our consumers where, when and how they decide to engage with us. We are also leveraging in-store operational initiatives such as improving our customer experience and our in-stock position.
The store operations team has an ongoing intensive effort to improve our in-stocks through training and technology, as product availability is an important driver of our customer satisfaction. We have ongoing opportunities for gross margin expansion through improvements in shrink, global sourcing, private brands, distribution and transportation efficiencies and non-consumable sales.
As always, we will continue to work to ensure that our value preposition resonates with our customers. We are committed to providing them with everyday low prices that they know and trust from us.
Our goal is to ensure, we are highly relevant for our customers through our ongoing price investment in everyday low price and targeted promotional activity. We have consistently shared with you one of the keys to our business is growing transactions and units.
Our pricing surveys continue to indicate that Dollar General is very well-positioned against all classes of trade and across all geographic regions. We are committed to being priced right for our customers to drive traffic to our stores.
Our focus on initiatives to capture growth opportunities is a second priority. We have a proven, high-return, low-risk model that our real estate -- which is our real estate growth.
We believe that we can extend this model to opportunistic purchases of the 322 sites. These sites are highly complementary to our long-term, new store growth plans with about 85% located in metro areas.
The majority of these sites are in strategic trade areas that we would have anticipated for new store site selection over time. This transaction would allow us to reach certain of these areas faster and potentially more economically with organic growth.
We will look to build out these sites, the range of different DG store formats is the strength that we can leverage based on the marketplace along with the opportunity to test new ideas. Our existing plans for 2017 new store growth remains on track with the goal to make the pending sites as accretive as possible to our new store locations.
So, 1,000 new stores anticipated when we announced 2016 year-end earnings are in the pipeline for fiscal 2017. As John discussed, we expect the transaction to bring our new store count for 2017 to 1,290.
We believe we continue to have first mover advantage to secure our best sites, while driving compelling new store average returns of approximately 20%. New store productivity and returns are metrics we constantly monitor to ensure our new store growth is best use of our capital.
I continue to be very pleased with our new store returns. The metrics we use to evaluate our real estate portfolio of new stores include, one, new store productivity as a percent of our comp store sales; second, actual sales performance compared to our pro forma model; third, returns of about 18% to 20%; fourth, cannibalization of our new stores on our comp store base; and finally, a payback period of less than two years.
Regardless of the metric, over time, we have seen very consistent performance from our new stores. Given the softness across retail, I’m pleased with how our new stores are performing.
We’re committed to ensuring we’re deploying our capital effectively to drive strong financial returns for the long term. Third, we’ll leverage and reinforce our positioning as a low cost operator.
Over the years, we have established a clear and defined process to control spending. All of our spending is filtered through three criteria, first is the customer facing; second, does it align with our strategic priorities; and finally, third, how does it impact our risk profile.
In our stores, we’re focused on simplifying our operations by reducing inventory, product movement within the stores and operating complexity, so our store managers and their teams can reinvest time savings to provide better customer service and a clean in-stock shopping experience for our customers. At the store support center, work elimination and process improvement are ongoing efforts to take cost out of the business.
Our underlying principles are to keep the business simple, but move quickly to capture opportunities, control expenses and always seek to be a low-cost operator. Our fourth operating priority is to invest in our people, as we believe that they’re a competitive advantage.
As we entered 2017, we made significant investments in compensation and training for our store managers. Our data-driven approach to store manager compensation segments our stores based on the labor market data and store level complexity.
Across our existing store, managers, internal promotions and external hires, we’re targeting our investments to drive results. Overall, while still very early, the strategy for putting the investments to work in the marketplace is off to a good start.
For existing store managers, we have seen an improvement of more than 400 basis points of voluntary turnover since the compensation investment. While internal promotions continue to be a great source of store managers who know our culture and processes, we’ve been able to attract experienced retail individuals from sectors of retail that assimilate well to our model and culture.
The stores with these new external hires are seeing improved results in associate turnover and positive impacts to same-store sales. Our organization’s capacity to focus on talent selection, store manager development through great onboarding and training, and open communication are critical to this investment paying off over time.
