達樂 (DG) 2003 Q4 法說會逐字稿

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

This call is being recorded by Conference America 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 stated by the company we will open the conference call for questions from the audience.

Before the presentation begins, the Company has requested that you listen to the following statement regarding forward-looking information and non-GAAP disclosures.

In addition to historical information, the Company's comments during this conference call will contain forward-looking information such as statements regarding the Company's 2004 outlet, including without limitations, annual net income guidance, growth target, capital expenditures and key plans and operating initiatives, as well as the anticipated settlement with the Securities and Exchange Commission.

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

The Company believes the assumptions underlying the 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 statement.

The factors that may result in actual results differing from such forward-looking information include but are not limited to those set forth in the Company's most recent annual report on form 10-K and in their fourth-quarter earnings press release issued today.

The Company cautions you not to place undue reliance on these forward-looking statements which speak only as of today's date.

Except as may be required by law the Company disclaims 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.

You are advised, however, to consult any further disclosures the Company may make on related subjects and its public disclosures or documents filed with the SEC.

The Company will be referring to certain financial information not derived in accordance with generally accepted accounting principles or GAAP such as net income, thus historical and projected, diluted earnings per share, selling, general and administrative expenses, operating profit margin, return on assets and return on invested capital, each of which excludes restatement (ph) related items.

The Company believes that this information is useful to investors as it indicates more clearly the company's comparative year-to-year operating results.

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

In addition, return on invested capital discussed in this call may be considered a non-GAAP financial measure.

Management believes that return on invested capital provides investors with additional and useful information for evaluating the efficiency of the Company's capital deployed in its operation.

None of this information should be considered a substitute for any measures derived in accordance with GAAP.

The company has included its calculations of return on invested capital and reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures in the schedule the company in their fourth-quarter earnings press release filed today, which can be accessed at www.DollarGeneral.com by clicking on the homepage highlight items.

Beginning today's meeting is Mr. Jim Hagan, Executive Vice President and Chief Financial Officer.

Sir, you may begin.

Thank you, operator, and good morning everyone.

Net income for the fourth quarter of 2003 was 102.8 million or 30 cents per share as compared against net income in the prior year of 108.1 million or 32 cents per share, a decrease of 4.9 percent.

The 2003 results include approximately 10.2 million in restatement related expenses, including the $10 million proposed settlement with the SEC described in our press release this morning.

The 2002 fourth-quarter results include approximately one million in restatement related expenses.

Excluding restatement related expenses from both years, net income in earnings per share would have been 113 million or 33 cents per share on the current year, versus 109.3 million or 33 cents per share in the prior year, an increase of 3.4 percent.

Sales during the fourth quarter of 2003 were 1.97 billion versus 1.76 million in the prior year, an increase of 11.8 percent.

Same-store sales increased by 3.3 percent.

The gross profit rate during the quarter was 29.32 percent versus 30.01 percent in the prior year, a decrease of 69 basis points.

The decrease in the gross margin rate is the result of the three issues that we identified as potential problems during our second-quarter conference call back in late August.

In order of magnitude, the three issues are as follows.

First, our purchase markup was considerably lower in the fourth-quarter this year as compared to the fourth-quarter last year.

This was due primarily to the difference in the timing of receipts in 2003 versus 2002.

When we talk about our full year results, you will hear that we had a higher purchase markup for the full year of 2003 as compared with 2002.

Second, we took more promotional markdowns in this year's fourth quarter, primarily to clear out excess Christmas merchandise.

And third, last year we recorded an $8.9 million positive LIFO adjustment while this year we recorded a $700,000 LIFO expense.

With respect to some other margin items, distribution and transportation expenses declined by 55 basis points in this year's fourth quarter and our shrink rate calculated of retail was 2.93 percent as compared with 3.41 percent in the prior year.

SG&A expenses in the fourth-quarter of 2003 were 391.4 million or 19.90 percent of sales, versus 350.4 million or 19.92 percent of sales in the prior year, an increase of 11.7 percent.

Net interest expense was 6.2 million in the fourth quarter of 2003 versus 9.3 million in 2002.

The Company's effective tax rate was 39.1 percent this year versus 35.7 percent last year.

The increase in the effective tax rate in the current year is primarily result of the fact that $10 million proposed settlement with the SEC is not tax-deductible.

For the full fiscal year 2003 net income was 301 million or 89 cents per share as compared against net income in the prior year of 264.9 million or 79 cents per share, an increase of 13.6 percent.

The 2003 results include 10.6 million in restatement related expenses while the 2002 results had 23.1 million in net restatement related items that had the effect of increasing pretax income.

The 23.1 million consisted primarily of insurance proceeds relating to the settlement of the restatement related shareholder derivative and class-action litigation.

Excluding restatement related items from both years, net income in earnings per share would have been 311.4 million or 92 cents per share on the current year, versus 250.9 million or 75 cents per share in the prior year, an increase of 24.1 percent.

Sales in 2003 were 6.87 billion versus 6.10 billion in the prior year, an increase of 12.6 percent.

Same-store sales increased by 4 percent.

Sales in our four major categories increased in 2003 as follows.

Highly consumables 14.5 percent; seasonal 16.3 percent; home products 6.5 percent; and basic clothing 4.1 percent.

