達樂 (DG) 2007 Q3 法說會逐字稿

Good morning.

This is the Dollar General Corporation third-quarter 2007 conference call on Friday, December 21, 2007 at 10:00 AM Central Standard time.

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

This call is being recorded by Conference America.

Under federal law, no other recording or rebroadcast of this session is allowed without the Company's permission.

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

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

In addition to historical information, comments today will contain forward-looking information such as expectation regarding the Company's operating and merchandising initiatives, ability to meet liquidity needs, store growth and performance in the fourth quarter of the fiscal year.

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

While the Company believes the assumptions underlying these statements are reasonable, any of these assumptions could be inaccurate and therefore actual results may differ materially from results projected or implied by the forward-looking statements.

The factors that may cause actual results to differ from the forward-looking information include, but are not limited to, those outlined in the Company's quarterly report for their third quarterly period ending November 2, 2007, which can be accessed at DollarGeneral.com under investing, financial reports, as well as factors discussed in today's call.

You should not unduly rely on these forward-looking statements, which speak only as of today's date.

Except as may be required by law, the Company disclaims any obligation to publicly updated or revise any forward-looking statement to reflect unanticipated events or circumstances occurring after this call.

You should consult any further disclosures the Company may make on related subjects in its public disclosures.

Beginning today's call is Mr.

Dave Bere, Interim Chief Executive Officer.

Sir, you may begin.

Good morning, everyone, and welcome to our call.

As usual, Dave Tehle, our Chief Financial Officer, is with me today to discuss our financial results.

As we're going to discuss, we have made a great deal of progress on our initiatives in the third quarter and through the end of the quarter, we are on target to meet our fiscal 2007 financial goals.

This morning, we're going to spend a few minutes with you to discuss the following -- first, review our third-quarter financial results; secondly, update you on the progress of Project Alpha; third, comment on a few of our more significant initiatives.

At the end, we will be happy to answer some of your questions.

Let me begin by saying that the merger with KKR continues to go well.

Management's working relationship with KKR has continued to develop into a strong partnership.

We are moving forward on the strategic initiatives that we mutually agreed upon prior to the merger and we continued to asses our progress using the 100-day plan model we have discussed previously.

We are also very pleased with our financial results in the quarter and year to date.

Let me give you some highlights.

Our same-store sales were up 3.7% for the quarter and 2.8% for the year-to-date period.

We're very pleased to report that, in the third quarter, both our average transaction amount and our same-store customer transactions increased.

Our gross profit in the 2007 third quarter was 28% compared to 23.8% in the 2006 period.

However, I do want to point out that the prior year included the initial lower of cost or market adjustment relating to Alpha of $71.2 million or 3.2% as a rate to sales.

Our SG&A in the quarter was 25.1% of sales versus 23.6% in the prior year quarter.

As David will discuss in a few minutes, after excluding some very specific items, our SG&A was up only modestly.

Our adjusted EBITDA for the quarter was $142.1 million, up 11.9% from the prior year.

Importantly, cash generation has been well ahead of expectations as we have been successful in clearing our inventory and we're doing a good job of managing our capital expenditures and other working capital accounts.

Also, I am pleased to report that Project Alpha is almost complete.

As a reminder, all of the 403 underperforming stores identified in Project Alpha were closed by the end of the second quarter.

We have substantially eliminated our historical inventory packaway strategy.

At the end of the third quarter, almost all of our packaway inventory has been sold except certain holiday items and winter apparel that we expect to sell in the current fourth quarter.

The second element of the inventory management portion of Alpha was to be able to sell through all current year seasonal merchandise in a timely manner.

We're very pleased with the progress we have made and we are on track to have nearly all fresh merchandise as we move into 2008.

We are also moving ahead on several other key merchandising initiatives that I'll discuss in a few moments.

Now, I will turn it over to Dave Tehle to give you some more detail on the financial results.

David?

Thank you, Dave.

Good morning, everyone.

I hope you have all had the opportunity to read our quarterly report that was issued yesterday afternoon.

If you have not seen the report, you can find it on our website, DollarGeneral.com, under investing and click on financial reports.

The financial statements in that report include the results of the predecessor company through the date of the merger and the successor company subsequent to the merger.

Of course, the entire third-quarter 2007 period falls in the post-merger successor period.

For comparison purposes only, we will discuss the combined results for the predecessor and successor for the periods presented in the statements of operations.

Let's start with sales.

Sales for the third quarter were $2.31 billion.

That is an increase of $99.4 million or 4.5%.

Same-store sales increased 3.7%, contributing $77.1 million of the total increase.

We define same stores as stores that have been open at least 13 full fiscal months and remain open at the end of the reporting period.

Year to date, total sales were up 4.8%, including a 2.8% increase in same-store sales.

Gross profit.

For the quarter, our gross profit increased by approximately $120.4 million or 22.9% from the prior year period.

As a percent of sales, gross profit increased to 28% in the 2007 period compared to 23.8% in the 2006 period.

The '06 amount reflects the initial $71.2 million lower of cost through market inventory valuation adjustments that Dave mentioned earlier.

This adjustment was 3.2% of '06 period sales.

The remainder of the increase from the prior year period was due to various factors, including higher purchase markups, which were partially offset by higher markdowns, including the incremental markdowns related to eliminating the packaway strategy.

