達樂 (DG) 2001 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for participating in today's conference call with Dollar General Corporation.

We would like to inform you that this call is being recorded by WorldCom Conferencing and CCBN. Federal law dictates that no other individual or entity will be allowed to record or rebroadcast this session without permission from the company. After a prepared statement by the company, we will open the conference call for questions from the audience.

Good afternoon and thank you for joining us. This is Larry

, General Counsel and Corporate Secretary of Dollar General Corporation.

With me on our conference call today are Cal Turner, Chairman and CEO, Don Shaffer, President and COO, and Jim Hagan, Executive Vice President and CFO, and Kiley Fleming, Director Investor Relations.

Our comments this afternoon on our conference call will contain historical and forward-looking information. The words "believe", "anticipate", "project", "plan", "expect", "estimate", "objective", "forecast", "goal", "intend", "will likely result" or "will continue" in similar expressions identify forward-looking statements.

The forward-looking statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. The company believes the assumptions underlying these forward-looking statements are reasonable. However, any of the assumptions could be inaccurate and, therefore, actual results may differ materially from those projected in the forward-looking statements.

The factors that may result in actual results differ from such forward-looking information are those set out in our most recent annual report on Form 10-K and in the press release issued today. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date.

The company undertakes no obligation to publicly update or revise any forward-looking statements contained herein to reflect events or circumstances occurring after the date of this release or to reflect the occurrence of unanticipated events.

This afternoon, the company announced financial results for 2001.

In accordance with interpretations of the staff of the Securities & Exchange Commission and the normal procedures of the company's auditors, the company's financial statements for 2001 fiscal year will not be deemed to have been issued till the company's annual report on Form 10-K is filed, and, as a result, the company's financial statements will necessarily remain subject to adjustments until such filing.

I'll now turn this call over to our Chief Financial Officer, Jim Hagan.

Thank you, Larry.

Good afternoon, everyone. This afternoon we reported net income for the fourth quarter of 2001 of $97.4 million, or 29 cents per share, as compared against the net loss in the

This afternoon, we reported net income for the fourth quarter of 2001 of 97.4 million, or $0.29 per share, as compared against the net loss in the prior year of 32.2 million or $0.10 per share.

The 2001 results include 10.1 million in professional fees related to the restatement of our financial results. The 2000 results include a $162 million for the settlement of the class action and derivative lawsuits filed against the company.

Excluding restatement related items from both years, net income and earnings per share would have been 104 million and $0.31 per share in 2001 versus 66.8 million and $0.20 per share in 2000. Sales during the fourth quarter of 2001 were 1.59 billion versus 1.44 billion in the prior year, an increase of 10 percent.

Please note that last year's fourth quarter had an additional week because of the 53-week fiscal year.

Same store sales during the fourth quarter were up 6.5 percent.

The gross profit rate during the quarter was 29.98 percent versus 26.30 percent in the prior year, an improvement of 368 basis points. There are three principal factors contributing to the improvement in the gross profit rate.

First, last year's figure was negatively impacted by the 21.5 million effect of the excess inventory markdown. Second, the company's distribution and transportation costs as a percent to sales were significantly lower this year as compared to last year.

And third, the company's initial markup on product purchases was significantly higher in 2001's fourth quarter as compared to 2000.

SG&A expenses in the fourth quarter of 2001 were 312.6 million, or 19.71 percent of sales versus 262.6 million, or 18.22 percent of sales in the prior year.

The 2001 results include 10.1 million in restatement related expenses. Excluding those expenses, 2001 SG&A expenses would have been 302.5 million, or 19.07 percent of sales.

This year's SG&A expense as a percent of sales is higher than last year's due principally to a higher provision for employee bonuses due to improved performance in 2001 and higher health insurance expenses.

Interest expense in the fourth quarter of 2001 was 10.8 million versus 9.8 million in the prior year.

For the full fiscal year 2001, we reported net income of $207.5 million, or 62 cents per share, as compared against net income and earnings per share in fiscal 2000 of $70.6 million and 21 cents per share. Those numbers include the impact of restatement-related items.

In 2001, the company recorded $28.4 million in restatement-related expenses. Excluding those expenses, 2001 net income and earnings per share would have been $225.5 million, or 67 cents per share.