As I have travelled to our store locations with our field leadership, the feedback and interaction with our store managers on our investment has been extremely positive. The customer experience and the profitability of our stores should benefit over time from this investment, giving how important the leadership of store manager is to these metrics.
Our early progress is encouraging. This year, we are on track to create more than 10,000 new jobs as a result of our planned new store openings and two new state-of-the-art distribution centers.
These new jobs help provide our employees with great career growth. We expect to invest more than 1.5 million trainee hours in employees in 2017 to promote education and development, as we look to use our robust and best-in-class training programs to support our commitment to investing in our people and our employees as a competitive advantage.
As for our customers, we continue to be cautiously optimistic about economic conditions but acknowledge that for our core customer, it is always challenging, given the pressures on her income and spending. Regardless of the economic outlook for our customers, we will do everything we can to provide them with the value and convenience they expect from Dollar General.
We are committed to the long-term growth and to the creation of shareholder value. Our business generates significant cash flow and we are in a position to invest in store growth, while continuing to return cash to shareholders through our share repurchase program and anticipated dividends.
To the more than 122,000 employees of Dollar General, I want to thank you for your efforts to put our customers at the center of all we do. With that, Mary Winn, we would like to now open the line for questions.
Operator
[Operator Instructions] Your first question comes from the line of Vincent Sinisi with Morgan Stanley.
Vincent Sinisi
Hey, good morning. Thanks very much for taking my question here.
I just wanted to ask about the traffic. I know you said that you are expecting it to turn positive in 2Q.
But just wanted to see if you could give us maybe a little bit more color on kind of the thoughts behind it and some of those headwinds like you had mentioned being more transitory in nature, particularly as you’re kind of lapping SNAP, and more so if you are seeing any changes on the promotional environment, in particular to some of your traffic driving items that have been inflationary, that would be great?
Todd Vasos
Sure. First of all, we are very, very confident in what we see coming out of our initiatives for 2017.
The early results of the initiatives that we put in place in Q1 that have also being put in place so far in Q2 have been very positive. Health and beauty, we called it out in the prepared remarks, I’m very encouraged in seeing that.
And I’m very encouraged as well in the big traffic driving areas of our coolers and our perishable type items. We’ve added more than 11,000 cooler doors so far and we’ve got a lot more yet to do as we work through this quarter and even into Q3 on many of those initiatives.
So, we are very, very confident in what we see so far that it should help us continue to drive traffic as we move to the back half of the year. As far as what we’re seeing in some of those transitory type items, we’re seeing deflation start to moderate.
As we move through Q1, deflationary pressures from a cost input standpoint, we did see some moderation; we’re not seeing a lot of inflation but we are not seeing a lot of further deflation either. So, it gives us confidence as we move through Q2.
And keep in mind, Q3, we saw pretty big deflationary time but as we get passed Q3, those should really start to roll off, at least based on what we see today. And as we look at our SNAP piece that really we start to cycle here in the next month or so, we’re already seeing some effects of that cycling, since the waivers sort of waived in, if you will, by state.
And right now, we’ve actually seen where we’ve been running about a 100 basis-point difference in our comp sales performance in those SNAP affected states versus our other states that we operate in; that has now been cut in half; we’re now seeing about 50 basis points of difference. So, we’ve already started to see that moderation and I believe we’ll continue to see that as we move through Q2.
And then lastly, your question on the promotional environment. Promotionally, we’re really seeing about the same that we saw coming out of Q4.
Q1 has been about the same. We’re really not seeing a big difference.
There’s some pockets here and there of activity. But overall, we feel very confident about our promotional activity.
But as you know, we’re more squarely focused on our everyday low prices here. And there, we really feel good about where we are.
Our everyday low prices are in the best shape that I think I’ve seen it in the close to nine years that I’ve been here across all geographic areas. So, we feel very good about that as well as we move through and into the second part of the year.
Vincent Sinisi
And just a fast follow-up. We on the phone I’m sure get asked this all the time, when we get asked, you guys had set out some longer term financial growth metrics, I guess it was earlier last year.
