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Operator
Good morning ladies and gentlemen and thank you for participating in today's conference call with Dollar General Corporation.
This call is being recorded by Conference Americal and CCBN.
Federal law detects -- dictates that no other individual or entity will be allowed to record or re-broadcast 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.
Before the presentation begins, the company has requested that you listen to the following statement regarding forward-looking information and non-GAAP disclosure.
In addition to historical information, the company's comments during this conference call will contain forward-looking information such as statements of plans and objectives for future operations, growth and initiatives.
The word believes, anticipates, project, plan, schedule, 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 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 statements.
The factor that may result in actual results differing from such forward-looking information includes but are not limited to those set forth in the company's most recent annual report on Form 10-K and in their first quarter earnings press release issued today.
The company cautions you not to place undue reliance on these forward-looking statements which speak only as today's date, except as may be required by law.
The company disclaims any obligation to publicly update or release 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 in its public disclosures or documents filed with the SEC.
The company may refer to certain finance information not derived in accordance with general accepted accounting principles or GAAP such as return on investment capitals and return on assets calculating using certain finance results that includes restatement related items.
In addition, return on investment capitals its self maybe considered a non-GAAP financial measure.
This information should not be considered a substitute for any measures delivered in accordance with GAAP .
The company has included its calculation of return on investments capital and a reconsiliation on the non-GAAP financial measures to the most comparable GAAP financial measures in its schedule accompanying first quarter earnings press release filed today, which can be accessed at www.dollargeneral.com by clicking on the home page spotlighting item.
The reason why management believes this information is useful to investors and the additional purposes for which management uses this information are disclosed in the company's Form 10-K filed with the SEC on March 16, 2004.
Beginning today's meeting is Mr.Jim Hagan, Executive Vice President and Chief Financial Officer.
Sir, you may begin.
- EVP, CFO
Thank you operator and good morning everyone.
Net income for the first quarter of 2004 was 67.8 million or 20 cents per share as compared against net income in the prior year of 60.3 million or 18 cents per share, an increase of 12.5%.
Sales during the first quarter of 2004 were 1.75 billion versus 1.57 billion in the prior year, an increase of 11.4%.
Same store sales increased by 3%.
Our net sales increasing by major category were as follows.
Highly consumable 12.6%.
Seasonal 9.8%.
Home products 7.7% and basic clothing 11.2%.
The gross profit rate during the quarter was 29.31% versus 28.80% in the prior year, an improved of 51basis points.
This improvement was due to the number of factors including but not limited to, higher average markups on the company's beginning inventory in 2004 as compared to 2003 resulting in approximately 46 basis points of gross margin improvement and higher initial markups on merchandise received during the 2004 period as compared with the 2003 period.
Resulting in approximately 10 basis points of gross margin improving.
Partially offset by an increase in markdowns resulting in a decline in gross margin of approximately 16 basis points.
Inventory shrinkage, calculated at the retail value of the inventory as a percentage of net sales was approximately 3.13% in the first quarter of 2004 as compared to 3.10% in the first quarter of 2003.
SG&A expense in the first quarter 2004 were 397.7 million or 22.75% of sales versus 349 million or 22.24% of sales in the prior year, an increase of 14%.
This year's SG&A expense as percent of sales is higher than last years due to a number of factors including but not limited to increases in the following expense categories that were in excess of the 11.4% increase in sales.
Increased costs for professional fees which increased by 123.7% primarily due to consulting fees associated with the company's 2004 store work flow project.
The cost of Worker's Compensation and other insurance programs increased 51.5%, primarily due to adverse loss development patterns resulting principally from an increase in medical and legal costs compared to previous years and store occupancy costs increased 16.3% primarily due to rising average monthly rentals associated with the company's leased store locations.
Net interest expense, and that's interest expense less interest income, in the first quarter of 2004 was 6.4 million versus 9.4 million in the prior year.
The lower net interest expense in the current year was primarily due to reduced interest expense due to the May 2003 purchase of promissory notes related to the company's DC in South Boston Virginia and reduction in amortization of debt issuance costs due to termination in 2003 of a 364 day revolving credit facility.
The company's affective tax rate was 37.2% this year versus 35.5% last year.
The company received a $840,000 benefit in the prior year quarter from a change in the state tax law.
The higher tax rate in 2004 is due in part to the expiration of certain federal jobs tax credits for employees hired after December 31, 2003.
Company estimates that the expiration of these federal credit programs increased its 2004 effective tax rate by approximately 0.5%.
Company opened 244 stores and closed 14 stores during the quarter.
We ended the quarter with 6930 stores.
We spent 51.1 million of cash on capital expenditures and we ended the quarter with 256.9 million in cash.
Total debt outstanding was 278.5 million versus 282 million at the beginning of the fiscal year.
Our inventories totalled 1.28 billion on April 30th, 2004 as compared with 1.20 billion on May 2, 2003 for an increase of 6.4%.
Our rolling four quarter inventory turns improved to four times from 3.9 times for the rolling four quarters, for the rolling four quarters that end the April 30, 2004.
We repurchased 8.1 million shares at a total cost of 152.6 million during our first quarter.
19 million of the 152.6 million actually did not settle until after quarter end so our cash flow statement will reflect 133.6 million in share repurchases.
