達樂 (DG) 2006 Q1 法說會逐字稿

This is the Dollar General Corporation first-quarter 2006 earnings conference call on Thursday, June 1, 2006 at 9 AM Central time.

Good morning, ladies and gentlemen, and thank you for participating in today's conference call.

This call is being recorded by Conference America and Shareholder.com.

No other individuals or entity may record or rebroadcast this session without permission from the Company.

After a prepared statement by the Company, we will open the conference call for questions from the audience.

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

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 anticipated second-quarter and annual 2006 earnings per share, 2006 store growth targets, 2006 capital expenditures and annual effective tax rate, key plans and operating initiatives and the expected timing both impact of those initiatives and anticipated in-store inventory level.

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

The Company believes the assumption underlying the forward-looking statements are reasonable.

However, any of these assumptions could be inaccurate and therefore actual results may differ materially from those projected or implied by the forward-looking statements.

Factors 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 reports on Form 10-K, most recent quarterly report on Form 10-Q and the earnings press release issued today, as well as factors discussed in today's call.

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

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

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

Beginning today's call is Mr. David Tehle, Executive Vice President and Chief Financial Officer.

Sir, you may begin.

Thank you, operator and good morning, everyone.

With me this morning are David Perdue, our Chairman and Chief Executive Officer and Emma Jo Kauffman, our senior Director of Investor Relations.

I am going to review our first-quarter results with you and then David will have some comments on our operations and our plans for the rest of the year and then I'll come back and talk about guidance.

We reported net income of $47.7 million or $0.15 per share for the first quarter ended May 5, '06.

That compares to $64.9 million or $0.20 per share for the first quarter of '05.

We are disappointed with our bottom-line results for the quarter, but on the other hand, we are making progress in some areas where we need to see improvement.

First, while not where we would have liked to be, our sales performance improved over the results from the fourth quarter of 2005.

Total sales for the first quarter of '06 were $2.15 billion versus $1.98 billion in the prior year.

That is an increase of 8.8% reflecting a 10.2% increase in highly consumables and a 12.5% increase in seasonal merchandise sales partially offset by flat to low single digit increases in our home and apparel categories.

Same-store sales for the quarter increased 1.6%.

As most of you know, and as we discussed in our March conference call, we had a spring advertising circular, which coincided with the typically high traffic time before Easter.

Encouraged traffic, this add included some promotional pricing on several national name brand consumables, as well as some seasonal merchandise.

I am sure David will talk more about this, but overall we believe the ad was a successful first step at educating more customers about our brand and who we are.

Today, we reported same-store sales for the four week period ended May 26 to be up 1.3% and that is over a 4.4% increase in May of last year.

I want to talk a little bit about our gross margin.

Our gross profit rate of sales of 27.2% for the quarter was down 132 basis points from last year's gross profit rate of 28.5%.

This decrease in gross margin was due to several factors.

First, our markdowns were up partly due to some promotional prices on various items such as coffee, laundry detergent and paper products, as well as some spring seasonal items in the ad and partly due to our efforts to continue to sell through noncurrent inventory.

We had a decrease in mark-ups on purchases in the quarter mainly due to the higher inventory levels of consumables.

As I mentioned, sales of basic clothing and home products, which are typically higher margin categories, declined as a percent of our mix from last year affecting our overall margin.

Inventory shrinkage expense was also higher in the quarter.

In addition, as seems to be the case with many other retailers, transportation costs as a percentage of sales were up during the quarter in part due to higher than normal volume resulting from the shipment of the promotional items to the stores for the ad, but more importantly due to the higher year-over-year cost of fuel.

These factors were partially offset by higher average mark-ups on beginning inventories in '06.

SG&A expenses in the first quarter of '06 were $503 million or 23.4% of sales versus $456.4 million or 23.1% of sales in the prior year.

The increase is primarily attributable to higher advertising costs, higher store rent expense, additional store labor costs in support of our spring circular and higher administrative salaries due to additions to our leadership team and the expensing of stock options.

SG&A expenses were offset by approximately a $5.1 million insurance recovery related to last year's hurricane damages and related business interruption.

In addition, we incurred unexpected expenses of about $2.4 million in the quarter related to an unexpected voluntary product withdrawal, which is included in cost of sales and higher than expected uninsured losses in SG&A.

Our tax rate for the quarter, the effective tax rate was 37.7% and this did exceed our expected tax rate of 37.0% due principally to some additional amounts accrued for potential state tax assessments.

On inventory, our total merchandise inventory balance of $1.64 billion at May 5 is an increase of about 11.6% over last year's first-quarter level and a 4.3% increase on a per store basis.

Inventory turns did improve to 4.1 times on a 53-week annualized basis from 4.0 last year, which is based on 52 weeks.

We continue to adjust our inventory levels to ensure appropriate in-stock in the stores and we do anticipate having higher inventory levels versus last year for the remainder of this year.

The Company cash balance of $71.9 million at the end of the quarter decreased by about $164 million from the $236.5 million at the end of '05's first quarter.

During the quarter, we invested cash in the business.

