Dec 7, 2017
Executives
Mary Winn Pilkington - SVP, IR and Public Relations Todd Vasos - CEO John Garratt - CFO
Analysts
Alan Rifkin - BTIG Karen Short - Barclays Capital Matthew Boss - JPMorgan Scot Ciccarelli - RBC Capital Markets Peter Keith - Piper Jaffray Paul Trussell - Deutsche Bank Michael Lasser - UBS Chuck Grom - Gordon Haskett
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 Third Quarter 2017 Earnings Call. Today is Thursday, December 7, 2017.
All lines have been placed on mute to prevent any background noise. 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 Web site 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 our 2017 and '18 store growth plans, our planned investments and initiatives, capital allocation strategy and related expectations, future economic trends or conditions, and the anticipated impact of proposed U.S. corporate tax legislation reform.
The company's financial guidance does not reflect any potential impacts from U.S. corporate tax legislation reform.
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, guidance, plan, opportunity, continue, focused on, intend, looking ahead, or goal, and similar expressions that concern our strategy, plans, intentions or beliefs about future matters. Important factors that could cause actual results or events to differ materially from those 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. At the end of our prepared remarks, we'll open the call up for your questions.
Please limit your questions to one and one follow-up question if necessary. 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 our third quarter performance as the Dollar General team delivered strong same-store sales growth, driven by an increase in average transaction amount and positive traffic, all while expanding gross profit margin and exhibiting good underlying expense control.
We are excited about our plans for the fourth quarter and into the New Year. Our third quarter results were achieved even in the midst of the hurricanes that impacted our business during the quarter.
We estimate that the negative impact of these storms in the quarter, including loss of inventory and incremental repairs for damages and other expenses offset by increased sales was approximately $0.05 per diluted share. I would like to thank and also recognize all of the Dollar General teams that worked extensively to be there in advance of the storms and afterwards to support our communities during the recovery process.
When our employees, customers, and communities needed us, team members from across the organization were there providing support for our impacted stores and coworkers. To all the teams that worked so hard to ensure our coworker safety, to secure and staff our stores, and to meet the needs of our customers, thank you.
This dedication to our mission of serving others is what makes us and our company so special. Turning now to the highlights of the third quarter of 2017; net sales increased 11% to $5.9 billion and same-store sales grew 4.3% as compared to the prior year third quarter.
Same-store sales for the quarter benefited by an estimated 30 to 35 basis points from incremental sales due to the hurricanes. Same-store sales growth was positive for both consumables and combined non-consumable categories with stronger growth in consumables.
Our highly consumable market share trends in syndicated data continue to exhibit strength with high single-digit share growth in both units and dollars over the 12, 24, and 52-week periods ending November 4. Our mature store base, which are stores that are over five years old and have not been remodeled or relocated, continues to deliver the best same-store sales growth that we have seen in four years.
In addition, the contribution of same-store sales growth from our real estate maturation curve, including new stores, relocations, and remodels was at the high-end of our expectations. We executed 634 real estate projects in the quarter, including 470 new store openings.
Net income was $253 million and diluted earnings per share grew 11% to $0.93, which includes $0.05 per share for the estimated net negative impact associated with the hurricanes. Year-to-date through the 2017 third quarter, we have returned $512 million to shareholders through the repurchase of 4 million shares of common stock and the payment of quarterly dividends.
Given our year-to-date performance and our expectations for the remainder of the year, we are narrowing our reported EPS guidance for the full-year. John will provide more details on our outlook.
The fundamentals of our business remain strong. Our third quarter results demonstrate our ability to deliver strong top line growth as we deliver the best same-store sales growth in 11 quarters.
Now, I'll turn the call over to John to go through more details of the quarter and our outlook. Then I'll share some highlights of our initiatives for fiscal 2018.
John Garratt
Thank you, Todd, and good morning everyone. As Todd has taken you through the highlights of our third quarter, I'll share more details on the rest of the quarterly financial results starting with gross profit.
Gross profit for the 2017 quarter was $1.8 billion or 29.9% of sales, an improvement of eight basis points from last year's third quarter. As compared to the prior year third quarter, the gross profit rate increase was primarily attributable to higher initial inventory mark-ups and lower inventory shrink, partially offsetting these items were a greater proportion of sales of consumables, which generally have a lower gross profit rate than other product categories, sales of lower margin products comprising a higher proportion of consumable sales, and increased transportation costs.
SG&A expense increased by 40 basis points over the 2016 quarter to $1.3 billion or 22.9% of sales in the third quarter. This quarter's SG&A increase was primarily attributable to increased retail labor expenses, given our previously planned investments in store manager compensation, and increased incentive compensation and occupancy costs, each of which increased at a rate greater than the increase in net sales.
The increased occupancy costs were primarily attributable to a record number of 470 new store openings in the quarter, over half of which were related to acquired stores and which represents an 82% increase in openings over the prior year third quarter. We also recorded $24.8 million of incremental expenses related to the impact of the hurricanes, which occurred during the quarter as Todd discussed earlier.
Partially offsetting these increased expenses were lower utilities costs and a reduction in advertising costs. Please keep in mind, in the 2016 third quarter we incurred charges of $13 million associated with store sites acquired from a large box retailer and the related closure of existing stores plus an estimated $7.7 million of incremental disaster-related expenses.