The gross profit rate in 2003 was 29.37 percent versus 28.26 percent in 2002, an increase of 111 basis points.

In order of magnitude the increase in the gross margin rate can be attributed to the following items.

Higher initial markups on merchandise received during 2003 as compared with the markups on merchandise received during 2002; a reduction in our shrink provision calculated at retail from 3.52 percent in 2002 to 3.05 percent in 2003.

A higher average markup on the company's beginning inventory in 2003 as compared to the markup on the beginning inventory balance in 2002, and a reduction in transportation expenses as a percentage of sales.

Components of gross margin that actually had a negative comparison with the prior year include the two items that I've already mentioned.

The first being the LIFO charge in 2003 and the second being an increase in markdowns in 2003.

SG&A expenses were 1.50 billion or 21.77 percent of sales in the current year, versus 1.29 billion or 21.15 percent of sales in the prior year, an increase of 16 percent.

The increase in SG&A expense as a percentage of sales in 2003 was due to a number of factors, including, but not limited to, increases in the following expense categories that were in excess of the 12.6 percent increase in sales.

Store labor expense, costs related to workers compensation and other insurance programs, store occupancy costs and an increase in bonus expenses related to the company's financial performance during 2003.

Net interest expense in the current year was 31.5 million versus 42.6 million last year.

The reduction in interest expense was due principally to lower average outstanding borrowings against the same time last year.

Again, due principally to the fact that our $10 million proposed settlement with the SEC is not tax-deductible, the company's 2003 effective tax rate increased to 37.3 percent as compared with 36.1 percent in the prior year.

In 2003 the company opened 673 stores and closed 86 stores, and our store count at the end of fiscal 2003 was 6700.

On the balance sheet and cash flow front we are very pleased with our performance in 2003.

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 319.9 million in 2003.

Our inventory turn improved to 4 times in 2003 from 3.8 times in 2002.

Our total inventory balance stood at 1.16 billion at January 30, 2004, which was an increase of only 3 percent compared with the inventory level at the end of fiscal 2002, even though we were operating 587 or 9.6 percent more stores.

Cash capital expenditures in 2003 were 149.4 million.

Our cash balance at January 30, 2004 was 398.3 million, and our total balance sheet debt was 282 million.

So our cash exceeded our debt by 116.3 million at the end of fiscal 2003.

That is an improvement in our net debt position of 341.5 million since the end of fiscal 2002 when our cash balance was 121.3 million and our debt balance was 346.5 million.

In 2003 the Company repurchased approximately 1.5 million shares of its common stock at a total cost of 29.7 million.

The Company is considering increasing the number of shares it repurchases in 2004.

You may recall that we have Board authorization to repurchase up to 12 million shares prior to March 2005.

So after deducting the 1.5 million shares repurchased in 2003, we still have 10.5 million shares authorized for repurchase.

Our strong cash flow performance in 2003 led to our announcement this past Friday that we are increasing our quarterly dividend by 14.3 percent from 3.5 cents per share to 4 cents per share.

I'd like to conclude by making some brief comments about the announcement this morning that I will be leaving the company after a reasonable transition period.

First, let me say that I have absolutely no concerns regarding the quality of our financial statements.

I am actually quite proud of the financial controls that we've implemented over the last three years.

I can also tell you that I agree with the strategic direction of the company.

Finally, I think all of you know that I didn't work at Dollar General during the fiscal years that were restated, so my departure is not related to any action that the SEC is taking.

Instead, as this indicates, with the announcement today of the proposed settlement with the SEC I think this is a logical time for me to close out my service with Dollar General.

After 23 years of life in corporate America, I would like to take a break, and then I would like to try something a little bit different, though I'm not quite sure right now what that might be.

With that said, I would like to turn the call over to David.

Thanks, Jim, and good morning everyone.

First, let me say how delighted I am with our results for 2003.

We have worked really hard and it's gratifying to see these record results.

As you know, this past year we have made significant changes in our organization, bringing several new people in from the outside and realigning a few inside individuals, as well.

This team is coming together, and we have undertaken an ambitious list of initiatives to help the Company be even more competitive going forward.

Speaking of organization, I will begin my remarks this morning with our announcement regarding Jim's situation.

Jim has served as a stabilizing force for the Company since he joined the Company three years ago.

He has been instrumental in upgrading the level of expertise in the finance area and implementing the systems and internal controls necessary at a company this size.

Personally I'm very grateful to have stepped into a Company with the strong controls that are in place here now.

I'm sorry to lose Jim but I understand his decision.

Let me assure you that Jim and I both are committed to a professional transition and to partnering to identify our next CFO.

In that regard we will conduct a nationwide search to find the right person to replace Jim.

I personally appreciate all of Jim's efforts here and wish him only the best as he takes a well-deserved sabbatical.

Moving on to our next topic, I am pleased to report to you that the SEC investigation seems to be coming to a conclusion.

This investigation, as we have discussed, concerns the restatement of Dollar General's financial statements for fiscal '98, '99 and certain unaudited financial information for fiscal 2000.

These restated financials, along with the audited financials for fiscal 2000 were issued on January 14, 2002.

We have been in discussions with the SEC staff responsible for our case since January of this year regarding its recommendations.

We have now reached an agreement in principle with the SEC staff.

They will now prepare the terms of the complaint, consent order and penalty and then submit that to the full Commission for their approval.