In addition to the increase in inventory, we have made cash expenditures of $77.1 million through the first quarter of '06 primarily related to the implementation of the Company's EZstore program, the opening of 182 new stores, including five Dollar General Markets and progress on various distribution, transportation and systems-related projects.

We still expect capital expenditures to be approximately $375 million for the full fiscal year.

In addition, we repurchased quite a bit of stock in the quarter.

We repurchased 4.5 million shares of common stock or about $79.9 million completing our existing 10 million share authorization that was scheduled to expire in September of 2006.

With that, I will turn the call over to David Perdue for some additional comments.

Good morning, everyone.

As David said, we were definitely disappointed with our first-quarter financial result.

However, I continue to be convinced that we're on the right track, we have added the right people and we are addressing our sales and operating initiatives as we speak.

First, let's talk about sales.

We posted a 1.6% increase in same-store sales for the quarter and while that is definitely not where we have been and where we want to be and where we expect to be, it is a turnaround from where we were in the fourth quarter.

After suffering negative comps in Q4 '05, we took some action.

We felt we needed to be more proactive in competing in highly promotional and competitive times during the year and in educating our consumers about the value and convenience of Dollar General.

In particular, we believe we have been missing some sales opportunities around important seasonal dry periods during the year.

We distributed a spring circular proceeding Easter and we saw positive sales results from this effort to reconnect with the customer.

I thought the circular was right on target in addressing our need to get the Dollar General brand more widely known and we're optimistic that the circular helped to bring in new customers as well.

We had feedback from many of our core customers that were very grateful for the reminders of the prices that we have and the brands that we have every day.

Some of you have asked about our ad strategy and have questioned our commitment to our everyday low price strategy.

I assure you we are committed to our EDLP strategy on our core products, but as I said last quarter, in the current highly competitive retail market, we recognize the need to increase the energy in our stores around certain events during the year and we plan to be better prepared and more competitive.

The circulars will have special buys, but they will emphasize our everyday low price on everyday items our customers need.

The most significant issue we are currently facing is the pressure on gross margin.

That pressure comes primarily from our sales mix, markdowns and from shrink and transportation expense.

What are we doing to turn these negative trends around?

We didn't just start focusing on these cyclical and secular issues.

We have been working on this for the last few years.

First, we have gained some very valuable insight from our circulars already and we believe we can be even more efficient and productive with them as we go forward.

Our consumables sales remain healthy, but to address the mix issue, we must improve sales in the higher margin categories of seasonal, home and apparel.

We have already seen some encouraging progress in our seasonal categories.

Beryl Buley, our new division President of Merchandising, saw seasonal as the best opportunity to make an early impact and he already had the team in place with which to take action.

So far our new planograms in the seasonal categories, specifically hardware, automotive and stationery, are showing some very positive trends.

Sales in the seasonal category were up 12.5% for the quarter and we still have many departments within that category left to tackle.

We recently added a new Senior Vice President and General Merchandise Manager over seasonal, home and apparel in our merchandising group.

We are working toward making positive changes there just like we have done in seasonal.

Stronger performance needs higher margin categories is important, not only to our gross margin equation, but to our comp sale performance as well.

For the long term, we believe we have gross margin opportunities from extension of our private label offerings and expansion of our sourcing activities.

Our Hong Kong office is fully operational and we're very pleased with the continuing results we're getting out of that effort.

We also see other cost-related opportunities that are available to do us to address margin.

As I mentioned, gross margin in the quarter was also affected by an increase in our reported shrink expense.

Our highest shrink stores actually improved in the quarter, but some of our low shrink stores actually had increases.

In 2005, it is interesting to note that 20% of our stores generated about 70% of our shrink problem.

I can assure that we take this seriously.

We are focused on it; we have got a team dedicated to it and we continue to put the right effort on it and we expect to see progress soon.

Unfortunately, retail gas prices once again were higher in the quarter, about 20% higher than the year-ago period.

Gas prices continue to negatively impact our transportation costs, as well as customers' discretionary spending, which negatively impacts our sales mix.

Obviously all retailers have this dynamic.

We are trying to address that impact on us right now.

From our operational standpoint, we're moving forward with our EZstore project.

Over 5000 stores have been converted and all eight distribution centers can now ship EZstore.

Four of our DCs are 100% EZstore compliant and we expect to have EZstore in all of DCs in stores by year-end.

EZstore is delivering on the metrics we expected, including improved efficiencies in store labor, decreases in the number and severity of workers' comp claims and most importantly a reduction in the hard physical labor required of our store employees every week.

While we recognized early on that the process would require pushing more work and cost back through the distribution chain, we are working to minimize that impact as much as possible.

Through the end of the quarter, we had opened 182 new stores, including five Dollar General Markets.

We fell a little behind our pace from last year as our new leaders in the real estate group spent more time analyzing the quality of sites in the pipeline before moving forward.

That seems to have paid off as we have seen improved performance in our new stores in Q1.

Our current plan remains to open approximately 800 traditional stores and 30 Dollar General Markets this year.

We are also enthusiastic about the changes that have been made in the lease renewal process.