We know obviously macro changes this year, investing in store manager comp and all that stuff. Do you still though feel good in a more kind of normalized operating environment of the metrics that you did lay out last year?
John Garratt
We still feel good about the fundamentals of the business in a long term growth potential; it’s still our goal to be at 10% growth over the long term. As we look at the business, we still see a tremendous amount of organic growth opportunity, great store level economics, still getting the 20% returns on new store openings, and we’re excited about the additional acquired stores this year that gets us into places we wanted to go, continue to generate a tremendous amount of cash.
We mentioned 26% cash growth, even when you strip out some timing with taxes, it was still double-digit cash flow growth this quarter. So, we continue to see a tremendous runway for growth; we’re excited about the initiatives we have in place.
We feel we’re in a good position from a pricing standpoint. We believe that combination of value and convenience really resonate with our customer and allows us to continue to grow share.
And we continue to have a lot of levers within gross margin and SG&A as the team does a phenomenal job managing and has a great track record of making the right trade off but with an eye on long term and investing where we need to as we have this year.
Operator
Your next question comes from the line of Michael Lasser with UBS.
Michael Lasser
Can you give us a little more flavor for how trends unfolded over the course of the quarter? Will we see a drag from the tax refunds?
Our sense is you’re probably negative. And then, by the end of the quarter, you were obviously positive, given where the full quarter ended up.
Was that solely due to the tax refund drag going away and then the SNAP drag becoming less of an issue or were you able to definitively tie some performance results to the initiatives that took place?
Todd Vasos
Yes. That’s a great question.
We saw the quarter unfolding this way, as we said in our prepared remarks, once we got past that delay in the income tax piece and remember also, Easter shift is from March to April this year. Once we got past that combined Easter shift and the tax refund delay, we did see a nice uptick as we got into April, even beyond the Easter shift, we saw that occur.
And I think it is a combination of many things. But, I again feel very confident in our initiatives.
We could really tie directly a lot of what we saw coming into April because that’s when some of our initiatives really started to take hold. We can really tie directly some of our performance into that.
While we’re not happy or satisfied with 70 basis points of comp, we know that we could grow that a lot more over time here. I think in this environment, I think we laid a comp on the table that was very competitive, but with an eye on growing that a lot more as we move to the back half of the year.
Michael Lasser
And then, Todd, my follow-up question is on the merchandise mix that you sold. Do you think you are seeing an economic drag, maybe a pro cyclical drag on some of those discretionary categories where consumers might trade into other retailers as a result of stable or benign economic period and the potential for those to get better in a more challenging environment or is there some influence you can have over the discretionary categories such as those areas can improve independent of macro?
Todd Vasos
As you look at our discretionary categories, prior to Q2 of last year, we had some very nice growth over about six to eight quarters. We believe it’s transitory in nature right now.
We believe for a lot of reasons, the customer has been pulling back, been holding back a little bit. Matter of fact, we don’t believe she’s been trading out at all.
What we see from our customer data is some of our stronger comps and stronger sales are coming from not only our very strong customers but that next level up, which would have a tendency and propensity to trade out over time, but actually have been our strongest in Q1, our strongest sales driver category of consumer. So, I don’t believe she has been trading out.
I just believe that she is in a economic cycle right now where there is a little bit of uncertainty and a little bit of a hold back on these discretionary items. And I believe and feel very confident in what the team has built here on the category management side to take advantage as soon as she starts to loosen the purse strings up a little bit on that non-consumable side of the business.
But to really look at it the proper way, we had a very strong Easter. Matter of fact, Easer was as strong as we’ve seen the last couple, three years.
So, it gives us a lot of solace that our non-consumable businesses as well as many of our consumables businesses that we have are trending in the right direction.
Operator
Your next question comes from the line of Peter Keith with Piper Jaffray.
Peter Keith
Just a follow-up on that last answer, regarding challenging environment. I guess, Todd, what do you think you need to see with the economy at this point, in order for your customer to loosen up the purse strings?
