達樂 (DG) 2003 Q1 法說會逐字稿

Good morning, 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 Sprint 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. Jim Hagan, Executive Vice President and Chief Financial Officer.

Sir, you may begin when ready.

Thank you, operator, and good morning, everyone.

With me this morning are David Perdue, our Chief Executive Officer who joined us on April 2nd; and Emma Jo Kauffman, our Senior Director of Investor Relations.

I'm going to take you through our first quarter financial results, and then David will comment on our fiscal 2003 initiatives.

Before we do any of that, I'm going to read our standard legal disclaimer.

In addition to historical information, our comments during this conference call will contain forward-looking information such as our statements regarding growth targets, key initiatives, and the anticipated results of those initiatives, 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 and in the press release issued today.

You are cautioned not to place undue reliance on those forward-looking statements which speak only as of today's date and, by their nature, reflect only our good faith estimate of the results.

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

We will be referring to certain financial information not derived in accordance with GAAP in order to indicate more clearly, for investors, the company's comparative year to year operating results.

The compensation committee may use this information for compensation purposes to ensure that employees are not inappropriately penalized or rewarded as a result of unusual items affecting the company's financial statements.

Management may also use this information to better understand the company's operating results.

We have included a reconciliation of this information to the most comparable GAAP measures in our news release issued earlier today and filed as an exhibit to a form 8-K, filed to today with the SEC.

That release is on our website located at www.dollargeneral.com under "investing-news."

And now on to our first quarter numbers.

Net income for the quarter was $60.3m or 18 cents per share, as compared against net income of the prior year of $45.9m, or 14 cents per share, an increase of 31.4%.

The2003 results include $300,000 in restatement-related expenses, while the 2002 results include $5.3m in restatement-related expenses.

Excluding restatement-related expenses from both years, net income and earnings per share would have been $60.5m and 18 cents per share on the current year, versus $49.3m and 15 cents per share in the prior year, an increase of 22.8%.

Sales during the first quarter of 2003 were $1.57b versus $1.39b in the prior year, an increase of 12.9%.

Same-store sales increased by 4.2%.

Our net sales increases by major category were as follows.

Highly Consumable 16.3%;

Seasonal 15.8%, Home Products 4.4%, and Basic Clothing 0.1%.

The gross profit rate during the quarter was 28.80% versus 27.37% in the prior year--an improvement of 143 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 inventory purchases was higher this year as compared to the same time last year.

And second, the company incurred a much lower rate to sales of damaged product markdowns in the current year quarter as compared to last year's first quarter.

The higher average mark-up was due to a number of factors, including increased purchases of higher marginal seasonal and house-wear items, a decrease in the percentage of total inventory purchases represented by lower margin items, particularly paper and home cleaning products, and the shipping of the purchase of certain products from domestic to imported sources.

Inventory shrinkage calculated the retail value of the inventory as a percentage of net sales was approximately 3.10% in the first quarter of 2003, as compared to 3.07% in the first quarter of 2002.

SG&A expenses in the first quarter of 2003 were $349m or 22.24% of sales, versus $297.3m, or 21.40% of sales in the prior year, an increase of 17.4%.

Excluding restatement-related expenses, 2003 SG&A expenses would have been $348.6m, or 22.22% of sales, and 2002 expenses would have been $292m or 21.02% of sales, an increase of 19.4%.

This year's SG&A expense as a percent of sales is higher than last year's due principally to increases in various store level expenses that were in excess of our percentage increase in sales.

Some of the specific line items contributing to the rate of sales increase includes store labor, store utilities, store occupancy which includes rent, property, taxes and licenses, and store repairs and maintenance.

Net interest expense, and that's interest expense less interest income, in the first quarter of 2003, was $9.4m verses $10.4m in the prior year.

The lower net interest expense in the current year was principally due to lower average debt outstanding as compared against the same time last year.

The company's effective tax rate was 35.5% this year, versus 36.7% last year.

The company received an $840,000 benefit in the current year quarter from a change in a state tax law.

Excluding this benefit, our effective tax rate would have been approximately 36.4%.

The company opened 223 stores and closed seven stores during the quarter.

We spent $30.1m on capital expenditures, and we ended the quarter with $75.9m in cash.

Our total debt outstanding was $342.6m versus 346.5m at the beginning of the fiscal year.

Our inventories totaled $1.20b on May 2, 2003, as compared with $1.13b on May 3, 2002, for an increase of 5.8%.

Our rolling 12-month inventory turns improved to 3.91 times from 3.52 times for the rolling 12 months ended May 3rd, 2002.

I'd like to step back for a moment and make some general comments on our first quarter performance.

As you might expect, we are quite pleased with our 22.8% net income increase, excluding restatement items.

The primary driver of the increase was our strong gross margin rate, which exceeded our internal plans by a fairly significant amount.