Now I'd like to turn the call over to David for his comments on the business.
- Chairman, CEO
Good morning everyone thank you, Jim.
As you may know, this is Jim's last earnings call with us.
He'll be with us through mid-June as we told you before.
We are really going to miss him as you might expect.
Next week David Tehle will be joining Dollar General as EVP and Chief Financial Officer.
David is currently the EVP and CFO of Hagar Corporation in Dallas, TX .
David is a very hands on CFO and I believe he will be a great addition to the Dollar General team.
We are pleased with the results of the quarter.
It appears that our core customers appear to be under financial pressure with gas prices and milk at such high levels.
But to some extent we see this as an opportunity internally.
Our customers need us more than every and we will continue to look for ways to serve them better.
One of our major initiatives for 2004 is the accelerated role out of our cooler program as we discussed earlier.
At the end of the quarter we had just over 4,000 in 20 states, with coolers.
That's up from 2500 stores in nine states at January 30 .
As you can see we've made a lot of progress.
As we've discussed before, the addition of coolers gives us the flexible to apply for approval to accept EBT or food stamps.
At this time we can accept EBT in several hundred stores.
We completed the conversion of all of our stores to automatic replenishment for core inventories.
This process is working well for us and we believe will perform even better as we continue to tweak some of the assumptions regarding number of weeks, supply, order quantities, et cetera, in the calculations.
Right now we are particularly focused on making certain that we keep in stock on our top, on our top selling items.
We are making progress with our major merchandising initiatives for the year.
Jim covered the topic of shrink pretty well.
We continue to see improved results in store physical inventories.
And although it is still too early to predict, we are hopeful that our reported numbers will show some year over year improvement as the year progresses .
We continue to make enhance to our store recruiting process.
We have repositioned some of our HR head count to provide recruiters in the field.
These recruiters are already partnering with our field staff to recruit a diverse pool of applicants both externally and from within our own ranks for store manager and district manager positions.
Our Easy Store project is well under way in the southwest.
We are testing a lot of different things and as you, as we've said earlier we expect to complete phase one by the end of the first half year and we're on schedule to do that.
We opened 244 new stores in the quarter, including six in New Mexico and six in Wisconsin new states for Dollar General.
We still plan to open 675 conventional stores in 20 Dollar General markets this fiscal year.
We are making good progress on our south Boston and Ardmore expansion and we have begun site work our new distribution center.
We will celebration our ground breaking on June 7 in Union County, SC.
In closing, we have accomplished a great deal so far this year, and have more on our plate.
Our number one focus remains our stores, where we can make great, the greatest impact for our customers and therefore our company and shareholders.
We believe we continue to distinguish ourselves from other retailers through our merchandise, brand names, good selection and value every day.
We continue to focus on serving our under served customers and providing opportunities for our employees to grow.
And certainly, we are focused on growing a business while achieving solid financial results.
Now, with that we would like to open up for Q&A.
Operator
At this time we will open the floor for questions.
If you would like to ask a question please press the star key followed by the one key on your touch-tone phone now.
Questions will be taken in the order in which they are received.
If at anytime you would like to remove yourself press star two.
Again, to ask a question star one to remove yourself is star two.
First question is Mark Mandel with Folcrum Global Partners.
- Analyst
Good morning everyone.
- Chairman, CEO
Morning.
- Analyst
Just had some cash flow balancing questions I wanted to go over.
First if you could comment Jim, on the increase in accounts payable ratio and the increase in dollars of the accrued expense, accrued expense and other line.
- EVP, CFO
Well, I can comment on increase in accounts payable and we attribute it to two things.
One would be an increase in clothing purchases that have more extended terms on them in the first quarter.
And the second thing would be, as we install more coolers we're doing more drop ship, shipment business and the terms -- the terms that we get there are a little longer and also the inventory turns coming out of cooler product is also a little bit longer.
- Analyst
So the historical ratio of about 30% you would expect to see something higher than that on a going forward basis?
- EVP, CFO
No, I don't think we're prepared to say any -- anything forward-looking about that.
But, you know, this is a trend that, that merits us continuing to watch it, especially with respect to the food drop ship because the food drop ship is likely to expand.
- Analyst
Okay.
Does that also affect -- that wouldn't affect the expense line.
What's behind that increase?
- EVP, CFO
I tell you what I prefer to do that.
Maybe you could follow up with Emma Joe later.
- Analyst
Okay.
The a cap ex number, are we still looking at about 300 million for the year.
- EVP, CFO
Yeah, you'd see that in the 10-Q we, we will file today.
- Analyst
Okay and then finally, in terms of the use of cash, obviously if you're buying back stock you're paying a dividend.
Any flexibility in terms of accelerating the paydown of the debt, the long-term debt?
- Chairman, CEO
Mark, this is David.
We have an authorization right now for a remaining 1.5 million shares under our authorization that we disclosed before.
We have a finance committee that operates very effectively within our Board and we continue to look at that, but we don't have any further forward-looking comments regarding how we would use cash flow or how we would treat the outstanding debt at this point.
- Analyst
Okay, thanks, a lot.
Have a nice holiday.
