達樂 (DG) 2002 Q1 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 the

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. Beginning today's meeting is Mr. Cal Turner, Chairman and Chief Executive Officer of Dollar General Corporation. Sir, you may begin.

Good afternoon. This is Cal and I am pleased to open this conference call about first quarter earnings. Realizing it is late in the day for many of you, we do appreciate your joining us today. With me now are Don Shaffer, our President & Chief Operating Officer, and Jim Hagan, our Chief Financial Officer. As the Chairman & CEO of this company, I am very proud of the exceptional effort put forth by the Dollar General team during the first quarter of our fiscal year. As reported, Dollar General's net income for the first quarter of fiscal 2002 increased 26.8 percent. Excluding the restatement related expenses from both years, net income during the current period increased by 35.3 percent.

We also achieved a 15.5 percent increase in total sales and a 6.7 percent increase in same store sales. I believe these results declare our customers' endorsement of our niche, small store convenience at everyday low prices. Also, I consider these results a clear indication that this strategic operator is doing a whole lot better job at implementing our operating plan. Our management team is energized by this performance and we are determined to do an even better job as the year unfolds. And now, I turn the agenda over to Jim Hagan.

Thanks Cal and good afternoon everyone. Our comments during this 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 and 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 differing from such forward-looking information are those set forth 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 the first quarter of fiscal year 2002. In accordance with the interpretations of the staff of the Securities & Exchange Commission, and the normal procedures of the company, the company's financial statements for the first quarter of fiscal year 2002 will not be deemed to have been issued until the company's quarterly report on Form 10-Q is filed and as a result, the company's financial statements will necessarily remain subject to adjustment until such filing. And now, on to the numbers. Net income for the first quarter of 2002 was $45.9 million or $0.14 per share as compared against net income in the prior year of $36.2 million or $0.11 per share, an increase of 26.8 percent. The 2002 results include $5.3 million in professional fees related to the restatement of our fiscal 1998 through 2000 financial results.

The 2001 results include $0.3 million in such restatement-related expenses. Excluding restatement related items from both years, net income and earnings per share would have been $49.3 million and $0.15 per share in the current year versus $36.4 million and $0.11 per share in the prior year, an increase of 35.3 percent. Sales during the first quarter of 2002 were $1.39 billion versus $1.20 billion in the prior year, an increase of 15.5 percent. Same store sales increased by 6.7 percent. The gross profit rate during the quarter was 27.37 percent versus 26.73 percent in the prior year, an improvement of 64 basis points. There are two principal factors contributing to the improvement in the gross profit rate. First, the company's average mark-up on its total inventory balance was higher this year as compared to the same time last year, and second, the company's distribution and transportation costs as a percent of sales was lower this year as compared to last year. SG&A expenses in the first quarter of 2002 were $297.3 million or 21.40 percent of sales versus $252 million or 20.96 percent of sales in the prior year, an increase of 18 percent.

Excluding restatement related expenses, 2002 SG&A expenses would have been $292 million or 21.02 percent of sales and 2001 expenses would have been $251.7 million or 20.93 percent of sales, an increase of 16 percent. This year's SG&A expense as a percent of sales is slightly higher than last year's due principally to increased store labor costs that were incurred as part of an ongoing effort to improve store conditions. Interest expense in the first quarter of 2002 was $10.4 million versus $11.6 million in the prior year. The lower interest expense in the current year was principally due to the reduction in the

rate as compared against the same time last year. The company's effective tax rate was 36.7 percent this year versus 37.4 percent last year.

The company opened 200 stores and closed nine stores during the quarter. Capital expenditures during the quarter were $34.8 million. You may recall that our 2002 annual Cap X plan is $150 million. We ended the quarter on May 3 with $287 million in cash, up from $262 million at the beginning of the fiscal year. Our total debt outstanding was $732 million versus $735 million at the beginning of the fiscal year. Our inventories totaled $1.13 billion, which was essentially unchanged from the beginning of the year.