That could take a couple of months, and there is no guarantee that the full Commission will approve this agreement.

Having said that, we are hopeful that the full Commission will indeed approve this agreement.

The terms of this agreement include Dollar General's consent to the entry of an injunction prohibiting future violations of the antifraud, books and records, reporting and internal controls provisions of the federal securities laws and related rules.

The payment of a $10 million civil penalty and a provision that Dollar General will neither deny nor admit alleged violations of these laws in the past.

We are pleased that this matter is drawing to a close and are satisfied that the proposed resolution is fair.

We will update you when the full Commission reaches its final decision.

Until then, however, we will have nothing further to say about this matter.

Now let's talk about our result.

As I have said, I am very pleased with the financial results we have released this morning.

To recap quickly, for the year 2003 our total revenues grew 12.6 percent.

Same-store sales increased 4 percent over strong comps of 5.7 percent in 2002.

Operating margin, when you exclude the restatement related income from last year and the penalty this year, improved from 7.1 percent to 7.6 percent.

Our net income grew 24.1 percent when you exclude restatement related items.

As you may recall, our original guidance for net income growth for the year was 10 to 15 percent.

After showing better-than-expected gross margin improvement in the first two quarters we raised that guidance to 15 to 20 percent.

We opened 673 new Dollar General Stores, including two Dollar General Market stores.

This exceeded our 2003 annual goal of opening 650 stores.

We also relocated or remodeled 76 stores and closed 86 additional stores, giving us 10 percent net square footage growth for the year.

We generated $320 million of cash flow before financing activities that we used to reduce debt, pay dividends and to repurchase 1.5 million shares of our stock.

At the end of the fiscal year cash on our balance sheet exceeded our annual our outstanding borrowings by $116 million.

Our return on invested capital excluding restatement related items in 2003 and 2002 improved by 112 basis points to 13.6 percent.

Based on these results, we believe we had a very successful year.

These results, while providing tough comparisons for 2004, do not yet reflect the full potential to be derived from our new initiatives.

Having said that, I am very excited about our plans for 2004.

As you know, we completed a comprehensive strategic plan with our Board last November.

Our 2004 goals and priorities are consistent with that plan, and I'm very excited about our prospects this year.

We have an aggressive new store growth plan, which includes new states and a detailed merchandising plan to drive same-store sales while maintaining our current gross margin levels.

Our top priority for the year, however, is to address our store operations across our network.

With that in mind, Kathleen Dionne, our EVP of stores with a backing of Lawrence Jackson, our new COO, has initiated a major store operations improvement project with the help of McKinsey & Company.

This project will include an analysis of all store operations including the flow of merchandise to our stores; we will then roll out the resulting recommendations to the entire chain.

This project is based on proven results achieved at other retailers with similar metrics as Dollar General.

The first phase of this project will be completed in the first half of 2004 and we will give you results as we go along.

We are also working to significantly improve our in stock levels at the store level.

This is one of the first issues I noticed when shopping the stores, in an area where we have already made big improvement.

At the end of 2002 there were 175 stores on the automatic replenishment system.

At the end of this year, for example, there were 2648 stores on the program and as of last week, nearly 4400 stores were all on this auto replenishment system.

In the fourth quarter same-store sales on auto replenishment experienced sales increases of 135 basis point higher than same stores not on the program.

We intend to complete the roll out to the rest of the chain in the first half of 2004.

While we cannot promise these types of results going forward, we are confident that the auto replenishment system will have a positive impact on our business.

We have taken steps to ensure that the store managers know how important this in stock initiative is to the company, including quarterly incentives for them based on in stock levels.

Our merchandising group has several exciting initiatives under way.

We believe there is an opportunity to significantly improve the sales per square foot productivity of our larger footprint stores.

We are testing several ideas in these stores currently.

It is still too early to discuss the details of this project, but hopefully we will have more to share by next quarter.

We are also focusing more on opportunistic buys than we have in recent years.

These items could be in any category, but this treasure hunt tends to add a little excitement for all of our customers.

Several of our initiatives for 2004 require a fairly significant capital investment.

First, we plan to open 675 new Dollar General Stores in 20 Dollar General Markets as we discussed before.

At the end of February, 119 of these new stores were already open, including three in New Mexico and one in Wisconsin.

Two new states for Dollar General.

We expect to open most of the Dollar General markets in the second half of the year.

We have also decided to roll out our coolers program companywide as quickly as possible.

As of January 31 we had coolers in almost 2500 stores and we believe we can have coolers in approximately 80 percent of our stores by year end.

The coolers continue to give us a higher ring through the register and a big opportunity to drive customer traffic and improve overall store sales.

In connection with the cooler rollout we are also installing the equipment needed to accept EBT as well as debit and credit cards.

Accepting EBT gives us a big opportunity, and we will continue to evaluate credit and debit cards as we go along.

We also have several capital projects underway regarding the supply chain.

We expect the expansion and conversion to dual sortation of the distribution center in South Boston to be complete by summer and Ardmore by the end of the year.

We selected the site for a new DC in Union County, South Carolina and expect to break ground in the next month or so.

We have a very sophisticated, well-run supply chain system and we continue to increase productivity at all our distribution centers.

We continue to invest in our information systems.

