達樂 (DG) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for participating in today's conference call with Dollar General Corporation.

We'd like to inform you this call is being recorded by the Sprint Conferencing and CCBN.

Federal law dictates that no other individual or entity will be allowed to record or broadcast this session without permission from the company.

After a prepared statement by the company, we will open the conference call for questions.

Today Mr. Don Shaffer is acting CEO, President, and COO.

Sir, you may begin when ready, and thank for you using Sprint.

Thank you, and good morning.

Thanks for joining us today, with me this morning are Jim Hagan, our Executive Vice President and Chief Financial Officer and Emma Jo Kaufman, our Senior Director of Investors Relations.

I’m going to spend some time reviewing our 2002 performance and our outlook for 2003 and then we’ll open the meeting up for questions.

Jim will first take you through the financial analysis, and then I'll cover our business initiatives.

Jim?

Thank you, Don.

Good morning, everyone.

In addition to historical information, our comments will contain forward-looking statements, such as our statements regarding growth targets, key initiatives and anticipated results of those initiatives, trends, CEO search, shrink reduction, store labor expenses, effective tax rate and annual sales and earnings guidance.

The words believe, anticipate, project, plan, expect, estimate, objective, forecast, goal, intend, will likely result or will continue, and similar expressions generally identify forward-looking statements.

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 or implied by the forward-looking statements.

A number of factors may result in actual results differing from such forward-looking information including but not limited to those set forth in our most recent annual report on Form 10-K, an 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 and by their nature reflect only our good-faith estimate of future results.

The company disclaiming any obligation to publicly update or revise any forward-looking statements to reflect events or circumstances occurring after the date of this conference call or to reflect the occurrence of unanticipated events.

Now, on to the numbers.

Net income for the fourth quarter for 2002 was $108.1m or $.32 per share, as compared to the prior year of $97.4m or $.29 per share, an increase much 10.9%.

The 2002 results include approximately $1m in restatement expenses.

The 2001 results include $10.1m in restatement related expenses.

Excluding those numbers from both years, net income would have been $109.3m and $.33 per share in the current year versus $104m and $.31 in the prior year, an increase of 5.1%.

Sales during the fourth quarter of 2002 $1.76b, versus $1.59b in the prior year, an increase of 10.9%.

Same-store sales increased by 2.1%.

While this 2.1% increase for the quarter is better than the results achieved by many other retailers, it represented our lowest quarterly increase of the year, and it fell short of our internal expectations.

Factors that we believe contributed to the shortfall include the late staging of seasonal merchandise as a result of the West Coast stock workers lockout, the shortened holiday selling season and the generally difficult economic climate.

The gross profit rate during the quarter was 30.01% versus 29.89% in the prior year, an increase of three basis points.

This slight increase in the net -- is actually the net result of four components.

On the positive side, our purchase markup was considerably higher than last year due to a number of factors, including but not limited to the arrival in the fourth quarter of high margin holiday seasonal goods that were due to arrive in the third quarter but were delayed by the West Coast lockout, and the early arrival of imported spring product.

We also recorded an $8.9m LIFO credit, compared to last year's $3.5m LIFO credit.

The LIFO pickup is a reflection of the fact we've been able to lower or product cost on an inflation-adjusted basis during these recent non-inflationary years.

On the negative sides or distribution and transportation costs increased due to an increase in the number of cartons and our shrink provision was higher this year when compared with last year.

We are devoting significant resources to combating shrink, and Don will discuss those initiatives in a few moments.

SG&A were $350.4m or 19.92% of sales versus $312.6m or 19.71% in the prior year.

An increase of [ inaudible ] excluding restatement related expenses, 2002 SG&A expenses would have been $349.4m or 19.86% of sales and 2001 expenses would have been $302.5m or 19.07% of sales an increase of 15.5%.

The 79 basis point increase in SG&A expense as a percent to sales, excluding restatement related expenses is due principal to percentage increases in store labor, store occupancy, and workers' compensation costs that were in excess of the percentage of increase in sales.

Interest expense was $9.3m in the fourth quarter of 2002 versus $10.8m in 2001.

The company's effective tax rate was 35.7% this year versus 35.9% last year.

The reduction in the effective tax rate in the current year is partially a result of an increase in targeted jobs tax credits and the favorable resolution of certain state-related items.

For the full fiscal year 2020, net income was $264.9m $.79 per share as compared to net income of $207.5m or $.62 per share, an increase of 27.7%.

The 2002 results include $23.1m in net restatement related items that had the effect of increasing pretax income the $23.1m consists of $29.7m of insurance proceeds relating to the settlement of the shareholder derivative in class action litigation, offset by a $.2m shareholder opt out claim and 6.4m in net restatement related expenses.

The 2001 results included $28.4m of restatement-related expenses.

Excluding restatement-related items from both years, net income and earns per share would have been $259.9m and $.79 per share, versus $225.5m, or $.67 per share an increase of 11.2%.

Sales in 2002 were of $6.1b versus $5.32b in the prior year, an increase of 14.6%.