We are looking at lease renewals much earlier, which gives us the opportunity to be more critical and more analytical in our approach to making the decision to renew a lease, relocate or possibly close a store.

We continue to make improvements in our supply chain to support our growth, as well as our merchandising and operating initiatives.

We're making good progress in our Marion, Indiana DC and expect to be shipping before the holiday season begins this year.

We are also continuing to expand the items sourced through our Hong Kong sourcing office.

Wayne Gibson has made recognizable progress in our Dollar General Market concept and we continue to be encouraged about this opportunity.

We're learning what works and making appropriate changes.

At the end of the quarter, we had a total of 49 Market stores open.

Please remember that this concept is still in the testing phase, but I am encouraged by the early results of our efforts there.

In summary, we had a disappointing quarter, but we believe we're headed in the right direction long term.

There are several negative trends affecting us right now.

We believe higher fuel costs and the resulting trip consolidations continue to negatively impact our traffic.

We have used more markdowns to freshen our inventory.

Rent has increased and this has hurt our ability to leverage our expenses.

Shrink, while improving in some stores, overall is still hurting our margin.

Fuel costs continue to negatively impact our transportation expense, which hurts our margin.

Our apparel and home sales have not improved, which dramatically impacts our margin, as well as comp sales.

We have identified in our expecting rapid improvement in these areas and we have plans in place for the areas of home and apparel in particular where change is to come.

And we believe that we have identified the things that need to be done in these areas to bring us back to the level of competitiveness that we have for so long enjoyed.

With that, I'll turn it back over to David Tehle.

Thank you, David.

I want to briefly talk about our outlook for Q2 and for the rest of fiscal 2006.

Let me address the outlook for the next quarter first.

For the second quarter, which ends August 4 for us, we are expecting earnings per share in the range of $0.18 to $0.22.

For the year, we're expecting earnings per share in the range of $1.09 to $1.16.

These numbers do not include any assumption for potential additional proceeds from our hurricane-related insurance claim going forward.

We expect second-quarter sales, gross profit and earnings to remain challenging as you can tell from the comments David said.

Our sales comparisons remain difficult; although we have seen some improvement in our trends from fourth quarter.

As you know, our comparisons are somewhat easier in the second half of this fiscal year.

We expect a tax rate of 37.3% for the year.

In recent years, we have benefited from the work opportunity tax credit, which has expired.

We expect the credit to be reinstated at some point, but at this point, it is not assumed in our guidance.

We continue to be concerned about the impact the current economic pressures are having on our customers, particularly high gasoline prices, increasing interest rates and rising personal debt.

The continued curtailing of discretionary spending impacts our sales mix and increases the pressure on our gross margin.

Having said that, we remain focused on meeting the needs of our customers.

We must continue to compete on price and convenience and we know we must differentiate ourselves from our competition.

With that, operator, we have some time to take some questions.

(OPERATOR INSTRUCTIONS).

Charmaine Tang, Citigroup.

Is there any way you could share any color you have on what you have learned with respect to the coolers, specifically metrics or observations, just in terms of customer behavior?

And then if anything, are there any enhancements you're doing to the coolers?

Great question.

Yes, we did the coolers back in '04 and I guess to some degree in '05.

We are actually coming to the end of that comparison in the first half of this year.

And some of our competitors are actually making that conversion now and enjoying the benefits.

But one of the things that we are learning is that we are -- first of all, we were not pleased when we first put the coolers in with regard to in-stock performance.

So our [DSE] performance, our partners there have improved their performance in terms of our in-stock -- our ability to maintain in-stock levels in the coolers.

Secondly, we have looked at the SKUs and the productivity of the SKUs and we've made some minor changes there.

Thirdly, we are actively looking at some of the commodity pricing in there.

For example, milk and so forth varies by region, as you know and we are looking at doing some things there to be even more competitive.

Some of the things we saw last year and when we first put coolers in we continued to see and that is the baskets that contain a cooler item are indeed larger than the baskets without cooler items.

That still remains the fact and that continues to grow.

We still see opportunities in some stores by the way to expand the cooler penetration.

We are demonstrating in many stores that the number of coolers we put in may actually present an opportunity to enlarge that presence.

As you may recall, when we first -- when I first arrived here, we actually slowed down the cooler effort or investigation at that time because we wanted to make sure we were putting the right number of coolers in.

We did that and now after about a year of performance, we're seeing that some stores have an appetite for actually deeper penetration from this cooler effort.

So I would say right now, it has been a very positive thing for us, although the comparisons up against it are painful.

It has also helped our EBT effort, as well as we continue to grow that.

Meredith Adler, Lehman Brothers.

I wondered if you could talk a little bit about the cost of becoming more promotional even if it is only a four times a year?

You talk in the press release about labor costs being higher to support the ad.

Could you talk about how having more advertised merchandise impacts the Company throughout from the distribution all the way through the stores?

Good morning, Meredith.

Yes, I would be glad to.

This is Perdue.

First of all, the comment we made on labor in first quarter was really I think a one-time event.

I would not say that labor is going to be higher behind any events that we have going forward.

Second, I don't know how many we are going to do this year, so we continue to evaluate every one that we are doing.