Let me conclude with an update on two issues that I think many of you are interested in. First, the company is in the final stages of completing the refinancing of our credit facilities on substantially the same terms that we outlined in our press release announcing the new facility on April 17. As a refresher, the new facility is a $450 million revolver. $150 million expires in one year and $300 million expires in three years. All in-drawn pricing on the new facility is

plus 237 basis points and the facility is secured by the same real estate assets that secure the existing facilities. While we anticipate that the facility will close some time in mid June, we make no such assurances and would point out that such deals are not complete until the money actually moves. Second, on May 24, the judge in our shareholder class action litigation approved the $162 million settlement, which received no filed objections from class members. Assuming that there are no appeals filed, we expect to make the final settlement payment some time in July. At about the same time, the company anticipates that it will receive $4.5 million in director and officer liability insurance proceeds.

As is typical in shareholder class actions, plaintiffs representing fewer than one percent of the shares traded during the class period chose to opt out of the class settlement and may elect to pursue recovery against the company on their own. The company does not believe that the resolution of any such opt out litigation will have a material effect on our financial position. You may also recall that the company and the individual defendants reached a settlement with the plaintiffs in the shareholder derivative lawsuits relating to the restatement. If this settlement is approved following the final hearing on June 4 and no appeals are filed, the company will also receive in July approximately $24.8 million as a result of that settlement. Now, I would like to turn the call over to our President and COO, Don Shaffer, for the operational review.

Thanks Jim and good afternoon. I want to comment briefly on the status of our key initiatives for 2002. As a refresher, these key initiatives are first, establish and introduce standardized store work processes to improve the execution of basic retail tasks. Second, begin the rollout of our professional inventories and generate more momentum behind the project. Third is to devise and executive an effective disposition program for aged and excess apparel inventory, and fourth, the implementation of the Arthur Merchandise Planning System, an improvement upon the merchandise planning processes. I am also going to give you a brief update on our store openings for the first quarter.

Over the last five years, we have invested heavily in all areas of our business except one, existing stores. This year, we have begun shifting investments or operations to improve both store standards and the execution of merchandising initiatives. We spent the last six months defining the work, developing efficient methods to accomplish the work and incorporating the methods into work processes with the overriding principle of simplicity or ease of execution. In order to demonstrate the benefits, we have identified and defined the work in seven key areas. They are ordering a product, the receiving of merchandise, the stocking of merchandise in our stores, presentation of that product in our stores, the selling environment and how we handle the sale, the support within the store, and then the staffing.

Standardizing these seven initiatives will, we believe, enable us to better measure results and produce more sales, improve inventory turn, reduce shrink, and ultimately provide a better shopping experience for our customer. To date, we have completed the rollout of the ordering process. We will start the implementation and receiving and stocking process in June. The other work processes are in various stages of development and we expect these to be in the implementation stage no later than September of this year. Also, by the end of September, we expect to have completed our second initiative by establishing perpetual inventories in all of our stores. As I am sure you remember, we completed 500 stores last year and plan to complete the remaining stores in 2002. To date, we have completed 2632 inventories and as I stated earlier, we are on track to complete all of the stores by the end of September. We anticipate that this initiative will improve our in stock position, which will increase sales and at the same point, lowering inventory; therefore, increasing turns and lowering our distribution costs by an even flow of the goods to the distribution centers.

Our third initiative is to reduce excess inventory through our new markdown program. Last year, we identified $116 million in excess and aged inventory in our stores. Our objective is to sell through this inventory by the end of 2002. Our budget provides markdowns for SKU-specific items, after season events and of course, clothing. We carefully analyze our markdown performance weekly and currently, have no information that would lead us to change our markdown estimates. Moving to our fourth initiative, we are continuing the strides we made in manager inventory and implementing and leveraging our Arthur Merchandise System. Implementation of this system will allow merchandise planning to the class level rather than department levels we do today, allow assortment planning within the class, and improve merchandise out occasions, based on individual store criteria and requirements. Finally, our store opening plan for 2002 called for the addition of 600 stores this year and in the first quarter, as Jim mentioned earlier, we opened 200 stores. In closing, I believe we had an excellent quarter. However, we know we still have tremendous opportunities. I believe we have the plan, the people and the momentum to maximize these opportunities in the remainder of 2002. Before we begin our question and answer session, Cal Turner has a few closing remarks. Cal?

Thank you Don. Before we open the agenda for questions, please allow me to bring you up to date on the transition in our Investor Relations Department. A few weeks ago,

Fleming informed us that she will be getting married later this year and relocating. Although she is obviously excited about her wedding plans, both

and the company are disappointed about her departure from Dollar General and Nashville.

has worked for Dollar General for eight years and we will certainly miss her, yet we wish her all the best in the future.