Same-store sales increased by 5.7%.

The growth profit rate in 2002 was 28.26% versus 28.36% in 2001.

In terms of some gross margin highlights.

On the positive side, our purchase markup was slightly higher in 2002, as compared to 2001.

Our distribution and transportation costs were 13 basis points lower in 2002, and as I mentioned earlier, we recorded an $8.9m LIFO credit in 2002, versus a $3.5m LIFO credit in 2001.

On the negative side, our shrink rate calculated at retail was 3.52% as compared with 2.90% in the prior year.

Remember, that if you want to get the P&L impact of shrink, you need to bring the retail value back down to cost.

SG&A expenses were $1.30b in the current year versus $1.14b in the prior year an increase of 14.2%.

Excluding restatement expenses from both years, SG&A expenses were $1.29b or 21.15% of sales in the current year, versus $1.11b, or 20.80% of sales in the prior year, an increase of 16.5%.

The increase in SG&A expenses in the current year period is due primary to percentage increases in store labor, and workers' compensation costs that were in excess of the percentage increase in sales.

Interest expense in the current year was $42.6m versus $45.8m last year.

The reduction was due principal to lower average outstanding borrowings, compared to the same time last year.

For the reasons I noted earlier, the company's 2002 effective tax rate of 36.1% is down from the 36.7% effective tax rate that was recorded in the prior year.

The company opened 47 stores and closed 10 stores during the fourth quarter.

For the full year, the company opened 622 stores and closed 49 stores.

Our store count at the end of fiscal 2002 was 6,113.

Cash capital expenditures during the fourth quarter were $29.6m and for the full year, capital expenditures were 134.3m.

As we've mentioned on our previous conference calls this year, we are very pleased with our recent cash flow performance.

The company's cash flow before financing activities, and that represents net cash provided by operating activities less cash used in investing activities was a source of cash of $300.2m in the current year as compared with a source of cash of $141.6m in the prior year.

That's an improvement of $158.6m.

Much of that improvement is due to improved inventory management.

Our inventory turn, calculated at the retail value of our inventory, was 3.6 times in 2002 versus 3.2 times in 2001.

Our total inventory balance stood at $1.12b at January 2003, which was actually down slightly from the inventory level at the end of fiscal 2001, even though we were operating 573 more stores.

Our total BS debt was $346.5m at January 31, 2003, versus $735.1m at the end of last fiscal year on February 1, 2002.

That is a reduction in debt of $388.6m.

Our cash balance as of January 31, 2003 was $121.3m.

So our net debt position defined as BS debt less BS cash was $225.2m.

With respect to guidance for fiscal 2003, we expect total sales to increase 13% to 15%, same-store sales to increase 4% to 6%, and net income, excluding restatement items to increase 11% to 15%.

We plan on opening approximately 650 stores, and closing approximately 50 to 70 stores.

Though it is not our practice to provide quarterly guidance, we do want you to know we have a challenging year over year comparison in the first quarter, and we have not assumed that our projected net income increase, excluding restatement items, of 11% to 15% will occur evenly in all four quarters.

In terms of some general themes regarding our finances in 2002, we have planned for a rather significant improvement in our shrinkage provision, though all we have assumed is that our physical inventory results will be similar to what was achieved prior to fiscal 2002.

We are not expecting any significant lowering of our SG&A rates to sales in 2003.

Though we expect our store labor expenses to roughly level off in 2003, we'll be investing in training programs, employee background checks and alarm services to help combat shrink.

Also, like most growth-oriented retailers, we'll need to aggressively manage our workers' compensation, healthcare and store occupancy costs.

Based on our current information, we expect our effective tax rate in 2003 to be approximately 36.4%.

On the liquidity front, we plan on spending approximately $165m on capital expenditures in 2003, and we will continue to place an emphasis on inventory turn improvement, which is an area where we believe we have upside potential.

I'd like to shift gears now away from the numbers and discuss a variety of topics which I think are of interest to most of you.

Let me start with a brief update on the status of our search for a permanent CEO.

The board search committee with the help of Corn Ferry(ph), have enter viewed a number of candidates.

The board continues to be satisfied with the progress and the progress that has been made so far.

The board expects to conclude the process in the not-too-distant future, as reported in our news release last Thursday night, the board of directors has authorized the repurchase of up to 12m of our common stock.

Historically, the company repurchases to offset the dilution of exercised employee stock options, however, this authorization is based on management belief that the repurchase of the company's outstanding common stock at current price levels is a good investment alternative.

The repurchase program is authorized through March 13th, 2005.

In addition to the stock repurchase program, we also announced a 9.4% increase in our quarterly dividend from 3.2 cents per share to 3.5 cents per share.

Given the significant amount of operating cash flow we generated in 2002 and 2001, the board felt that this was an appropriate time to return some cash to our shareholders.

Lastly, on the S.E.C. front, there is not much new to say.

The S.E.C. has taken quite a bit of testimony and has continued to gather information.