Todd Vasos
What I think we need to see is a little bit more confidence in what the consumer is seeing today from job growth and wage growth, will it be sustainable? I think that’s the big ticket right now that we’re waiting to happen, I think that they’re waiting to see happen.
Our core customer, as you know, doesn’t have large bank accounts to fall back on. And so, during times like these where she’s starting to feel little bit more comfortable because she’s back to work and seeing a little bit of wage growth, she wants to make sure it’s sustainable.
The huge downturn that we all experienced in 2008-2009 hit our consumer extremely hard, probably the hardest of any group that was out there. And I think that’s still very fresh in her mind.
So, she is making sure that what she’s seeing now is sustainable and can grow over time. And I believe once that happens, we’ll start to see that purse string loosen.
Peter Keith
Maybe on a similar note then. We talk about the discretionary business being a little bit weak starting with Q2 last year.
I would think discretionary within your mix would be the area that’s most at risk to losing share to ecom, certainly more so than the consumables. Do you have a perspective on your positioning with ecom today and if there’s potential encroachment?
Todd Vasos
Yes. We see ecommerce about where we had seen it coming out of Q4.
Our core customer is the fast follower, there is no doubt. Only about 70% of them today have cell phones -- excuse me smartphones.
And I believe that over time, she will probably start to gravitate a little bit more toward online purchasing. But today, all of our work shows that she is still lagging there compared to the rest of the customers and the economy that’s out there.
In saying that, we’re working very diligently here as well. Part of our strategic review, as we mentioned, was digital.
And we’re working hard to ensure that as our customer starts to gravitate more and more to digital that we’re going to be able to take her along the journey with us and she’ll look to us for her future digital needs like many others do -- other retailers, both online as well as brick and mortar retailers today. So, I don’t see that today though that our core customer is spending a lot more of her disposable income online than she did before.
We just don’t see that.
Operator
Your next question comes from the line of Matthew Boss with JP Morgan.
Matthew Boss
So, on category drivers, I guess how much do you believe tax refunds drove the mix shift towards consumables in the first quarter? And I guess, to go back to some of the comments you had earlier, what’s driving the mix shift acceleration into the second quarter?
And within the consumables, I think there was some talk about more micro category -- intra category shift between food and non-food, just if you can parse through some of the 1Q versus what’s continuing in the 2Q and what you’re seeing in that category?
Todd Vasos
As we look at the tax refunds, and I think others have said the same thing, once you don’t have that same refunds, at the same time you never seem to get back all those sales that seem to not be there, right. Now, we got our fair share I think of what came, but it just wasn’t to the extent I believe that it would have been, if they came on time.
Now, when saying that, the majority of those sales normally because it’s tax refunds in nature, usually does come in our discretionary categories. So, it did slow our discretionary little bit more than we had anticipated in Q1.
What we’re seeing though as we move into Q2 is the continuation of what we saw really in Q1 and that’s the consumer really holding on to our money, spending where her need is the most and that’s been on the consumables side of the businesses. And then, even within that we’re seeing some mix shift inside of the categories where driving the mix to some less profitable areas as well within categories.
So that continues to be there. The great thing is we have a great category management team that’s able to watch and see what’s happening and then be able to react to that, so that as we continue to move through Q2 then into the back half of the year, make adjustments.
And those adjustments and we’re used to doing this, we do it very well, make those adjustments to work that margin, depending on the way the consumer is shopping. This isn’t anything new.
We’ve been doing this for many, many years, and we know how to do it pretty well.
Matthew Boss
Great. And then, just a follow-up.
Can you touch on the productivity and return metrics that you are seeing from some of your more recent classes of new stores? I guess just more so, any perspective on what you are seeing from the latest classes versus historically, some of the metrics that you had seen in the past?
John Garratt
We continue the consistent results. We walk you through the key metrics that we look at in terms of new store productivity with that goal as percent of our comp store base being in that 80% to 85%, we remain within there.
We continue to see our actual sales performance compared to pro forma very close, ebbs and flows from time to time but hitting those pro formas pretty consistently overt time. We continue to see track returns.