I am delighted to inform you that we recently have recruited Emma Jo

to serve as Senior Director of Investor Relations. Emma Jo has a great deal of experience in IR, having most recently served as Vice President, Investor Relations and External Communications for Auto Zone. Emma Jo will join us full-time June 10 and while we are all looking forward to working with her, I believe Jim Hagan will be the most relieved when Emma Jo is on board. We have been a bit shorthanded of late from an Investor Relations perspective and I apologize for any gaps in our following up with you that may have surfaced.

Investor Relations has always been an important priority for Dollar General and it will continue to be one in the future. Emma Jo knows she is going to be behind as soon as she gets here, but she is a quick study and I believe you will find that she is very responsive and you will enjoy working with her. And now, if there are any questions, we would be happy to answer them for you. Operator, we are ready for the first question.

Thank you sir. All sites, at this time, we will now take questions. If you would like to ask a question, please press star one on your telephone touch pad. If at any time you would like to withdraw your question, please press star two. If you are using speaker equipment, please lift your handset prior to pressing star one. Once again, all sites, that is star one to ask a question and star two to withdraw your question. And gentlemen, please stand by as questions are calculated in the order in which they are received.

Our first question is from Dan

, from William Blair. Sir, you may ask a question.

Good afternoon. Just on the gross margin, I was wondering if you could quantify what, you know, roughly what percentage of that improvement came from the lower distribution percentage and what percent was from a higher initial markup?

Well, we have got items in gross margin that are going in both directions. In other words, there are also some items within gross margin that did not perform as well this year as they did last year. The two items that I singled out as being up fairly significantly over last year was the markup on the overall inventory balance and the distribution and transportation expenses. I think I will tell you that the distribution and transportation expenses are approximately 67 basis points lower as a rate to sales this year as compared to last year, so that is fairly significant.

Okay and how sustainable do you think the, you know, the gross margin improvement is through the balance of the year? Would you expect a similar rate of improvement?

I think you have got to be... I think you have got to be a little bit careful with that. We do continue to ship to the consumable basic side of the business, as you are all aware. In particular this year, we have expanded some food items and some health and beauty care items and additionally, the way the retail inventory accounting method works, and it works based on averages, you may recall that we took a fairly sizable inventory markdown in the fourth quarter of 2000 that Don has described and because of the averaging methodology of the retail method, the further away we get from that fourth quarter of 2000, the less of an impact there is on the average markup coming out of that fourth quarter 2000 markdown. Now, I know that is a tough concept to grasp, especially over the phone and in sound bites, but it is factually correct and I would tell you that that is part of the reason why the first quarter of 2001's gross margin rate was lower was because it was really the first quarter after the markdown was taken and therefore, it has still the feel of a sizable impact from that fourth quarter 2000 markdown. I know that is fairly complicated, but it is accurate. What else can I tell you on it?

Thank you very much.

Thank you. Our next question is from Mr. Daniel

, from

Asset Management.

It is Daniel Berry, from Merrill Lynch.

We knew Dan.

Good. I wonder if you would update us on your program with perishables? I know you have been rolling that out, and if you would tell us if you know or have tested, rather, if those perishables are having any impact on comps in the store and what that might be?

Dan, we had about 420 stores that we rolled out last year. I think we told you earlier on that we were seeing a fairly appreciable increase in the average transaction value, not just in terms of perishables, but also in the other products in the store. About a half of the increase was coming in perishables and the other half was coming out of core product in the store. We have rolled out about 250 so far this year. Last year, it was just Kentucky and Texas. This year, we have moved some up into Tennessee and Louisiana and Georgia as well. The plan is to roll out somewhere in the neighborhood of 1000 stores this year in total, but in the first four months, we have rolled out about 250. It is too early to tell on those yet as to what is happening, but in the ones that have been open for over a year, we are still seeing a larger increase in average transaction value.

Can you put a number on that? Is it

in any amount, one or two percent?

I would not want to give you that right now, Dan. I think the transaction values are continuing to be up, but I do not know if... until we get a little bit further into it and a little more, a few more stores on to it, I would be a little hesitant to give you a specific number.

All right fine, thank you.