The company continues to cooperate fully with the S.E.C., and we still can't predict when the investigation might conclude on what the outcome might be.

I'll now turn the call over to Don for the operational review

Thanks, Jim.

I'll spend part of the time this morning discussing how we performed against our key in initiatives in 2002, and share with you the key initiatives we have identified for 2003.

You'll remember that the five initiatives for 2002 were first was to open 600 new stores, second was the implementation of seven habits of a highly official Dollar General store, third was the rollout of the perpetual inventory process in all stores, fourth, the disposition of aged and excess inventory, and finally implementation of the Arthur merchandise planning system.

Let's first look at the new stores open in 2002.

We exceeded our goal by opening 622 stores in the year, and our existing 27-state trade area.

The largest concentration of new openings was in New York, Texas, Pennsylvania, and Georgia.

Our next initiative was the implementation of the seven habits.

The rollout of all seven habits was completed in 2002, and we have moved to the evaluation phase intended to measure our compliance with each initiative.

Each store is being reviewed and rated on a month by basis, by their area manager. [Inaudible] are given scores that rates the score based on the compliance with the seven habits.

This score is then collected at the division manager level and reviewed for comparison with other stores in the division and the company.

This score is also used to evaluate the progress being made toward improving store performance with the intent of identifying those areas requiring additional assistance.

We realize we still have opportunity at store level and will continue to use the seven habits to improve our performance in 2003 and beyond.

Our third initiative involved the taking of professional inventory at all of our stores.

We completed this project in September as planned and now have an inventory by SKU or item information for all of our stores.

We expect this valuable information will give us an opportunity to move to an automatic replenishing method, and allow for allocation of seasonal inventory based upon actual store ownership, improve our in-stock position which should in turn increase sales [inaudible] and lower inventory by replenishing based on customer demand and existing inventory at store level.

I'm not sure everyone understands the importance of this initiative, but we now have the capability to ship to stores based on factual inventory information rather than strictly based on prior unit sales history.

In many cases, it is old process either did not allow the store to maximize sales, or left the store with excess inventory at season end.

The fourth was to reduce aged and excess inventory identified during the restatement process.

Our current inventory level is less than $25m, and we feel the small amount of product still in our inventory is priced appropriately for sale and represents approximately $4,000 per store.

As a tie back to the prior initiative on perpetual inventory, we now have the data necessary to identify any potential surplus or aged inventory, this will allow us to address this inventor with appropriate markdown action to liquidate the product in season before it becomes a problem.

Our final 2002 initiative was to implement the Arthur merchandise planning system form this system was installed in 2002, and populated with current data in September, ahead of the planning cycle.

The system was used to develop the merchandise budget of 500 classification levels by week, which was a first for Dollar General.

In prior years, we planned to ten department levels by month, so we have a much higher degree of specificity than in prior years.

Before I move to 2003, I want to share with you some information regarding the shrink initiatives we feel will help reduce our losses.

We certainly were not pleased with the performance last year and recognized early in 2002 that we needed to take steps to reduce this profit drain.

We started by hiring and training a loss prevention team that currently consists of 28 employees located geographically in our higher shrink areas.

This group was fully operational in July and was provided with exception reporting software that flags unusual activity at store level.

This programs works as an early warning system that led to many investigations and arrests for inappropriate behavior.

In addition, we installed 415 closed-circuit TVs and plan to add over more than 1,000 more to our stores in 2003.

We also added over 1900 security alarm systems in our stores in 2002 and we expect to add over 1600 more this year.

We also implemented shrink tip hotline to provide employees a highly confidential method to report inappropriate activities.

We have also established a shrink committee headed by senior director of internal audit made up of employees from most of our employee groups, this committee has developed a number of measurement vehicles that will provide an earlier warning of potential shrink problems and allow both asset protection and operation management to respond before the situation deteriorates.

Finally we are adding employees to the internal audit staff, who will be assigned to perform audits at the store level, again with identifying situations that can be eliminated before they become major issues.

These initiatives along with the area manager review as part of the 7 habits initiative should provide the necessary attention to positively impact our shrink results in 2003.

One other program we implemented in 2002 we feel will have a positive impact on future performance is our store manager training initiative.

We knew we had to improve both our hiring and training of store managers to ultimately improve our store performance.

With that in mind, we identified a store in each of our 35 regions to be used as a training center store, our training department then developed a four week program that involved two weeks of classroom training and two weeks of in-store experience; the two weeks of training is conducted by an experienced training manager and supported with a training manual that contains all the details needed to effectively manage a Dollar General retail store.

Today, we have 18 training centers in operation, and we have planned to have all 35 in operation early in the second quarter of this year.

We have graduated 566 store managers from the current training centers stores.

While it is early in the process we believe we are developing managers with the right tools to succeed in our organization.

The ultimate goal is to have all the our managers, both new and existing, to attend this training program.

Moving to the key in addition if I was for 2003, we have identified two that are new and five that are continuations of program started in 2002 or earlier.

Let's review the five to continue in 2003.

They are first, the planned opening of 650 new stores in our existing 27-state market.