Among other things in 2004 we plan to develop a data warehouse to help us collect all our data in one location, making it more useful for planning and decision-making.

We are also going to install PCs in some of our stores and develop the tools our managers need to develop their stores better.

And of course, we will continue to make enhancement to our distribution transportation systems.

Briefly, I want to touch on a couple of other topics.

First, our overall shrink rate is still unacceptable and there is a lot of work yet to be done.

Our most recent physical inventory results indicate that we may be beginning to move the Dow, (ph) however.

It is still our goal to eventually get shrink in the 2.5 percent range.

As we have said before, shrink seems to be more of an internal problem and we continue our efforts to decrease turnover at the store level through better hiring and better training.

We would like to make our stores a more fun and rewarding place to work, and think we have the operation's leadership to do this now.

We have changed our hiring practices and have made some realignment in the field.

Recently we named 48 new district managers, for example, with 76 percent of these being internal promotions.

Our financial guidance for 2004 is for net income growth of 10 percent to 14 percent excluding restatement related items.

As a cautionary note as you see from the initiatives we have laid out there are some moving parts to the plan for next year.

It is very difficult to predict the sales impact of the merchandising initiatives and the impact that our store project will have this year.

In summary, we had a great year in 2003, but have much to do to realize all the potential that exists for the company right now.

We want to become even more competitive, and I'm convinced we gave the correct initiatives in place and the right team to execute them.

As John Wooden once said, be quick but don't hurry.

As a management team we are focused on implementing our prioritized changes while minimizing any short-term disruptions.

Thank you for your interest in Dollar General.

Now we will take your questions.

(OPERATOR INSTRUCTIONS) Daniel Berry, Merrill Lynch.

I noticed that your labor costs for sales was up both for the quarter and the year.

Could you elaborate a little on that?

Is that due to some of the programs you are implementing and do you think that would continue this year?

Very much so, particularly in the fourth quarter.

Some of the realignments obviously required some additional cost and investment.

We feel like we are through a good bit of that, although the initiation of this store operations project will have some temporary impact on that potentially.

We don't see that we see that trend breaking in 2004 and that I think we're going to begin to get some leverage on the labor line.

Exactly where is it coming from?

Are you just putting more labor in the stores?

In the past year you could see that in 2003 compared to 2002, we did put a few more hours in there which is one big reason why we're looking at the workflow of merchandise into these stores, Dan.

We are handling a significant number of increased cartons in the stores compared to a few years ago.

We've asked them for additional things that we required are additionally in the stores and so we've gone back and revised many of those practices to enhance not only the performance of stores but also the shop ability, if you will, in the stores.

Great.

Thanks.

Meredith Alder, Lehman Brothers.

I was wondering if you could talk a little bit more about what you see the opportunity for this sort of fixing up of store operations.

You talk about the stores being more shop able, handling the flow of goods better.

Do you think that's going to drive sales or expenses?

And then I have another question.

Thank you for the question.

We believe that it absolutely will drive sales in that we've looked at very intensely where our time goes in the stores.

It's amazing that basically our stores have turned into many distribution centers where we force most of our management and workers to handle merchandise instead of working with customers and having a very pleasant environment within which to shop.

So we think that absolutely we can bring the labor line down at the same time impacting sales by this lean retailing exercise that we are undertaking.

Another question I have is about shrink.

At one time when I first picked up the stock I was told that you had a handful of stores or 200 stores that had excessively high shrink and that the others were higher, but not as high.

Is it still true that shrink is not evenly divided amongst the stores, and what do you do?

If you made progress with those 200, what do you do with them?

Absolutely, Meredith.

Again, good question.

If you look at our stores across 6700 stores of the end of the year, well over half of these stores are very much under control.

If you look at -- if you consider 2.5 percent under control we have got three of our divisions doing quite well in that regard.

So yes, we are still very much focused on those same -- I think it ended up being about 260 some odd stores that we focused on.

We saw their shrink get cut in half in the last few months of last year.

We have actually expanded that group now as you might imagine some stores that weren't in that group may have bubbled (ph) up through the year and now those are on the list, as well.

And we continue to see improvement there, frankly, as we change the hiring practices and some of the work habits within the store; the seven habits that this company worked on for the last couple of years is beginning to get (technical difficulty) we have not walked away from that.

What we have done, though, is to try to make the stores a little more pleasant place to work, and certainly a more shop able area when you look at the way we handle merchandise and that sort of thing.

So very definitely I think shrink is a byproduct of that.

And we see some improvement right now coming even in the early parts of this year.

My final question is kind of about you talked about giving your store managers some new tools.

But it seems to me that you got a group of store managers that isn't maybe terribly sophisticated.

How do you get that group to be able to use technology more effectively and presumably to train them in a higher level that we're going to have less turnover?

You have to look at our stores are very simple; the technology we have in there is pretty direct.

This is not rocket science, and quite frankly, we have not had any negative feedback with regards to what we're trying to do in the stores.

As a matter-of-fact we're getting great results when we add just a little bit of sophistication in the store.

And it is not really that we are that sophisticated in the store; we're really basically trying to make it very efficient, very pleasant place to shop and one in which people enjoy being there.

So the sophistication really comes from our ability to load it, keep it in stock, set it up in such a way that it is the most effective and efficient way to present the merchandise to the customers.

And you'll hear us talking a lot about that over the next year or two.