In 2000, the company recorded a $162 million pretax expense for the settlement of the class action and derivative law suits filed against the company. Excluding the $162 million expense, net income in 2000 would have been $169.6 million, or 51 cents per share.

So, on an apples to apples basis, excluding restatement-related expenses, the company recorded 67 cents in EPS in 2001 versus 51 cents in EPS in 2000, for an increase of approximately 33 percent.

Sales for the year were $5.32 billion, which represents a 17 percent total increase and a 7.3 percent same store increase over the prior year's results.

Please note that the total sales increase of 17 percent is based on a 52 week year this year versus a 53 week year last year. The 7.3 percent same store sales figure is based on 52 weeks both this year and last year.

The company's gross profit rate for the year was 28.36 percent, as compared to 27.49 percent in the prior year. There are two factors that contributed to the increase in the gross profit rate in 2000, both of which I mentioned while discussing fourth quarter results.

First, the company increased its initial markup on inventory purchases in 2001 versus 2000. Departments that contributed to this improvement included housewares, seasonal and men's and boys.

Second, last year's figures included the effect of the excess inventory markdown, which reduced gross profit by $21.5 million.

SG&A expense during 2001 was $1.14 billion, or 21.34 percent of sales, versus $934.9 million, or 20.54 percent of sales in 2000, for an increase of 80 basis points.

The $28.4 million in restatement-related expenses incurred in 2001 accounted for 53 of the 80 basis point increase in SG&A as a rate to sales. Store labor accounted for much of the remainder of the 80-basis point increase.

I believe we mentioned during our conference call on January 14 that we allocated additional payroll dollars to the stores this year in an effort to improve store conditions. Excluding the restatement-related expenses, SG&A expense would have been 1.11 billion, or 20.80 percent of sales.

Interest expense in 2001 was 45.8 million, or 0.86 percent of sales versus 45.4 million or one percent of sales in 2000. The company's effective tax rate was 36.7 percent this year versus 35 percent last year.

You may recall that 2000's effective tax rate was driven down by the $162 million litigation settlement expense, which had a high marginal tax rate of 38.9 percent applied against it.

The company opened 602 stores and closed 62 stores in 2001.

We spent 125.4 million on capital expenditures in 2001 versus 216.6 million in 2000. Last year's cap ex number is higher than this year's due to construction costs for two new distribution centers and expenditures for new stores and relocations that were developed with the company's funds last year.

Finally, the company is working actively on a plan to refinance its credit facilities that come due in September of this year. We plan on completing the refinancing well in advance of the deadline.

And though we are not at a point right now where we feel comfortable disclosing our progress made to date, we should have something to say about our plans in the not to distant future.

Now I'd like to turn the call over to our President and COO, Don Shaffer, for the operational review.

Thanks, Jim.

As the numbers illustrated, 2001 was a very productive year for Dollar General.

As Jim commented earlier, we achieved a 7.3 percent increase in same store sales, primarily through strong merchandise assortments at better inventory allocations and improved store

.

We did open 602 stores, including 57 stores in two new states, and those new states were New Jersey and New York.

We improved our average new store sales performance, reduced average capital investments per store. In addition, we opened our seventh distribution center in

, Ohio in April.

That facility now serves approximately 770 stores. And we also increased the capacity of all of our

due to some improved processes and increased productivity.

And we improved our retail inventory turns by 20 basis points, to 3.2 turns, which is the highest level we have achieved in four years.

I think our performance in 2001 lays the foundation for our work in 2002.

In 2002, we expect sales to increase 14 to 16 percent, and earnings excluding restatement-related expenses to increase 13 to 15 percent. To support this plan, we will focus on four primary initiatives.

First, this year we intend to build upon the investment we made in store labor in 2001.

One of our most important and inclusive initiatives is the standardization of our key store work process. These processes really include basic retail tests such as ordering, unloading trucks and merchandise stocking.

We also plan to enhance our recruiting, hiring and training programs for field employees. Our goal is to improve the consistency of our store presentations needed to enhance shopping enhance shopping experience for the customer and obviously repeat transactions.