We opened 81 stores this February, and fully are on track to reach our goal of 650 by the end of the third quarter of this year.

The second initiative continuing through 2003 is the implementation of seven habits started last year.

As I mentioned earlier, we continue to monitor and work on this process to increase our performance at store level.

The third initiative is continued emphasis on shrink reduction, and we feel we have formulated the program to reduce our inventory shortages.

All of those programs are in place, with the exception of the hiring of internal auditors that will conduct audits at the store level.

We anticipate having these people in place in the first quarter and expect them to start during the time frame.

The fourth continuing initiative is the installation of coolers which actually stated in 2001 with an additional 1000 stores planned; we will be entering a new stage with this initiative and installing coolers in Pennsylvania, Indiana, Ohio, and Illinois.

Ending 2002, the company had 1367 stores with coolers.

After the installation of coolers, the stores on average have increased traffic, high sales than non-cooler stores in the chain.

The average cooler transaction in 2002 was just over $13 as compared to an average transaction of approximately $8.50.

It's also important to note that over 40% of that additional transaction value is in non-cooler product.

This shows that we are not only getting additional revenue from the cooler, but that customer is also making additional purchases in non-cooler product in our stores.

While we will continue to review the parameters for stores selected to have a cooler, and the type of cooler they receive, we are pleased today with the impact they have had on the sales in those stores.

The fifth initiative involves the continued implementation of auto-replenishment.

We currently have auto replenishment for 13% of our stock-keeping units.

These products include cough and cold, vitamins, family core apparel, and insecticides and have been in operations for up to 4 years.

In addition, we have been testing auto replenishment in all core products in a limited number of stores for over three years and brought approximately 175 stores live on the system in the middle of last year, in two regions, in Oklahoma and Tennessee.

We experienced positive results in terms of improved in-stocks while reducing inventory levels.

We completed the rollout of this program in those two regions in February and currently have approximately 350 stores live on the system.

Our plan is to continue the rollout of this program to as many as 2500 stores this year.

We feel comfortable with our program and believe we have completed the appropriate testing to proceed with this rollout.

This initiative will reduce the workload at store level by eliminating the manual order process and free up store hours to better serve our customers and improve the presentation of our sales force.

We have also experienced a more even flow of product into our stores and helps both our distributions centers and the store in there human resource scheduling.

Turning to new initiatives, first, we will be testing the acceptance of credit and debit cards starting in May.

We currently have a software up and running testing in 25 stores and we expect to start with 16 of those stores accept Visa and MasterCard cards near the beginning of April, and plan to roll the program out to all Indiana stores on or about May 1st.

Our research has shown that we are starting toattract a slightly higher income customer that is accustom to paying with either a debit or credit card and we feel a test is appropriate to determine if acceptance of cards can positively impact our revenue stream.

Based on the results of this test, we will likely make a decision late summer regarding the rollout of additional stores leading up to the holiday selling season.

We will also be introducing acceptance of EBT.

That's the food stamp card, in 50 stores in Tennessee and 50 stores in Louisiana.

EBT card program allows the acceptance of government programs and should give us another reason for our target customer to shop our stores.

Finally, we have begin searching for a new site for our next distribution center that we plan to open in late 2004, or early 2005, as we continue to add stores, we will be entering new states and exceed our current distribution capacity for approximately 7500 stores.

As a review entering [inaudible] we will be positioning this facility to maximize both our distribution and transportation efficiencies.

In closing, our 2002 performance fell below our original projections.

While there were ups and downs, the major miss ways in our shrink performance.

We feel we have taken the steps necessary to address this issue, anticipate reduction as the year progresses and all the programs take effect.

Operator, we're now ready for questions.

Okay.

At this time, if you have a question, press star-1 on your phone, your line will be placed in queue.

And your name will be announced in the order it arrives.

Once again, if you will press star-1 for questions, it will be a moment or two before the first question.

Once again, star-1 if there are any questions.

It will be just a moment a two before the first question.

Thanks for waiting.

We do have the first question from David Yamamoto of Wedbush Morgan Securities.

Your line is open, David

Good morning.

Just actually a couple quick questions.

With regard to shrink, can you quantify what your expectations are regarding for shrink in 2003?

I don't think we want to get in that level of detail as we provide guidance for 2003.

I said in my portion of the presentation that we are planning for a rather healthy reduction, but it would take us down to rates that we have historically achieved and historically achieved not too long ago

I believe you had indicated that you had a target shrink rate of 2% to 2.5% longer term.

Is that still a target?

On previous calls we have stated that.

A medium target would be more in that 2% to 2.5% range

Great.

Lastly, you also mentioned you're experiencing better markup.

What merchandise categories are those in?

Well fairly strong markups this year, almost across the board, and one of the things that we felt particularly good about was the fact that in our food portion of the business which I think all of you know is growing leaps and bounds, we were able to maintain markup in the food portion of our business.

But I think we run the business based upon ten departments right now, and the majority of our departments were up year over year, and.

Okay.

Great.

Thanks very much.

