Thank you, and good morning, everyone. On the call with me today are Todd Vasos, our CEO, and Kelly Dilts, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News and Events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, long-term financial framework, strategy, initiatives, plans, goals, priorities, opportunities, expectations, or beliefs about future matters, and other statements that are not limited to historical fact. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
These factors include, but are not limited to, those identified in our earnings release issued this morning under risk factors in our 2024 Form 10-K filed on March 21, 2025, and any later filed periodic report, and in the comments that are made on this call. 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 unless required by law. At the end of our prepared remarks, we will open the call up for your questions. To allow us to address as many questions as possible in the queue, please limit yourself to one question. Now, it is my pleasure to turn the call over to Todd.
Thank you, Kevin, and welcome to everyone joining our call. I want to begin by thanking our team for their great work to fulfill our mission of serving others every day in our stores, distribution centers, private fleet, and store support center. These efforts are resonating with our customers as well as driving strong operating and financial performance. To that end, we are pleased to deliver strong second quarter results highlighted by earnings growth that significantly exceeded our internal expectations. For today's call, I'll begin by recapping some of the highlights of our second quarter performance, as well as sharing our latest observations on the consumer environment. After that, Kelly will share the details of our financial performance, as well as our updated financial outlook for fiscal 2025. I will then wrap up the call with an update on some of our key growth-driving initiatives.
Turning to our second quarter performance, net sales increased 5.1% to $10.7 billion in Q2, compared to net sales of $10.2 billion in last year's second quarter. This growth was driven by strong performance from new stores and our mature store base. We grew market share in both dollars and units in highly consumable product sales once again during the quarter, in addition to growing market share in non-consumable product sales. Same-store sales increased 2.8% during the quarter, driven by relatively balanced growth of 1.5% in customer traffic and 1.2% in average basket. The basket growth was driven by an increase in both average unit retail price per item and average items per basket. We were excited to see a second consecutive quarter of broad-based category growth with positive comp sales in each of our consumables, seasonal, home, and apparel categories.
From a monthly cadence perspective, we saw same-store sales growth above 2% in all three periods, with our strongest comps in June and July. We believe these strong and balanced top-line results are a reflection of the hard work the team has done to improve execution and further enhance the value and convenience proposition for both existing and new customers. To that end, we're pleased to see growth with customers across all income brackets during the quarter. This includes our core customer who increased spending despite worsening sentiment. In addition, we continue to see trade-in growth with middle and higher-income customers during the quarter, which we believe is contributing to the nice performance we've seen in our non-consumable categories. Ultimately, customers across all income brackets are coming to Dollar General as they seek value.
As America's neighborhood general store in more than 20,000 locations across the country, we recognize and embrace our role in being here for what matters for our customers. This includes providing the items they want and need at prices they can afford. With that in mind, we are committed to delivering everyday low prices that are within 3%-4% on average of mass retailers. While we are pleased that we continue to operate within the targeted price range, we are also focused on maintaining our substantial offering of more than 2,000 SKUs at or below the $1 price point. We know this price point is important in helping our core customers stretch their dollar, particularly at the end of the month and when budgets are tight.
In fact, our $1 Value Valley merchandising set, which is comprised of more than 500 rotating SKUs, was one of our strongest performing areas in the quarter, with same-store sales growth more than twice the rate of the overall company. We believe this holistic approach to offering value will continue to be important for our customers, particularly in the back half of this year. Now, I'd like to provide a brief update on how we're thinking about tariffs. With the rates currently in place, we believe we will be able to mitigate the vast majority of the impact on our cost of goods. The proactive approach of our sourcing team, coupled with our relatively low direct import exposure, has positioned us well to serve our customers with a quality assortment at tremendous value.