The extra labor we had in first quarter to be more specific was over -- we bought actually a little more inventory in anticipation of that and that is one of the learnings that we are having is how to refine that.

So the labor cost in first quarter was elevated.

We are learning from that and I think going forward, based on the sales, that the percentage of labor actually is not going to be any greater than it is during normal times.

From that standpoint, I don't see any real problem either in distribution or in stores.

Actually one of the derivatives that we received, we didn't anticipate this, but it was actually nice to get and that is the enthusiasm and energy level in the stores was raised partly by reconnecting with customers.

We had many of our employees thank us because of the reconnection there and because of the comments that were being made by customers as they came in the store, both old-time customers, as well as new customers.

I think one of the other items on the circular -- we had great learnings on the productivity of the circular from a geographic standpoint in terms of which areas worked better than others and then we had some market basket learnings in terms of which items really helped drive traffic.

And I think both of those learnings will help make us more productive in our next effort in this.

And you did this circular in a pretty short time frame.

Were you able to get support from vendors that -- your fair share of support given that short time frame or do you think that there is more potential for that in future advertising events?

That's a great callout.

Beryl Buley got here and almost immediately started working on the negative comp sale trend that we presented him from fourth quarter last year.

And this decision to put a communication out in first quarter was not taken lightly, but it did have a very short fuse on it.

We were not able to get all of the potential treasure hunt items that we planned to get behind these in the future.

We were not able to do some of the vendor partnership ideas that we now have in place.

I'm very pleased with our vendor support in the first quarter.

I do think though that there is a greater opportunity to drive our brands through this process through a greater, stronger partnership there.

Our partner vendors are participating with us.

We have some great treasure hunt items coming in our stock now.

And this is part of this effort, but it is in addition to.

People like Black and Deckers and Carters and Jersey and Turtle Wax, Mattel, Hasbro, Hallmark, Conair, RCA, Warner Brothers, Sony -- I mean these are people that are all playing in the game right now and there are great opportunities and I think that we can present the energy that we used to have frankly in this treasure hunt dimension as part of this whole exercise of communicating.

There was a time and I have heard people talk about this around here when in some of these small towns, they would follow the Dollar General trailer truck to the store to see what new treasure hunt items were actually being delivered.

Well, frankly, I think in the last few years we've lost some of that energy and we're trying to get that back.

That is separate from the communication exercise, but it also plays a part in it because we will use that as part of the reason to draw people to the stores as opposed to any high/low pricing strategy.

We are committed to really communicating our everyday low pricing that we have established for so long.

And then I have one final question about the changes that you can make in apparel and home.

It seems to me that to do much different, you're going to end up with more inventory risk.

So you're going to end up with more product and it is going to be either more fashion or more seasonal and maybe it sells, maybe it doesn't.

Do you see that you're going to have the ability to drive sales in those high margin categories without adding a lot of inventory risk?

Actually, Meredith, that is a great callout.

That is one way to do it is to add more fashionability into it.

I think one of the problems that we've had here in the last few years is that we have tried to play that game frankly and it didn't work.

What we're going to do is get back to our core basic strategy and that is core replenishable products that people need frequently.

Now in apparel, the replenishment cycle in that is not what it is in cleaning fluid, but certainly there are items that have more frequent use and are more core products.

We have demonstrated that we can become a destination for certain apparel products and I will tell you in the children's area, our Fisher Price exercise has been a model for success.

We're very pleased with that effort so far and we think we can leverage that.

Secondarily, I think we can lower the risk profile.

In fact, one of the things we want to do is to lower the risk profile to affect the increase in markdowns that we've had over the last year or so and I think that is part of the strategy in apparel and home.

The other is the allocation.

You know, we -- years ago, we went from being an apparel closeout house to a consumable purveyor or a purveyor of consumable basics and over that period of time, we enjoyed the positive contribution that that had to comp sales.

Well, for the last few years, that mix has been fairly constant.

There are some stores where we have the opportunity to actually decrease that mix with regard to apparel and at the same time we think because of the opportunistic buys and because of some of the other things we're doing in sourcing to maintain the margin.

But we're not giving up on apparel.

We think apparel is a needed category for our customers and we think if we can get back to and lower the risk profile, as you say, we can drive comp sales in there and actually, because of our sourcing effort, we think we can maintain the margin as well.

Stacy Turnof, Merrill Lynch.

When you look at the expense ratio and actually it looks like it was a bit better than what people are expecting.

I don't know if you could help us flesh out the impact from EZstore concept and if you saw any of that on the line and costs related to the advertising circular.

I will give you a little bit of flavor around that.

Of course, we don't get into quite that level of detail.

Clearly, on our labor line, we do continue to have pluses that we got from EZstore accruing to us.

However, in the quarter, as David mentioned, we did have some extra labor for the advertising event.

And we believe we can control that better in the future.

It was one of our learnings in terms of the amount of inventory that we bought.

The other issue on our SG&A is rent.

We have talked about this.

We continue to have processes in place to work through our rent issues and try to reduce our rent on an ongoing basis going forward, but again that is still an area where we have some deleveraging from the prior year.