We believe this valuable investment in stores will drive increased same store sales, position stronger new store performance, reduce store inventory shrink and increase inventory turns.

Another company initiative in 2002 and one we talked about at the January 14th meeting is the move toward establishing perpetual inventories in all stores.

Last year we established perpetual inventories in approximately 500 stores. We established effective training programs and created the systems required to maintain store level data, meaning down to the SKU or item level.

Using both sales and inventory item information, we can be more effective in purchasing and shipping products to those stores. This process should improve our in-stock position, resulting in increased sales and lower overall inventory levels, thus improving inventory turn as well as inventory shrink.

As of March 15th, we have established perpetual inventories in more than 875 stores. Clearly, the projects are progressing quickly, and we expect to have all stores completed by the end of September, October 1 of 2002.

The third initiative is last year we identified $116 million excess in aids inventory, mostly clothing in our stores.

And we reduced the cost of this inventory in the fourth quarter of 2000. We have developed a markdown program to address this inventory, and we do expect to sell through it in 2002.

We believe that this program -- the benefits of this program will increase sales, reduce inventory shrink and improve inventory turns.

The fourth initiative is that this year we intend to build upon the supply chain investments we have made and install a

merchandise-planning program. This system should provide with better planning, allocation and exceptional reporting tools to enable us to maximize the return on our inventory investment.

With these, these are the operational priorities planned for 2002. In addition, we anticipate opening approximately 600 new stores, closing 60 to 80 stores and remodeling or relocate approximately 100 stores.

We also intend to continue to develop our merchandise mix, increasing our assortment of consumer basics and seasonal merchandise.

We also intend to continue to develop our merchandise mix, increasing our assortment of consumable basics and seasonal merchandise.

We also plan to expand our assortment of perishable items, such as bread and milk, to more than 1,000 stores.

I'd like to summarize this.

These initiatives should help us increase revenues by 14 to 16 percent, increase same store sales by five to seven percent and increase earnings from 13 to 15 percent in 2002. As a reminder to you, we are hosting an analyst's meeting here in Nashville next week on March 26, when we will expand further upon these initiatives.

If you'd like to attend this meeting and have not yet registered, please call

, our Director of Investor Relations.

Before we begin our question and answer session,

has a few reminders for you.

Thank you, Don.

On January 14th of this year, we announced settlements of the securities class action and shareholder

litigation brought against us in connection with the restatement we announced on April 30, 2001. These settlements are subject to final court approval.

Unfortunately, this means that because of the ongoing nature of the litigation and the SEC investigation, our ability to answer questions regarding certain topics is limited.

These limitations apply to such topics as identifying individuals involved in the issues which resulted in the restatement, how these issues came to the company's attention, the employment status of specific individuals, any remedial employment action taken by the company and the role of our former auditors in connection with the accounting issues which resulted in the restatement.

In addition, it is the policy of the company not to comment on personnel matters.

Operator, we're ready for the first question.

Yes, if you'd like to ask a question at this time, press star, one on your touch-tone telephone key pad. If you are using speaker phone equipment, you will need to lift the handset before pressing star, one.

Should you wish to cancel your question, or if your question has already been answered, press star, two. Once again, if you have a question, press star, one.

And to cancel your question, star, two.

One moment while the questions register.

Our first question is from

with Merrill Lynch. You may begin.

Good afternoon, everyone. Terrific quarter.

Just -- can you give us a little more elaboration on the reasons why your gross was up? You kind of ran through them and identified them briefly, but a little more elaboration.

And, also, to what extent were they a surprise to you?

Well, I think that for the -- the departments that we mentioned included home products, hardware, seasonal and some of the basic clothing areas. I think if there's one factor that led to the improved margin rate I do think that we finally start to see the benefit of the store reset program that was so disruptive last year, but it did create the space in the stores for us to be able to present some higher margin products, especially during the holiday selling season.

But was that anticipated? Was that something that came up unexpectedly?

Well, no. I think that was part of the whole rationale for going forward with the store reset program. I think another issue that sometimes people forget within our gross margin is that we do have our distribution and transportation costs in our gross margin rate.

And we had a particularly good year managing our transportation costs. We did get some benefit there from lower fuel costs.