While the landscape remains dynamic, tariffs have begun to result in some price increases, and we will continue to work to minimize them as much as possible. Most importantly, we know this further amplifies the need for value within our communities, and we remain committed to serving our customers with the everyday low prices they have come to know and appreciate from Dollar General. Overall, we're proud of our performance during the quarter and the tremendous progress we've made throughout the first half of the year. Our actions are delivering an enhanced shopping experience for our customers and driving strong operating and financial results. We are further strengthening our value and convenience proposition for our customers while making significant progress on our long-term financial goals.
Before I turn the call over for our financial update, I want to thank Kelly for her partnership, as well as her leadership of our financial organization over the last few years. We wish her the very best as she prepares and begins her new chapter. I also want to note that we're excited to welcome Donny Lau back to Dollar General as our next CFO, beginning in October. He is highly regarded throughout the organization for his deep understanding of the business, thoughtful strategic leadership, and appreciation for our culture and values. We look forward to his leadership of our financial organization as we seek to drive excellence and create long-term shareholder value. With that, I'd now like to turn the call over to Kelly.
Thank you, Todd, and good morning, everyone. First, on a personal note, I want to express my appreciation to this team, our customers, and our shareholders. This is a special organization with a unique mission, and I'm grateful for the time I've had to serve alongside them. Now that Todd has taken you through a few of the top-line highlights of the quarter, let me take you through some of the other important financial details. Unless we specifically note otherwise, all comparisons are year over year, all references to EPS refer to diluted earnings per share, and all years noted refer to the corresponding fiscal year. For Q2, gross profit as a percentage of sales was 31.3%, an increase of 137 basis points. This increase was primarily attributable to lower shrink, higher inventory markups, and lower inventory damages.
Our focus on reducing shrink has continued to produce positive results, including a healthy year-over-year improvement of 108 basis points in the second quarter. We're excited to be outperforming the shrink reduction expectations contemplated within our long-term financial growth framework in terms of both timing and magnitude. Given these results, we're optimistic about the potential for shrink reduction to contribute more than 80 basis points toward the operating margin goal of 6%-7% contemplated within our long-term financial framework. In addition, we were pleased to drive a reduction in damages in the second quarter, as our efforts in this area have begun to take hold as well. The gross margin increase was partially offset by an increased LIFO provision, as well as increased markdowns and increased distribution costs. Now, let's turn to SG&A, which as a percentage of sales was 25.8%, an increase of 121 basis points.
The primary expenses that were a higher percentage of net sales in the quarter were incentive compensation, repairs and maintenance, and benefits. Moving down the income statement, operating profit for the second quarter increased 8.3% to $595 million. As a percentage of sales, operating profit increased 16 basis points to 5.6%. Net interest expense for the quarter decreased to $57.7 million compared to $68.1 million in last year's second quarter. Our effective tax rate for the quarter was 23.5% and compares to 22.3% in the second quarter last year. Finally, EPS for the quarter increased 9.4% to $1.86, which exceeded the high end of our internal expectations. Turning now to our balance sheet and cash flow, where we continue to make great progress strengthening our financial position.
Merchandise inventories were $6.6 billion at the end of Q2, a decrease of $391 million, or 5.6% compared to prior year, and a decrease of 7.4% on an average per store basis. The team continues to do a tremendous job reducing inventory while increasing sales and improving in-stock levels, which is having positive operational impacts in both stores and distribution centers. The business generated cash flows from operations of $1.8 billion during the first half of the year, an increase of 9.8% compared to the prior year. Our strong top and bottom line results, along with our focused inventory management efforts, continue to generate significant cash flow. During the quarter, we returned cash to shareholders through a quarterly dividend of $0.59 per common share outstanding for a total payment of approximately $130 million. Our capital allocation priorities continue to serve us well and remain unchanged.
Our first priority is investing in our business, including our existing store base, as well as high return growth opportunities such as new store expansions, remodels, and other strategic initiatives. Next, we seek to return cash to shareholders through a quarterly dividend payment and overtime and when appropriate, share repurchases. While our leverage ratio remains above our goal, which is below three times adjusted debt to adjusted EBITDA, we are making great progress towards reaching our target level. Importantly, we remain focused on improving our debt metrics in support of our commitment to middle BBB ratings by S&P and Moody's. Overall, we're very pleased with our operating performance and financial results. Our strong performance has positioned us to raise our financial outlook for 2025.