And then additionally, we had expensing of options, which we didn't have last year and obviously that is something we will have going forward on an ongoing basis in our SG&A number.

Another question about advertising.

Now that you have had the circular, what are you not planning to do and what are you continuing to plan to do because it seems like the circular had a lot more of the lower margin consumable items and you did it pretty quickly?

In light of that, what have been some of your learnings?

I think one of the things that we saw was, because we had to do it so quickly, we were not able to have the balance between our consumable and some of the treasure hunt items that we will have going forward.

Let me give you some ideas.

I mean we have -- in the future, we have got things like a Black and -- and these are typically high margin items.

We have a Black and Decker bug zapper, Carter's sleepwear, Jerzees T-shirt program, Turtle Wax special program.

Conair is in there and then toys, Mattel and Hasbro have stepped up and what we were able to do now is partner with our vendors and also in our treasure hunt area to have a little better mix between the energy driving products in there, as well as our everyday priced commodity products.

In the first quarter, we had to go more heavily weighted on our commodity products.

Again, the reason for it was to try to drive traffic and to try to re-energize the stores in a very short period of time.

As we have more time to plan that, we can [move things] being more focused on these treasure hunt items and a reminder of our everyday low price in brands.

There are three objectives that we have within the overall objective of reconnecting with the customer.

One, communicate that we still are a treasure hunt destination.

Two is that we have major brands.

Three is that those major brands have great prices and if that is simply put, we will be able to do a better job of that now that we have a little more time to plan.

David Cumberland, Robert Baird.

On shrink, that has been an area of focus for awhile.

Are you doing any anything new to reduce that or is it more a matter of existing efforts needing more time to have an impact?

It is a combination of both.

When I first got here, I made this a CEO initiative and we got after the worst 300 stores that were in double-digit shrink and we made dramatic improvement and for about a year, we saw a reduction in shrink.

Then we started moving new products into our product mix like DVDs and CDs and even some of our cotton underwear items ended up being extremely high shrink items and so we have added some pressure -- negative pressure anyway to our focus.

Our store operation group have this as a primary focus, but I will tell you that we're going to re-energize that from a CEO level.

I'm not happy right now.

Yes, we have an accrual combination issue and yes, we do see some improvement in some stores, but what is happening is stores -- some of our better stores that might have a 1.2% shrink for example actually saw increases in the quarter to maybe 1.4% or 1.5%.

If you have enough of that going on, it can really impact you.

So we are going to re-energize the focus from the CEO level on this.

It is an emotional issue and it is a big drag on our margin and right now with transportation costs doing what they're doing, we can afford -- I am losing patience if you will in terms of the amount of time it may take to get this done.

So it is a great callout, but it is a combination of some of the things that we have been doing between asset protection, putting cameras in certain stores and we are continuing to do that.

We put laptops in all of our district managers, so we're in closer contact with our stores and we're trying to hook that technology up so that we have a better capability of accessing our stores in that regard.

We are actually incenting our store operations people in a way that we haven't before with regard to shrink.

Two more items on shrink.

Additionally, we are partnering with some vendors on high shrink items, looking at packaging and trying to find new packaging that will help make it more theft resistant and then additionally we have got some software we are using that points out -- an early warning system for us that points out stores that are having unusual trends that would signal to us that there is something going on in that store that needs to be investigated by asset protection that you have a potential shrink problem going on.

That is -- we have been very successful and it has been very accurate in pinpointing problem areas for us.

Thanks.

And my other question is on EBT.

David, you mentioned EBT when talking about the coolers.

What are your current thoughts on the opportunity there?

Well, you know, we got a slow start on that because most people didn't realize we had it.

Frankly, there are cultural habits built into EBT purchasing we are learning and those habits are slow to change.

But we are seeing that change and we're seeing improvement in that area.

We continue to communicate it and we continue to make that available to the customers that can access that.

So at this point, I'm very pleased with what we're seeing there.

We actually have talked about trying to build that into some of our communication efforts because there are a lot customers out there that still don't really see us as a destination for that and we still see upside potential there.

Michael Exstein, Credit Suisse.

Two quick questions.

One, where do you stand in terms of your commitment to 800 stores per year?

Are there any thoughts about what you will do next year in terms of that growth rate in absolute numbers of stores?

And secondly, now that you have exhausted your repurchase, will you go to the Board and try to reload or are you going to give yourself a breather in that regard?

Great questions.

Yes, I can't comment on '07 yet.

We will do that later this year.

Yes, we are still committed to the 800 stores this year.

Generally, and I've said this publicly before, we are committed to try to stay in that 10% range of new square footage and what we are learning and what we're doing this year as a matter of fact.

It is not just new stores.

It is a combination of all of the above and that is that we are working on conversions, we are working on closing stores, we are working on -- and dressing up some stores this year.

So our real estate group under [Gale Edgar] is really looking at this quite differently than we have in the past.

It is not just a brute force effort to get the number of rooftops.

We are actually putting quality control efforts in place to make sure that what we are putting up is what we want, where we want and can withstand new competitors as they come into an area.