While some component of our strong first quarter gross margin rate should probably be attributed to better information from our investment over the last few years in inventory systems, we should also point out that we benefited from some timing differences in purchase patterns versus the prior year.

We do expect to give some of that benefit back during the last three quarters of this year.

With respect to our expense structure, I can tell you that we are not satisfied with our first quarter operating rate to sales.

One of our goals for the remainder of 2003 is to narrow the gap between last year's expense rate to sales and this year's expense rate to sales.

The 120 basis point increase in our expense rate to sales excluding restatement items that we reported in the first quarter is not acceptable and needs to be improved upon.

Given the strength of our first quarter, an obvious question might be--what does this do to your guidance for net income for 2003,which calls for an increase excluding restatement items of 11% to 15%?

The answer to that question is that while we did beat our internal expectations in the first quarter, we are operating in a tough and volatile retail environment, and it is too early in the year for us to change our net income guidance range.

Let me conclude by commenting on a couple of miscellaneous topics.

You may recall that in March, our board authorized a share repurchase program of up to 12m shares, which expires in 2005.

We have not repurchased any shares as of yet under this program.

On the SEC front, practically speaking, we have nothing new to report.

However, we can tell you that we have provided the SEC all of the testimony and information that it has requested to date, and at his point, are awaiting further word from the SEC.

Now I'd like to turn the call over to David for his comments on the business.

Thank you, Jim.

Good morning, everyone.

I also want to thank you for joining us on this call today.

Everything I have learned in my first eight weeks here confirms my original opinion that this is a strong and very relevant business model.

Competing on convenience, product assortment and price with assortment mentality really works.

Today, I'd like to briefly update you on the status of the company's key initiatives for 2003 as outlined in the company's recent year-end conference call, and to share with you some of our initial areas of focus.

The company remains committed to its stated growth plan and is committed to opening 650 new stores this year as part of that initiative.

Through the end of the quarter, we had opened 223 new stores with the largest concentration of new openings in Alabama, Texas and Pennsylvania.

Our goal is to have over 600 - all 650 new stores opened by the end of our third quarter, and we believe we are on track to do that.

Our second initiative is to improve the consistency and productivity of our stores.

We continue to train our store managers to execute on seven key operating functions by complying with rigorous standards of performance.

I will not go into too much detail on this initiative, but this area is critical, and we take it very seriously.

We must provide a comfortable and consistent shopping experience for our customers.

The improved consistency resulting from this intense focus should take store performance to a higher level and further differentiate Dollar General in the marketplace.

In support of this effort, our new store manager training program is also key to improving store performance.

We now have 29 store manager training centers open where we conduct a four-week training program that teaches all of the details needed to effectively manage a Dollar General store.

We expect to open the last before the end of June.

To date, we have graduated approximately 1,200 store managers from the training program, and while it is still early in the process, we believe we are developing managers with the right tools to succeed long-term in our organization.

Our ultimate goal is to have all of our store managers, both new and existing, attend this training program.

Our third initiative is the reduction of shrink.

Jim has already talked about the numbers, so I'll update you on the steps we're taking to tackle this issue.

We now have our asset protection team spread among major markets with higher shrink issues.

We also have devoted an internal audit team to store audits, which will help identify and prevent shrink.

Since third quarter of last year, we have added 435 closed circuit TVs and over 2,000 security alarms in many of our higher shrink stores.

We've also had success with our shrink tip hotline for employees.

Shrink is an area about which I feel very strongly, and it will continue to be one of our highest priorities.

As part of our fourth initiative, in Q1 we installed coolers (ph) in 276 stores and now have a total of 1,643 stores with coolers.

These stores on average continue to show increased traffic and higher sales than the non-cooler stores.

The average ticket for a transaction, including a cooler item in the quarter was $13.41, as compared to a company-wide average transaction of $8.42.

Over 40% of the additional transaction value was in non-cooler product, however, which shows we are not only getting additional revenue but also that these customers are making additional purchases of non-cooler product.

We will continue to review the parameter for stores selected to have a cooler and the type of cooler they receive.

Currently we plan to install a total of 750 coolers this year, a decrease from our original estimate of 1,000.

To date, we remain pleased with the impact of coolers and the impact they've had on our stores.

The fifth initiative involves the continued implementation of automatic replenishment.

We currently have auto replenishment in all of our stores for approximately 13% of our stock keeping units.

We have 40 stores that have been on 100% auto replenishment of core SKUs for over a year.

In the stores with auto replenishment, we are experiencing 5% to 7% better core merchandise in stock levels than our non-auto replenishment stores and have lowered our core inventory dollars in these stores by $5,000 to $7,000.

Our plan is to continue the rollout of this program to as many as 2,500 stores this year.

As of today, 540 stores are on auto replenishment of 100% core SKUs.

The basic stock levels that drive the program are store-specific, tailoring each store's inventory levels to match its sales.