- EVP, CFO
Thanks, Mark
Operator
Our next question comes from sharey eastbound Sherry Eberg with J P Morgan.
- Analyst
Good morning everybody.
Just wanted to follow up on the SG&A expenses, you mentioned that they were a large increase on the consulting cost in the quarter.
Would this be a peak then for both costs as we lookout through the year?
And I'm assuming that you got, I guess, very little benefit from those investment in Q1.
Just how should we be thinking about that throughout the year?
- EVP, CFO
Thank you, Sherry.
Yeah we, as we've said, the only thing that we've really committed to at this point is, is obviously this Phase One.
And the -- in addition to the McKenzie expenses we have some other investments that are, we said before are more front-end loaded this year.
We're not precluding any investment going forward.
We have, you know, Phase Two is really the rollout of the recommendations coming out of that project going forward.
I would anticipate those expenses would not be at this level but we just don't, I don't want to commit to anything at this point until we see the results at the ends of this first half.
We'll have more to say about that, I'm sure, after we see the recommendations of this Phase One project.
- Analyst
Can you quantify what the expenses were in Q1?
- EVP, CFO
Yes, Sherry, we have in Q1 it's about 2.7 million.
- Analyst
Okay.
Great.
And then just a --
- EVP, CFO
I'm sorry Sherry, there's one other thing too that shows up as a one time expense.
We have about $570,000 that we spent in Q1 on Sarbannes 401 -- 404 compliance as well.
You should know about.
- Analyst
Okay.
So neither of those -- that would not repeat going forward?
- EVP, CFO
The KPMG, it's expenses actually for KPMG who's assisting the company with the Sarbannes Axley compliance, I do believe that there will be some component of that will continue on until we continue with the process.
I'm going to defer to David on the McKenzie.
- Chairman, CEO
Well we have to finish the KPMG work this year.
I mean that's the targeted plan.
And I think at this point -- again I think in second quarter, honestly, we're going to have more McKenzie expenses.
But I think in the second half is what I'm not ready to commit to at this point.
- Analyst
Okay, it sounds like we're at, you know, close to a peak level here in Q1 perhaps.
And then I have a second question on just the auto replenishment.
You were able to roll that out, I believe, faster than your plan.
And I was just wondering if there was any disruption in the quarter from that and then what type of benefit you're expecting going forward from that process?
- Chairman, CEO
Sherry, we have Lawrence Jackson, our President and Chief Operating Officer with us this morning, I'd like for him to take, field that question if you don't mind.
- Pres, COO
Sherry, the role out of the basis stock replenishment to the remainder of the system was pretty much on accelerated target we had as an internal target that we were trying to hit.
It caused no disruption and now we're in a phase of going back behind all that role out and ensuring that we take it to a higher level of education with our individual store employee.
- Analyst
Okay.
And then just last question, inventory looked extremely well controlled given your real estate growth.
I was wondering if you could comment on the content of the inventory?
The quality of the inventory?
- Chairman, CEO
Correct, sorry.
Well if you noticed Sherry, our markdowns were up a little bit and I think both of those observations are consistant with our strategy to remain more current with the seasonal merchandise and our opportunistic merchandise in our stores.
We have, you know, in the past had a major pack away strategy, we are moving away from that as you might know and so I think that, both of those are impacting what you're observing on the inventory lines.
- Analyst
Okay.
Great.
Good progression, guys.
Thanks.
- EVP, CFO
Thanks, Sherry.
Operator
Next question comes from Daniel Berry with Merrill Lynch.
- Analyst
Hi, good morning.
I have a two part question on the same issue, and after your increase in rentals, can you elaborate on why it was up so much and if it has anything to do with the Dollar General market and then the second point, can you elaborate a little bit more on your progress on Dollar General market?
- Chairman, CEO
Dan this is David.
The increase in rent in the first quarter had nothing to do with the DG market.
I mean, there are only two stores.
We think that the biggest impact there is from the percentage of our stores that are build to suit, frankly.
These are stores that are not secondary space, we build them, we occupy them and we lease them.
And on average, as they come out of the gate, they have a little higher ratio to sales of rent.
But as we've found in the past, they also have higher potential for revenue as we go forward and they mature.
So what you're seeing is an increase in the number of immature stores with a little bit higher rent on the build to suit side.
- Analyst
And that would be a long term trend of build to suit being increasing percentage of number.
- Chairman, CEO
Well I'm not sure, I think, you know, we're looking at all the opportunities.
As we go into new states we see a lot of secondary opportunities but as you might imagine, as we've said before, in states like Florida where it's increasingly difficult in some small strip centers to get secondary space because there might be a primary grocer there with clauses in their individual contracts that might proclude a Dollar Store for example.
So in those situations, we opt to go and build a build to suit.
With regard to your second question, you know, on the Dollar General market, we don't have any further specifics.
We can tell you that the test continues.
We are testing some new products in there but the early observation we have made regarding the DG market still apply.
We are excited about what we're seeing.
Traffic is increasing.
The ring average is up and, you know, we're continuing to be excited about the 20 stores that we're building this year.
Primarily in the back half as we've said before.
And those stores will give us a different look in different -- at different things that we're testing in each of those stores as well.
- Analyst
Thank you.
- Chairman, CEO
Thanks, Dan.