This update primarily reflects our outperformance in the second quarter and improved outlook for the second half of the year, while considering the potential uncertainty, particularly on consumer behavior as we move through the back half of 2025. With that in mind, we now expect the following for 2025: net sales growth of approximately 4.3%-4.8%, same-store sales growth of approximately 2.1%-2.6%, and EPS in the range of $5.80-$6.30. Our EPS guidance continues to assume an effective tax rate of approximately 23.5% and that we will not repurchase shares under our share repurchase program. Now, I want to provide some additional context around our expectations.
While we're not providing specific quarterly guidance, the low end of our sales and earnings guidance ranges allow for increasing pressure on consumer spending as we move through the back half of the year, with Q4 potentially more impacted than Q3. In addition, we expect shrink to be a continued tailwind throughout the remainder of the year, though to a lesser extent in Q4 as we begin to lap the improvements we made toward the end of last year. Turning to SG&A, given our strong performance, we now anticipate incentive compensation expense to be a headwind of approximately $200 million. Moving to the final portions of our guidance for 2025, we continue to expect capital spending in the range of $1.3-$1.4 billion designed to support our ongoing growth.
This includes our continued expectations to execute approximately 4,885 real estate projects in 2025, including 575 new store openings in the United States and up to 15 in Mexico, 2,000 project renovate remodels, 2,250 project elevate remodels, and 45 relocations. Finally, as a result of our strong cash position, we are using cash on hand to redeem $600 million of our senior notes in the third quarter, earlier than their April 2027 maturity. In summary, we're pleased with our Q2 results, and we're proud of the work that the team has done to strengthen our operating and financial position. This business model is strong, and we believe Dollar General is well-positioned to drive sustainable long-term growth on both the top and bottom lines while creating long-term shareholder value. With that, I'll turn the call back over to Todd.
Thank you, Kelly. I'll take the next few minutes to provide updates on three of the most important initiatives across the business as we look to further advance our progress toward achieving our short and long-term goals. I'll start with our real estate work as we continue to focus on driving sales and market share growth by expanding our unique real estate footprint while also enhancing our mature store base. We opened 204 new stores in Q2, primarily using our 8,500 sq ft format in rural markets. Dollar General continues to serve as a vital partner, bringing value and convenience to communities across the country through new store growth. In addition to our U.S. growth, we opened four new stores in Mexico during the quarter, bringing us to a total of 13.
Our team is doing a wonderful job serving those communities as we continue to test and learn and further develop that potential growth opportunity. We are also pleased with the progress of our remodel projects. As a reminder, in addition to our traditional remodel program, which we call Project Renovate, we have introduced a new incremental remodel program called Project Elevate in 2025. This initiative is designed to drive sales and market share growth in portions of our mature store base that are not yet old enough to be part of a full remodel pipeline. These projects include physical asset investments as well as merchandising optimization, product adjacency adjustments, and category refreshes, all of which impact approximately 80% of the total store. We completed 729 Project Elevate remodels in Q2 and an additional 592 Project Renovate remodels during the quarter.
While still early, we expect to reach our goal of delivering first-year annualized comp sales lifts in the range of 6%-8% for Project Renovate stores and 3%-5% for Project Elevate stores. Importantly, we've seen significant improvements in customer satisfaction in these locations upon completion of the remodels, and we believe the improved performance and customer response in these stores paves the way to make Project Elevate a key component of our real estate strategy in the years ahead. The next area I want to discuss is our digital initiative, which serves as an important complement to our expansive store footprint as we continue to deploy and leverage technology to further enhance convenience and access for our customers.