Currently, we are putting into place new programs to better automate the maintenance of these stock levels.

In our sixth initiative, we have begun testing the acceptance and impact of credit and debit cards.

We now have about 300 stores, mainly in Indiana, where we are accepting Visa and MasterCard as well as debit cards.

Our objective, of course, is to increase the average ticket per customers using these cards.

We will gather and analyze data throughout the summer and expect to make a decision later this year regarding the continued launch of this program to additional stores.

Finally, we have initiated a comprehensive site selection effort to find the optimum location for our next distribution center that we plan to open in early '05.

This endeavor supports our store growth strategic plan, and we want to position this facility to maximize both our distribution and transportation efficiencies.

That covers the status of our primary initiatives currently.

Now I'd like to take a few minutes to share some of my initial impressions and areas of focus.

First, as I have said, I really believe in this concept of small-store convenience and meeting the needs of the underserved customer.

To better serve this customer, we must improve the consistency of our in-store execution.

To do that, we must focus on hiring, training and retaining the right people.

Our manager training program, our rigorous in-store standards of performance, and our merchandising initiatives are certainly steps in the right direction.

Next, I'm very focused on reviewing our merchandising mix and the impact on store profitability and inventory performance.

As the current quarter's results reflect, changes in our merchandising area are beginning to have a positive impact on margins and inventory.

We are very pleased with the results we've achieved using the Arthur merchandising planning system.

As a reminder, for this year, the system has allowed the company to plan purchases and receipts on a weekly basis at a much more detailed level, using 550 separate categories compared to 10 broad categories on a monthly basis in the past.

I am very encouraged by the additional capabilities of this system.

I've been particularly impressed with the impact on the business of our recent IT and supply chain investments.

I have visited each of our distribution centers, and we will be investigating further ways to take advantage of these investments by further integrating our supply chain.

We also plan to focus on our new store efforts.

As you know, we have a significant opportunity to add new stores, and I see no reason to alter our current plans.

I do, however, want to ensure that each of our new stores is in the best possible location with an appropriate cost structure.

Lastly, I'm also personally focused on finding a new President and CEO.

We engaged a leading executive search firm to assist us in this effort, and I'm excited about our progress thus far.

Thank you for your support as we make progress at Dollar General.

We will be presenting at several conferences this summer, where I hope to meet many of you.

That's all I have for now.

Jim, do you have anything to add?

Operator, I think we're ready to take some questions.

Ok.

If you'd like to ask a question, using your touch-tone phone, please dial the star key followed by 1.

This will enter your name into the queue, and we'll take the questions in the order that they appear.

It will be just a moment for the first question.

Again, if you'd like to ask a question, please dial star 1 on your touch-tone phone, and this will place your name into the queue.

Again, that is star 1 to ask a question.

Ok.

Our first question today comes from Deborah Weinswig from Smith Barney.

Go ahead, please.

The gross margin improvement was impressive in the quarter.

Can you talk about, two of the aspects?

One, in terms of the lower rate of sales of the damaged product?

And also, are you sourcing differently on the seasonal items and housewares?

And if not, what drove the gross margin improvement from those items?

It wasn't a lower rate of sales of the damaged product.

What that is just that it would appear that we have less damaged product out in our stores.

The component of gross margin, and it's a reduction of gross margin, that damaged markdowns represented was significantly beneath last year's numbers and recent historical trends and also significantly beneath our plan, And, one quarter doesn't a trend make, but we're keeping our fingers crossed that the effort we've had for the last two years here to rid ourselves of aged inventory is also going to allow us to see this as a future trend--reduce damaged markdowns.

We did have about a 56% increase in imported product in the first quarter of this year.

I think that actually came from many of our various categories, no one category in particular.

And we spent some money systems-wise on an import core reorder system.

So this is a point of emphasis for the company, and in terms of trends going forward, we would expect to see our percent to total purchases that comes from imports to creep up gradually.

Getting back to the damaged product, is it that the stores are now either putting the parts on the shelves differently, are they receiving them differently?

What led to just the lower amount of product?

You know, I'd be lying if I told you that we have that level of specific information on this.

I think what I gave you is the anecdotal feedback we've had, which is just that we've got a cleaner inventory base, and with 6,300 stores out there on an issue like this, unfortunately, we basically go on anecdotal evidence.

Ok.

And last question, have you noticed a difference in the performance of the stores where the store managers have gone through the training program?

Deborah, this is David.

Yes, I think we've seen several things.

First, our turnover rate is substantially lower, although it's very early.

Next, is the performance against the seven criteria that we're using, "The Seven Habits," as we call them, is very encouraging.

We see outer-stocks much lower and our in-stocks are better.

We just see a general performance increase in these stores.

Again, it's so early in the process that the evidence we have is more anecdotal, but I'm very encouraged, Deborah, that this is going to bring strong benefits to our store execution.

Great.

Thanks.

Thank you.