In the press release issued this morning, we have provided tables detailing the estimated impact of the 2017 hurricanes on our third quarter results. Moving down the income statement, our effective tax rate for the quarter was 35.8%, as compared to 36.2% in the third quarter last year.
The effective income tax rate was lower in the 2017 third quarter, due primarily to the recognition of greater federal Work Opportunity Tax Credit this quarter, as compared to the prior year quarter. Looking at a few items on our balance sheet and cash flow statement merchandise inventories at third quarter end were $3.6 billion.
For the quarter, total inventory increased 3.1%, while declining 4.9% on a per store basis. This marks our second consecutive quarter of inventory decline on a per store basis.
We believe our inventory is in great shape, and are comfortable with the quality. Our longer term goal continues to be inventory growth in line with or below our sales growth.
Year-to-date through the third quarter, we generated strong cash flow from operations totaling $1.14 billion an $18 million increase compared to the same period last year. This year's increase was primarily due to an improvement in our same-store inventory levels partially offset by increased income tax payments as a result of timing of income recognition for tax purposes.
It is also important to note that we're lapping significant working capital improvements from 2016. We continue to be pleased with our solid cash flow generation.
During the quarter, we repurchased 1.8 million shares of our common stock for $135 million, and paid a quarterly dividend of $0.26 from the common share outstanding at a total cost of $71 million. Year-to-date through the end of the third quarter, we have returned cash to shareholders totaling $512 million through the combination of share repurchases and quarterly dividend.
From December 2011 [ph] through the third quarter of 2017, we repurchased $4.9 billion or 78.4 million shares of our common stock. We have remaining authorization of approximately $635 million under the repurchase program.
We remain committed to a disciplined capital allocation strategy to create lasting value for our shareholders. Our first priority remains investing in new stores where we continue to see great returns and the necessary infrastructure to support our store growth, our second priority is to return cash to shareholders through anticipated dividends and share repurchases.
Underlying our capital allocation strategy is our goal to maintain our investment grade rating by managing to leverage ratio of approximately three times adjusted debt-to-EBITDA. Looking ahead, please keep a couple of points in mind, recall our fiscal 2017 is a 52 week year versus the 2016 53 week year, we estimated that the 53rd week in 2016 contribute about $0.09 per share to earnings that will not recur this year.
As Todd mentioned, we are pleased with our performance at this point in the year. We are narrowing our forecast for GAAP diluted EPS to range of $4.37 to $4.47 compared to our previous guidance range of $4.35 to $4.50.
Given that our guidance is on a reported GAAP basis. We are absorbing the $0.05 per diluted share for the net negative impact associated with the hurricane.
However we are only reducing the high-end of our guidance range by $0.03. For the fiscal year, this guidance includes the debt extinguishment charge of $0.01 per share recorded in the first quarter and absorbed two items that were not contemplated when either we provided our initial fiscal 2017 EPS guidance or our most recent update.
Number one the $0.02 per share charge reported in the second quarter primarily for lease termination cost and number two the estimated $0.05 per share net negative impact of the hurricanes during the quarter. Our guidance does not contemplate any potential impact from U.S.
Corporate Tax Legislation Reform. We are raising our 217 same store sales growth forecast to approximately 2.5% and updating our 2017 net sales growth forecast to approximately 7% which is at the high end of our prior outlook of 5% to 7% growth.
We are also updating our 2017 capital expenditures forecast to be in the range of $700 million to $750 million as compared to our private previous guidance of $750 million to $765 million. Share repurchases for the fiscal 2017 continue to be forecasted at approximately $450 million.
We have been very disciplined and how we manage expenses in capital with the gold to deliver consistent, strong financial performance while positioning our business for a long term growth and we planned to continue with this strategy in the future. We are investing in initiatives and tended to drive same store sales and the loyalty across our consumer base with the value and convenience that our customers need and trust from us.
With that, I will turn the call back over to Todd.
Todd Vasos
Thanks, John. As we have shared with you over the course of the last several quarters.
Our expectations with that overtime the transitory headwinds we were facing with moderate and our merchandizing initiatives coupled with our store manager pay in training investments will continue to contribute to our same store sales growth. I believe we saw this continue to play out in our results for the third quarter, and that we are well-positioned to continue to benefit from our model of value and convenience that is relevant to a broad cross section of shoppers.
Dollar General is differentiated by many strength; all of which are focused on the combination of value and convenience for our customers. We are executing our comprehensive strategic plans focusing on the actions that we believe have the greatest potential to drive shareholder value over the longer term.
We continue to believe we operate in one of the most attractive sectors in retail. Our unique strengths include more than 14,000 convenient small box stores with strong economics that allow us to serve and unreserved customers to shop our stores differently than other sectors of retail.
With an average basket of about five items and an average ticket of approximately $12, our stores and product mix are streamlined to help make the shopping trip convenient for our customers. They can easily shop our stores, find what they need and beyond the link.
With our strong stores growth we anticipate that 75% of the U.S. population will be within 5 miles of a Dollar General by the end of fiscal 2017.
Our range of formats from 3,500 square feet to 16,000 square feet allows Dollar General to capture growth opportunities in the areas ranging from rural to metro location. Once we find an attractive side, we can be flexible to optimize the stores square footage that can best fit the opportunity.