Operator
Our next question comes from Meredith Adler with Lehman Brothers.
- Analyst
Yeah, a couple of questions.
You said that you're seeing good results out of your physical inventories but the numbers you reported showed today showed shrink being flat.
At what point do you think you will make a decision?
What are you waiting to see before you decide that you can bring your shrink accrual down?
- EVP, CFO
Meredith I'm trying to actually understand the question.
Can you maybe do, can you maybe rephrase it a little bit and let me see if I can get the gist of it.
- Analyst
Yeah, I mean, it's just, it didn't, shrink didn't seem to show any improvement in the first quarter in terms of the numbers you gave us, and yet I ...
- EVP, CFO
Okay.
Meredith -- Meredith?
- Analyst
Yep.
- EVP, CFO
Alright, I've got -- I've got the general point.
- Analyst
Okay.
- EVP, CFO
Alright, let me, let me try and walk you through it.
As David alluded to, the actual results of the physical inventory counts done in the first quarter of 2004, were better than the results of the counts taken in Q1 2003.
All right.
So that's sort of point number one.
Point number two, both the 2004 and 2003 counts resulted in physical shrink amounts that were less than the accrual provision that had been provided for those stores.
Alright, so on both years, 2004 and 2003, when the physical counts came in in the first quarter of each, the results of the counts were better than from our perspective, what had been provided for in the accrual.
Alright, but here's sort of the, the accounting ramification and where, to the outside world you're not seeing progress.
What makes the 2003 let's call it generally accepting accounting principle shrink result a little better than the 2004 result is that the 2003 counts had a larger positive variance versus their accrual provision than the 2004 accounts did.
Okay, but the actual physical counts themselves in 2004 were lower than they were in the first quarter of 2003, that's what causes David to make the comment.
- Analyst
No, my question was what does it take for you to decide that you can lower your accrual?
- EVP, CFO
That's also, given my comment, that's a great question.
The accrual is not a judgmental number.
The accrual is based upon the most recent physical inventory that was taken out of stores.
So if a store just got an inventory last week and it came in at 325, until its next physical inventory we're going to accrue that store at 325.
Okay, if the store had come in at one and a quarter.
We're going to accrue it at one and a quarter until its next physical count.
So it's not a, it's not a management judgmental I'm going to increase or reduce the accrual.
The accrual is basically a computation based upon the most recent physical count shrink result.
- Analyst
Okay.
- Pres, COO
It will gradually come down if we continue to have better --
- EVP, CFO
Right.
Operator
Our next question comes from David Cumberland with Robert Baird.
- Analyst
Good morning.
Question on your 2004 net income guidance and maybe this is in the 10-Q.
But, Jim, do you continue to project net income up 10 to 14% or might, or might that be slightly lower due to the fore gone interest income related to the stock by back?
- EVP, CFO
You know, it's been our general practice to not updated guidance and I think we're going to continue with that this morning.
- Analyst
You may not update this comment either but, on the Q4 call looking at '04, you noted that the net income guidance assumed gross margin in '04 similar to '30 levels with a strong gross margin in Q1.
Any change in the gross margin outlook for the year?
- EVP, CFO
I'm not trying to be argumentative here but we, I really have nothing to add to the initial comment.
- Analyst
Then finally, on apparel in answering the question on accounts payable, you mentioned more receipts of apparel, is that a timing issue or related to some of your merchandising initiatives in apparel.
- Pres, COO
David this is Lawrence Jackson.
The apparel is just purely a timing issue when we've gone into our apparel reset process which will be completed by, quite frankly, in a couple of days.
- Analyst
Thank you.
Operator
Our next question comes from John Harlow with Barrow Henley.
- Analyst
Yeah, I've listened very carefully to your comment about the accounting on your shrinkage, but just maybe you can answer it in terms of what the real world tells you, is it getting better, or getting worse getting rid of a formula.
It seems to me listening to your explanation, and I as the question because I may have it wrong, it did not really get any better on an underlying true rate.
- Chairman, CEO
No, John this is David.
I'm not an accountant.
So I'm going get myself in trouble, but I'm going to tell you it's getting better.
- Analyst
Well I already got in trouble by asking the question. [Laughter] It is getting better can you tell us why and by how many?
- Chairman, CEO
Well I can tell you why.
You know we, I would say this goes back a couple years.
But we feel like we my be on the verge of breaking the fever.
Now it's a long battle.
We have a lot of stores and this is influenced greatly by human behavior as we've said before.
But we have added asset protection group here in the past.
We now have educated our store managers.
We have a store operations group that has a focus.
We have incentive people in this area.
We've educated them.
Our training process for store managers is really beginning to kick in and show an impact.
We have leading indicate stores that show us now problem stores before we get to the inventory.
- Analyst
Wow.
- Chairman, CEO
We're taking extra inventories in these stores.
We identified our worst stores last year, mobilized behind them and really showed some signficant improvement there.
- Analyst
How do you get a leading indicator?
- Chairman, CEO
Well, you watch inventory.
And you look at average inventory per store, per square foot and you begin to see trends there very quickly.
- Analyst
Okay.
- Chairman, CEO
And we look at individual items as well.
So we're, we're looking at inventory much more closely now than we have before, at the store level.