Our short-term conservatism when it comes to 2004 is partly a result of a lot of changes that we are having in basically the store operation group and also in merchandising.

But our long-term enthusiasm comes out of the same framework, Meredith.

So I am not really too worried about being overly sophisticated to the extent that it's a problem with the people who we're hiring in the stores.

They are quite capable.

Even if you put in PCs and stuff you think --.

Yes.

We're not going to be doing programming in the stores; we don't need to.

But we will be doing things like communicating, issuing priorities, giving directions with regard to merchandise flow, timing of specific shipments of merchandise that we do during the year and so forth.

All this sort of ties back together; it is a labor productivity shrink, sales-per-foot productivity and so forth.

So it is not a luxury.

It is something that we really need to do.

Great.

Thank you.

David Cumberland with Robert Baird.

Good morning.

On shrink, you have mentioned a target of 2.5.

Does the net income guidance for 2004 include some progress toward that goal this year?

The guidance that we have right now assumes a very minimal improvement in shrink, David, to be candid with you.

We have -- because of the moving parts I am just going to say we have given you what I think is a conservative stance on this thing.

We don't know, frankly, how fast we can bring shrink down.

We see improvement right now.

There are numbers that in a quarter will be able to talk to you a little bit more definitively about that.

But we have not cracked this.

We know that we've got probably half of our chain is in good shape.

We've got another 2000 stores that are pretty good, and then we got 300 to 500 stores that are really hurting us.

And those are the ones that are improving dramatically but we still got a lot of work to do.

So we have not assumed in that guidance that you are getting any dramatic improvement in shrink.

And then David, you mentioned a rollout of EBT credit and debit acceptance.

Can you elaborate on that?

It sounds like it might be separate rollouts for different types of payments?

What we have done so far since Lawrence Jackson got here and Kathleen Guion, they have focused to a large degree on what is going on in the stores, where the opportunities are.

And this is one that looked like a low hanging fruit if you will in that a significant percentage of our shoppers are subsidized and have the subsidized cards and so forth and a large number of customers will take advantage of EBT.

But in many of our stores they were not able to shop us in that regard.

So we have made a decision to make EBT available as fast as we can in any store that qualifies, and fundamentally we've got to have the food products in these cooler stores in order to qualify.

So that is the process right now.

We have made a decision to roll coolers out network wide, we will get 3500, 3600 of those out this year we think.

In any event, we will be in the 6000 range by the end of the year.

And then the process of getting approved, we are becoming more efficient at doing that every day.

So we have a full-court press on trying to get EBT into as many stores as we can.

And then the credit and debit acceptance, is that a different rollout?

No, it's not actually, it's the same equipment, and we are -- we continue to monitor the test that we have out there.

We haven't changed any, we haven't added any new state into that test.

But as we said before in one of these calls, we still get a lot of noise and variability in that, and it just has not quite settled out.

We got some states that have just gone on it, so we want those to mature a little bit.

And we continue to evaluate the merits of debit and credit.

Thank you.

Dan Wewer of CIBC.

Question about the doubling in your CAPEX from 150 million in 2003 to 300 million in 2004 and yet the actual number of new store openings relatively identical year-over-year; so perhaps you could give us an indication where that incremental $150 million is being allocated on these different initiatives.

I didn't think I would get away with that without having to put a little more flavor behind that.

Thank you.

I would say the biggest single difference between our plan for '04 and our actuals in '03 is in our supply chain area.

We are going to get started in a new distribution center.

We are expanding two existing distribution centers; we've also gone to third shifts and so forth, that have required some capital.

We are investing quite heavily in our transportation.

We've got incremental trailers that we need and so forth.

IT is getting another big investment year and so forth.

Now the other thing is that the DG (ph) markets turning those up have added a few dollars in there as well.

But I will tell you that between just the new store growth which is about the same as it was last year, and our distribution efforts in transportation efforts, the whole supply chain, that is taking up the lion's share of it.

We know that you been very focused on improving return on capital since joining the company.

Yet we are looking at new net income growth of only 10 to 14 percent during the next twelve months compared to CAPEX doubling, was there ever a consideration that maybe now is not the right time to do the DG markets given that the returns are uncertain?

And perhaps that's an initiative that could wait until your CAPEX growth begins to moderate?

Obviously we did think about that, and I will just tell you the results are so encouraging coming out of that model that we decided that we just had to do it.

While 2004 is an investment year, it is not by any stretch of the imagination a problem year.

We are still very bullish on our initiatives going forward into the next few years.

And quite frankly as I said before in these calls, we are certainly a company to watch I think for the long-term.

This is not a turnaround.

We have some cleaning up to do; shrink, turnover a few fundamental basics like that.

But I think this is not a bad year frankly, Dan, to go ahead and begin making these investments.

Now return on capital means that we have to get serious about -- not that we haven't been -- but really get serious about controlling expenses and getting the leverage off of these expenses back to where we want it to be in order to maintain that ROIC that we are trying to drive so hard right now.

But it is a good point, and we did debate it, but I think we are going to be fine in '04 with regard to that measure.

One last quick question if I could.

I know you've given us measures of about a $13 average ticket for customers who are buying the cooler item compared to the house average about 850.

But it might be more meaningful if you could just indicate what is the average ticket trend in those stores with coolers rather those customers who are buying the cooler item.