We are strategically investing our business to help our customers utilize digital tools and resources for our personalized shopping experience at Dollar General. We have the unique opportunity to help, shape our customers behavior and habit has their digital shopping journey all while leveraging are more than 14,000 brick-and-mortar stores and our geographic footprint to help them save time and money.
We remain committed to our long term operating priorities 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 with a focus on driving both the top line and bottom-line. Our goal is to both attract and grow new customers and trips and to capture share with existing customers.
This includes expanding the merchandising initiatives in our existing store base to drive traffic into those stores and improve same-store sales. For 2018 our merchandising initiatives are designed to provide our customers with trusted simple solutions to help to manage their household budget and provide them with even more value.
We know that our customer looks to us to fill an immediate need, while also providing the opportunity to make purchasing decisions in the aisle that fit within the budget. Our research indicates that our customers, not only like but also have a need to make purchasing decisions they can see and touch, while making isle tradeoffs between shopping consideration such as opening price points affordability compared to value and/or pack size to name just a few examples.
Based on our customer insights, we know that among the most important drivers of our customers to Dollar General is the ease of shopping our stores with the value and quality they expect from us in an enjoyable shopping experience. Our 2018 merchandising initiatives are designed to provide easy, identifiable, everyday low prices with a focus on opening price points including the one dollar price point complement with compelling promotions.
Our goals are for assortment to be differentiated and on trend and to continue to elevate the in-store experience through our store layout and then stock reliability in an easy and fun shopping environment. In-store for 2018, we plan to redesign our snack and beverages aisle to create a best in retail shopping experience.
This change in enhanced customer awareness and further position us a destination retailer for the media consumption shop through assortment and everyday low prices. Across a select group of stores, we also will be introducing and expand the assortment of better for you products with a focus on higher protein, lower salt and healthier food choices at price points that will be attracted to our customers.
The Dollar General customer looks to us to be part of her solutions for her day-to-day shopping needs. Over the last several years our expansion of coolers has helped drive trips in basket size.
The affinity between perishables and other categories is evident in our customer shopping habits. We continue to believe, we have an opportunity to selectively expand cooler doors to allow a great assortment of perishable foods, ice-cream, single serve drinks and cold beer.
By the end of 2017, we anticipate at across our store base. We will have an average of 18 cooler doors up from 10 in 2012.
Year-to-date through the third quarter, approximately 18,000 cooler doors have been installed across our existing stores. For the locations received an incremental coolers we continue to see an improvement in transactions.
Our initiatives for 2018 will continue to build on a multi-year track record of growth in cooler doors and associated sales. Given our success this year, expanding health and beauty aid products, we will be launching Phase II of this initiative.
The great news is that we have a substantial opportunity to capture share in health and beauty. Importantly, while we are making progress in our syndicated share trends this year, our health and beauty aid share is still below our customers and household needs categories.
Our 2018 plans are targeted to invest in driving overall category awareness with our customers to improved and impactful displays, consistent messaging and stores and across print and digital media enhanced quality perception and superior shop ability. We see significant runway for this category given our price advantage relative to some other channels.
The expansion of private brand offerings with a focus on quality and appealing packaging will play a role in our category management process while helping our customers stretch their budgets. For instance, in just seven years, we have built a proprietary brand Rexall to nearly $200 million in sales through our commitment to quality price and assortment.
We know that private brands resonate with our customer when we deliver the right combination of price and quality. Given the significant price gap as compared to national brand and to other channels such as drug stores, private brands play a significant role in helping our customers manage their budget.
Across the non-consumable categories, our 2018 merchandizing initiatives will continue to be relevant to our customers. While positioning Dollar General as a fun place to shop.
We plan to introduce new and expanded categories with improved value across non-consumables. Our customer loves the in-store treasure hunt at Dollar General for unique items to delight her family.
We believe our product offering will be a price points to see us comfortable with as the vast majority of our production offering will continue to be priced below $10. Moving to our marketing initiatives, we see a continued opportunity to improve engagement and build loyalty through expansion of our digital footprint and further integration of our traditional and digital media mix.
Our plan is to reach our customers, where, when and how they decide to engaged with us? We intend to continue to innovate in the channel in this area.
To assist with these efforts, we have hired our first Chief Digital and Customer Engagement Officer, a newly created position that will help lead the strategy for customer engagement including digital experience and tools. This position should help accelerate our digital strategy as we continue to develop resources to personalized offerings for our customers to save time and money.
With more than 10 billion subscribers to the DG Digital Coupon Program, we have a great foundation to build on for the future. We have ongoing opportunities for gross margin expansion that includes improvements in strength, global sourcing, private brands, distribution and transportation efficiency and non-consumable sales.
Inventory shrink reduction continues to be a large opportunity in gross margin. In 2018, we plan to expand electronic article surveillance to an incremental 5,000 stores, bringing the total stores with EAS to about 10,000 locations.
This is a proven, high return project for us to help further reduce shrink and drive sales to improve product availability. While we have seen carrier rates and fuel cost on the rise, we are working to mitigate this cost through stem mile reductions and optimization of loads.
Our Jackson, Georgia distribution facility began shipping in October of this year. Given our experience in opening six distribution centers since 2012, the team is getting better and more efficient with each opening.
The Jackson, Georgia location has come out of the gate strong as well. Additionally, across our distribution centers, we have implemented paper performance, which is a win-win for our employees and for our company.