But I do think we're also starting to see, especially in the second half of the year, the benefit from the alignment of our distribution centers. We did reduce our stem miles during the year just from having a well aligned distribution network.

And the other reason? Third point?

Nothing I can particularly think of.

OK. Thank you.

Thank you.

Our next question comes from

with Morgan Stanley. You may begin.

Hi. I'm -- I think I'm going to ask the obvious question. On the guidance you gave, can you elaborate on why the EPS growth would be less than sales growth?

Thanks.

Well, I think,

, for one -- I do think we're going to avoid getting in specific line item discussions in terms of how margin's going to fall out for the year or how SG&A expense is going to fall out for the year. But I do think that you should at least be aware that we continue to make investments in our store labor.

I think one of the reasons why we're able to produce the same store sales increase this year that we did was because we did allocate enough payroll dollars to the stores. I think that's a theme that you can continue to look for going forward.

And so, where we do have some opportunities to improve our operating profit margin rate on a go forward basis in areas such as shrink, probably continued improvement in distribution and transportation expenses, there are some line items such as store labor where you may see some additional investment. And like many other people, we struggle right now with our total insurance program costs, including Worker's Compensation, but there's also been some increases in insurance costs as a result of September 11th.

And also, like many others, health insurance expenses are always a challenge.

So, Jim, beyond 2002, do you foresee kind of returning to seeing operating margin expansion?

Well I think -- I think it is certainly possibly, especially on the shrink line. You know, we do run in the high 2s at retail on shrink.

And, you know, it's not unreasonable to think that once we started executing crisply on shrink-related issues out at the stores, that that number could float down to the two percent range. And, you know, we've talked a little bit about distribution and transportation expenses and the fact that we started to see some leverage on those lines.

The company has made significant investment there over the last five or six years, so that's also another area for opportunity.

Now, you know, on the other side of the coin, even though we did a -- I think a phenomenal job in the latter half of this year on our gross margin rate and our purchase markup, you know, there's no doubt that the mix of this business does continue to shift more towards the consumable side of the business.

So it's possible, but, you know, we'll have to take it one quarter at a time.

Or I think as we start to go through these work processes and better understand what the true

for requirements are in the store, it will give us a better idea of what our expense structure will be and if there's opportunities with reduced inventory levels in the store and improved processes to ultimately take that number down.

Although, that certainly is not our plan in the short term. That's an area where we really need to concentrate on improving the presentation at the store level.

Great, thank you very much.

Thank you.

Our next question comes from

with Credit Suisse. You may begin.

Good afternoon.

Just a couple of questions.

I wonder if you could talk a little bit about the perishable business and if you could give us a sense of what will be included in the perishable offering, how much square footage you're thinking about dedicating to that, what you've tested already, how many stores you've tested and that type of thing.

, we have tested in 2001 in about 400 stores in Tennessee and Texas a cooler program. And in that program, we've tested -- gosh, I think everything from milk to ice-cream.

I'm really trying to get a sense on what is the best assortment for our customer and how she uses our store.

I think the assortment is really going to depend on the store size.

We're looking at, I think, two different coolers right now, a five-door and an eight-door. But basically, we're looking at perishables that include milk, that include, I think, a variety of other perishable items as well.

Like packaged cheeses, packaged meats and those types of things. As Cal said also, some frozen food products as can include ice cream.

And could you remind us that your planning on distributing that or is that direct store delivery? And how's that going to work?

We are currently working with individuals in markets that we are served.

And we are not servicing that ourselves. It is a direct to store distribution channel.

OK. One more question just on the outlook for store openings that you gave a sense on '02. I wonder if we should think about 600 as -- 600 gross new stores as kind of the go forward rate, or do you think you might grow that in the future?

Or are you sort of it may be a logistical limit that you're comfortable with at 600?

No. I don't think that we're necessarily locked into 600.

That's the number that we did last year -- or that we did this year. We'll look at it every year and decide where we think there's a better opportunity to make our investment in same store improvement, where there's an opportunity to grow stores.

And we certainly are limited. I think at one point a couple years ago we opened 750. So, it's not so much an issue of how many you can open.

We want to make sure we open them in the right places to earn profit.