And our next question is from Robbie

, from Morgan Stanley.

Thanks. My question was on the, you know, on the clearance, the apparel clearance and some of the other items that you have taken the markdown for, where are you guys in clearing through that stuff? I know you have said you expect to be out of all of it, you know, by the end of this year. You know, is it kind of 25 percent each quarter, and also, with that clearance going on, how much has that been helping your same store sales as you are clearing through those already marked down items? Thanks.

A couple of issues. We are actually, we took a number of markdowns in the February-March time frame on some aged and excess spring product and those we are selling through at the rate we had planned. We just, this week, are taking a second markdown on that product and taking our first markdown on some, little more current spring goods. I do not have any numbers on that; obviously, we are just in the processing of taking it right now, but as I said, I think, earlier on, we do not anticipate any change in our markdown. It appears that at this point at least that we are tracking to what we thought we would be for the year.

And just the, you know, if you look at the $116 million of merchandise, you know, how much of that has worked through the system and my follow-up question would be, you know, your overall inventories were up, I guess close to 25 percent in total, year over year, in the quarter. Can you give us some guidance on how you think inventory is going to track for the rest of the year?

Well, relative to what we have cleared through in terms of markdowns, I think it goes back a little bit, it gets to be a little bit complicated, as Jim was talking about. We identified that $116 million; however, we have been selling through some of that product at regular price at the same time that we are marking down certain goods, so it is a bit difficult to tell exactly where we are until we complete this markdown. This week, we anticipate that we will have sold some portion of the product that we anticipate the first markdown coming this week in the first quarter of this year. So again, based on where we have tracked and where we have planned for the markdowns for the year, it would appear that we are in line with our expectations and I say we will have a little bit better handle on that probably in the middle of next week, after we get the second markdown in place. Relative to the inventory for the year, we are certainly putting in place in the perpetual inventory program. It will not be completed until the end of September. We think that is going to give us an opportunity to better manage our inventory. We will then have much more visibility to what we have in our stores and we will be able to, especially on the allocation side of it, about 70 percent of our product was actually

some of the store orders about the other 30 percent or so. It is a poor system. We will have a much better handle on the pushing of product into the store, so we would anticipate a better ability to manage that inventory the further we get into the year and the more detail that becomes available to us.

And can you just... my last question. Can you just comment on, you know, sort of, why the inventory level was so high at the end of the first quarter?

Actually, it was in line with where we had hoped it would be, and it was basically flat from year end, so I do not think that we feel. I think we feel right now that our inventory position is a fairly comfortable position. I mean, we would like it to be a little bit lower and improve turn a little faster, but we are comfortable with where it is today.

So, Jim, is it okay to assume that it will be roughly flat for the balance of the year, for the next three quarters?

When you say flat, do you mean in absolute terms?

Yeah, absolute terms.

Well, I think we are going to have your natural seasonal build as we come up into the holiday selling season, fourth quarter, sure. I will also tell you this that you know, we have planned for some turn improvement in the current year.

Okay great. Thank you very much.

Our next question is from Mr. Patrick

, from Sun Trust Robinson

.

Thanks. Jim, as far as the incremental labor investments at the store, when will we see the biggest bump in SG&A from those programs?

I think, as we... I tried to answer that and Jim can step in when he wants to, but I think that we certainly added to our staffing in the first quarter. As Jim talked about earlier, to work on cleaning up the stores. As we roll into some of these additional processes, as I indicated earlier, the ordering process is complete. It has rolled out. The stocking and replenishment process, right now, is in the process of... will be starting to roll out in June. I think you will see some increase in payroll. However, I would say to you that I think part of the sales increase that we are enjoying is because we put some additional labor into the stores, that have cleaned up the stores, have gotten some of the excess in aged inventory out of the back stock rooms and are providing a higher level of service. So, we think there is a return on that investment and I think as we get through the second quarter, with the rollout of the stocking replenishment program, the majority of the programs that go forward after that are less labor-intensive and more process oriented.

I will add this, that I think we are anticipating that the theme you saw in the first quarter of the labor rate to sales being higher this year than last year is a theme that is probably going to carry through the entire fiscal year.

Okay, but it was not, I think, as great as some may have expected, but what were the offset

benefits or efficiencies elsewhere in SG&A or more favorable, I guess, expenses than you thought might be the case?