As always we continue to work to ensure that our value proposition resonates with our customers. We are committed to providing them with everyday low prices that they know and trust.
Our goal is to ensure, we are high relevant with our customers through our ongoing investments in everyday low prices and targeted promotional activity. We have consistently shared with you one of the keys to our business is growing transaction and item units.
Our pricing surveys continue to indicate that Dollar General is well positioned from a price perspective again to all classes of trade and across all geographic regions where we operate. We are committed to be in price rights for our customers to drive traffic to our stores.
Our focus on initiatives to capture growth opportunities is our second priority. We have a proven, high return low risk model for our real estate growth.
We constantly monitor new store productivity and returns to ensure our store's growth is the best use of our capital focusing on the following five metrics. First, new store productivity as a percent of our comp store sales, actual sales performance compared with our pro forma model.
Average returns of 18% to 20%, cannibalization of our new stores on our comp store base and finally a payback period of less than two years. Our 2017 new store growth is right on track with strong sales and returns to nearly 300 store sites we acquired earlier in 2017 continued to be an exciting opportunity for us as gain more exposure in metro locations.
We are seeing that our brand is resonating in geographic areas that are new to us as some of our highest sales performance is coming from areas, where we historically have not [indiscernible]. Overall, the performance of this group of stores continues to gain traction as we build our brand in these locations.
For 2018, we expect to open 900 new stores, remodel 1,000 of our mature store locations, and relocate about 100 stores. That's about 2,000 projects in total.
With solid new store productivity, we have the opportunity to significantly increase our mature store remodel program with the gold to touch each location approximately every seven to ten years. Our experience gives us confidence in the incremental sales list and returns from our remodel program as we look to enhance and consistently deliver on our brand promise to help our customer save time and money every day.
Of the 1,000 plan store remodels for 2018, we currently expect approximately 400 locations to be in the Dollar General traditional plus format with 34 cooler doors for increased perishable selection. Our cooler door expansion has proven to drive baskets and trips with our customer base, while also attractive new customers with the expanded offering.
Our strong real-estate model allows us the ability to invest the new store growth and our new markets deliver new formats and reinvest in our mature store base. Our third operating priority is to leverage and reinforce our position as a low cost operator.
Over the years, we have established a clear and the fine process to control spending. At the store level, we are always focused on our process to drive productivity inside the four walls of our stores.
For 2018, our store operation initiatives are centered on space optimization and ongoing efforts to simplify operations in our stores by reducing inventory, operating complexity and product movement within the stores. These actions are designed to allow our store managers and their teams to reinvest time savings to provide better customer service and a clean in stock shopping experience.
Additionally, we have a focus on improving the speed of checkout. We look for opportunities to capture the benefits of reducing transaction time at checkout.
For example, consider the significant opportunity we have to drive cost out of the system by reducing as little as three seconds in each of our approximately 2 billion customer transactions. These time savings can be reinvested by the store teams to deliver a higher level for customer service, which ultimately helps improve sales.
Our ability to drive execution across our large and growing store base is a key strength to Dollar General. 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 they are a competitive advantage. A significant investment in-store manager compensation and training we made this year is paying off as our store management turnover for 2017 is on track to be at the lowest level in the recorded history of the company.
For the seventh consecutive year, Dollar General was remained to trainee magazines, top 125 training list, moving up every year in the rankings of companies that are recognized for excellence and employ training and development. For 2018 list to be released in February, we ranked now in the top five.
Collectively the team and I are very proud of these results. The leadership of our store manager is key to help and improve the customer experience and profitability of our stores.
Our investment in store manager compensation is anticipated to continue to positive impact our results next year. We are excited about how engaged our workforce is across our business.
I believe that this has helped to contribute to improvement and our overall customer satisfactions scores, which are currently at the highest level of the year. Turning now to our customer, we operate with the assumption that in challenging times, she needs us more than ever and in good times she has a little bit more money to spend with us.
Regardless of the economic outlook for our consumers, our goal is to do everything we can to provide them with a great shopping experience to deliver value and convenience they need and expect from Dollar General. We are committed to our 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 dividend.
We are excited about our plans for the future. The team is making thoughtful investments that ensure our strategy resonates with our customers and positions us for the long term.
I look forward to sharing more details with you in the future. As we are in the busiest time at retail, I want to thank each of our approximately 130,000 employees across the company for their tremendous efforts to help our customers save time and money every day.
The team did an amazing job during the third quarter of 2017 executing a record 634 real estate projects in just a single quarter. I appreciate all the hard work of our employees across the store operations, distribution centers, and at the store support center to support the approximately 2 billion customer transactions we execute annually.
Before we open the lines for questions, I want to let you all know that after eight years, Mary Winn, our SVP of Investor Relations, will be leaving Dollar General. Her last day will be December 15.
I would like to take this opportunity to personally acknowledge Mary Winn in the significant role she has played not only in building and leading a first-class communication team but also a trusted advisor to me and the rest of the team. On behalf of everyone here at Dollar General, we thank Mary Winn for all her insights and commitment to our organization.
We wish her all the best in her next chapter. Donny Lau, Vice President of Strategy along with Kevin Walker, Director of Investor Relations, will oversee our IR function in the interim.
As we search for replacement, we are fortunate to have people like Donny and Kevin on our team who have deep knowledge of the business. I am confident you will enjoy working with them.