We target 18% to 20%. We continue to see our returns tracking towards the high end of that range.
We’ve not seen cannibalization move on and this has been pretty consistent, what we expected, and we continue to see a payback period of about two years. We continue to see the same great results that we expect, consistent with performance.
And with that in mind, we are very bullish about the future of this. But, obviously, we diligently track these, monitor them very closely and our nimble company that can make adjustments as needed down the road, but right now what we’re seeing we like.
Operator
Your next question comes from the line of Charles Grom with Gordon Haskett.
Unidentified Analyst
Hey, good morning. This is Actually John [ph] on for Chuck.
So, I guess first, I mean, what is the annualized lift that you guys expect to see to both sales and earnings from these stores that you are acquiring?
John Garratt
In terms of lift, what we said there was we expected to drive a point of total sales growth. So, as we had said in our guidance, we upped it from 4%-6% to 5%-7% and then it doesn’t show up in our comp base until next year, so what we know impacts sales comp.
Unidentified Analyst
Okay. But there is no kind of guidance on what that does on an annual basis?
John Garratt
So, on a annual basis from a dollar amount, it’s little over $0.5 billion.
Unidentified Analyst
And then, just switching gears a little bit. It seems like the new store productivity kind of spiked up a bit here in the quarter.
I mean, are you guys doing anything different around your new store openings, kind of speak to that or…?
John Garratt
I think it just speaks to we have a tremendous real estate team that continues to hone that model. They do a phenomenal job of finding the best dice and they continue to hone that algorithm, find the best dice, continue to optimize that box.
We see ourselves as the innovator in different formats. And what we’re finding is the right format to fit the occasion and seeing the success in the smaller box for instance, which opens up areas that weren’t open to us in the past.
So, I think it’s just a testament to the rigor and the capability of the team here.
Operator
Your next question comes from the line of Karen Short with Barclays.
Karen Short
Just a question to clarify, is traffic -- did traffic end in a positive note in the quarter and is it positive into the second quarter? Just wanted to clarify that, and then I have another question.
Todd Vasos
Sure. Traffic did spike up obviously in April.
Combination of the Easter shift as well as our initiatives, I believe drove that to positive. And we’re not really talking too much about Q2 right now, but we saw some positive momentum coming into Q2 but it’s still very early.
So, we don’t want to comment on where we believe that’s going to end up. But again, we’re very, very confident in our initiatives to drive the top line.
And we’re looking forward in future quarters to see that traffic move to positive.
Karen Short
And then, you commented I guess the doors testing produce are seeing strong same-store sales. I’m just wondering if you could get a little more granular on what kind of comp lift you’re seeing from this.
And then, maybe you could give a little color on how shrink is looking at those doors in particular?
Todd Vasos
When you look at stores that we put produce and again just keep in mind, it’s a very few stores. But, we have seen nice comp lifts in these stores.
Now, these same-stores have been remodeled as well. So, we’re watching the comp across all categories within those stores.
Produce is helping that comp but even without that those stores are comping very, very well. And it’s really attributable to the amount of cooler doors we’re putting in on the refrigerators and frozen side of that equation, has been well received by the consumers.
And we’re starting to really see traffic start to pick up in those stores as word of mouth continues to get out and we’ve got a broader selection of things they need to include better for you type products within those coolers. So, we’re pretty excited about what we see there but there’s still a lot more yet to figure out on these new stores as it relates to produce.
As you know, we’ve been in the produce business for only a short period of time in these stores but we’ve got a lot of experience with them in our market stores. And we’ve taken the learning’s from those and applying them there.
And then, as far as the shrink in these stores, a little too early to tell yet. As you know, shrink has a pretty long tail to it.
And since we’re just been remodeling these stores recently, a real shrink indication probably won’t be evident until probably latter part of this year in those stores to see exactly how they’re starting to trend.
Operator
Your next question comes from the line of Stephen Tanal with Goldman Sachs.
Stephen Tanal
So, I just wanted to spend a sec just to understand kind of the analyses that you guys run around traffic to understand whether it’s sort of exogenous or macro or competition. Specifically, I think I get it on the get it on the trade up piece but I wonder about replacement.