Well, I think that... I think that for the most part, the expense structure here is under control. You would always like it to be a little stronger, but you know, labor is something we are consciously spending money on. I can tell you that we were under our administrative expense, our non store related expenses budget for the first quarter. So, we do not... Other than the labor line, there are really no other costs that are significant that would be moving that rate to sales over last

.

Okay thanks Jim. And then just one quick one. Do you expect any more restatement related expenses this year?

Unfortunately, yes. You know, we would anticipate that they are going to diminish or they will be reduced as the year goes on, though I guess, I have got to throw in that a lot depends as to whether the SEC investigation were to get more active than it currently is. Right now, from the company's perspective, there is not much communication going on and therefore, not much in the way of, you know, fees being incurred. If the SEC were to reappear that would probably change.

Okay. Thanks Jim. Thanks Don.

Thank you. Our next question is from Mr. Jack

, from

Lord Advisors.

Mr.

, sir, you may ask the question.

Oh hi Jim. It is Jack

. Two questions. One related to new stores. Obviously, you opened a lot of them in the first quarter. What are you seeing in terms of new store performance, you know, both from the ones you opened through the back half of last year and the ones you opened during the first quarter?

What we are... a couple of things that we actually, as I think I commented on in maybe the Analysts' Meeting that we actually saw an improvement in the 2001 openings over the 2000 openings we think did a - I do not know - a better job, but a good job of being able to identify the locations, staffing them properly and

properly. I think it is early on, Jack, in the stores we have opened in the first quarter. I think early indications have been good, but I think it is a little early to get down to specific details on it, but we did see in those stores the fact that they tend to be tracking actually and a little bit ahead of what the ones were for last year, but again, it is so early in the year, I hesitate to put too much faith in that right now.

Okay, just a quick follow-up question, unrelated. Jim, could you walk us through, assuming the settlement... all these settlements are in fact approved and there are no challenges, how the monies will be disbursed over the next couple of months?

Yeah, we have got the... The settlement was for $162 million. We have actually

that so the payment that we would make probably in July would be approximately $161 million. That settlement will then get $4.5 million of insurance proceeds applied against it and that money will move, basically simultaneously. Separate from that, but the timing should be very similar, is the final settlement of the derivative suits and there is a hearing on that June 4. We have no reason to believe that there would be a problem at the hearing and assuming all went well, the company would receive approximately $24.8 million of proceeds some time, also in July. It would not necessarily be on the same day as the class action funds move; it would be in the same general time frame.

Thank you.

Our next question is from Mr. Michael Baker, of Deutsche Bank.

Hi thanks. A couple quick questions. Following up on an earlier issue, Jim, you said that some of the gross margin lines moved in the wrong direction. Do you have any details there and maybe or maybe not related to that, can you update us also on what is going on with your initiative to improve shrink?

Well, I think that what we can tell you is that, you know, our shrink performance in the first quarter was not quite as strong as we had hoped it would be and that, therefore, is going to be an ongoing emphasis here. That is one of the line items that moved in the wrong direction versus the prior year. Another item that moved in the wrong direction versus the prior year, but you know, I do not think this is necessarily bad news and it is consistent with what is going on out at the stores is that some of the damage markdowns being taken at store level have come in higher than plan and higher than last year, but that is also part of an effort.

We have given the stores a little bit of latitude and it is by no means out of control, so we feel confident as to where we are right now, but this is part of the overall process of trying to improve store appearance and store standards. But that was a line, the damage markdown line at store level, which is a little higher than last year.

Okay fair enough. If I could ask one more question, just interested in some of the early reactions to the initiative to roll out the new ordering processes. How have the store managers reacted to that? You know, has it gone smoothly or have there been any disruptions to ordering and maybe, is there any connection between the high levels of inventories and new ordering processes?

Well I think that generally speaking, I think the new ordering process has been very well received. We broke the store down into basically three sections and order those using three people as opposed to having a store manager try to order the entire store.

