And you combine all those four things together and that’s how we achieve the operating profit, which will certainly allow us to continue to lean into our real estate model as we go forward.
Charles Grom : Okay. Great. And then for Kelly, just looking at the change in the guide, can you help us think about the shape of the back half in a little bit more detail and a little bit more context between the third and the fourth quarter? I guess, would you expect the third quarter comps to be outside of the band that you provided, the down 1 to up 1? And any help on how much compression we should expect to see in both the gross margin line and operating margin line in the third and fourth quarter just so we can true up our models.
Kelly Dilts : Yes. No, absolutely, happy to help. So I’d say, first, obviously the actions that we’re taking to drive sales and lower our costs will set us up for ’24. And our revised guide is really a function of the slower transactions that we’re seeing and higher expected shrink. We did give a pretty wide range of the negative 1% to 1%. Net sales range is really a function of how quickly our customer responds to our actions and really how they respond, honestly, to their own financial situation in the back half of the year. When you think about the EPS range, it’s flow-through of the sales, obviously, the higher shrink in the investments. And we also have a little more pressure around damages and then around the markdowns associated with the lower sales.
So it’s probably going to take a couple of quarters just to get — make sure that we’re taking all the actions and we get back to that operational excellence. If I break down the quarters, to your point, starting with the third quarter, we should see comp sales lower than our range. What we’re seeing now is with Q2, comp decelerated sequentially by period. But we did see traffic trends improve. What we’re getting pressure from, and we talked about this a little bit in the prepared remarks, is that we’re starting to lap the more significant price increases in the back half of last year. This is going to pressure Q3 more than any other quarter in particular. And so to your point, we do expect comp sales to be negative in Q3, and we’re running as expected to date.
Just on the margin piece of Q3, that’s also going to be more pressured than what we are seeing in Q4 with our inventory actions as well as shrink. And so right now, we’re expecting Q3 gross margin to be below 30%. And obviously, that would put pressure on Q3 EPS. On the Q4 side, we believe that we’re going to start to see the benefit of our actions and our investments a little bit more. In Q4, we’ve also got a tailwind around lapping Winter Storm Elliott. So we’ll see stronger Q4 comp than we would think for Q3 as well as EPS. And then just touching on the timing of the investments, especially the inventory actions that we’re taking. We’re going to give ourselves a little bit of wiggle room and make sure that we can react to the customer response, and we may choose to pull some of those investments forward into Q3, if it makes sense.
Operator: Our next question is from Matthew Boss with JP Morgan.
Matthew Boss : So Jeff, maybe to break down the macro versus micro. I guess, first, how would you assess the low-end backdrop today notably tying in July and August relative to three months ago? Or any change in purchase intentions noted from the customer survey work that I know you guys do? And then on the macro, any change in the competitive landscape as you assess relative comp performance or market share by category?
Jeffery Owen : Thanks, Matt. On the customer, she still is challenged, and we talked about that in the first quarter and that continues. Our customer, what she’s telling us is that certainly as gas prices are less than last year, but they’re accelerating throughout 2023, and she’s still feeling the headwinds of the SNAP reduction and also the lack of tax refunds. And her savings are gone. And so certainly, she is still living with the inflationary pressure. So certainly, the customers are challenged. But quite frankly, our customers is frequently challenged and we know that. And we’ve made actions, and I’m very pleased with the actions we took to help her in her time of need, which is exactly why we did it in the first quarter.
So we feel good about our ability to offer value to her and also be there for her. And when you think about the execution opportunity we have in front of us, where we’ve seen initial signs of our progress but also with the actions that we just announced to accelerate that progress, that’s only going to allow us to further serve this customer. And she’s going to lean on Dollar General even more, like she typically does in times of challenge like this. And we are going to be even better positioned to serve her. Certainly, as we improve our in-stock levels, our store standards and certainly, as I said earlier, love what we’re seeing with the smart teams we’ve just deployed. So as we think about the competitive landscape, Dollar General has been able to compete quite well for quite some time.
And this team knows exactly where we need to course correct, we know how to course correct, and we’ve announced today the actions that are going to of course correct. So we feel great about our ability to return to the excellence that we’re accustomed to achieving even faster than we were before. And we don’t take it lightly that our sales performance right now is not where we want it to be. But we’re pleased with the actions that we’re going to see show up and the early signs that we’re seeing already. So looking forward to back half of this year and then certainly into 2024.
Matthew Boss : Great. And then, Kelly, with EBIT margin this year forecasted roughly 200 basis points below pre-pandemic, how do the back half investments structurally impact the margin profile for next year or just your margin recapture ability next year? And then secondly, with the balance sheet leverage remaining above your targeted 3x, how does that impact the historical double-digit bottom line algorithm?
Kelly Dilts : Yes. So I’ll start with the structural piece first and break it down a little bit between gross margin and SG&A. And so we really think that the current headwinds are more transitory, specifically when we talk about shrink and damages and markdowns. We think we’re well positioned on supply chain efficiencies with structural improvements on the horizon, as we talked about a little bit with the automation piece of that and certainly the private fleet continuation. DG Media Network should provide significant gross margin opportunity as well and, again, DG Fresh and NCI as we move forward and maybe mix into more non-consumables over the next couple of years. We also continue to see some opportunities in private brands.
. On the SG&A side, I’d say the labor investment is embedded now in our baseline. But as we go forward, we are really looking at an end-to-end operating model to make sure that we’re driving efficiencies in the store and lowering our cost to serve. And as Jeff said, we’re also looking at inventory management as well to lower our cost to serve over the next couple of years. I think that, that will help us take some cost out of the system. And then we’re ramping up our save-to-serve initiative and expect to see benefit of that next year. So we feel like — again, not specifically speaking to ’24 but to the future, that we’ll be able to get back to that operating profit growth. But we do — we will have some near-term headwinds just on the financial strategy side of things around share repurchases in the near term.
On the — remind me again on the balance sheet question?
Matthew Boss : Just with the balance sheet leverage above your targeted 3x, maybe what’s the time line to get back there and how best to think about priorities for cash flow.
Kelly Dilts : Yes, absolutely. So I think just going through priorities, we still believe in the capital allocation priorities that we’ve laid out, making sure that we’re investing in the business and high growth opportunities, as obviously our first priority. Next would be dividend payments and then, of course, any share repurchases with the remaining cash available for that. You’re right on the leverage ratio. Right now, we’re above our target. The good news here is that this model has a strong history of generating significant cash flow, and we continue to believe that, that strength will continue over time. We think this leverage ratio will probably be with us for a little while, but we are working to get back to our targeted leverage ratio in the near future.
Operator: Our next question comes from Simeon Gutman with Morgan Stanley.
Simeon Gutman : I wanted to first ask around the comps and where they’re performing. If you could put it all together and summarize what you attribute to some of the underperformance, too. It does sound like traffic is underlyingly okay and it’s just lapping some tickets. Curious how you diagnose or rank pricing, if it’s merchandising, anything related to the stores. So how should we think about that?