So right now, it is only a quarter, but I will tell you that what we call TYOP -- that is the quarter -- it's the stores we've opened this year are actually performing better than expected, better than we projected when we did our financial analysis in justifying the store and doing better than the stores did last year.

Now going forward, we have the DG Market concept out there and as we continue to improve it and develop the financial return on that that we want, then we have another option as we go forward in terms of adding square footage to meet the needs of the customers.

With regard to the second part of the question, I'll defer that to David.

On the stock buyback -- to answer your question.

Yes, we absolutely will have ongoing discussions with the Board on that.

Our feeling at this point -- we did purchase 4.5 million shares in the first quarter.

That compares to 1.2 million shares that we purchased in the same quarter last year.

So we purchased like four times the amount of stock that we did last year at this same time.

So we are way ahead of where we were last year on the stock buyback.

But we will continue to evaluate that with the Board of Directors.

Just to follow up in terms of this issue of store openings and square footage growth.

Is there an implicit need, is there a breakeven where you have to open 5% or 6%, 7% square footage to try to keep your costs in line?

To keep your what in line?

Costs.

Oh, costs.

Well, you know, there are a lot of different ways to look at this.

I get the question frequently -- what kind of comps sales do you have to have to leverage the business?

Well, you have to make assumptions about new stores growth and expenses and all that.

I don't know that there is truly an answer to that.

We have objective functions around here that drives shareholder value and that means driving EPS.

And when we look at that, with the opportunities we have out there to put new stores up, that seems to be the highest return on investment we have with regard to generating bottom-line results.

When you look at what we did in '05 of generating 4.1% of net sales and net income, although the growth of that wasn't what we wanted, the generating power off the sales was pretty good relative to our direct competitors.

So we continue to look at that, but we are not blackmailed into adding stores just to make the model look good or continue to work it.

I think there are opportunities to meet the needs of customers is the primary reason we're adding those stores.

Now, you may say, well, in some areas you are saturated and when you put a new store in, you may cannibalize it.

Well, in some places -- I'll give you an example, Bowling Green, Kentucky for example.

We have a number of stores there.

We continue to add stores.

It is a very good market for is and we when add a new store, we may negatively impact one of the local stores adjacent to that new location by a couple hundred thousand dollars that year, but in total, in aggregate, we are taking more sales dollars out of that community.

And with our marketshare, our share of wallet being so low, we have a long, long way with regard to penetration within existing markets and then of course the new markets off of that potential we've talked about for a long time.

So I think at some point, there will come a time when saturation gets to be an issue and we have to worry about, well, what does the model have to have in terms of real growth to maintain itself.

But frankly we are a long way away from that and in this model right now, there is so much opportunity on the profitability side.

We are only sourcing a small amount of our total offering out of Asia.

Our treasure hunt has declined and we don't have our private label offering is certainly in any degree matured.

We think we have a huge upside there that we have identified under Beryl's leadership and we're going to address that under our merchandising effort.

So it is a very complicated question.

It is a great question.

We have debated in here a lot and we look at the money we are investing in each store versus other opportunities and right now, we still have plenty of opportunities to make those investments every year and we will continue to do so.

I look forward to seeing you next week.

Thanks.

I look forward to it.

John Zolidis, Buckingham Research.

Some previous analysts got some of my questions but I will try to ask a question on the EZstore.

I was wondering if you can expand a little bit of the implementation of EZstore, how that is being received by the employees in the store, if you're preparing them a little bit better than maybe some of the first employees that had to switch over to it?

And then the expense associated with the initial rollout, are we mostly done with that and going forward it is going to be a benefit to the SG&A line?

Thank you.

Good question, John.

In the early days when we started EZstore, and first of all, let me say what we have done.

We took some high potential, young people in our organization and we borrowed them, if you will, from their existing assignments in the company and formed a hit team.

And that hit team has been dedicated to this for the last year and a half or so.

And they're doing fabulously.

Everywhere they go, the people rave about how integrated they are and the person leading that is a middle management person, MBA, well-educated person, but actually ran a store for two years.

So there's not a lot of nonsense that goes on with him with regard to this implementation.

Now, what did we learn?

Early on, we combined the staffing and the new staffing model that we have and you hear some of our competitors talking about now thinking about going.

Wal-Mart made the announcement about a month ago that they're thinking about moving their staffing away from the workload of managing inventory to putting it in there when the traffic is in there.

We do that in the early days with EZstore over a year and a half ago, two years ago now and by combining that, I think it confused some of the early store managers.

Number one, they liked not having to unload the trailer.

I don't think you'll find any of our store managers that would give up the roll [taners] to go back to unloading the trailers.

However, when we put the staffing program in on them, some of them did not like that and we probably didn't do a good enough job explaining and training that in the early days.

So since then, we have learned from that, we have adapted to it and we spend a lot more time now following up behind that piece of it and we have actually separated the implementation of that away from the EZstore implementation, so it doesn't look like it is all part of the same thing.

It is really quite separate.

The results we are getting speak for themselves.

We're leveraging store labor.