With that, Mary Winn, we would now like to open the lines for questions.
Mary Winn Pilkington
Go ahead please with first question.
Operator
Your question comes from the line of Alan Rifkin with BTIG.
Alan Rifkin
Thank you very much. Mary Winn, you are certainly going to be missed, thank you for everything over - all of these years.
Todd, maybe just give us an update of [technical difficulty], one would have thought that perhaps it's a very strong comp even including the hurricane expenses we would have [saw] [ph] maybe a little bit more leverage on the SG&A line? Thank you.
Todd Vasos
Yes. I'll start, then I'll turn it over to John for a little bit more color, but we continue to be very focused on expense control here at Dollar General.
And I can tell you that the team has generated a tremendous amount of savings and value this year in 2017. And what I am happy to report is that we have identified a lot of also savings for the upcoming 2018 timeframe that we will discuss with you on our next call, but I think as you look out, this team has proven over time that we are very cost conscious as well as reinvesting where appropriate to continue to drive sales.
John, you might want to add something?
John Garratt
Yes, adding little more color to that, as you alluded to while SG&A was up 40 basis points, the hurricane impact of nearly $25 million was 42 basis points. While we did have some headwinds last year, I think it's important to note that there is two key headwinds this quarter with the ongoing impact of the store manager investment which again we continue to see as a great investment that will pay off for us.
As we get into next year, it will no longer be a headwind. And then the other key point is the ramp up of acquired stores.
Again as we mentioned, we opened a record number of stores this quarter, up 82% over the previous year. Over half -- this 470 stores, over half of those were new stores.
Many of which had expenses throughout the quarter as we were opening those up. So those put pressures on that.
When you strip that out, we are still in the place we want to be from a leverage standpoint. And as Todd said that with zero based budgeting that's really becoming [grand] [ph] in everything we do here.
And I can assure you, the team is laser-focused on driving out any and all spending that don't touch our customer, support our strategic initiatives, or change our risk profile. So, we continue to be very focused on that as well as gross margin, making the right tradeoffs there while investing in the business and still see ourselves in that same leverage point that we targeted.
Alan Rifkin
Okay. Thank you very much.
And just a follow-up if I may, with respect to wages, certainly the pressures on wages are well documented, but maybe Todd, if you could maybe share with us as you look to 2018, what incremental wage pressure do you see on at the store level? And also considering your core customer with higher wages being implemented in more and more states via increases in minimum wages, what benefits do you see from that consumer to your business?
Thank you.
Todd Vasos
Sure. We - the one thing about what we've seen on the wage front is we continue to be right now as stand today at our highest level of participation inside of our stores.
Meaning open positions are some of the lowest levels we've seen. So, we feel very good about where we are as it relates to the wages that we pay.
There is no doubt that in certain states and municipalities, we've seen additional wage pressures. But we continue to operate in those environments just like we do everywhere else.
As we go into 2018, we believe that some of the increase in wages whether it would be with our core consumer or others should help continue to benefit the economy in totality, which I believe that with our initiatives that we have in place, we should get more than our fair share of that participation. So, we feel good about where the consumer is right now.
But as I always say, we work under the premise that she is always tight because her expenses continue to rise on the other side of expense -- excuse me, of her income rising. So we continue to make sure we're laser focused on offering value and convenience everyday for our consumer.
Alan Rifkin
Thank you. Thank you very much.
And best of luck over the holiday season.
Todd Vasos
Thank you.
Operator
Your next question comes from the line of Karen Short with Barclays.
Shaun Cross
Hi guys. This is Shaun Cross on for Karen.
And Mary Winn, you'll certainly be missed.
Mary Winn
Thanks.
Shaun Cross
Did the comp slowdown over the course of the quarter just trying to get a sense of maybe why the implied fourth quarter guidance is for slowdown on a one and two year basis?
John Garratt
Yes, if you look at the cadence across the periods in the third quarter, every period was positive. But September was the most positive of the quarter’s period [Indiscernible].
I think it's also worth that noting the balance between both consumables and non-consumables being positive overall.
Shaun Cross
Okay. And then, on the gross margin, can you give us a sense what that number would have been excluding the acquired stores?
Mary Winn Pilkington
I don't [Indiscernible] meaningful impact to that at all…
Todd Vasos
Yes, it wasn't a meaningful impact, yes. But we are pleased with the balance of delivering a strong top line and 8 basis points of expansion.
But there wasn't a meaningful impact from that on the margin.
John Garratt
It was a couple basis points at most.
Shaun Cross
Okay. Thanks guys, appreciate it.
Operator
Your next question comes from the line of Edward Kelly with Wells Fargo.
Todd Vasos
Hi, Ed.
Unidentified Analyst
Hey, good morning guys. This is actually Anthony [indiscernible] on for Ed.
Thanks for taking my question. Just back on gross margin again.
Guidance seems to imply a little compression in Q4 similar to earlier in the year. Can you just walk us through the puts and takes here?
How should we be thinking about that?
Todd Vasos
Yes, well, as in the past, we don't guide on gross margin. We really like to make sure making the right tradeoff between gross margin, SG&A.
But what I will say is that as you look at quarter, Q3 we are pleased to see the gross margin expansion driven by higher initial markups and shrink improvement. That was the fourth consecutive quarter of shrink improvement.