OK. Thanks.

Thank you. Our next question comes from

with Deutsche Bank. You may begin.

Hi. Thanks. Good quarter in a tough environment.

A couple questions on the gross margin line. One, I'm wondering if you could talk a little bit more about some of your initiatives to reduce shrink and how these might be new or different than some of the other things you've tried in the past to reduce shrink.

And then also on the gross margin line related to that $21 million write down, how did that help your fourth quarter '01 gross margins in the sense that you didn't have to take markdowns this fourth quarter that you may have otherwise taken if you hadn't already marked those down previously, if that makes sense? Thanks.

Let me take the shrink piece of it first. We have gone to the outside market and hired a senior person in our resources or loss prevention area.

We reassigned a number of people into the areas that are most specifically a problem for us. We have some number of stores that on a regular basis tend to run higher than what the company average is.

So that program is being put in place. We've also purchased a software program.

It'll be put in place midyear this year that's really an exception-based program that will identify some of those areas that should be, for lack of a better term, red flagged, that there's a potential issue in a store.

So, we're not trying to look at 5,500 stores. We're going to be looking at those, that where we had specific issues -- or at least indications of specific issues.

Also, I think the other part is, as we move through this inventory -- this excess inventory, we'll have less inventory in the back stockrooms and give us an opportunity, I think, to manage your inventory is a lot better than we had with some of the excesses we've encountered.

In terms of the $21.5 million markdown, I mean, there's no doubt that that gave us a nice comparison versus last year.

Although I'm not -- I'm not sure that it actually led to us recording lower markdowns in the current year, because the $21.5 million markdown was taken against product that I don't believe typically in a normal year would have -- would have necessarily been marked down. But there's no doubt that the $21.5 million does make at least a fourth quarter comparison of gross profit rate look very strong.

Right. OK, sounds good -- thanks.

Thank you.

Our next question comes from

with Bank of America.

You may begin.

Thanks.

Most of my questions have been answered. I just wanted to touch on the -- on the debt refinancing.

I know that you can't give too much information there. But I was wondering what was implicit within the guidance that you have in terms of the cost of debt?

What's implicit is actually an up-tick from where we are right now. Right now, most of our debt, I believe, is priced at about

plus 112.

And I believe we've gone fairly significantly north of there, at least in putting together our budget for the coming year.

Great, thank you.

Thank you.

Our next question comes from

with

.

You may begin.

Good afternoon, everybody.

I've heard some of the questions asked about the shrink, and I didn't see anything in the press release, so forgive me if this has been disclosed. But did you actually state what your shrink accrual was for the past year, and can you tell us what rate you're accruing at or what rate you plan to accrue at for the coming year?

Well, I think that when we file our 10K, there will be a specific disclosure on the current year's shrink. I don't believe we're going to get into specific guidance on shrink for 2002, although it certainly is a goal to reduce it from the levels it's at right now.

In response to

question about the gross margin, you didn't indicate that shrink had contributed meaningfully to the fourth quarter earnings surprise. Is that a fair conclusion?

That's correct.

OK, thanks.

Thank you.

Our next question comes from

with

.

You may begin.

Guys, can you discuss your currently liquidity and explain to us if the company's intent to treat the synthetic leases and the litigation pay-out as debt like normal debt going forward, kind of like Krispy Kreme did? Or do you plan on attempting to continue to use this synthetic lease strategy going forward?

Well, the only caution I'd throw out is that we're not through the refinancing process. But I think it's a fairly safe be to say -- I can say that we are not looking at an option at this point that we continue with this synthetic structure.

So, I think that in looking at the company right now you can mentally start thinking about the refinanced company and think of the synthetic debt right now becoming some form of true debt after the refinancing is complete.

And when you say true debt, do you mean like that would be a high yield bond or are you looking to do secure debt in front of the current bonds that are outstanding?

Well, that's right now what we're not quite prepared to talk about. We've actually analyzed a number of different opportunities for refinancing the company.

We do believe we have a lot of avenues available to us. We have at this point chosen one that we think is optimal, and we've started down that path.

And we're still a little bit too early in the process to tell you specifically what we're doing.

OK. And what -- can you just discuss your current liquidity right now?