We do have the next question from Deborah Weinswig of Salomon Smith Barney.

With all the store initiatives currently in place, can you give us some guidance onthe levels of comps that you need to leverage SG&A at this point?

I think that will vary year to year, and you put your finger on it with the comment on store initiatives.

You know, this year in particular, we are still going to be spending money training store managers.

At some point in time, we may expand that and train area managers.

I think this is a year where we see store labor actually maybe level off, but in future years, I don't see any particular reason why that rate can't start coming down seeing some leverage.

So, you know, I think as we go forward, we get beyond this turnaround phase from an operating standpoint and we solve shrink.

I think you're looking at the same-store leverage number that's probably inflationary or 3.5% to 4%.

And with the inventory per store down about 10%, with you talk about the major components of that?

I think that there were a number of issues.

As you know, we liquidated a fair amount of aged and excess inventory last year.

We also with the perpetual inventory we were able to buy on special and seasonal product based on what we actually knew the stores had.

I think you know in prior years we didn't have the capable to do that at the store level.

I think it came out of the Christmas selling season in much better condition than both the holiday product as well as the -- some of the toys and Christmas goods and that type of thing.

So I think those are the things that have driven that down.

Also, we were able to liquidate apparent, and we didn’t buy back at the rate we were liquidating so we think we have much cleaner inventory going into the spring season of 2003 as well.

Great.

Thanks so much.

Next question coming from Daniel Barry of Merrill Lynch.

Your forecast of comps of four to six seems to imply some real positive expectations this year.

You only did a 4-7 last year, a 2-1 in the fourth quarter.

Consumer spending is slowing;

I'm just wondering about the outlook this year that makes you confident that you actually might have a high end a sales gain stronger than last year.

First of all, we did a 5-7 in the year we just concluded, and I think that the fourth quarter in particular, where this year the fourth quarter comp store increase was down 2.1%.

You know, we're anticipating that economic conditions will be better.

We also won't have the hick cup of the West Coast situation caused even though we may have tough comparisons earlier in the year.

I think when we get to the back end of the year with some of the big sales numbers, we felt comfortable with that 4 to 6%

It's [inaudible] an easy comparison in the fourth quarter

I wouldn't say that's the only thing, but that's one of the factors

Okay.

Another question, you're planning to buy back shares, but you don't know if the S.E.C. would impose a fine.

Have you got any indications from the S.E.C. that any such fine might be not exorbitant, such that you feel comfortable coming buying shares?

We've gotten no information from the S.E.C. at all.

We've provided detail and been cooperative, but know nothing more than that at this point

Okay.

Thanks.

David Cumberland of Robert W. Baird and Company.

Your line is open, David

On the Q3 call you discussed a new layout that adds shelf space.

What is the plan for rolling out that layout in 2003, and on stores where the new layout has been implemented, what impact have you seen on comps?

First of all, the 650 stores planned for 2003 will all be in a front to back layout.

We've chosen not to be aggressive about that program in 2003.

We will open some -- or rather, re-lay some additional stores, but the other things going on with auto-replenishment, we didn't want to take on too many issues.

We'll end 2003 with probably upwards of 1500, 1600 stores with a front to back layout.

Depending on the success of the other programs in 2003, that could be a major initiative moving into future years

One other question.

Could you please comment on recent trends in field level turnover?

Yes, I would tell you across the board, whether it's in the stores or in the distribution centers, all the turnovers for the year are down.

Thank you

Ben Kurrs(ph.) of B.K.

Equities has the next question.

Congratulations on the great cash flow for the year.

I have two questions.

First, you mentioned earlier, I think longer term, same-store sales growth of roughly 3% to 3.5% would be required to [inaudible].

I believe this year obviously we're looking at 4% to 6%, and we’ll take the up end of that 5 to 6%, it look like that's what you need to avoid compression in the operating income margin.

Am I correct in assuming that once we get the store set and labor beefed up that you think we can fall back to 3% to 3.5% to offset cost creep in your operations?

Dan, I think that some of the other factors that are a little bit of wildcards, workers' compensation costs, healthcare costs, you know, to some extent, but maybe a little lesser extent, store occupancy costs, so whereas labor is the single biggest line item in our expense structure, really by far, a couple of these other items have been seeing pretty big year-over-year basis point increases, and I think we'll have to attack those in the next 12 to 24 months before we became really confident in saying this 3.5% to 4% leverage range was solid

Thank you.

And in a somewhat related sense, do you have any idea or comfort level concerning, you know, being able to project a robust cash flow improvement at the free cash flow line this year over the tremendous improvement last year, driven by, again, much improved or continued improvement at inventory turn?

In other words, I think last year you did a 13% or so increase in turns.

Is there any order of magnitude you could give us there how that might happen this year?

Well, Dan, I think that's getting into a level of guidance that's maybe more precise than what we're comfortable giving now.

Inventory turn, we're placing a high degree of emphasis on that.

The free cash flow that we generated this year we were very pleased with.

We think that we'll generate a significant amount of free cash flow in this year that we are now in.