Our digital capabilities include an engaging mobile app and website that continues to be very popular with our customers, as well as growing our delivery options and DG Media Network. We continue to expand the reach of our delivery options with solutions targeted both new and existing customers. Our DoorDash partnership, which now serves more than 17,000 stores, continues to drive significant incrementality and sales growth. To that end, our Q2 sales through this platform increased by more than 60% year-over-year. Building on this success, we partnered with DoorDash to launch our own same-day delivery offering through our DG digital solutions late in 2024. We have now expanded this offering to nearly 6,000 stores. We are also excited to note that we now expect to offer DG delivery for more than 16,000 stores by year's end, compared to our previous expectation of approximately 10,000 stores.
Most recently, we entered a partnership with Uber Eats to further expand the reach of our delivery capabilities as we provide value and convenience to customers on their platform. We have already expanded to approximately 4,000 stores with Uber and expect to be in approximately 14,000 stores by the end of Q3. Collectively, more than 75% of the orders through these offerings are delivered in one hour or less. Ultimately, we believe this suite of delivery options will introduce new customers to Dollar General and drive incremental sales growth, while also further enhancing the value and convenience proposition for our existing customer base. The linchpin of our digital initiative is our DG Media Network, which enables a more personalized experience for our unique customer base while delivering a higher return on ad spend for our partners.
We continue to be pleased with the performance of DG Media Network, which is driving significant year-over-year growth in retail media volume as partners seek to access our unique customer base. This initiative is an important component of our strategy to deliver on our long-term growth framework, and we are excited about its potential. Over time, we believe we can leverage our digital initiative to increase market share and drive profitable sales growth while further evolving our relationship with our customers and driving greater customer loyalty within the digital platform. The final initiative I want to discuss is our non-consumables growth strategy. As a reminder, we are focused on a few key growth drivers in our non-consumable categories over the next three years. These include brand partnerships, a revamped treasure hunt experience, and reallocation of space within our home category.
During Q2, we were pleased to deliver positive quarterly same-store sales growth in each of the three non-consumable categories for the second consecutive quarter. Notably, the magnitude of growth was broad-based, with same-store sales increases in each of these categories of at least 2.5%. Our brand partnerships are resonating with customers, and we have been pleased with the strong sell-through in many of these sets. As a result of this success, as well as our improved execution, our home products category saw its largest quarterly same-store sales increase in more than four years. In addition, our pOpshelf stores delivered another quarter of strong same-store sales growth. We continue to be pleased with the performance of the new store layout in this banner, including a greater emphasis on categories such as toys, party, candy, and beauty.
The pOpshelf banner also continues to produce learnings that we are able to apply to our non-consumable categories in our Dollar General stores to further strengthen that offering for our DG customers. We believe our non-consumable sales performance both in Dollar General and pOpshelf stores also benefited from improved execution in our stores and supply chain, as well as from the expanded trade-in shopping we've seen from middle and higher-income customers. These results, including strong sales performance and market share gains, continue to demonstrate that our treasure hunt approach is resonating with the customer. In turn, we believe we are well-positioned to serve them in these discretionary categories in stores across both banners and ultimately drive further growth in both sales and gross margin. In closing, we're pleased with our second quarter performance.
Operationally, we are improving execution, stabilizing our workforce through lower turnover rates, advancing our key initiatives, and enhancing our position for sustainable long-term growth. Financially, we're delivering balanced sales growth, significant margin improvement, and strong earnings, while also strengthening our balance sheet and operating cash flow. With that said, we have ample opportunity in front of us to drive growth and further improve our operating and financial performance, and this team is laser-focused on delivering on these goals. As an essential partner in communities across the country, our customers rely on Dollar General in all economic environments. Delivering on our mission of serving others continues to guide everything we do, and we are excited about our plans for the back half of 2025 and beyond.
Lastly, I want to thank our more than 195,000 employees for their commitment and dedication, and I'm looking forward to all we can accomplish together in the second half of the year. With that, operator, we would now like to open the lines for questions.