I believe in the press release today that we disclosed cash. Give us a second here.

We concluded the year with a significant amount of cash. Yeah. We concluded the year with $261 million.

So, liquidity is certainly not an issue. We do plan on funding the litigation settlement this summer out of cash balances on hand.

OK. And then -- and your intent is to increase the size of the bank facility?

Well, not necessarily.

I don't believe that we have any burning desire to be over-financed and to, therefore, have the carried loss to go along with that. So, we are taking into account the amount of cash that we've got on hand right now and the amount of free cash flow we might generate in the coming year.

We've given you guidance on -- general guidance on net income for the year, given you guidance on cap ex for the year. And if you put those two together, the company's free cash flow is fairly strong, so there is an opportunity to maybe look at how much of the refinancing we need to really do.

And I'm not so sure we need to increase the facility.

Is your EPS guidance pro forma for the synthetic leases being treated as normal debt, or did you pro forma as the synthetic leases as they are?

I'm not sure there would be a dramatic difference, but it is -- it would actually be pro forma. I believe maybe somewhere about midway through the year for it being new debt.

OK.

So you treat it -- so you assume that the synthetic leases could be refinanced at, you know, around your cost of bank debt, which is, you know,

plus 112?

I think that's a little overly optimistic.

If you look at the bank market right now, we unfortunately couldn't get a deal done at that level. And I think in a response to an earlier question, we

into our budget for the year, which is roughly what our guidance is based on.

Higher interest costs on the synthetic facilities as they become refinanced.

OK, thank you.

Thank you, sir.

The next question comes from

with

.

You may begin.

Hi.

As a follow up to that earlier question on free cash flow, do you

any guidance on depreciation and amortization for the year to get an EBITDA number?

No, we have -- I believe Don Shaffer gave sales and net income.

And, at this point, I believe that's where we're going to remain.

With regard to working capital, obviously you've given inventory levels and it looks like

has gone up by about 270 million, of which about 100 million was cash and 100 -- say 120 million was inventory.

Is it safe to assume the majority of the other increase is receivables on the asset side? Or is there anything else going on there?

You know, I'd have to look carefully. It would probably take -- it would probably take a little too long.

If maybe you can give us a buzz tomorrow, we'll help you out.

One last question.

Just working capital guidance for the 2002?

Well I don't think we're going to give anything specific, but if you think about it more intuitively, we've got a pretty ambitious reduction program for this excess

inventory out there.

So if we're successful in liquidating much of this in accordance with our plans, you know, I think some sort of improvement in our

numbers is probably real reasonable to expect.

Great -- thank you.

Thank you, sir.

Our next question is from

with

.

You may begin, sir.

Thank you.

Congratulations on the number, by the way. I'm curious about specifically the traffic trends you're seeing in the stores that you've expanded highly consumable or -- or specific -- I'm sorry, specifically the perishable items such as bread and milk. Can you comment on the traffic trends in those stores?

, I think until we expand it, we know that in the stores that we've tested in we see an improvement in the traffic in the transactions -- number of items per transaction. I'm not prepared at this point to quantify it.

I think we'd like to get it into the additional stores before we go down that path.

Those -- so you're in about 400 stores now?

Did I understand that correct? Or is that how many you've tested?

That's how many we -- both.

Both. OK.

So, you've tested and you expect to increase that to 1,000. Is that -- will that expansion mostly be in to continue in Texas and Tennessee?

We plan to expand it into two or three additional states.

OK. Look forward to additional data on that.

Thank you.

OK. Thank you.

Thank you,.

Our next question is from

with

. You may begin.

Yes. Great quarter. I'm wondering, I didn't hear -- and I apologize because I had to jump off and on.

The extra week, what did that add to earnings last year -- extra weekend, I think. Extra week, I guess it is.

Well, I don't believe we ever really quantified that. I would tell you this, that going off of memory last year, excluding the litigation settlement expense, was a 51-cent EPS year.

And I guess you won't be terribly far off if you just do the math and just do a straight division of one week on that and pro rata back your EPS. I mean, it's not going to be perfect because of seasonality, but I think it's going to be representative maybe.

OK. Thank you.