That's one of the reasons why we felt comfortable authorizing the share repurchase program.

If we were to hit the sort of turn improvement that we saw in this year, I guess it would be possible to see free cash flow that would be comparable or maybe even slightly north of where we were this year.

That's great.

Would it be fair to say, then, that improvements are maybe less P&L driven or mainly asset turns driven, enhanced free cash flow, lower investment of capital in the business?

In other words, that's one great road to Rome, isn't it?

Well, here's the flip side to our shift to highly consumables.

I know people make much of the fact that it's lower margin items and it puts pressure on the operating margin rate, but the flip side is that it is higher turning product, so not only have we made some significant improvements in just the way we manage inventory from a systems standpoint and process standpoint, but we also have sort of this natural built-in turn improvement as the food portion of our business grows as a percentage of the total portion of the business.

So every year when you sit and look at the percent of sales that highly consumables is, and it continues to grow a bit into the low 60s, one of the good aspects of that is that it's very high turn merchandise and you know, our turns year over year should be able to continue to grow, especially with the continued investment in systems relating to inventory management.

And the markups aren't too bad, either?

Well, we've been able to maintain markup and actually in food this year, maybe slightly improve it.

It's something we're very conscious of and it's also going to be a point of emphasis this coming year

Thank you very much.

Great cash flow job.

Thank you.

Next question comes from Dan Lescanno(ph) of Caxton(ph).

Can you tell us how January, if you've done audits on the shrink and how it's going with the new initiatives in place?

It's really early to tell.

I will tell you we have taken some inventories in January and wouldn't get too excited.

I will tell you they are down to the prior year.

We ended the first quarter with probably in excess of 2000 inventories to have give you a much better feel at that time.

Again, just a limited number in February.

And how many have you done in February, and how much are they down as a percent?

We did about 400, which is about the same as last year

And the differential between last year and this year?

Well we're won't be getting into numbers.

It's too early to say, but I would tell you again that the number has shown improvement 2003 over 2002, and I think again in the first quarter, with a represents statistically valid sampling, representative sampling, we can give you a whole lot better feel about that.

We do feel good about what we put in place, but now we have to make sure that in fact coming out and we take the inventories

Good luck.

Thanks.

Thank you.

Next come will come from David Mann of Johnson Rice and Company.

David your line is open

Yes, thank you.

Can you quantify the gain you got from the cooler program to comps last year and what you might expect that to generate in '03?

I'm not sure that I can.

I can give you the transaction value with the cooler sale in there.

I would tell that you typical it's running two to -- depending on the area of the country, 2% to 3.5% to 4% of the store's sales, and it depends on the part of the country.

Typically, its 2% to 3% but we do have some closer to 4%. [Inaudible] the coolers in place today.

The stores that have the cooler programs, what are the comps in the stores relative to the rest of the base?

Well, I would tell you, without getting specific, I would tell you their comps have typical been better than -- on whole have been better than the company's comp average

Okay.

Then gas prices have been up.

Have you seen any impact on your customers?

Is that an issue you expect might hurt you in terms of costs in the first quarter?

I think everything that's going on rite now, with the threat of impending war and gas prices going up, consumer confidence down, I think all those things can have a negative impact.

You know we deal with a low income fixed income person who actually suffers more when gas prices go up than maybe the upper or middle income customer does, so we’ll just have to watch closely and see what impact that has on our business.

Along those lines, he said that you believe he might be attracting a better customer.

What data leads to you that thought process, and what else might you be doing in terms of sites of locations in the store to go after that customer.

When I say better customer, I want to make sure we don't get confused.

We're here to serve that low income and fixed income customer, that’s the bulk of our customers but the recent research we did on some exit interviews in conjunction with some outside sources, we did find we were attracting more of the $30,000 to $50,000 customer household than we had been attracting, and there has been some special request for the debit card and credit card.

We do run into that occasionally.

That's why we want a test in place.

Certainly, if all we do is transfer a cash sale to a charge sale, we won't like that answer.

We need to understand what we can do in terms of driving increase value to the transaction, more transactions, are there departments that in fact fare better with a credit card, which make mean we should expand the assortment in that particular department.

When we get that done, we'll do an analysis and make a decision at that time.

Thank you.

Next question coming from Asma Usmani of Edward Jones and Company.

In terms of the shrink, was that pretty much in the 27 states that you're present, was it evenly distributed, our was there a number of stores where isolated a certain market or isolated certain number of stores?

If I understood you correctly -- I had trouble hearing you -- but I think the shrink was spread across various areas of our country.

When we put our asset protection team in place, we did locate 28 people, geographically where we have the higher shrink issues.

But I think as you look across it’s fairly evenly spread across regions and districts across the country.

In terms of the training you are providing store managers, could you give us some information in terms of has there been any change in the store compensation for these managers?

That's been implemented?

Well, we changed -- I think we talked about this on the last conference call.

We actually changed the compensation for the store managers going into 2002, that allowed more of a base salary, and a little less in terms of incentive opportunities.