Our next question comes from Gary Balter from UBS.

Go ahead, please.

Thank you.

Two questions.

One is, either David or Jim, if you could comment on your thoughts on the tax law, tax bill that was just passed and the implications it has for your company.

That's one, especially as you read things like in today's "New York Times" that say that some of the lower income people will actually not get that $400 tax rebate, or credit, and what's your thoughts on that?

The second is, shrink looked very good in the quarter.

Is there something sequentially, because the three one year over year looked ok, but obviously your shrink last year went up as we got to third quarter.

Is there something sequentially that will send it up a little bit, or is this a number going forward, which would mean pretty strong gross margins?

Thank you.

Gary, this is David.

With regard to the first part of your question, we're not anticipating - and this is not a political response, but we're not anticipating any benefit from the current tax legislation.

You know, I think a discussion on what impact it might have on our dividend strategy and so forth going forward is another issue, and I'm not prepared to comment on that this morning.

With regard to shrink, I would just tell you that I'm not happy with our current level of performance, and I think the company knows that at this point.

We've been focusing on this for sometime, and I will tell you that we've invested heavily in it in the last year.

And we're beginning to see on some weekly results some improvement, but overall for the quarter, as you can see, we're still at a level that is in my view unacceptable.

So we are identifying that as a key tactic that we've got to achieve.

Just back on the tax law, are you not assuming a benefit to be conservative or are you not assuming a benefit because you don't see a benefit for your customers in the tax bills?

Well, I think at this point, I'd rather respond to that is that I'm being conservative.

Ok.

With the unemployment situation the way it is and the percentage of our customers that are unemployed, I'm not sure how to respond to that.

So I think at this point, it's more a point of conservatism, Gary.

Ok.

Great.

Thank you very much.

Good luck

Our next question is from Jack Sebald (ph) from Whiteford Advisors.

Go ahead please.

I'm still a little confused on the shrink issue.

I know when you gave guidance for this year at the end of the fourth quarter, the guidance was embedded - some improvement in shrink as the year wore on, and you did tell us that the first quarter, you'd probably not show any on a year to year basis.

Could you just elaborate a little bit as to what's actually happening as you're doing the rolling store inventories and then how that then rolls into the following quarters in terms of shrink estimates?

Well, I think that with respect to Qs 2-4, I don't want to get caught up in making a specific forward-looking statement, but what we've just reported in Q1is really nothing about the way we're going to take inventories between now and the end of the year that would sort of systematically make that number drift up.

Now, it may drift up just because the results aren't particularly good, but there's nothing inherent in it when you compare it against last year, anything else like that, that is going to cause sort of automatic erosion.

And as you know, last year the shrink rate crept up as the year progressed, and then we wound up the year somewhere around, I think, 3.52%.

So, given what we just recorded in the first quarter, it would be our hope that by the end of the year, we'll have significant improvement over last year's 3.52.

But as David mentioned, and it's not a number we publish, you know, we still are behind where we'd like to be or are reporting a higher shrink rate than what we would like to, and our plan for this year was pretty significantly beneath last year's 3.52.

And just a second question.

As you've ramped up store openings here in the first quarter, could you give us some sense as to what you're seeing in terms of store opening volumes?

Are you pleased?

Are they on trend?

Jack, this is David.

Yes, we're very pleased.

In fact, the result this year generally is better than we've seen in the last several years.

I think that's attributable to site selection, some of the locations have rents that are a little more conducive to our model.

But I think also we're beginning to see the impacts of some of the training that we're doing.

When you have 6,300 stores, the impact of the individual store manager is absolutely critical.

So right now, I'm very pleased with the early evidence on these new stores, and we're anticipating that new store performance this year will be quite good.

Thank you very much

Thank you, Jack.

Our next question is from Daniel Barry from Merrill Lynch.

Go ahead, please.

Good morning.

David, appreciate you being on the call today and hope you'll be on future calls.

When you were first announced that you were joining us, I think many people were surprised you didn't have a visible background in retailing, although I assume you've dealt with retailers as a consultant.

Can you give us a little more about your background and experience in retailing and why you chose to join a retailer instead of non-retailer?

That's a very good question.

Thank you.

While I haven't been employed by a retailer directly, anecdotally, my first job was in a retail organization many years ago--more than I want to admit.

But seriously, I have been focused on a common entity with retailers all my career, and that is the consumer, and so at Reebok, at Sarah Lee, and other places, we have partnered with retailers to focus on the dynamics of point of sale, merchandising, new store operations, and so forth.

So when this opportunity came along, along with my background from an operating point of view, it seemed to be consistent that what is necessary here is an execution strategy behind the basic business model.

I don't anticipate changing dramatically this business model because it is empirically sound, and I think it has strong legs with which to grow.

And combined with what I know how to do, and that is execute, I believe it would make -- would have made a strong combination.

So that was a large part of why I came here.