Well, congratulations.
I like the expression breaking the fever because that's about what it is like I'm sure.
Well, it's a long battle as you might be aware with other retailers, but we all fight this.
It's not any one contributor, obviously, if it were this would have been solved long ago.
But, we have raised this to the level of insensity, I believe, to show some improvement over time.
- Analyst
Tell me one more thing.
What has a greater effect on your inventory turn, the cooler program or automatic replenishment?
- EVP, CFO
Good question.
- Pres, COO
Wow, I don't know.
- EVP, CFO
John, to be honest with you we don't know yet.
You know, the coolers are so new with us the DSD part of that is going to help us, no question about that.
Auto replenishment should help us.
But as we begin seeing the benefits of auto replenishment we have , really are beginning to use that information to look at our shelling and our placements and facings and all that and how much inventory at the skew level.
But I just don't, I don't think we can give you an answer yet.
We'll continue to monitor that and ask us again later, maybe we'll know.
- Analyst
Okay.
Thank you.
- EVP, CFO
Thanks John.
Operator
Next question comes from Christine Augustine with Bear Stearns.
- Analyst
Thank you.
Can you tell us what the lag time is between when you role the coolers out and when you can actually get approval to accept EBT?
And then my second question is also related to coolers, can you tell us how the stores did in the quarter that had coolers versus the non-cooler stores?
Thank you.
- Chairman, CEO
Christine this is David I am going to take a shot at it and I'll invite Lawrence to supplement my answer.
But I think, let me ask -- answer the last part of the question first.
The, we're not ready yet to disclose an abrogation, if you will, in terms of the results to cooler stores versus non-cooler stores.
I think you can take from, as an indicator,our increase velocity of opening coolers in stores to mean that the results are favorable.
With regard to EBT I just, I just don't think we're -- you know it's a laborious process, as you can imagine.
We can certainly get coolers in stores sooner or quicker and easier than we can become approved.
But, I'll leave it at that at this point.
I think it is too early to try to quantify that in our situation.
Operator
Our next question comes from Michael Baker with Deutsche Bank.
- Analyst
Thanks.
A couple of questions.
One, just on the gross margin and the timing of the that [inaudible] that came in, it sounds like earlier this year, are there any other fluctuations in terms of timing that we should know about that might impact the gross margin over the next couple of quarters?
- EVP, CFO
Well I, you know,we don't think so, but we don't know.
I mean this is such a [inaudible] of what sales day to day with auto replenishment and so forth, we are in a real line environment in terms of replenishing our inventory at the distribution center level, so it's very difficult to really make that call.
That's a direct derivative and as our turns increase you might imagine, that becomes more of a derivative than a causative in our operation.
- Analyst
So there's nothing planned.
For instance, if you go back the last few quarters, you know, you'd indicate, for instance, that seasonal was going to come in early in the fourth quarter and there had been some, you know, ability to forecast some changes but at this point there is nothing planned?
- EVP, CFO
I wouldn't say anything.
I wouldn't say that we have anything planned like that like we did last year.
That's a good call out, though we did say that last year.
The only thing I might add is that, you know, our back to school program we called out last year it was not as evident as it should have been.
It certainly wasn't efficient as our holiday role out one and we believe that that might -- we're planning for that to be better this year.
That might have an impact on the timing of inventory.
Other than that I can't think of anything now we're planning.
- Analyst
Okay, great.
And then If I could ask one other question.
Just as a sort of overall question in the state of your customer, I think in the past you've indicated that your customer is certainly impacted by employment trends and as employment gets better that should help your customer.
Is that something you are starting to see yet at all with employment -- with job growth increasing or is there sort of a lag that maybe takes your customer a little while to adjust the spending pattern?
- EVP, CFO
We have a difficult time yet seeing any impact, positive impact within our core customer base.
And I'm talking about the low income consumer.
The employment numbers we think that this group of people are really lagging, the national average numbers, if you will, in that the jobs that are being created or increased now tend to be higher a little higher level jobs, frankly and so we don't really see any benefit in that and frankly I think this had impact on this whole secter's comp sales in the last couple of quarters.
As that happens as they start to become re-employed and so and remember, many of these households are multi generations, more than one or two in some cases, job holders, so we think overtime as the unemployment numbers come down well benefit.
But remember, this model, our share of wallet is so small and we have such a high percentage of oru products, or replenishable products that people need, commodity product that we're somewhat insulated from both the extremes of great economies and real bad economies.
But having said that, I do think that our customers right now are being impacted still by unemployment in a stronger way than most other groups of consumers.
- Analyst
If we look at some of the bureau and labor statistics, is there a particular data series you look at that you think is more impactful to your customer, manufacturing employment, or --
- EVP, CFO
We look at, you know, hourly employment numbers from that standpoint for the most part.
We try to stay abreast with all that and read all of your reports as well in that area.
We have a market research group that talks to our customers on a regular basis, so we're trying to look at all of that.
But our feeling is, from what we see in the stores and honestly what we see during the month in terms of daily sales and that sort of thing, we interpret all the things that we're seeing right now that our customers are still under great pressure economically.
- Analyst
Thank you very much.
- EVP, CFO
Thanks Michael.