You're talking about the overall store?

Yes.

I was a bit surprised last month to see the average ticket declining even though some of these stores now have coolers.

I think part of that had to do with some of the markdowns we might have been taking, but I don't have the statistic that you're talking about in front of me.

Dan, I would be happy to get that and get back to you on that.

But I simply don't have that number right.

Okay, great.

Thank you.

Sherri Ebert, J.P. Morgan.

I just want to touch on 10 to 14 percent net income guidance for '04.

Just trying to get a sense of what types of measures are included in there, you mentioned that you are not really expecting a big pickup in shrink but are you expecting some improvement in terms of the gross margin, and what you factored in for the increased expenses given the McKinsey Consulting project.

Sherri, we have certainly got the McKinsey project baked in obviously to the earnings guidance.

The other thing is that we haven't really forecast a big reduction in shrink, and then I think the overall cost of the CAPEX obviously depreciation-related items in there.

We are not -- what was the first part of your question, Sherri, I'm sorry the first variable.

On the gross margins, I'm just trying to get a sense of --.

A good question.

We are not forecasting in '04 any improvement in the current run rate of gross margin.

We had a great runoff in gross margin last year but partly because of some things that as Jim has mentioned several times in these quarterly calls, were a little bit of anomaly.

We think we got a run rate that we can maintain, but we don't see a dramatic improvement in there in this year.

What makes this year different from the longer-term?

Because you also did mention on the call that you made a lot of improvement in the operating margin but you believe there's a lot of improvement still to go.

Can you talk about what would be different in '04 relative to the gross margin versus over time?

Over time you've got some things that we are putting in.

For example, opportunistic buys, opportunistic purchasing.

We are going to staff that up; we've already begun doing that.

And we will begin having that as a bigger percentage of overall mix.

The second thing is that sourcing we are light in sourcing relative to some of our competitors.

We have basically redoubled our efforts in that area.

We've opened up our own buying office in Asia and so forth.

Those are two areas, and I think we are looking very hard at category management efforts over the next two years.

This is not necessarily an '04 initiative but over the next few years you will be seeing us talk about our mix, things that we think we see as opportunities and we have identified things that we can do in our merchandise mix relative to margin.

We just don't think that '04 is the year that we can do it because of all the other things that we are focused on.

We decided last year in our strategic planning effort that stores would be to focus/focus (ph) in '04 and as you can see from our initiatives, we are staying true to that.

That doesn't say that we don't have potential over the long-term in this margin area.

We think we do.

And just in terms of what kind of top line growth you are looking for, I know you have sort of highlighted the store growth.

But what type of top line plan is baked into that 10 to 14 percent?

At this point in time with the visibility being what it is we are not giving that guidance, Sherri, right now.

So I think as the year goes along we might come along and talk about that a little more directly.

But at this point, I am just not ready to do that.

Last question, obviously you made a lot of improvement in terms of the inventory turns in this year.

Can you talk about what type of outlook you have in terms of the turns going forward?

Thank you, but we don't think we've finished with that one either.

We think that the supply chain work that we're doing, the work we are doing in the stores, and then when we get to this category management piece out in our future, you will see us attack that as well.

In '04 we have not included any dramatic improvement in turns though in this guidance that we are giving.

Okay.

Thank you.

Michael Baker, Deutsche Bank.

I guess sort of following on that question so we know 2004 is going to be a transition year.

But longer-term, where do you see the operating margin for this business going, and presumably if it is higher than it is this year, is that going to come more in the gross margin line or is it more of an expense leverage story, or perhaps even a little bit of both?

I think its both, frankly.

I think that as we get this thing going we can run our stores more effectively.

We've been told that by outside people; we have looked at benchmarking comparisons and so forth and we're on it.

So we know we can leverage our expenses.

Our administrative overhead, however, is among the lowest in the business.

And I'm quite happy with the leverage we're getting there.

We will operate our stores more efficiently, and we will get leverage on that expense.

The other thing is, I really believe when you look at our competitors that we have an upside in our margin.

We know we don't source as much as they do, we know we don't purchase opportunistically as much as they do, and when I look at our current mix of brands and private-label we also have an opportunity to balance that in way and drive that such that we can improve our margin while still maintaining an advantage on the price side.

So you're exactly right, we are going to attack both sides of that, and I am quite optimistic long-term that we are putting initiatives in place right now that will begin to show results in that over the next eighteen months.

So where can you just discuss where the percentage of imports is this year versus last year and where that goes?

We had, I think the number we quoted is about 15 percent in direct imports.

Now there is another number on top of that just so you know, that we buy from U.S. vendors that is sourced abroad, my guess is that number is under 15 percent, as well.

And when you compare to some of our competitors, you can see that both those numbers are a little light.

I see, and then as you add more imports, would that not be offset by it sounds like moving a little bit more in the consumable direction on the other side in terms of the Dollar General market and adding more coolers as those two sort of offset each other, or does the increased imports more than offset the --?

I think -- my intuition looking longer-term, you can more than offset that, frankly, but I am not ready to guarantee that in the forecast.

I think what we are trying to do is balance this margin issue with the mix issue with the productivity issue.

And by the way, the given constraint is the price issue, because pricing convenience is the only reason we exist.

So as a Dollar store, that is a given.