As far as the new managers are concerned, there hasn't been a change in that particular compensation from the same process we used in 2002.

Is there no -- in terms of what you pay, is there no association or more association with shrinkage going forward?

No, the shrink percent we apply equally across all the stores, and about a quarter of their incentive is based on the shrink performance on the individual store.

And stores are planned for shrink improvements, depending on where they ended the prior year.

Obviously, we wouldn't expect a store to improve at the same rate as a store with a high shrink number

You mentioned more of a store manager is compensated -- the basis has actually been increased, but the payout risk piece has been actually decreased, the bonus piece has actually been decreased?

It's come down some from what it was originally

What is the breakdown?

Can you break it down?

In other words, 60% is more fixed a 40% is variable?

Well, because of the fact that the salaries vary by size of store, geographic location of store, that wouldn't be a very easy thing for me to provide to you.

Okay.

Then just finally, you mentioned about the -- could you elaborate on the store layout?

You mentioned that you made changes to 1500 to 1600 in terms of the new store layout --

Well, the question was asked earlier related to our front-to-back format that we had -- actually most of our stores we did, we converted a number of stores to changes.

If you remember our stories traditional lay out left to right, with a lot of tandem and a lot of aisles.

We went to a layout that ran front to back with longer runs of tandem, wider aisles, but fewer aisles, making it easier to shop.

My comment relative to that program, is with all the other initiatives in place in 2003, we didn't want to take on store renovation as part of that, but the 650 stores we open this year will be open with that format.

And then 2003, how many of these stores will be with this new layout?

My guess -- and this is strictly a guess, but it's got to be in the 1300 to 1500 range

Okay.

Thank you so much.

Next question is pr Mark Mandel, from Blaylock and Partners.

I want to throw out a follow-up question regarding your cooler program.

Can you provide us with some qualifying comments on the impact on the gross margin and SG&A, how many square feet do the coolers take up?

Do they replace any other merchandise?

Finally, if the average ticket jumps for $13 or so from the $7-$8, whatever the number better is, I would expect the impact to be more significant that you're implying.

Well, there were a lot of questions there.

But first of all, we put in either five-door or eight-door coolers, depending on the space, the volume of the store.

They take up space in the front of the store and I will tell you that we have not had to take any merchandise out of the store because of the addition of the coolers.

We have re-laid the floors in some cases to put the coolers in.

You'll find in a few stores the coolers are actually in the back but generally they're in the front location of the store.

They contain milk, dairy product, juices, etc., there is ice cream, frozen foods.

I believe those are the four categories.

The five-door just contains a smaller assortment and smaller line than what the eight-door does.

I’m not sure about the other questions, Marc

If you have any color to the impact on gross margin or SG&A.

Perhaps even more importantly, giving the numbers you gave, regarding $13.00 average ticket size in stores that have the cooler versus the company wide average.

Might the impact on same-store sales be more significant than you were suggesting?

I'll tell you first of all from an SG&A standpoint, those are serviced by the vendors, and they would also take out anything if some of their product is date-coded or date-sensitive.

So from a labor standpoint, there really isn't an increase in labor.

There is a less decrease in the margin because, as you know, that product carries a lower margin.

However, the think we have been satisfied with is the 40% of that increase in the transaction value is coming from non-cooler product which allows us to not have the margin impact that the $13.00 number might indicate.

The sales increase as I said, they are running -- I don't want to call it considerably higher, but higher than the non-cooler stores.

I just don't want to get into the percentage of increase at this time.

Okay.

Fair enough.

One final question, given the progress you're making on various fronts, are you rethinking a potential entry into more urban-type markets that your rival has been pursuing

I will tell you we have a group looking at that.

We have a misconception, I think, we do have stores in urban markets today.

It is a situation we are looking closely at to try to understand the ones we have there and the profitability of those, but I don't think there's any intent to just vacate the rural and metro market and devote ourselves to purely urban market.

We think a good balance is what we need to have.

Great.

Thanks a lot.

The next question coming from Mark Miller from William Blair and Company.

Question of the purchase markups, I believe you had been down the first part of this year and talked about how you recaptured some of the markup with the arrival of some of the spring goods.

How much did that help the gross Margins in this period?

Was that as much as a 50-base point benefit?

It was certainly significant in the fourth quarter.

We had a pretty big jump in our seasonal category.

Now, for the year, if I understand, you had obviously ordered less apparel product, so that slowdown in the orders of that product, I think even below the rate I have of customer off take would have depressed for the year, so you achieved this even despite the disconnect in orders versus what was sold in the store.

Is that right?

Yeah, I think that's a fair statement

Would you expect, then, going forward that we would continue to see an increase in the markup at Dollar General, especially as orders closer matched the rate of sale?

That's a difficult one to answer.

I think that we've got to look at it closer to go through the first half of the year and then we get into the auto-replenishment process.

I believe intuitively, if we could manage our inventories better, which we certainly have done, and buy closer, I believe there's an opportunity for some of that, but you have again the same situation Jim talked about earlier.