I think that is, hopefully, then part of the reason for our high same store sales increase, that we are getting a better order and I think you know we put in the satellite system last year and into this year, have it in all but about 50 or 60 stores today, which has allowed us to order in a more efficient and in a more timely manner and it has also allowed our distribution centers to start shipping and that goes a little bit faster, so I think the stores are getting back into stock in a more timely manner with the new ordering process and I think, generally speaking, it has been very well received. They now have the ability with their ordering, hand-held ordering device to actually look at the last five weeks of sales, which gives them better, a lot better information. They were kind of ordering blind in the past. So, I think it has been a positive for us.

Great, fair enough, thank you.

Our next question is from Mr. David

, from Johnson Rice.

Yes good afternoon. In terms of the perishables program, can you just give us any progress on the acceptance of food stamps and any data on penetration on that?

I can tell you that we are taking food stamps in a number of stores. I do not have specific detail here. I would tell you that from the last information I saw, we were having some stores were doing very well; some we were not doing quite so well in. We are currently using, basically, the State's equipment and in many cases and because of their limited budgets, we have not been able to get their equipment into as many stores as we would like. We are currently looking at some type of a device of our own that we could put in that would allow us to take those food stamps as we go forward and as we roll out more of the coolers into the stores.

In terms of, one question on gross margin. The last few quarters, you have seen faster growth in your hardware seasonal area versus, let us say, consumables. Do you expect that trend to continue?

Our seasonal product lines have been very strong for us and so has the home planning and food areas of the business. I do not see any reason that that is based on recent discussions I have had with that group that there would be any major change in that. We have had some great acceptance by the customers on some of the seasonal lawn art and those types of things in the spring season, so I do not know of any reason that that would necessarily change at this point.

Okay and one last question. In terms of guidance, at the beginning of the year, you kind of intimated that earnings would grow slower than sales. Yet, in the first quarter, obviously, we were... nice to see it go the other way. How does that impact, you know, sort of the guidance for the rest of the year?

I am not prepared to change the guidance at this point. We are only one quarter of the way through the year, so we are still sticking with the same guidance we provided early... late last fall.

Okay thank you.

Thank you. Our next question is from Mark

, from Omega Advisors.

Hi thank you. Forgive me if you said this. What was inventory on a comp store basis change, year over year?

We did not give that out. Let us see if we have got anything that would be helpful on that.

Mr.

, sir, you may ask a question.

The comp store inventory, at store level, is relatively flat year over year.

Okay and in just getting to this gross margin, the complexion of gross margin. Again, the logistics in transportation enhance the margin, I believe, by 67 basis points, based on your earlier comments and the absolute change year over year was about 64, so the IMU portion offset, it sounds like, some markdowns and it offset some, you know, shrink issues. What was that order of magnitude and why is IMU up year over year? Is the seasonal carrying better IMU or was it just that some of this merchandise came in late in the quarter and that impacted the averages, and also is inflating the inventory picture a little bit?

Well, this is what I tried to explain a little bit earlier and, excuse me, it is not actually the quarter's IMU. What was up year over year was the blended average markup on all sitting inventories year against year and I mentioned before the reason for that. It is a little oversimplification, but nevertheless, accurate, is that the further away you get from the markdown that was taken in the fourth quarter of 2000, the less of an impact that that markdown should have on the blended markup rate of the company's sitting inventory.

So that along with the distribution and transportation expense being lower as a rate to sales, those were really the two drivers in the improved gross margin, the first one being the higher markup on average inventory outstanding in the first quarter this year versus first quarter last year. That is a little different concept than IMU on purchases made in the first quarter.

Okay. No that is true. Okay and lastly, interest expense. Can we just get your sense of how that plays out through the balance of the year? It was lower than we... I may have expected in the first quarter.

Well, you can, you know, we have got approximately $732 million in debt outstanding at this point and, you know, we now have a facility that is coming on board here in a couple of weeks, hopefully, that will have a

plus 237 spread attached with it. So if you go through the math there, excuse me, and factor in the $161 million, then net out the insurance proceeds, you can do sort of your own sources and uses, and you should be able to come pretty close to what the interest expense is going to be for the year.

As Don mentioned, the interest expense for the full year is embedded within the guidance that we gave you a couple of months ago and did take into account higher interest costs associated with a new credit facility. So, really we would not be backing off any of the guidance given for the full year right now, based upon how the first quarter came in.

Okay, okay that is fair, but we would need to know how much of the revolver you will use and when...