What you didn't see in there is any issues around promos or clearance, that being a non-impact. And what I would say is as we look over the long term, we continue to see opportunities to enhance margins or strategically invest back as needed to drive traffic.
But, continue to see opportunities around shrink. Even though we had four consecutive quarters, we continue to see opportunity to further improve that.
Team continues to do a great job around category management with more opportunity there. We see opportunity to enhance private label and foreign direct sourcing penetration and continue to see operations - opportunities around supply chain efficiencies despite some pressure from -- in the near-term from fuel rate and carrier rate.
So over the long term, we continue to see opportunity there. But then also look to strike a right balance between that and managing the levers between gross margin and SG&A to deliver strong operating margin.
Unidentified Analyst
Got it. That's helpful.
Thanks guys. And congrats on a solid quarter.
Todd Vasos
Thank you.
Operator
Your next question comes from the line of Matthew Boss with JPMorgan.
Todd Vasos
Hi, Matt.
Matthew Boss
Hey, Todd. Congrats on a nice quarter.
Todd Vasos
Thank you.
Matthew Boss
So, Todd, can you speak to some of the learnings from your remodel program to date and just touch on maybe some of the more recent performance that you are seeing in your mature store base?
Todd Vasos
Sure. We continue to be very, very encouraged on the remodeled program, both our traditional remodels and our remodels that incorporate the additional coolers.
And some of those, the entrance of producing some of those locations, those locations in particular continue to outpace our normal remodel program almost 3x. And that's what gives us great confidence as we expand the remodel program next year up to 400 stores -- 1,000 stores, excuse me, but 400 of them will be under that banner of the large coolers.
And in some cases not all 400, but some additional produce. So we continue to do very well.
The customers are resonating well. We continue to see that we get about one additional trip in those stores than normal from our core customer because of that expansion of coolers.
And by the way, we see expansion in those remodels in health and beauty as well, and in some of our non-consumable category. So all ships in the harbor, if you will, rise within those remodels.
Matthew Boss
That's great. And then just a follow-up, I guess larger picture, as we think about the 10 to 15% earnings growth algorithm, I think you had laid out last March, if same-store sales remains in the 2 to 4 target range that they are today, are there any headwind to achieving the 10 to 15% bottom line as we think the next year and beyond?
Is that still the algorithm you think that fits with 2 to 4% comp?
Todd Vasos
Yes. We still see that 2 to 4% helps deliver the 10% plus growth algorithm.
And really we will be commenting on 2018 when we will get into the March timeframe. But still see ourselves as double digit growers.
And we don't see any meaningful headwinds to that in the near future.
Matthew Boss
That's great. Best of luck.
Todd Vasos
Thank you.
Operator
Your next question comes from the line of Scot Ciccarelli with RBC Capital Markets.
Todd Vasos
Good morning, Scot.
Scot Ciccarelli
Good morning guys. How are you?
Todd Vasos
Good.
Scot Ciccarelli
Excellent. So I guess as a bit of a follow-up maybe to Alan's question from earlier.
Given -- on the wages, given the success that you have seen with the increased training and the increased payroll, does it make sense in your view to actually accelerate those investments as you look out to 2018 and 2019? Just given the benefits that they have yielded or do you think you are pretty happy with kind of the performance that you have seen and there is not going to be incremental investments on that side?
Todd Vasos
Yes, we are very happy with the investments that we made here in early 2017. As I indicated, our store manager investments in both compensation and training are really paying off.
What we are very proud about here is that we are seeing lowest turnover rates in recorded history from our store managers. And being an old operator and I use the term old myself, there is nothing more important than the store manager to the key of any company's success in retail.
So I think we made the exact right move in the investment in both the compensation and training. And we don't see -- we think we're in great spot based on everything we have seen and heard and continue to see out in the marketplace as far as compensation is concerned.
So we don't see another round of large investments there. And we'll continue to monitor it.
And we'll continue ensure that our store manager and all of our employees are taken care of on a compensation basis where appropriate.
Scot Ciccarelli
All right. That's super helpful, Todd.
And just a quick follow-up because John had talked about the comp contribution from new store maturity curve, can you guys just update us in kind of where we are today in terms of the comp contribution from that new store maturity?
Todd Vasos
Yes. What we have said in the past is when you look at the net impact netted against the cannibalization, it's about 150 - 200 basis points and we are at high end of that.
So we are very pleased with what we are seeing from that, from sales contribution as well as rate return.
John Garratt
Yes. Our new store program is hitting on all cylinders right now.
Scot Ciccarelli
Roger that. All right, thanks guys.
Operator
Your next question comes from the line of Peter Keith with Piper Jaffray.
Peter Keith
Hey, thanks. Good morning.
Todd Vasos
Good morning.
Peter Keith
Good morning team, nice quarter. So there has been a couple of questions around the Q4 guidance, I guess maybe I'll rephrase it as have you changed your outlook for Q4 within the context of the overall full-year guidance, because it certainly looks like there's a deceleration of fundamentals based on the implied guide.
John Garratt
We continue to see same strong business fundamentals and feel great about the business top line, bottom line. If you look at EPS based on year-to-date performance, we did narrow the guidance on that raising the bottom end of it $0.02.
We only lowered the top end of that $0.03 after taking into account the $0.05 net negative impact from the hurricanes. If you strip out the hurricane impact, we really see as a raise on both the top end and the bottom end.