So within the constraint of price, those are the variables that we are balancing going forward.

Great, thank you.

David Mann, Johnson Rice.

Good morning.

David, can you talk about how you are looking at Christmas next year in terms of your plans, given the higher markdowns you had to take and the mutant sales during the fourth quarter?

I'd like to get through March, but yes, I think in all seriousness, it is a profound strategic question, David, that we have undertaken here.

And that is that we want to become more current as we go along with our inventory.

That means that whenever we roll seasonal product or promotional product or opportunistic product through the stores, that we're merchandising in a way that we can actually clean it out and transition.

See, we've never had transition plans to exit seasonal merchandise here before.

And by that, I mean in-season transition.

What we used to do is hold it back and eventually mark it down.

It might be sometime in the distant future before it got marked and moved.

What we want to do is, and we're spending a lot of time right now working on the front end from a forecasting perspective, to make sure that we're not overbuying or under buying, and yet we have a plan to exit each one of these particularly seasonal plans that we load in .

So I would say for holiday next year, I would anticipate another -- we will have -- we have markdowns provisions baked into our plan for the year, and I would say it is not materially different than what we did this year, although I can't imagine it being a lot greater, frankly.

And the amount you're buying in terms of seasonal is about the same as well?

About the same, yes.

We have not seen any major trend.

I will tell you that seasonal grew more than consumables did in '03, and that was part of the gross margin move.

I don't think that you will see a dramatic change in that mix in '04.

And then if you could give a sense on the initial markup that you have going into Q1 this year, given how much that helped your first-quarter margin last year?

Does that compare year-over-year?

David, the opening margin that we're going to roll into 2004, because of the strength of the purchase markup in 2003, it will be up over the beginning inventory balance in 2003.

Okay, great.

Thank you.

Wayne Hood, Prudential Financial.

Can you give us any kind of look at the quarters coming up for '04, in terms of what kind of trend you would expect for gross margin in the first-half versus the back-half for SG&A, without being specific, I guess?

Well, I think the first quarter and second quarter, I don't really see any margin improvement for sure.

I think when you look at the way the stores are being loaded in and the way some of our initiatives are getting traction, I would tell you that the way our quarterly plan rolls out is that it is a back-end loaded year from an earnings point of view.

I think that is a fair statement.

Having said that, there are a lot of initiatives, Wayne, that are going into place right now, and we are beginning to see some early indications that they are getting traction.

So stay tuned.

And what we will do this year, honestly, is we will stay closer to you guys with regard to the changes because there are moving parts this year.

It is a transition year to an investment year.

Now having said that, I am still very optimistic about the year and certainly about the next two to three years.

The second question I had is you mentioned that 200 to 300 stores are kind of underperforming.

If you were to strip those out and just look at them (indiscernible) what kind of margin would you be looking at for the company?

Is it material if you even strip those out?

Not really.

I mean 300 stores out of 6700 is 4, 5 percent.

The reason I bring that up is that you always refer to these as real problem children, but yet if you strip them out as not material I am just wondering why highlight them if they are not material.

They are highlightable because of the shrinkage issue per se and as a percentage of the shrink they are material with regard to that.

It is not just in terms of overall earnings, but in terms of calling out the shrink issue, it is material in that conversation.

That is the only reason I do it, Wayne.

Okay, thank you.

John Zolidis of Buckingham Research.

Thank you.

A follow-up question on the coolers.

I wonder if you could tell us if the coolers are still ROIC accretive?

And then if you talk about whether you have any extra challenges from an operating perspective in terms of putting those coolers in the stores and if they are causing any disruption to the operations on a store level?

And then finally could you talk a little bit more about the comps at the coolers versus the non cooler store?

Thank you.

I'm sorry, John, the concept of the coolers or the comps?

Comps.

Thank you.

First of all, we don't see any disruption.

We put enough of these coolers into these stores that we don't really see any impact close in with regard to current productivity.

With regard to comp sales, cooler stores or some non-cooler stores while we talked about the auto replenishment difference, we're not ready to talk about the difference yet in coolers.

But I think it is safe to say that since we are rolling these out that it is higher.

Its to quantify the number I just don't have that for you.

And as far as the investment criteria of the cooler, John, it is very definitely accretive.

This is one of our better investments, and one that is actually going to separate us from the pack, frankly with regard to giving us flexibility in our mix and driving EBT and a few things like that.

So we are very high on this as a strategy.

Are the coolers adding any pressure to your SG&A ratio going forward?

No, actually I don't think so.

When I look at SG&A, what the only thing there would be whatever incremental depreciation and that sort of thing goes in.

But from an operating point of view, no.

We see that as just another thing that we're going to have to balance, just like every year we trade SKUs in, trade SKUs out; we reset a department or two.

That is just normal activity, and we don't see that as being disruptive and certainly the investments there are significantly accretive.

All right.

Thank you very much.

Ed Roche (ph) Bank of America.

I noticed the guidance is for the net income line, yet you mention that you are going to be buying back more stock in '04.

I was wondering if you could tell me what the growth in the EPS line might look like.

I think we ought to stay with the same relative guidance.

We have issues that we're going to buy some shares back, but within the guidelines that we have from our Board, it all depends on the market and the opportunities they are in.

We are going to try to become a little more consistent in that purchasing strategy or the tactics therein, and I think you will see us be very active in that going through the year.