How do you sort of analyze the idea that while maybe some low end consumers are shopping at discount growth or is there something like that more and maybe that’s why we’re seeing less strips? How do you head around that and get comfortable with what’s going on there?
Todd Vasos
The great thing about Dollar General is we do a tremendous amount of work with our customer. I mean, each and every quarter, we reach out and touch our consumer to understand exactly what she is feeling, what she is seeing and what she is doing.
We do it on a personal level, then we do it on a macro level as well. And what we see and what we’ve been seeing for the past three quarters including Q1, has been a continued consolidation of her shopping patterns.
Shopping less and shopping fewer retailers as she shops, on both sides of that equation. So, she is making decisions on where she shops.
And as she does that she is also making decisions that I’m going to shop a little less as well, maybe more less frequently. So, we watch that very carefully.
While we have seen the same phenomenon in our business as others have seen based on all the work that we see, we actually have seen the rate of that consolidation quicken in other channels of trade versus ours, while we have still seen a decrease in the amount of time that or amount of shops that she does in a month’s period, we are not seeing the contraction as deep as other classes of trade. But there is still concerns that she is contracting across the board.
So that means that while she is shopping, we have to have the right items at the right time at the right price to attract her and that’s what we’re working on to make sure that happens.
Stephen Tanal
Got it. That’s helpful.
I was wondering as well if you would quantify or comment on the uplift from the remodels to sort of like-for-like box?
John Garratt
Yes. We continue to see great performance from the remodels.
What we’ve said in the past is in terms of the sales lift we get about 4% to 5%, we continue to get that. And on some of the remodeling, we’re placing more coolers in, we’re seeing a considerably higher lift on that.
So, we’ve been very pleased with what we’ve seen as we add coolers to the stores.
Todd Vasos
Yes. When you take a look at our Dollar General traditional plus stores that we are putting as these ones that we are remodeling, we’re seeing three times the comp sales lift in those stores than we’ve seen from a traditional remodel.
Remember, we’ve always said, a traditional remodel runs between 4% and 5%, we’re seeing three times that lift from these. So, we’re very encouraged early on in what we’re seeing.
Operator
Your next question comes from the line of Brandon Fletcher with Bernstein.
Brandon Fletcher
Our only concern is this, what we like best about you guys is how defensibly you are geographically; we love the more rural locations, especially because that’s hard to replicate and with new distribution centers letting you run efficiencies further out. We think those stores are protected for a long run.
Help us understand why you guys like the metro stores as much, especially if we imagine, let’s say produce goes in there? And I don’t know what’s your strategy is for produce, and I know it’s evolving.
But we just get nervous that if you have more metro stores and they are doing the same thing that [indiscernible] will do, that competition gets really intense. So, if you could add any color on your strategy around that that would be very useful.
Todd Vasos
Absolutely. Those are great questions and the things that we look at internally here all the time.
One thing I think is important to keep in mind is not all metro locations are created equal. There are certain metro areas that actually feel and look more like our rural locations, let me explain, both from a customer standpoint, as far as the demographic is concerned as well as from lack of competition.
There’s a lot of metro areas out there that we’re looking at that we’re actually opening, as well as part of the 292 stores that we’re going to be opening from our recent acquisition, many of them are in these areas that have little competition in them as well, because not every metro area has a great amount of competition. So, we’re very selective and we’ve been watching this very carefully over time and feel confident that there’s thousands of opportunities out there metro that meet the criteria we need to be successful.
So, stay tuned, continue to watch, but we’re watching it very carefully and we’re very happy what we see early on.
Operator
Your next question comes from the line of John Heinbockel with Guggenhiem Securities.
John Heinbockel
So, first thing on the acquired stores. So, the productivity is obviously very good because they’re metro stores.
How large is the gap in profitability with maybe your overall base or your metro stores? Do you think you need to invest in price and labor in those stores, because maybe that has not happened?
And then, what does this do to your expansion profile after 2017, does it come down because you’ve front loaded it somewhat here?