The morale seems to be better now, although you will still get when managers come on it -- it's a difficult thing to adapt to because of the staffing requirements that go along with it.

But like I said, when I go to stores and I do this a lot and someone is talking about the things we can do to improve and I always ask that question openly, I never get anybody that would take me up on, well, let me ask you this.

Would you -- let me trade you.

I'll give you the hours back in the staffing model, but I want you to unload the trailers the way you used to.

I haven't had anybody take me up on that yet.

With regard to the expenses, we continue, on the CapEx part of it, we continue to spend money this year as we finalize the implementation.

We have got some 5000 stores done now.

We will get the rest of them or we plan to get the rest of them done between now and the end of the year.

So that CapEx will continue to be spent.

With regard to the implementation expense and the staffing of that and so forth, obviously those dollars will continue.

The consulting expense pretty much went away a long time ago, so we don't have that big hit on there.

And then the labor that we have spent -- we took labor out of the stores.

We saved labor because we don't have to sort it, we don't have to unload it, etc. in the stores.

We now sort it and aggregate it back at the DC, so we did have a little bit of an increase there.

We knew that going in and we absorbed that.

And actually our distribution folks have taken this very well.

Now that we have got four or five DCs that are really mature on this thing, they are getting their productivity numbers up as well in terms of the sortation and the loading and our utilization continues to be encouraging.

So we're very pleased with it at this point.

We've talked a lot about it.

But I think over time, you'll see that it allows our store managers more time to work the endcaps, to work the in-stocks, to run the store the way they ought to and then they have people in the store when the customers show up.

So that is really in a nutshell what we're seeing.

Thanks for those answers and good luck.

Christine Augustine, Bear Stearns.

Could you give us the ticket and traffic trends in the quarter and for the month of May?

That is my first question.

Christine, you're not going to like me, but this is Perdue.

I am the bad guy here.

Everybody else sitting at this table would have me give that number to you.

There is very simply -- now that we have started communicating with our customers, it is a competitive issue.

You can look at our comp sales and you can deduct from that that we're not excited about what is happening in that number and traffic is one of the two big numbers in there, but I would rather not do that for May.

What about for the quarter?

No, same thing.

What is happening with the planogram changes?

I think there are a number of things going on April, May and June.

Is that right?

May, June and July.

May, June, July?

Yes, we've got a lot going on.

The cleaning wall is being done as we speak.

That was a late May, early June.

We've got paper coming and then some of the dry good areas will come right after.

The HVA is being done I think in June or July.

So we delayed that this year.

It is a great callout and we're paying for it obviously in some of our comp sales in the quarter -- in first quarter.

The purpose of delaying it is we have changed more SKUs in some of our core categories.

Let's take cleaning for example.

Cleaning -- we enjoyed very strong marketshare there, although it is under pressure.

As some of our competitors come out of apparel and go into more cleaning offerings, that is a valid competitive challenge.

Because of that and because we felt like we had a lot of SKUs, even on the cleaning wall where we were very successful, we had a lot of SKUs that were not as productive as they should have been.

We went back and pretty much doubled the changes in that cleaning wall over the changes we made last year and to do that, we had to delay the implementation of that planogram change.

I am excited about the thought and the energy and the process that Beryl is bringing to the planogram process here at Dollar General.

Number one, we're not going to just do it once a year and then put a new item in and then wait a year to see if it worked.

We will know after two months if a new item is going to be -- if it is going to be good for us or not.

If it is not working, we're not going to be bashful about revising that planogram as we go through the year.

We're bringing people in and we've moved people around that get it.

We promoted Rita Branham, who has been here for 25 years or so, to Senior VP of Consumables and she is really all over this.

She has been wanting to this a long time.

She is good at it and knows it and we are enthusiastic about it.

So it is a little early to -- I can't read you the results from that yet, but as we go into Q2 and Q3 especially, we'll see the benefit of that new planogram process.

Thank you.

Are you -- I guess what I am kind of wondering is as you're changing out some of the SKUs, are you putting in products that might carry a higher average unit retail?

Or are you trying to keep the price points reasonably similar?

Well, we're trying to keep the price points reasonably similar.

Having said that, there are a couple of dynamics going on.

One is there are some new items coming under the private label, although few and that helps and those are targeted right now at entry-level price points.

Secondarily though, we've added some commodity items, such as French's mustard and Heinz ketchup and Jif peanut butter, things like that that have their pricepoints.

Now they are replacing another no-name brand and in those isolated cases, they probably do have a little bit higher pricepoint.

So we're trying to govern that.

We are so committed to being known for, on key items, a few key items, to have as good a price or better than anybody else out there.

Our clean wall is successful largely because of that -- our paper products.

But what we've got to do I think and Beryl agrees and this is part of what we're now beginning to focus on is we believe our private label program is greatly underleveraged.

And this will seek to the pricepoint and the attractiveness of getting at the right pricepoint for a given category and a given product.

But no, we're not generally trying to grow sales by having higher cost items or a higher price item in a category.

I don't see that at all going on.

Okay.

I guess just on the private label because you say that that is an opportunity and you are pretty early stages on your sourcing initiative.