The other is, this is a part of the industry that I see is has tremendous growth potential, and that is serving the under-served in the retail marketplace.

And as we see what's going on in retail today, we see a lot of consumers coming to us.

In fact, one of the things I've learned since being here, Dan, is that the largest growth area for us or one of the largest growth areas for us are people with a little higher income, and I don't know if the unemployment numbers have anything to do with that, but I think it's a strong model, I think my background fits it, even though I haven't necessarily been with a titled retailer, and right now I'm very comfortable with what I'm seeing and the strategies we're putting in place.

That's a great answer.

Thanks.

Thanks.

Our next question is from Meredith Adler from Lehman Brothers.

Go ahead, please.

Yes.

I was wondering if you could talk a little bit more specifically about what you're seeing with your expenses at the store level.

What's driving higher labor costs?

Obviously, you're opening a lot of stores, that will have some impact on occupancy costs, but is there something else?

What about utility?

Can you be more specific about what you would do to control those costs?

Well, Meredith, with respect to utilities in particular, in this year's first quarter, we were hit with a much more severe winter in many parts of our trade area, the Carolinas, here in Tennessee.

And as a result, really the year over year increase in utilities cost was almost all gas heating related.

I think that that's unfortunately -- you can sort of tweak around the edges at that, but when you have a sort of February and early March like we've had here, there's not very much you can do to actually control that.

In terms of some of the other line items, in terms of rent, you know, it's sort of good news/bad news.

We have started to pierce some of our percentage rent numbers in terms of leases that kick in when you hit certain sales volumes.

Some of our common area, and maintenance costs have been a little bit higher, and in the first quarter, some of that was snow removal.

Taxes and licenses has been another area, we've seen some property tax increases in various parts of our trade area.

So it's been a little bit death by a thousand cuts.

In terms of the labor line at store level, we will start anniversary-ing here, pretty shortly a much higher rate to sales.

We talked during our conference calls last year about a fairly sizable increase in pay rates of our store managers towards the end of the first quarter, beginning of the second quarter last year, and that drove the labor rate to sales up.

We thought that was necessary to be competitive and to attract the kind of managers we needed.

And also you may remember that at the time that we raised pay for our store managers, we were also discontinuing having them in the option program, just because we didn't think that we were getting the bang for the buck out of having them in the option program.

So I think in terms of controls going forward, it's just sort of nuts and bolts retailing discipline.

I think on our non-store related expenses right now, we have them under fairly good control, and David has made a priority of trying to narrow the gap on our operating expense rate to sales, but there's no sort of magic silver bullet here.

It's just going to be going line item by line item on the P & L and trying to control costs a little bit better.

Great.

I have just another question.

If I understood your comments about shrink, what I thought I heard you saying was that you had originally budgeted that you would have shrink down substantially over last year by the end of the year, but that you are behind your own internal plan through the first quarter, and that has been offset by other improvements in gross margin.

Did I understand that right?

Meredith, this is David.

I think that's fair to say.

I think we've got very aggressive internal targets on this issue.

The fact that we might be a little behind after the first quarter doesn't concern me that much, but I think for the year, we've got a lot of work to do in this area.

The only thing I'm trying to say is that I want you to know that we're making this a very high priority.

Ok.

Great.

Thank you very much.

Our next question is from Dan Wewer from CIBC World Markets.

Go ahead, please.

Thanks.

Jim, there seems to be a bit of confusion on the shrink message.

It might be helpful if you would remind us of what the shrink rates were in the second through fourth quarter of a year ago.

Well, let me see if I can't dig that out.

Ok.

It was 361 in the second quarter, 4% in the third quarter, and 341 in the fourth quarter, 307 in the first quarter, and that all amounted to a 352.

And then maybe on Jack's question, I think you had indicated there's not any inherent reason why the shrink rate would increase sequentially from the level achieved in the first quarter.

Is that correct?

That's correct

So assuming there's no change in your performance or the results from your -- you know, the inventories you take going forward, we could potentially see a 50 basis point improvement in shrink in Q2, assuming a static scenario?

In Q2?

Yes, I'm thinking we'd have a 3.1 comparing against like a 3.6 a year ago?

Yes, I mean, that's possible.

Also, a question on the damaged goods.

A lot of retailers include shop-worn product in shrink.

Do you guys exclude that from your shrink numbers that you're providing?

Yes, it's a separate line item in our gross margin.

Also, you'd made, I believe, a comment that there are some timing differences that favorably impacted the initial mark-up, and that these would begin to work their way out in the second through the fourth quarter.

If you could elaborate on that.

I'm just trying to understand the extent of the magnitude of these timing differences coming up.

Well, we have a planogram set that will consist mostly of highly consumable lower margin items that's going to come in probably sometime in the second quarter which will probably pull the margin rate down a little bit, and then also -

The initial mark-up would come down?

Correct.