And recall, we had indicated previously that Q3 would be the strongest quarter of the year with Q4 having a more difficult lap and included in that overlap and estimated $0.09 benefit last year from the 53rd week. So we continue to see things in a similar light.
Peter Keith
Okay, thank you, John. A follow-up that's unrelated, but there seems to be a growing drumbeat around potential welfare reform as we look out to 2018, I was wondering if you could provide a historical perspective on when there's been past welfare reform how that's impacted your business and if there are specific pockets of government subsidy programs that you'd be most concerned about getting cut?
Todd Vasos
Obviously, our core customer does rely on assistance in many areas but the one thing that we see is that if we continue to show our core customer quality and value, give her a reason to shop with Dollar General, she'll shop with us no matter what kind of economic condition is out there. And as we've always said when times are tough and they could be tougher if certain things happen along government assistance then she needs us more, because we offer that great value.
So we feel that that over time she figures that out, you know, figures her budget out and over time we can continue to deliver a real benefit to her through our everyday low prices and convenience.
Peter Keith
Okay, thank you very much, and my best wishes to Mary Winn, you are one of the best.
Mary Winn Pilkington
Thank you, Pete.
Operator
Your next question comes from the line of Paul Trussell with Deutsche Bank.
Todd Vasos
Good morning, Paul.
Paul Trussell
Good morning. You guys touched on this a little bit in the call, but I just want to circle back to the acceleration that we saw this quarter on both comps and gross margins.
It was a really nice acceleration, but certainly we also recognized that it came against easy compares from a year ago. And so, just help us with some additional details, the puts and takes on the sustainability of some of the drivers of comps and gross margins, particularly I'd like to hear about some of the initiatives on both the consumable but also the discretionary side of the store.
And also just your outlook around the macro environment and what you're seeing that might be different in terms of just the way the consumer is acting and shopping?
Todd Vasos
Yes, Paul, when you look at our top line sales, we delivered exactly what we said we were going to deliver, and we knew that the transitory headwinds that we had called out would start to subside as we move through third quarter and into the fourth quarter as well. We saw that, but what we also saw was our initiatives really starting to take hold and really make a difference both on the consumable side and the non-consumable side of the ledger.
So it was great to see the teams - the category management teams have done a great job working in tandem with our store teams and our marketing teams to get the message out. Our core customer continues to rely on Dollar General very heavily to offer that value, that convenience, and what we continue to do is we continue to be a leader in that, in the channel.
And as you look at our initiatives for the balance of '17 and into '18, it really capitalizes I believe on what our core strengths are, and exactly it is all put together, and executed against what the customer is telling us that she needs. And I think that's the important part of what has made Dollar General successful over the many, many years is that we really work hand-in-hand with our consumer, and we make the trade-offs inside the store, and sometimes it could be consumables versus non-consumables depending where she is at in her economic cycle.
What we see moving into 2018 as I talked about in my prepared remarks, I think we have a real opportunity to accelerate our non-consumable businesses, especially in areas that the consumer gives us credit for, and where she'd like to see enhancements, and stay-tuned as we get into March, we'll talk a little bit more about what those are, but I could tell you that the treasure hunt is what she's looking for and that's what we're going to be delivering to her as we continue to move forward. So we feel good about that.
We feel good about our margins. Our margins, as you continue to look into the back-half of this year and into early next year, we have, as John indicated, a lot of levers to continue to work, but we always make sure that we balance that with driving traffic.
And I think we've exhibited in Q3 here that we can do both of those.
Paul Trussell
Thanks for the color. And then, just looking at the cash and the balance sheet, just remind us, you guys - I think outlined a plan for $450 million or so, I believe in share repurchase this year, which is again materially below some prior year levels.
Just remind us was that very specifically related to kind of the real estate acquisition and projects that you guys took on and just want to better understand how you guys think about contribution or earnings from buyback going forward? And then also, well, I know it's pretty early and hypothetical, given that we are having conversations around tax reform, you know, if that was to flow through in terms of a lower corporate tax rate, how would you think about your investment strategy, your capital plans, and your cash usage?
Thank you.
Todd Vasos
Sure. In terms of this year, it was lower than previous years because of the investments, you know, the two key investments being the investment we made in store manager pay, which again we think was the exact right decision to make; w are seeing the benefits of that, as well as the increased development.
Now, as I look forward, and as we consider tax reform, obviously we're watching this very closely. As it's currently drafted, the bills are expected to have a material favorable impact to us.
Obviously, the likelihood timing and details of that are uncertain, so I can't comment specifically what we would do here, but what I can tell you is we don't fundamentally see this changing our capital allocation priorities. They worked very well for us, and we see them working well for us in the future.
And just to [indiscernible] what those are, it's first and foremost investing in the business, as long as we continue to see great returns in new store growth like we have, that's the best use of our capital. We will continue to do that - evaluating other high return investments in the business.
The good news is this business generates tremendous amount of cash as is. So we do well under any tax code, but with the excess cash, what we do want to do is strike the right balance, pay a competitive dividend, and continue to repurchase shares with the excess cash flow up to while protecting our investment grade rating.
So I don't see that's fundamentally changing as things solidify around the tax changes we can comment at that further in the future.
Paul Trussell
Thank you very much, and best of luck during the holidays, and especially best of luck to you, Mary Winn.