Is that, just with lead times, is that something that could actually help your business into the second half or is it a little aggressive?

Should we think about that for '07?

Yes, you need to think about that for '07.

I think honestly we have made a lot of progress in sourcing.

We converted our hardlines.

We're now converting some of our softlines and so I am very encouraged by that.

We know that our numbers are low there and we see the opportunities in our product line.

And Beryl is all over that and the people that are involved in that -- you know, we integrated that (technical difficulty) merchandise when we [brought] Beryl and he knows that world very well, as I do.

So we will be able to drive that going forward.

The private label is -- I am anxious to get at that.

But with the lead times involved and some of the packaging and things that we're working on right now, there's just not a lot of benefit that we will get from that this year.

David Mann, Johnson Rice.

You commented about aged inventory and it seems like that something you have been talking about for over a year.

Can you just give us an update on where we are?

Are we talking about the same aged inventory, backroom inventories, or what is going on there?

We continue to sell off the inventory.

We have been talking about this.

We believe we made great progress in selling this off in '05 and we continue those efforts in '06.

Obviously we have mentioned previously that we have been evolving our strategy away from a pack-away strategy and more trying to get out of product in season.

And we continue to do that and we're happy with our efforts in terms of where we are in that and it is continuing.

David, I will add one thing too and that is we called this out.

We haven't said a lot about this, but one of the prices that we're paying in doing this is we are reducing the amount of our open to buy and in some of our new products and some of our new seasonal items certainly in the back of last year and even in the first half of the this year in order to accommodate the placement of some of this backroom merchandise out on the floor.

And so there is a downward pull if you will on comp sales as a result of that.

We are living through that.

We're working through it and we are not whining about it because we're doing the right thing.

Our turns are up a little bit and as I said three years ago, I think our inventory turns can be higher than they are and I think our balance sheet -- while we generate a lot of cash flow, I don't think we are as efficient as we should be and so we're working on the balance sheet.

We are not ignoring that, but there is a little bit of a P&L drag in the short term and I'm not using that as an excuse for Q1.

Q1 is that plus many any other issues.

But I am just saying there is a little bit of a drag because of that.

Is this something we should expect for the rest of the year?

Yes, these efforts continue.

Okay.

In terms of your guidance, your implied guidance for the rest of the year, obviously it suggests that you expect improvement sequentially going into the third and then obviously into the fourth quarter.

David Perdue, you laid out a number of factors that are negatively impacting you.

When you look out to that implied improvement into the back of the year, which of those items are you looking to improve and which items might you think you're not necessarily looking for improvement?

That's a great question and let me try to address it as directly as I can.

I think Beryl will have a little -- he has got some new players.

We have a new Senior VP of our home, seasonal, apparel.

We have seen some improvement in our seasonal performance fairly quickly.

I think we can -- we plan to have a lot of changes in the home and apparel area, which could have a positive impact in the back half in terms of mix.

We think that we're putting -- well, we are putting some things in place that we think can give us some benefit in the shrink and in the transportation expense and so forth.

We are working on communicating with our customers, which could impact the traffic.

Certainly that is the intent.

So those are some of the things that we're working on.

The markdown probable issue will probably continue through the year.

And some of the cyclical issues -- for example, trip consolidation.

I don't know that there is any -- we are not planning on that changing frankly because of higher fuel prices and so forth.

I don't think anybody in retail really knows how that is impacting them right now.

I would think that large boxes should benefit from trip consolidations.

I am not clear on that because of the results.

It is just not that obvious that that is happening.

I think eventually the small box neighborhood locations, trip consolidation could benefit as high fuel costs, at least from that standpoint, could come back and settle out to where we actually can benefit.

But I don't think that is going to happen in '06.

So I think I've addressed most of the issues that we talked about there, but the biggest one is that I think our merchandising effort will begin to have more impact in back half than obviously it had in first half.

Having said that, these efforts in merchandising, some of them like private label and sourcing and others, are multi-year efforts.

So because I'm calling it out doesn't mean that I'm projecting that I'm going to see a panacea in fourth quarter.

Fourth quarter, as you know, for the last 10 years or so, has been an extremely difficult quarter for Dollar General from a comps sales standpoint, etc.

We are looking to change that trend this year.

We're working hard right now to be more competitive during that period of time.

That's all I can tell you.

However, there are some secular issues out there that address -- that are impacting it.

We're not burying our heads about it.

Number one, we have increasing minimum wage labor laws going in in various states out there.

We are addressing that.

Transportation is out there.

That will change the way we locate and build our distribution centers and how we run our network of replenishment.

But we think there are opportunities to address all of those things.

So the cyclical and the secular issues are ones that we are identifying and I would say it is an outgrowth really of running from being up say the first nine months last year where we had really good comps to have such a really bad quarter in fourth quarter.

It has sobered all of us in terms of our evaluation of some of these cyclical and secular issues that relate to our model.

But we still like our model.

I still see the long-term need for it and I still think that what we are looking at here is some imbalances short term that we are working through.

Thank you and good luck.

Operator, that completes our Q&A.

Thank you, everybody.

We appreciate your support and interest in Dollar General.