Operator
Next question comes from Aaron Rubenson with Banc of America.
- Analyst
Oh hi, it's Ed Raish.
I was wondering if the stores have had good experience keeping the coolers in stock?
- EVP, CFO
I'm sorry we missed the last part of that question.
- Analyst
Oh, if they've been able to keep the coolers in stock.
- EVP, CFO
Oh yes, that's a good question, I'll let Lawrence address that, thank you.
- Pres, COO
Is this Ed?
- Analyst
Yes, hi.
- Pres, COO
This is Lawrence Jackson.
Let me answer that question.
It's, it's really dependent upon the location in general.
There's two type of products that are in the cooler more or less.
The first is what I call your basic dairy, milk, eggs, and I'm going to include ice cream in that category.
In the vast majority of coolers in that area we have up and down the street, service from various vendors and we do a pretty good job of keeping it in stock and in fresh.
Now there will be pockets of the country, because we're so remote, that even the best yet D vendors will have a problem getting to our stores regularly as we or they would like.
And we're improving that process as we speak.
But, primarily around milk, eggs, and ice cream, I don't, I don't feel that will be a problem for us at all today or going forward.
And I think it will get better.
In the area of refridgerated meats it's a little different.
That we've had struggles with.
And we're working on improving upon it.
We're working with several different vendors.
Some have really good services in particular areas of the country, in other areas of the country we don't get the service requirements that we need.
But despite on balance, having the cooler program has been a real big positive and it still, it still is showing great returns.
- Analyst
One follow up, still looking inside the stores, can you talk about some of your people initiatives and you know, the training and if you are seeing any improvement on turnover?
- Pres, COO
We're seeing -- starting to see some improvement on turnover.
You know our turnover at the store manager level were in excess of 50%.
And it's starting to, you know, starting to look like it is coming down.
And I don't want to take a victory lap yet because, you know, we're dealing with 7000 stores and all the work the people have to do and all the processs that we're trying to put in as we do this, is a real challenge.
But I feel we are starting to make progress.
We've done a few things at the store level led by Kathleen Guion and her store operations team to more empower and bring our store organization into what I would call the Dollar General family.
We've found that local incentives at the store level really have an impact.
And we're utilizing that much more and that's gotten people involved for the first time.
In the fourth quarter, for example, we had a little incentive contest by region and recognize we have 43 different regions out there that average from 150 to 220 stores.
And each store that was the best in terms of performance over the prior year in terms of sales in that particular region, we brought those store managers in and celebrated with them and recognized them and rewarded them.
And that's starting to build positive momentum in the field that we really care about the store employees and what goes on the store.
And as you know, David and I, and Jim, have all been a big proponent of building what we call a store centric culture here, in this building here in And it's starting to show momentum.
It's too early to take a victory lap, it's a lot of work, but I think we're making some real good strides.
- Analyst
Thanks, Lawrence.
Operator
Next question comes from David Mann with Johnson Rice.
- Analyst
Yes, good morning.
Jim, you mentioned in terms of gross margin that you saw higher IMU on beginning inventory.
I was wondering if you could elaborate on how you started the second quarter year over year in terms of IMU?
- EVP, CFO
You know, David, I believe that's also forward-looking and it is going to impact second quarter.
I think we want to avoid anything that's forward-looking.
- Analyst
Okay.
And in terms of, David, you talked about in the past trying to increase your import sourcing.
Can you just give us a sense on the progress of that initiative?
- Chairman, CEO
Yes, good morning, David, thank you.
As a matter of fact, we have opened our Dollar General global sourcing limited buying office in Hong Kong.
We have the grand opening, I believe, in a week or so.
Actually Lawrence is going over there with the people from here who are in charge.
That's actually ahead of schedule in terms of the volume that we're running through there and I'm very excited about the people that we have brought onto the team.
As you may know we had various agents that we bought through before.
We're now buying direct.
But more importantly is the ability to get in and have early incite into new products and new ideas and so forth, over there.
What we're finding and this addresss the inflation potential that everybody is talking about right now as well.
Being closer to the source gives us a little better early warning indicators, if you will, with regard to that dynamic.
And what we're -- you know, we're developing ways to do that, but I would say right now I'm very excited about number one the decision to do what we've done and number two, the potential long term benefit that it'll bring to Dollar General.
Thanks for the question.
- Analyst
David, are imports currently a higher percent year over year as,as, you know, as it pertains to your mix?
- Chairman, CEO
No, they're not, David, yet.
And I wouldn't, we -- you know we didn't expect that they would be this early.
Getting these people on the ground and as you may know, many of the projects we are involved in in Asia, are six months, seven months out.
So, you know, we really haven't seen an appreciable gain in that yet, but we are still planning to see that number increase.
- Analyst
Okay.
And then in terms of the question about your customer, we're starting to hear very early under currents about thoughts of increase in the minimum wage.
Have you heard anything along those lines from your contacts in Washington?
- Chairman, CEO
Well you know, there's -- it is a political year, obviously.
But I don't think I can give you -- I'm not a politician and I certainly am not a prognosticator about what goes in Washington.
I've got enough to take care of here, David.
But, you know, from the customer standpoint that could be a big issue.