Not the reported gross margin?

Well, one basically is going to impact the other.

So if your initial mark-up is coming down, it's also likely that that's going to impact your gross margin rate in the same direction.

Except when you have this big pick-up in shrink?

Correct.

That's right.

I mean, you have other items that could offset it, no doubt.

Also, we bought quite a bit of seasonal product in the first quarter of this year that was bought in later quarters last year.

It was higher margin product, and so we won't have that same benefit as we go forward here either.

This is the last question I have, could you talk about on the shrink initiatives, what that's adding to your expense rate?

And I guess at this point, perhaps we spent more on, you know, trying to reduce shrink than the actual benefits, but if you could give us some sense as to the impact on the cost of these initiatives?

David Perdue;

Dan, this is David.

I don't think I can speak on that this morning.

I can get that number back to you.

But in terms of the cost, the cost is minuscule compared to the size of this issue.

If we pick up 100 basis points on this thing, you're talking about a $60m issue potentially.

So I can assure you we're not spending $60m of incremental labor or cost on attacking this.

What we have done is put some things in place that most retailers traditionally have, asset protection and so forth.

What we have done is we've reached over and added a little bit of labor in our audit function so that we make sure that we have their help as well, and we're focusing on in-store, which is part of their normal jobs anyway.

So I wouldn't say that we've extraordinarily increased expenses to attack the problem.

It's just I feel like to run a disciplined retail shop, you have to have this under control.

Great.

And good luck.

Thank you, Dan.

Our next question comes from David Yamamoto from Wedbush Morgan.

Go ahead, please.

Yes, good morning, and congratulations.

One question regarding imports, where do you see imports can go to?

In terms of a percentage of our business?

Yes.

Well, David, that's a very good question.

If you look at other retailers, you know, their percentage is very significant.

I don't really have a specific number in mind.

What I do know is that we owe it to our customers in a global marketplace to find the best buys that we can within the relative quality that we need to deliver.

And I think we've got some potential yet to go in that area here.

So I would not be surprised to see that creep up, to use Jim's term, in the next few quarters as we go forward.

We are very heavily involved in Asia now, so this is not a new area for us, but it is one that holds a lot of potential as we continue to look at the breadth of our general merchandise mix.

Ok.

Can you quantify just a conservative figure?

Well, it's so early in my tenure, David, and I'm not sure anybody internally knows the answer to that question.

What I've asked them to do is bring the best opportunities that they can find.

I would not be surprised to see this materially go up.

We're at 13% now.

If that were to double in the next year or two, I wouldn't be surprised at that at all.

Ok.

And if that did happen, what type of improvement on gross margin would that have, hypothetically?

Well, I don't think -- I mean, we can have a general conversation about that, but I don't think I can come up with a hypothetical estimate of that right now.

I know it would have a general impact.

I wouldn't want to crank that into the numbers, though, David, just for the very reason that we have a global marketplace with currency fluctuations and so forth.

And my impression is that it definitely will have an impact.

How much, I think it's immaterial to say at this point.

Ok.

Can you also talk a little bit more about some of your other merchandising initiatives?

Are you bringing in any new products, other changes in terms of the categories?

Well, I think we're looking at some of our traditional categories to make sure that the productivity continues to perform, and that what we're trying to do right now is evaluate from a comp store basis what SKUs need to come out of the mix and what SKUs go into the mix.

And as past performance has shown, our merchandising group has pretty good track record in doing that in a very tough retail environment.

I think that when you look at some of our general merchandise, Apparel right now has declined to under 10% of our volume, I think, and I think that's an area where we do have some potential to merchandise that in a more profound and impactful way.

I can imagine that that might grow a little bit over the next year or two, not to a really high level, of course, but I really am committed to the general merchandise nature of our mix.

So I think that's an area that I can see growing.

Ok.

I can also give you some color on some items that really contributed to our first quarter comp store sales increase.

In the highly consumable area, dog and cat food was up pretty significantly over the prior year.

Chocolate candy was up significantly.

Seasonal candy including Easter was up nicely.

Gums and mints, bread and milk, and those were all areas that showed large increases over the prior year in the first quarter.

In the seasonal area, hardware/automotive was up pretty significantly over last year, plush products were up, we had some decent sell-through of Easter products, lawn art was another pretty big item.

Garden statues, grills and accessories, flower pots, charcoal.

So these were some of the items, just to give you some color, that showed strength year over year in first quarter in terms of sales.

Ok.

Great.

Thank you.

And one last question, can you discuss some of the changes that you've made this year in store operations?

Well, I think the biggest is the continued implementation, David, of what we call "The "Seven Habits" and the training program.

Both of those combine to make our store manager much more qualified, really, to run an entrepreneurial store, which is really the root of this model.

I can't emphasize too much the importance of having an appropriate and effective store manager backed by this corporation.

So I think those two areas are definitely changes that, while they've been ongoing, are really increasing in their impact during first quarter.