Yeah, I guess the way you can look at that is and you are right. One other piece of information that you should know is that, you know, we plan on basically taking all of our surplus cash after this summer's final settlement of the class action litigation and basically applying that cash against whatever is outstanding under the new facility. So, for instance, you know, we closed the first quarter with $287 million of cash. We have got the $160 million settlement payment. Offsetting against the $161 million settlement will be insurance proceeds of, in round numbers, $29 million; that is an inflow.

So, if you do the math on those items, you are going to be left with a pretty significant cash balance still

. I am telling you is take that cash balance and use it to apply against the new debt that will be outstanding. On the other hand, you will obviously be foregoing the interest income that we were receiving on the cash that we have right... although that was at an exceptionally low rate. I am not sure we are going to be able to provide much better guidance than that at this point.

Okay, just lastly, your point was that the cash on hand in the first quarter was at a below market rate of interest, so?

Well, the cash on hand at the end of the first

is being invested in typical overnight instruments.

Okay I got it.

You got it? Okay.

Thanks.

Thank you and our next question is from Jeff

, from JLF Asset Management.

Thanks very much. Congratulations guys.

Thanks.

Thank you.

Thank you.

Sure. Just two quick follow-ups. I guess, the first is I wanted to get some perspective on how in stock levels are running now versus six months ago?

Jeff, I am not sure I can answer that. I think in store visits

, I think that you would see a higher in stock position than we have been running a year ago. I do not actually have a specific or direct number. I know at a distribution center level, we have a very high rate of in stock and with what we have done in terms of the ordering process, I mean, intuitively, I believe that we have increased the in stock, but I do not have a specific number for you.

And Don, you would probably also say that every store does not have in stock levels that you seek so far, right?

No question about that. Therein lies the challenge.

Okay terrific and the other question I have, I just wanted to clarify. I think you mentioned, you said that same store inventories were roughly flat year over year, but I think if I am doing the math correctly, total inventories are up 25 percent and sales are up about 15.5, so I am seeing roughly a ten percent increase in inventories that seem to be not attributable to stores. Is that in the distribution center, in transit, just to provide some flavor, and what I might be missing there? I would appreciate it.

We did have a pretty significant year over year increase in the inventories sitting at the distribution centers; that is correct.

And if I may ask, what type of inventory? Is there a reason that it is at the DC centers?

Jeff, I think - this is Don again - a couple of things. We have... as we have started taking these perpetual inventories and where we have better insight into what is in the store, we have not been shipping out on the allocation system, maybe, as much product as we have in the past. We have actually tried to hold some additional goods in the distribution center for distribution where we see the rate of sale warranting it as opposed to shipping it out, maybe as we have in the past, and getting it out into stores and having to pull it back in to put it in other places. So we have made a conscious decision, I think, to hold that product in the distribution centers. It is fresh product. There is not any issue there relative to old or excess goods.

Okay terrific. Thank you very much. Just one final question. You guys have had very strong sales as you alluded to over the most recent couple months compared to the retail landscape. Are they in any particular areas, geographies or products, if you will, just to elaborate so I can understand where the specific out-performance is coming from.

Well, I think that you are seeing it from a geographic area and I think you have seen we reported that the South and Southeastern part of the United States seems to be holding a little stronger for us. The Carolinas, Florida. Texas has been pretty strong for us and from a standpoint of product, we talked earlier about the seasonal goods, the health and beauty aids and the home cleaning and food areas.

Thank you very much.

Okay. Operator, we can take one more question please.

Thank you and our next question is from Dan

, from

Equities.

Yeah hi. Good afternoon gentlemen. Thank you. Could you clarify something for me? At the beginning, you said that, in your introductory remarks, Jim, that SG&A before restatement-related expenses, as a percent of sales, was nearly flat. Did I get that right? I think you said 21.02 percent versus 20.93.

That is correct.

Okay and could you tell me with the restatement of some of the synthetic leases and corresponding increase in depreciation, which is carried in your SG&A. To what degree, if any, was there any material impact on SG&A expense level from restatement of assets?

It would be comparable. There obviously was, if you go back in time, but in terms of our comparing ourselves first quarter 2002 versus first quarter 2001, you know, we have not been adding properties to that synthetic lease program and the properties are on our books, so you should be, those should be pretty comparable year over year numbers at this point.

Okay, so you do not have a materially higher depreciation level then?