Mary Winn Pilkington
Thank you very much.
Todd Vasos
Thank you very much.
Operator
And our next question comes from the line of Michael Lasser with UBS.
Todd Vasos
Good morning.
Michael Lasser
Good morning, Todd. Thanks for taking my question.
Good luck and best wish, Marry Winn. Todd, you had a range between your initiative may be more favorable environment, and it's easier to compare, how would you bring those in terms of driving the acceleration in your comps…
Todd Vasos
Yes. So when you look at it, I would tell you that our initiatives are really paying off.
I would tell you that would be first and foremost. And I think as you look at it, you see those initiatives paying off both in our mature stores, some of the best comp we seen in our mature store base as many years.
Also in our new stores, you see that, because remember our new stores get the best and the brightest if you will of all of our initiatives, all at one time. So I think here I think that would be first and foremost.
And then obviously some of those headwinds we've been talking about abating would be second on the list. So that's why we feel very good about the positioning, we are in right now for Q4 and as we move into 2018.
Michael Lasser
And then John, you talked a little bit about what you do from a capital perspective, you said that if there is tax reform, your tax rate goes down, how would you think about your - in that sort of environment, would you take that as an opportunity to invest for your margin, lower your margin, and either lower prices or best more in your stores or below the line through your profitability?
John Garratt
Again, we will have to wait and see exactly how that comes up. What I would say is as we see it now, we see ourselves continuing to operate, run the business same way we have this worked quite well obviously evaluating situations as we go, but feel pretty happy about the way we are managing all the levers now.
Michael Lasser
And I guess, piece of that would depend on what happened - what your competitors do? So with that being said, are you seeing any changes in the promotional environment, the pricing environment that would suggest maybe getting better or worse right now?
John Garratt
Yes, I would tell you that as far as the competitive environment, it's always competitive to retail, but as you look at it, we really haven't seen a change in the competitor environment in the last few quarters. So we're - it's about where it was.
And the great thing is that Dollar General is positioned very well price-wise both every day price and the promotional activity that we have to offer for the consumer. And the other thing that we offer her is a great compelling offering on our digital side.
More and more digital engagement is starting to happen here at Dollar General with our core consumer. And if that continues to resonate with our core, you'll continue to see more of that, and I believe that overall our core customer is responding pretty well to all of the initiatives that we put together here in 2017.
And again, that's what gives us a great solace as we move into 2018 that we can continue to keep that momentum moving.
Michael Lasser
Thank you, and have a good holiday.
John Garratt
Sure.
Mary Winn Pilkington
Operator, I think we have time for one more question. Flip one in.
Operator
Your final question comes from the line of Chuck Grom with Gordon Haskett.
Todd Vasos
Hi, Chuck.
Chuck Grom
Good Morning. Most of my questions have been asked, but it's just first on the fourth quarter implied comp; it doesn't sound like [indiscernible] anything with your consumer that's given you guys pause here in the first five or six weeks of 4Q?
And then second, to follow-up on Matt's question earlier on the remodel cadence, you doing a 1,000 total projects, 400 are the traditional plus, and as you alluded to, the comp is usually 3X a traditional remodel, so just my question is why not accelerate that pace, what's the potential to - what's the store potential to roll that traditional plus out, and then could you shed some light on how many are going to receive produce this year?
Todd Vasos
Sure. So, as you look at so far in the quarter, yes, we don't see anything that shows us that anything is really changing in the quarter.
We feel good about where the comp is. But keep in mind, we have a lot of quarter ahead of us, some of our biggest weeks leading up to Christmas here the next three weeks, and January traditionally in our channel is a very good month for us as well.
So, we'll continue to watch that, stay-tuned, but we feel good about where that comp is headed. As it relates, Chuck, to the remodel program, you're right, 1,000 remodels is on the books for next year as we indicated.
I think that's a very aggressive plan. It really touches a lot of our mature store base.
And with 400 of them being in the traditional plus model, we feel very good about where those comps can head. But one thing to keep in mind, on the traditional plus model is that like our real estate program in general, we are very disciplined on where we put the certain stores and what format we put them in, because we've got a proven track record of where they are most successful.
And I can tell you that of the - of thousands that we are doing, the 400 that we fit, we feel very good about the success rate that we should see from those 400. We probably have another 2,000 to 3,000 of those opportunities as they exist today, but you know what, as we continue to learn more about what the consumer is buying out of those traditional plus stores, and what they continue to ask us for, that actually could expand; we could see that opportunity could be as high as 5,000, and we are watching that as we speak, and we will continue to monitor it as we move forward.
And then, produce, we continue to work the produce side, because it is a competitive advantage for us in many areas when we offer produce. I could tell you that out of the 400, probably 25% of them or so will probably have produce as we look at it, but as we continue to learn the produce business, our stores learn more about it, I think there is going to be more and more opportunity for that as well in the upcoming years ahead of us.
Chuck Grom
Great. Thanks a lot.
Mary Winn, you are going to be missed. Take care.
Mary Winn Pilkington
Thank you very much.
Mary Winn Pilkington
With that, I will conclude our call for today. Kevin, Donnie, and I will be around today to do calls, and I look forward to speaking to you.
Thank you for your continued support at Dollar General.
Operator
Thank you. That does conclude today's conference call.
You may now disconnect.