Ok.

Have you changed the number of hours that your stores are open during the day?

Not materially, no.

Not materially?

Thank you so much.

Thank you, David.

Our next question is from Mark Miller from William Blair.

Go ahead, please.

Hi, good morning.

David, I'd like to get your thoughts on store manager turnover at Dollar General, and it sounds like this is going to be a significant priority for you.

I mean, with a fresh set of eyes on this issue, can you comment on why turnover is so high?

And I know you've got some training programs in place, but I'd be interested to hear a little bit more specifically some of the measures you're going to tackle to try to bring this down.

Thanks.

Well, thank you, Mark.

And obviously it's a key strategic success factor for us.

You know, our model is predicated on the fact that we can run a large number of small box retail operations, and we've done that in the past, and we're doing it right now very well, I think.

Having said that, I think turnover, while it's not extremely high compared to our competitors in the general marketplace, it's higher than I think it needs to be.

I think some of the contributive factors are the fact that, A, I'm not sure that in the past, we were as rigorous in interviewing as we could have been.

And so the company, even prior to my coming, initiated a change in that where we have to have at least two different levels interview a potential candidate.

The second thing is that I think it's fair to say that we will increase our testing and our interviewing process to make sure that we get the right profile individual in each store.

Then I think the next thing is the follow-up from the company's point of view, we have an organization that its only intent is really support and train and maintain that store manager with our organization -- our store operations organization.

And so, we've looked very carefully at that.

Most of these people have been in place now for the last year, year and a half in terms of senior management, and down at the regional level, while we have some new players in there, we are anticipating a lot more training in those levels as well, as to how they support the store manager.

Then, one of the things that I want to bring here is a weekly interface between our store operations group and our merchandise group.

While we do that, I think there's a direct impact in our store manager turnover that can be impacted by a closer integration of those two critical functions.

So to use Jim's term earlier on the SG&A, I mean, if your turnover is high, it can be death by a thousand cuts.

There are many reasons that contribute to it, and we're going to attack the high priority ones directly.

Can you comment just generally where the turnover level is and where you think you can take it, and just some sense as we watch you implement these processes how quickly that might happen?

Well, I think if you look at some of our turnover right now in -- let's take store managers, as an example -- is in the low to mid 40's currently.

I think that that number can be significantly lower.

The impact is, at 43%, we have multiple turnovers in same-store.

I hope you understand what I mean by that.

It's not that we changed 40% of total store managers in a year.

It's basically that maybe 20% of the stores changed twice or something.

But we have - that is a big issue.

Comparing to that in the corporate headquarters here in Nashville, our turnover is only 11%, and our D.C. that's in the mid 30's.

So we know that we can attack this.

It's just that we have to take a more distributive effort to really get at that.

Thank you for your candor on that.

Just one other question.

The apparel sales have been a little bit weaker this spring.

Can you comment on where that is relative to your plan?

I know you probably weren't looking for real strong numbers there, but is there any markdown exposure?

Thank you.

Thank you.

We just made -- had a big effort last year, made a big effort last year and got rid of a lot of really obsolete apparel.

So I think we've cleaned a lot of that up.

We planned Apparel down this year, and so it's pretty much performing where we wanted it to be.

And I think that my comment earlier is more about a strategic implication than it is tactically for '03.

Let me speak to that.

I think long term that Apparel should be a higher percentage of our business.

I don't anticipate it being 20% or 25%, but I think it should be stronger than the 9% that we have today.

We've got to prove that we can merchandise it and display it, price it appropriately, source it appropriately, and deliver the kind of product and value that our customers will respond to.

Ok, David.

Good luck.

Thank you.

Our next question is from Wayne Hood, and he's from Prudential Securities.

Go ahead, please.

Yes, Jim, you mentioned that there were some timing differences on some purchase that affected the first quarter gross margin.

Can you quantify, in basis points, what the impact of that was so we can get a sense of what we need to think about coming out of that in the second or third quarter?

No, I don't think that -- I don't think we want to be that precise right now.

And frankly even here, we're dealing with a range.

Ok.

You also mentioned that in the second quarter, that you're bringing in a new planogram of consumables.

Can you elaborate a little bit on what you're replacing and what kind of inventory or sales level you're buying to, is that planogram or is it non-material?

I would say that from a sales perspective at the company, it's not particularly material.

I believe much of the product is paper and chemical household products, and that's why it will have some impact on our initial markup because those are lower margin items.

Ok.

And then also on the cooler program, you're backing off of that a little bit from what you originally thought.

Why are you doing that?

Wayne, this is David.

I wouldn't read anything into that.

What I -- what Jim and I are doing is looking at the size of cooler and its application in specific stores.

And I want to make sure that when we have all the information with which to make a good decision.

We're going to continue this launch, and the early results are very encouraging, and I would not read anything into the fact that we're only going to open 750 this year as opposed to the original 1,000.