But I think the employment number its self is probably right now as big an issue of that in terms of getting these people back to work.
- Analyst
Okay, Great.
Thank you.
- Chairman, CEO
Thank you David.
Operator
Next question comes from Patrick Mckeever of SunTrust Robinson Humphrey.
- Analyst
Thanks very much.
Just a question on new store growth.
You opened a huge number of stores in the quarter, almost 250, and you've done a lot better in that area than your key competitors.
So, I was wondering if you might -- I know you have difference in the urban and smaller market approach and all that other stuff -- but I was just wondering if you could just discuss what's behind your ability to very effectively get your new stores up and running?
And also if you could provide any comments on new store performance that would be helpful.
Thanks.
- Chairman, CEO
Thank you Patrick.
Again, I'm going to use Lawrences term here.
Thank you for calling that out.
We're not going to take a victory lap yet because we think as well these stores are doing we can do belter.
First of all, how can we open this many stores and why are we able to stay on target right now as opposed to what a few other people are doing?
We make this a part of our operational strategy here.
We hold people accountable.
We have a very good core competency here and we have good people involved in it, very experienced people at the region level all the way through corporate management.
We also have new technology.
We talked about this before, we use DIS data, we scrub that data very carefully.
We look at individual locations, we predict what we should get from those locations, and then we monitor, through Kathleen Guion's organization of Store Operation and Tom Hardshorn's organization of New Store Development, we compare and we go back and watch and learn, from each of these individual openings.
Now, I will tell you that our focus right now is not on quanitity, I mean, even though we're opening a large number of stores and we're on target, we are still planning to open the 675 stores for the year that we had planned.
We're really focused on the quality of those new stores.
First of all, the stores that we've opened so far this year, are actually performing very well.
I'm in -- I'm terribly encouraged by their performance.
We focused on them, we kept their inventory up, early in the process which was a problem last year; and those stores are indeed performing very well.
What I think we have an opportunity to do is, actually, as we open up new areas, we can improve the quality of these new stores we're opening earlier.
By that I mean the maturing process won't be quite a long as it has been in the past.
Second to that is, I think, our new store manager training effort, really are showing up now as we open up these stores.
They've got their manager ready, they've got their teams ready, the coordination of inventory is there.
All the multi-functional things that have to come together are there now, and the performance is getting better.
We have found that we had a problem in the past getting all these different functions coordinated where everybody was ready exactly the same day of the opening.
And so, while we might have a store opening, it might not have been as efficient as we would have wanted, so the quality of the store location, the quality of the people and then the quality of the opening is what we're really focusing on now, but it is a core part of our strategy going forward as we continue to grow.
- Analyst
And then just a quick one on the coolers.
I know you don't want to discuss too many of the details and break out cooler stores and non-cooler stores and sort of thing, but I think you have provided in the past comps on cooler stores versus comps on non-cooler stores, you're not going to provide that any longer?
- Chairman, CEO
I'm not familiar with that number in the past, but I think right now, forward-looking, we can't do that and there are a couple of reasons.
One is, our general practice of guidance, but the other is quite frankly, it's so early we still have a lot of noise in the system.
- Analyst
And are you pleased with the overall mix of merchandise that you're carrying in the coolers?
Do you think that will remain the same or are there opportunities to adjust to that kind of thing?
- Chairman, CEO
Yeah, I think for the most part we're very pleased right now.
The early indications are and we've got it right, obviously in our overall merchandising strategy, we continue to look at the productivity of every individual skew every year and we go through line reviews periodically and update that, so I don't anticipate any significant changes for a while until we have a shot at evaluating what we've just decided to really put in there.
- Analyst
Okay, thanks David.
- Chairman, CEO
Thank you, Patrick Your next question comes from David Yamamoto with WR Hambrecht.
- Analyst
Yes, good morning.
My first question was there an impact on sales from the apparel re-set initiatives?
- Chairman, CEO
David, this is David.
I'm, you know, I'm scratching my head because I don't think we know at this point how to measure that.
I will tell you that our apparel sales are disappointing in the first quarter, but I don't think it was due to the re-set.
You know, what we have is a very routine pattern of re-setting these stores, so, and I don't think it's finished yet as a matter of fact.
- EVP, CFO
David, can I get some clarity on your question, cause when you say apparel sales, you know, you cut across a couple of things.
You cut across Easter and you cut across summer and I'm not sure which you're talking about or if you're talking about both.
- Analyst
I was just talking about -- just the affect on sales just from the reset its self.
- Pres, COO
Reset its self, okay.
Well the re-set is later in the year this year than it was last year.
And because of that, it would have, we expect to benefit from an apparel reset to happen to us later in 2004 as opposed to it was done earlier in 2003.
- Analyst
Okay.
Great.
And an update regarding your initiative to improve the productivity of the larger stores.
- EVP, CFO
Yeah, David, we have a couple of tests outstanding right now with regards to that.
And the early indications are that we are going to be able to get that productivity up.
We -- the numbers we have right now are so small on the tests from the number of stores that are in the tests that it's too early to really have included that in the results.
Going forward, everything we said about that still holds, I don't see anything from our early tests results that indicate that we're going to change that strategy.
So we still call that out as an opportunity for the balance of the year.