You have the basic consumable product, while we've been able to take that up a tick in margin, the fact is it's continued to grow and it does have a lower margin than seasonal or apparel or home house wares has.

I think the other issue on the markup going forward is that the better SKU level store level inventory information we're getting is probably also going to lead us to reduce the purchase of certainly apparel lines which on high markups, but which had abysmal turns associated with them.

That will be a net positive to the overall business from a gross margin return on investment, but in terms of the way we report our purchase markup, it may put pressure on the purchase markup.

Can you just highlight maybe the one or two things that are helping you get this much better or have allowed you to get a much better markup, again stripping out the difference in rate of order versus rate of sale.

Is there a change in the private label mix or the way you're sourcing this product?

I think there's probably a couple issues.

One is we have continued to grow or seasonal business, that's whether it's spring or summer product or the holiday season goods, toys, all of those carry a considerably higher markup than actually any of our other lines, so I think that's probably been more of the driving forces, as they have continued to go up in margin, they've offset some of maybe the shortfall in the basic consumables and feud areas

One other question -- go ahead.

The other piece is that our house wares business has continued to grow and it also carries, in fact we think we have a great opportunity going forward, it also carries a higher margin, so those are the a couple things that have allowed us to offset some of the other things we talked about today.

I understand there might be plans to fest a much larger format.

Something in the range of 20,000 square feet.

I know it might be early, but is that something you could comment on?

I think it's maybe a little early.

I'll tell you this.

If plans like that ever get serious or significant, we'll let you folks know about it.

We're always thinking of testing concepts and ideas.

We probably for competitive reasons don't want to get out ahead of ourselves and talk about it until they become more concrete.

We'll take one last question, if you would, please

Very well.

Last question will come from John Rouleau with Wachovia Securities.

I feel lucky today.

Last question.

Good morning.

Without really quantifying anything, the shrink last year on a sequential basis from first, second, third to fourth quarter, you know did you increase the rate that you were accruing for shrink on a sequential basis last year?

Did that stay relative the same throughout the year?

What was the fluctuation between quarters?

On a trend basis.

It bounced around a lot more, this year just completed, than it did last year.

I would tell you, in 2001, it was fairly consistent through the first three quarters, then just a little change in the fourth quarter.

This year, it bounced around quite a bit.

The peak was in the third quarter, but there was a rise from the first quarter to the second quarter to the third quarter.

Okay.

And then we backed off a little bit, because of the amount of sales that gets generated in the fourth quarter, the shrink provision came down in the fourth quarter.

But last year was a fairly stable number, and this year it bounced around quite a bit

Okay.

But I basically was trying to get at the trend whether it increased from the first to the second to the third, and it sounded like it did

It sure did this year.

That’s right.

So when you say you're actually running below the first quarter levels last year kind of early on, or at least the February results, those are the lower results in the first quarter, implying that there's additional room as we go out here into the second and third quarters

I don't think that's necessarily true.

I think, again, it's much too early with 400 stores, and I think what Jim was really talking to when he talked about increases, as we went through the second and third quarters is that the numbers were higher.

While we thought they were going to get better, they didn't.

They continued to stay at the same rate I think we probably came through the first and second quarter.

So I wouldn't make in a assumption at this point

Next question, a couple store managers commented that you've recently raised some prices, I think particularly in the health and beauty category.

I know you're talking about firmer other pricing across a lot of categories, but that's a fairly competitive category.

Did you find prices were simply too low in certain categories including that one, or have you found that the competition has slowly started to eek prices up?

We raised actually very few prices.

There were some items that we recognized we were well below the competition with and went out and raised some prices, but there was a limited number of products that got raised.

That's a very competitive area, and we certainly make every attempt to stay competitive.

You also mentioned the fourth quarter become particularly challenging.

If you look back at comps on the second quarter.

Those were actually quite a bit higher, so is there something planned for the second quarter?

Am I missing anything in regards to your comments on the first half versus the back half?

Well, I think we touched a little bit on one of the factors that impacted 2002 in terms of the way the EPS fell out in 2002 and that the second quarter shrink number was quite a bit higher than the first quarter in the year we just completed.

And you can obviously see that in the depressed gross margin.

Last question, any plans to perhaps do a little bit of test advertising?

I know you recently ran like a bag stuffer highlighting the ability to use the Procter & Gamble coupons in the stores.

Any plans to do more of those?

Were you please with that?

Maybe you could just touch on the advertising component.

The only advertising we generally do is we have a pre-opening ad when we open a store, and a post-ad that goes out after the store has been open.

That traditionally is what we have done.

We did some advertising with P&G, they've been cooperative with us, and I think the results of those are generally favorable but there is not a program at this point to go out and be aggressive in any type of advertising program.

We have basically built in our programs with the 12-page flexi that we send out to introduce the opening of stores.

We may look hat a couple markets to drop some ads to see what happens, but there's no way or initiative in 2003 to increase our advertising costs.

Thank you very much.

We appreciate your time.

And we look forward to seeing you all.