There wasn't anything really strategic in the 1,000 number.

What's more important is that we learn how to match up the size of the cooler with the specific stores within which they're going to be placed.

Ok.

And then my final question, Jim, I guess, is you bring up more items or departments on the perpetual and automatic replenishment.

Do you feel comfortable enough with the unit integrity that you won't get a pop-up in shrink again as you're putting more of these things up on line?

Yes.

Yes, I think that any impact that we've seen in shrink, if there was any, from going to the item level inventories has been factored into our numbers now for a while.

Ok.

Thanks, Jim.

Our next question comes from Mark Mandel from Blaylock & Partners.

Thank you.

Good morning.

My first question relates to your private label products.

What percent do you see that evolving into as we go forward, and with the advent and proliferation of the cooler program, does this provide further opportunities to have private label products in areas like milk, butter, et cetera?

Mark, let me take a shot at that.

This is David.

Again, I'm going to hide behind my tenure here of only eight weeks and not give you a number percentage because I don't know what that is yet in terms of our strategy.

I will tell you that the cooler program is just another area of the store within which we need brands and we need private label.

We are committed to our branded vendor partners, but at the same time, I think private label gives us an opportunity to give our customers the kind of choice that we are known for.

So while I see private label continuing to be an important part of our business, I don't see that the cooler necessarily has an impact one way or the other.

I think its mix will be fairly representative or similar to the rest of the store

Ok.

Secondly, Jim, tax rate going forward, should we keep it fairly constant?

Yes, I think in the first quarter, it would have been 36.4.

I'm not certain that it's going to remain exactly at 36.4 going forward.

But, that's probably a decent proxy right now.

Ok.

And then another question.

Refresh my memory, if you would, please, have you made any decisions on the EITF 2-16, where you stand with that?

You know, I'm going to show my ignorance here without looking at the Qs, which particular issue does that address?

That's the vendor (inaudible), money vendor allowances, et cetera.

We do not have significant exposure.

I really shouldn't even say "significant."

We tend to take vendor moneys directly into the cost of the product.

So in other words, we are not a type of vendor that is getting $6m, $7m, $8m checks from a vendor that needs to be spread, say, over three years because of various performance issues in a contract.

The vendor moneys that we do get tend to be for performance already rendered, not for future performance.

And again, compared to grocers in particular, we're a very different model in that we're negotiating right into the cost of the product what would be vendor moneys in other segments of retailing.

Ok.

And finally, final question, SG&A or operating expenses about an 18% rate, square footage is up about 10%.

Obviously, you're targeting this area.

What kind of spread can we look at or model for the rest of this year?

Any guidance there?

Well, I think I said during my portion of the presentation that what our goal is over Q's 2-4, it's to narrow the gap on the operating expense rate to sales between this year and last year.

So, while a long-term goal is to start actually seeing year-over-year declines, and while there's really nothing about our business model that someday won't let us get there, I think for the balance of this year, a more modest goal will just be to start narrowing the gap.

Ok.

Well, thanks a lot and congratulations.

Our next question comes from Jeff Feinberg from JLF Asset Management.

Go ahead, please.

Jeff Feinberg, if your phone is on mute, please un-mute your phone, sir.

Ok.

We'll move onto the next question.

Our next question is from Meredith Adler.

She's from Lehman Brothers.

Go ahead, please.

I'm sorry.

I just had a follow-up question.

There's been a lot of discussion about the opportunities over what you've achieved in terms of improving gross margin.

Could you comment at all about pricing and whether you feel that you ought to be reinvesting some of the gross margin improvement in your prices to, you know, maintain or improve your competitive position?

Certainly it's something that we've heard others, like Wal-Mart, talk about.

I was just interested that there wasn't really any comment on that at all.

Well, that's a very good question, Meredith.

Thank you.

This is David.

The number of items that we increased price on are very minimal, very minimal.

And they're in areas where we were substantially below market.

And our merchandising group made judicious decisions, very careful judicious decisions to increase that price.

One of the things that we're extremely careful here is trying to balance our gross margin performance with our market basket competitiveness, and we look at that weekly.

It's a very important balance for us, and our strategy is to be a low-cost provider, and we think we are, and it's been demonstrated over and over again over the last few years in terms of outside investigation.

So our strategy is to be a low-cost provider, and we're going to continue to monitor that balance with gross margin.

And when you compare yourself in terms of market basket competitiveness, are you comparing yourself to other discount-type retailers or are you looking at the broader competitive set selling similar products?

Well, no, we try to find the lowest prices in the marketplace, and it's generally in the mass or in the discount channels, and that's -- you know, those are the prices that we try to compare to.

Ok.

Great.

Thanks very much.

Thank you, Meredith.

Operator, I thank you very much.

I think that probably concludes the time we have allowed for our questions.

Thank you, everyone.