- Analyst
These larger stores, how much does that account in terms of total company sales?
- EVP, CFO
You know, David, I don't know that at this point.
I think we've called out the number of stores in the past.
It's order magnitude is the 1,000 stores that are in that larger store category, you know, plus or minus some because we are not necessarily addressing every single store.
But I think that order magnitude, that's an indicator of the number of stores that we would classify as a larger store.
- Analyst
Thank you so much.
- EVP, CFO
Thanks David.
Operator
Next question comes from Mark Miller with William Blair.
- Analyst
Good morning.
For what it is worth the fed thinks the second half is going to show improvement for the low income consumer. [Laughter]
- EVP, CFO
Thanks, Mark.
- Analyst
Okay.
What factors do you think are driving the sector leading comps?
I mean, I guess I'm interested in your opinion on the relative importance of the automatic replenishment roll out, the cooler roll out and mix would be an obvious, another factor.
- Chairman, CEO
Well I think, you know, we're disappoint -- I'll be candid with you, I'm disappointed in the comp sales in the quarter.
I think while everything is in line, you know, we saw some things internally that we can do better.
I think overall you've got the KUMA program obviously had an impact but I think generally we had a couple of items in there in the candy area that did quite well in the quarter, but I don't think there's any general from a merchandising standpoint, any general conclusion I would draw right now.
We are working hard to at the sales level at the store level rather, to really execute a better sales mentality.
I don't know if we're seeing that yet or not, honestly Mark.
But it's certainly -- I know Lawrence and Kathleen and their teams have been working hard on it.
And then Stonie Obrient in and the merchandisers have been working hard to replenish the stores.
And I think that has had an impact in the first quarter.
- Analyst
Are you seeing the same lift to end stocks as you switch over to automatic replenishment in the same lift of sales that you did early on?
- EVP, CFO
Yes.
- Analyst
Okay, and then it just seems like while, with all these initiatives, that comps ought to accelerate going forward as you really ramp these things up in the first quarter.
Besides uncertainty with gas prices, are there any other initiatives that have potential to disrupt the sales trend that we may, may not understand here?
- EVP, CFO
Well comp sales is a very complicated formula, as you might imagen, with a lot of moving parts and a lot of variables.
The economic environment, the individual environment, our own performance inside.
We don't see anything inside that's going to potentially, negatively impact our comp sales effort this year unless we just don't perform against the initiatives that we have out there.
I think what worries me, you know, looking at our business this year is the external environment, the ability to have visibility into the next six or eight months is very difficult right now.
And I think the economic environment right now, while the government is saying employment is going to better for the lower income consumer in the back half, if that happens, obviously we think we would benefit, but it's just too early to make that call.
- Analyst
Can you give any additional inside on EBT, I know it is early but to me, it seems like a pretty exciting initiative?
For example, what percent of your assortment could qualify for EBT?
- Pres, COO
A good percentage of our assortment can qualify for EBT.
Because you know once -- EBT has the four or five basic groups.
The primary push is to have perishibles as you know.
But in most of the stores we have dairy, we have bread, we have a meat of some sort, in someplaces it's refridgerated perishible meat, in certain states, the qualification could be something like a canned Vienna sausage.
So it really is a mix of many things.
- Analyst
Lawrence do you that is as much as 10% or more of your assortment -- of your sales?
- Pres, COO
It would be around that number easily.
- Analyst
Okay.
Great work and Jim wanted to wish you good luck in your future endeavors.
- EVP, CFO
We have time for one more question, operator.
Operator
Okay next question comes from Michael Epstein with Credit Swiss First Boston.
- Analyst
Good morning everyone, two quick questions.
Oneis what's your opinion on the sort of rationalization of the drug store industry as it starts what impact does it have on real estate locations for you and secondly if your sales decelerate, how do you flex your expense structure?
Just sort of a FYI question.
Thanks.
- EVP, CFO
The consolidation of the pharmacy retailers is very interesting.
You know, we have a good relationship with those folks and we have actually taken secondary real estate, we negotiated with them and actually worked with them to takeover some of their secondary space and some of those locations are some of our highest producing locations.
We don't think overall it is going to have a major impact.
There might be a few locations we'll pick up in the aftermath of that, but it's just too early to tell.
We don't have any hard numbers on that.
And I am sorry, what was the second?
- Analyst
The second was on the expense structure.
- Pres, COO
I'll handle that.
You know, we actually -- the primey place where we flex is obvously store labor.
And One time we had a model where we worked at store labor particularly on a month to month basis.
Now, we actually look at at store labor on a weekly basis.
We have the ability to flex our schedules utilizing how we allocate labor hours through the stores.
So we're trying to do that and we monitor it pretty, pretty closely, specially around the high point which are the beginning of the month and fifteenth of the month to make sure we have adequate coverage in those areas.
The tough part about this whole process is that though we can flex at the store standpoint, we're still very much in a interesting growth mode as an industry in our belief.
And so we're still making investments to take advantage of the bill.
Now, if we think that there's a long term decline in growth, then we'll have to deal with it differently.
Bu thus far we don't have anything to believe that this is anything other than a growth industry at this moment in time.
- Analyst
Thanks a lot.
- EVP, CFO
Thank you everyone.