Not this year against last year.

Okay. If I can shift to cash flow from operations, did you mention what it was in the first quarter? If so, could you please repeat it, if you have that number?

I do not think I mentioned it. I certainly do not mind mentioning it.

Thank you. I am all ears.

Okay, give me a second here.

Net cash provided by operating activities, and that is the line item that you would see on the company's SEC Form at Cash Flow, was approximately $74.8 million of a source of cash in the first quarter.

Do you have offhand how that compared to last year's Q1?

Yeah it was about $35 million higher.

Great and you stated earlier in the year that, I think you did, when you did this whole restatement, that you do expect the company to be cash flow or free cash flow positive this year? Is my understanding correct and if so, do you still expect that? In other words, do you expect to generate free cash flow this year?

You know, I am thinking through. You know, I tend to think of the company so much excluding the restatement items, you know, in terms of cash out the door, we do have this big payment this summer.

Okay, before that; I am sorry.

Before that, we would have been cash flow positive, absolutely.

Okay. And a part of that is obviously, a reduced or more focused Cap X and part of it is also getting better turns at the critical inventory level, right?

Well, it is both of those things, but also, it is just very simply, the amount of net income plus adding back depreciation and amortization, you know, but your basic EBITDA. I mean, this company just generates a ton of EBITDA.

Okay and separately, can you tell me. You reviewed this once and please let me have one more go at it. What was unique to the leveraged earnings growth that we saw in the first quarter that we should not expect to repeat in some kind of similar fashion, either in Q2 or for the balance of the year? Is it possibly that you expect lagged SG&A expense inflation that will take hold as you build up the ranks of people in existing stores? Is that one of the things that makes you feel that you are not going to have a continuation of leveraged earnings growth?

No, there was a similar question earlier on, which spoke of the gross margin rate improvement year over year and whether that was sustainable for the full year.

Yeah.

And I answered that in two ways. Number one, saying that we are a little cautious about the amount of consumables that are still being introduced into the stores, but more importantly, I went through the whole explanation of how the first quarter of last year's gross profit rate was depressed a little bit because it was so close to the quarter in which the company took the markdown, which was the fourth quarter of 2000 for our excess inventory. So, if you were to tomorrow go through an exercise of going back and looking at the gross margin rates last year in the four quarters, you are going to see that the back half of the year had much higher, much higher gross margin rates than the first half of the year. So, I do not think we are particularly anticipating that the kind of basis points gap that we had in the first quarter, positive basis point gap, in gross margin rate over last year is going to be particularly sustainable as the year goes on and that was, you know, that was the contributing factor to getting the leverage against the sales improvement.

Okay and purely from a seasonal perspective, though, the first quarter tends to be more lower margin, consumables heavy, does it not?

That is correct. I would tell you that the sort of trend you saw last year, which is where actually, the margin rate to sales built every quarter. It got successively stronger first quarter through fourth quarter. You know, that sort of trend roughly should be repeated this year. I am not sure it is going to be repeated identically, but you know, that concept of the margin building as the year goes on is a theme that we probably will repeat.

Oh okay and specifically, at the SG&A, did you possibly say something about that you would expand... expect some kind of lagged build in SG&A expense inflation? I was

top line again, as you do, man stores more intensely to improve the store experience?

Well, let me just step back and just make sure that on the gross margin rate line, you know, I am not making any promises that the next couple of quarters are going to be stronger than the first quarter. The second quarter is also a challenging margin rate time period. The back half of the year does tend to be the time when margin rates should be stronger than the front half of the year. The comment I made on the expense structure was that in terms of the lack of leverage we are getting on the expense structure, it is primarily coming from store level labor. You know, there are some other items that are up year over year, but nothing of the magnitude of the store level labor, in terms of a rate to sales and I think the only comment I made is that sort of theme of labor rate to sales being a little higher throughout the year is probably one you can expect as we go through each quarter, year against year.

Thank you very much.

Okay. Did that sign off? This is Cal. Two comments. One more time, thank you, all of you, for your interest. The management of this company is committed to your interest being appropriate and I also have to say that as CEO of the company, I am delighted with the management team we have in place, which was very ably represented by Don and Jim, and I am very pleased about all of that, and I hope all of you have a good day.

I would like to thank everyone for joining today's teleconference call and have a great day.