Thank you, sir. Our next question is from

with William Blair Asset Management. You may begin.

Hi.

from William Blair Brokerage Firm. A question first on the cash flow again.

Your cash flow went up by about $100 million and your long term debt went up by, I guess, only $5 million year to year. How much did the short term debt change by excluding any other items, I guess the synthetic lease specifically?

Well, I don't believe we had much of any change in the short-term debt. I think where most of the free cash flow went is to an increase in the cash balance.

We got about $100 million more in cash in February 1, 2002 than we did at February 2, 2001. The debt levels remained fairly constant, $735 million this year versus $729 million last year.

Right. And so my question was, there was no short-term revolver increase that accounted for that higher cash?

No, no. As a matter of fact, I believe we only maybe had to draw on lines, I believe, one day out of the whole fiscal year.

I think it -- I think it was right after September 11th, because we had trouble accessing

account.

Right.

That's a nice cash flow then. The -- can you indicate what the payables end of the year was and how that related to inventory?

Well, we haven't given that specific disclosure yet. I would tell you that we did disclose our merchandise inventories in our press release today.

And I believe that the accounts payable support ratio on that is going to be fairly close to historical levels. There wasn't -- to the best of my memory, there wasn't a big shift in that from prior years.

OK.

And then just one other question on the gross margin.

Backing out that markdown you had last year, it's about a 200 and -- I think

basis point increase in gross margins -- comparable gross margins. Which would have been a bigger factor in that improvement, the increase in the markup, process categories or the reduction in transportation cost?

You're talking about for the full year or the quarter?

I was looking specifically at the fourth quarter, because it looked like the transportation cost was improving as you went through the year.

And then my question, also, is going to be, as you go forward, should both of those factors continue to provide gross margin improvement year over year?

Well, I think in the fourth quarter, we've probably got a little more benefit from the stronger purchase markup.

Do you have any thoughts, Don, on purchase market going forward?

I think what you'll see -- you're going to see some leveraging of our distribution facilities.

And we've opened a number of them in the last few years and do not plan to open any in 2002. So we'll obviously be able to leverage that distribution transportation cost down, which will be a factor in our margin going forward.

Relative to purchases markup, I know we've been able to -- been able to negotiate some better situations, some better buys, based on some of the retail environment out there today. But I don't know we can necessarily

on a go-forward basis.

But, I mean, to be clear, would you expect these factors to continue to drive higher gross margins going forward?

I mean, it seems like they should be recurring.

I think maybe the -- the distribution and transportation side probably still continues to have some upside.

I think that the ability to have purchase markups in strong as we had in the year just concluded, we certainly have that ability. I don't know if it's going to be easy to beat this year from a purchase markup standpoint. We'll just have to see as the year goes forward.

Sorry not to beat a dead horse here, but you had much more gross margin improvement in the fourth quarter than you had, I guess, throughout the rest of the year. You didn't really have that much of a gross margin improvement.

When did you start to get that improved markup? Was that evenly through the year, or did that start to really kick in later in the year?

When you get to seasonal items that start taking into that November -- late October/November, early December time frame. And certainly as we drove additional volumes and got our distribution systems, the last

were up and running profit.

We did see a significant drop in that distribution and transportation line.

Got it. Thanks.

Thank you. Our next question is from

with Credit Suisse. You may begin.

Yes. Hi. Good afternoon.

I actually am calling on behalf of

. And most of the questions have been answered.

But I was wondering if we can get a little bit more clarity, if it's possible, on the re-negotiation of the bank line.

Well, I think given where we are right now in the process, and we are literally subject to a confidentiality agreement, I think it's difficult to do that.

I would tell you that to sort of state the obvious in the refinancing, I think our -- maybe our primary goal in doing the refinancing right now would be to do the entire refinancing on an unsecured basis. So -- and if you think about that, there are a wide array of options that would allow us to do it on an unsecured basis.

One option might be a fully unsecured bank deal. Another option might be an unsecured bank deal plus some sort of capital markets transaction, whether it be high yield or convertible instrument.

Those are markets that we were at least told at this point are fairly strong markets right now and might be receptive to us.

So, those are sort of the range of options out there.