Todd Vasos
As we look at it, John, these stores that we’re acquiring, again top line, as you indicated is pretty good. What I think they’ve been suffering from is really a lack of scale as it related to the profitability and watching it drop to the bottom, as well as a lot of the knowhow that we have on how to run stores from a shrink perspective.
So, we believe that the opportunity gap is very large on the profitability side. As we look at price, what we’ve modeled in as we look to purchases is to get them more aligned with where Dollar General pricing is.
So, yes, the prices will come down in those areas, but they should because again, we’re all about making sure we drive traffic and units in there. And we believe that the $0.5 billion in sales that these stores are throwing off could also increase very profitably.
So, we think we’ve got opportunities both on top line as well as letting it fall right to the bottom line.
John Heinbockel
And then just unrelated, I actually thought the discretionary performance in the fourth quarter was pretty good and one of your better ones in the last year, year and a half, in light of the macro environment. So, maybe touch on that a little bit.
And in particular, I was surprised, apparel was as good as it was.
Todd Vasos
As you said, John, while we’re never happy with where we ended up there and we always think there’s more, the team has done a great job in non-consumables. And as you continue to look forward, I believe we’ve got the right product at the right price for what the consumer is looking for in non-consumables.
And saying that apparel did do pretty well as we move through Q1. I believe the line-up that we have for spring and summer is one of the best that we’ve seen.
But also, the transition out of Q4, which is more of a winter and fall type goods, we were able to take advantage of that as well on a top line with a little bit of the cooler weather start to the quarter one, helped propel little more of that and elongated out a little bit more of the winter goods as well. So, we saw apparel benefit on both sides of that equation.
And then, lastly, I mentioned earlier, our seasonal business continues to do very well, and Easter was again one of our best in a couple of three years and not only on consumable candy but also on our non-consumable sides of seasonal. So, we feel we are well-positioned but we are not going to rest until we see comps accelerate a lot more from where they are today in non-consumables.
Operator
Your final question comes from the line of Paul Trussell with Deutsche Bank.
Paul Trussell
I just wanted to get a little bit of handholding around the guidance, and I know you don’t provide quarterly detail. But, as we think about your first quarter metrics from a comp and margin standpoint, how should we think about the puts and takes and the opportunity for improvement in 2Q versus the second half?
In particular, on SG&A and gross margins, if you can give just a little bit more detail on how you’re thinking about, again, merchandise mix, markdowns, need for further price investments. And then, we haven’t really touched so much on the expense front around ZBB and what you were able to execute in the first quarter, so some details on that front will be great.
Thank you.
John Garratt
Okay. Starting with the overall guidance, that remained unchanged with GAAP EPS guidance remaining at $4.25 to $4.50 that is inclusive of the acquired stores.
The thing we mentioned there was that that would be modestly accretive for the year as we have expense on the front end of that, about $0.02 in Q2 and then the backend loaded nature of the openings, we won’t get a full-year benefit; that’ll be towards the end of the year. The other thing we did mention as we continue to see the headwinds we saw in Q1 and the team did a phenomenal job working through that, we continue to see those headwinds coming into Q2.
And the other one we mentioned was mix. But as Todd said, we are comfortable with our ability to category management to improve that.
And as we get through Q2, we’ll have all our initiatives in place getting into the back half of the year as well as the thing we noted was in Q3 that’s where you see the comps, both from a top line and a bottom line ease. So, we feel good as we get into the back half of the year with those initiatives in place with headwinds starting to subside and the comps easing, we feel good as we get into the back half of the year.
But, we’ve stuck with the same guidance; there are still a lot of year left. Q1 came in about where we expected; so, we thought we would keep the guidance where it’s at for now, but very excited about the acquisition opportunity here and see -- over time that’s going to be accretive to us.
Mary Winn Pilkington
I think that’ll wrap up our call. I know we’ve left a few people in the queue and I do apologize about that.
But please feel free to give me a call. And we look forward to updating you as we move forward.
Thank you.
Operator
Thank you. This does conclude the Dollar General first quarter 2017 earnings call.
You may disconnect.