But we have not at this point stepped out there and said that EPS is going -- that we are going to thin the shares out enough that that will grow faster than net income.

And then one other follow-up on guidance.

I assume you have the costs of some of these initiatives, such as rolling out the coolers.

Just to clarify there is no benefit from the coolers being added to the stores included in guidance?

Is that how I understand it?

That is close, Ed, it is a good catch.

You're seeing a plan that has a lot of the obviously its easy to estimate the cost of these things and some of the negative impact.

But at this point we have been rather conservative in terms of the upside quite frankly because of the timing.

It depends on how fast you put the 3600 new coolers in; it depends on how fast this project gets rolled out to all store operations.

And so there are some moving parts there, so yes, we've been conservative on the benefit side of all these initiatives.

All right.

Thank you.

David Yamamoto, WR Hambrecht.

Good morning.

First, can you give us an update on the Dollar General market stores?

What is the performance been over the last several months including the holiday season?

And what are your thoughts on about returns on investment of this concept?

Thank you, David.

We only had to stores open, two Dollar General market stores open during the holiday season.

Both of them had great holiday seasons.

What we are seeing there is although they are very young stores, the enthusiasm of the customers is fantastic.

We are attracting a lot of new customers, frankly, to this concept; the enthusiasm of our labor force, our associates is just phenomenal.

We are very excited out what's going on there.

The financial results are just exactly in line with that.

The productivity of those stores is significantly higher than our original model.

The cost of rent is a little bit higher and so forth.

But we see that -- and again, realize that that store -- 85 percent on the food side of the operation -- 85 percent of those SKUs are consistent with SKUs in our normal stores, just that we present it quite a bit differently.

And it also has become a destination concept as opposed to just a fill in concept as we do a lot of market research behind that.

The 20 stores that we are rolling out this year, David, we are really trying to test several things and look at those 20 stores location, mix, set up, a lot of things that we're trying to fine tune.

But we still remain very bullish about that.

In terms of return on capital, obviously it still above our hurdle rate, and we look at each new store investment with that hurdle rate and just like we do everyone of our CAPEX investments.

And they are -- it's an easy jump for them to get over the hurdle at this point.

My last question is where do you expect depreciation and amortization as a percent of sales to be in 2004?

Jim, you want to take that?

I think that's guidance on a specific expense line, and (indiscernible) obviously be up because of the size of the CAPEX program.

I think we're going to avoid being that specific.

Okay.

Thank you.

Operator, this is David.

I think we only have one more minute in our conference, so we can take one last question.

Patrick McKeever, SunTrust Robinson Humphrey.

Question on pricing.

I think in the last conference call you talked about some areas of opportunity on pricing perhaps to raise your prices a little bit, nothing major but just a little bit to come up to either some of your key competitors in this market rates in general.

Just wondering if that -- if you saw any of that in the fourth quarter, let's say and if you have any of that baked into your guidance for next year or if that's going to be a non issue?

Thanks.

Patrick, good morning.

Thank you.

Yes, we did see that in fourth quarter and we are seeing it right now in first quarter but no, it's not baked into our assumptions for the year.

We are absolutely convinced that there are opportunities and we are working with our vendors by the way and they are convinced of it, too, where we are out of line with our competition on the low side.

Meaning that we think that we can build a little bit of margin improvement and still be significantly under our competition.

Sizing has a lot to do with that and the packaging as well, but we are continually working with our vendors to take cost out of product.

This is not something that we sit back and wait for inflation to hit us; we are in there every day fighting to take cost out of these products with regard to unnecessary things, such as distribution cost, transportation, inventory turn and so on.

For example, we are working with Procter & Gamble right now to do a much better job planning.

And so what we hope to do is to help them continue to take cost out.

We are going to continue to take cost out.

That is one of the prerequisites to exist as a dollar store is that you are one of the best at working in this price issue.

Second question is on guidance for next year.

I know you're shying away from giving any top line guidance these days; just wondering if you might provide any color by quarter as far as how we should expect the year to unfold.

I would imagine your biggest opportunity would be in the fourth quarter.

Any color there on quarterly cadence for next year?

Well, I think that yes, we are looking at a year when I think first and second quarter revenue -- first quarter revenue growth is going to be probably lower than the average for the rest of the year.

Whereas the second and third quarter might be a little higher than the average for the rest of the year, and obviously fourth quarter is something that we are very excited about.

We just learned a lot this year by the way we flowed product into the stores and by the effectiveness of that effort.

And frankly by the -- we learned some things that didn't work.

So we think that -- let's see, I've got -- when you look at comp sales and that sort of thing in addition to the growth of our new stores, the middle part of the year is really where we think we will begin to get traction on some of these top line initiatives.

One last question for Jim.

Jim, just wondering if you might give us a little bit more color just on the timing of your decision to leave the company, especially given the fact that one would think that with the SEC matters behind you, at least it looks like it will be behind you, one would think your life would get a little easier.

Well, I would tell you life as a CFO for a publicly held company right now I am not sure is ever easy, but I think I am just going to keep my comments to what I had in my script and also what is in the press release.

Fair enough.

Thank you very much.

Thank you, everyone.

Ladies and gentlemen, thank you for your participation in today's teleconference.

You may all disconnect your lines at this time.