And I think that we'd really like to try and avoid doing anything on a secured basis right now. We don't really feel that our credit profile should require that.

So, I think I'm stating the obvious, but that is sort of one fundamental goal we've got as we march through this process.

And not to add more to that, but any conversations so far with the rating agencies regarding it that you could elaborate on?

Well, I can tell you this, that we've been in close contact with the rating agencies. We're keeping them apprised of our refinancing plans. You know, they, I will tell you, do have a little more information than the folks on this call, but we're staying very close to them, and we're going to continue to update them as we go forward here.

OK. Thank you very much, and congratulations on a good quarter.

Thank you.

Thank you.

Our next question is from

with Suntrust. You may begin.

Thanks. I've a question on distribution.

What is your -- your average

capacity? Where does that stand right now, and where are you in terms of capacity utilization for your distribution centers?

I'm not sure I am in a position to give you the exact number, but I can tell you we have sufficient -- or I guess maybe

excess capacity, because we really made a major investment over the last few years -- the last three or four years in opening a number of new

million square foot distribution facilities. So we do have capacity -- excess capacity, to be able to handle our new store openings.

And you say all the improvements in efficiency are pretty much reflected in your guidance for this year?

I think so.

We're adding into our

Distribution Center

equipment. We have that in

and

already, which gives us the ability to even increase the capacity in the

distribution facility.

OK.

And then one question on the pricing environment.

What are you seeing in terms of your -- the competitive pricing environment or any signs that things are easing or becoming more rational?

I'm not sure if anything ever becomes rational, but we really haven't seen any significant changes there.

OK.

I thought we had heard some comments from some competitors that Wal-Mart may be backing off a little bit in some areas.

Well, I think that -- I'm sorry, I didn't understand your question. I think that, certainly, with what's happened with the other big retailer, the other big discounter -- and they're backing off, I think on some prices -- that's probably giving Wal-Mart the opportunity to go back to the pricing structure they were at prior to them being taken on.

OK. Thanks very much.

Thank you.

Our next question comes from

with

.

You may begin.

Yes, I'd like to ask a question on the perishables issue.

You can just comment on the stores where you've put that in. What categories they've tended to replace?

And, also, what percentage of sales do you think perishables can be in the first year?

Well, I probably won't answer your second question, but I'll answer your first one, in that they really haven't replaced anything.

We've moved the coolers most typically to the front of the store and have

the remainder of the store around that. So we have not seen any change in the -- the

units or the assortment that we have in those stores.

There has just been a value added to it.

And then what percentage of sales do you think that you can get?

We're not at position to answer that at this time.

We're still too early in the process, I believe.

And then one last question.

In the stores where you do have perishables, are you able to take food stamps yet? And how's that going?

We do take that in some stores. That is somewhat limited by the ability to get the equipment from the participating states.

And I think that we're certainly seeing -- we serve that disadvantaged, that low income or fixed income customer who, in many cases, qualifies for food stamps, we do believe that it's an opportunity for us.

Is the ability to handle food stamps a differentiating factor in those stores in terms of the sales you're getting in the stores that can handle food stamps versus those that can't?

I don't think I have a good answer to -- that's a good question. But I don't think we're far enough along to be able to answer that.

In many cases, we're just getting the food stamp equipment into our stores. It's a little premature to give you an answer on that, I think.

Thank you very much.

Operator, I think we'll take one more question.

Very well. Our next question is from

with

Assets. You may begin.

Hi. It's

. Earlier you had given us some guidance on tax rates.

And obviously the numbers look a little bit funny if you sort of have all the numbers in there. Just for clarity purposes, can you give us some sense as to whether the implicit tax rate you have in your guidance for the coming year is the same as this past year, at about 37 -- a little over 37?

Well, if you're talking ballpark, the answer would be yes. Yeah.

OK. Thank you.

Thank you, sir.

I'd now like to turn the call back over to Mr. Hagan.

Well, we want to thank you all for participating and particularly want to thank those of you who commented on the strength of the fourth quarter.

It's awful nice to hear positive comments. And we look forward to seeing many of you next week down here in Nashville at our analyst meeting.

Thank you, all.

Thank you for participating in today's teleconference call. You may now disconnect.

END