We are on schedule to achieve our plans with regard to sales of existing packaway inventories by the end of '07 and we intend to continue our initiative to sell virtually all current year, non-replenishable merchandise by taking end-of-season markdowns to permit increased levels of newer currencies and merchandise in the future.

For the 39-week period, our gross profit increased by approximately $180.8 million and our gross profit rate increased 27.4% from 26.0% in 2006.

Again, the '06 period had the Alpha-related below-cost markdowns of $71.2 million, which was about 1.1% of sales.

The remainder of the increase in the '07 period resulted from various factors, including higher purchase markups.

There was some offset by higher shrink and higher markdowns, again related to eliminating the packaway strategy.

SG&A expense.

For the quarter, SG&A expense increased $57.1 million from the prior year period and increased as a percentage of sales to 25.1% in the '07 period from 23.6% in the '06 period.

SG&A in the '07 period includes $10 million related to amortization of leasehold intangible assets capitalized in connection with the revaluation of those assets, an increase over the prior year and employee incentive compensation expense of $5.3 million.

That is resulting from us meeting certain financial targets to date, an accrued loss of approximately $3.4 million related certain distribution center leases also.

As a reminder, at this point last year, there were no bonuses accrued under the Company's incentive compensation program.

SG&A in the '06 period was net of insurance proceeds of $7.9 million received during the period for business interruption insurance coverage related to Hurricane Katrina.

Excluding the impact of the amortization, the distribution center-related expenses, incentive comp and the hurricane, SG&A as a percentage of sales increased moderately from last year.

The remaining increase in SG&A primarily relates to current initiative such as increased store maintenance, mainly floor cleaning, and consulting expenses, including our KKR monitoring fee.

For the 39-week period, SG&A increased by $174.5 million to 25% of sales from 23.5% of sales in the '06 period.

SG&A includes approximately $54.3 million in the '07 period related to expenses incurred in connection with closing the remaining stores identified in our November 2006 strategic review.

That includes lease contract termination costs, incremental labor and advertising, repairs, fixed asset disposals and payments to third-party contractors.

In addition, SG&A in the '07 period includes the amortization of $13.4 million resulting from the capitalization of below-market leases in the asset revaluation and $12.3 million of accrued employee incentive compensation expense.

Again, we had none of that in the '06 period.

That again resulted from meeting certain financial targets to date.

There was also approximately $12 million relating to the probable loss associated with the restructuring of leases related to certain of our distribution centers.

SG&A in the '06 period was net of insurance proceeds of $13 million received during the period for business interruption insurance coverage related to Hurricane Katrina, partially offset by an $8 million impairment charge related to the strategic store closings.

Excluding the impact of the amortization, the store closings, the distribution center expenses, incentive comp and the hurricane, SG&A as a percentage of sales was essentially flat.

Interest income and expense.

Interest income increased by approximately $0.5 million in the 13-week period and $2.7 million in the 39-week period due to higher levels of cash and short-term investments on hand.

Interest expense of $112 million for the 13-week period and $158.8 million for the 39-week period reflects increases of $101.1 million and $131.8 million respectively for the quarter and the year-to-date period, primarily in the successor period resulting from interest on long-term obligations incurred to finance the merger.

As we noted last quarter, the successor period also includes the operations of Buck Acquisition from its date of inception.

The only significant item in Buck is the impact of interest rate swaps and the related tax effect of the swaps.

While we did not incur significant merger-related expenses in the third quarter, other than a loss on the interest rate swaps, I would like to remind you of merger-related expenses, which are included in our statement of operations, most of which were incurred in the second quarter.

$0.9 million in the 13-week period and $102.6 million in the 39-week period are reflected in a separate line called transaction and related costs within operating expenses.

$39.4 million of this total is compensation expense related to the accelerated vesting of stock options, restricted stock, and restricted stock units.

The remainder primarily represents professional fees such as investment banking and legal fees.

There is a $6.8 million nonoperating loss in the third quarter and a $2 million loss in the 39-week period resulting from interest rate swaps entered into by Buck prior to the acquisition.

We recorded a $6.2 million nonoperating loss resulting from the tender in the second quarter for our $200 million of 8 5/8% notes, which were due in 2010.

This was primarily consent fees paid on the notes, of which over 99% were tendered.

Last, we recorded an $8.6 million charge in the second quarter and an additional $3.4 million charge in the third quarter included in SG&A expenses to reflect our current estimate of probable loss in connection with the expected restructuring of three of our distribution center leases and the purchase of the related D.C.

equipment.

These items are not expected to impact the future operation of the Company and along with other items as described in our quarterly report have been added back on our calculation of adjusted EBITDA as defined in our new credit facility.

I'll talk a little bit about the balance sheet now.

We believe we have substantially completed the allocation of the purchase price of the Company to the balance sheet and there were a few fairly minor changes from the balance sheet shared with you at the end of the second quarter with the majority of these changes being classification changes among various noncurrent asset accounts.

Inventories as of November 2 were down about $190 million or 11.3% from a year ago.

The majority of this improvement is from the execution of Alpha, but we have also added a heightened level of discipline to our buying processes.

The increase in inventories of approximately $81 million over the second quarter primarily relates to new seasonal inventories for the fourth-quarter holiday season.

Some information on debt now.

We had total outstanding debt at the end of the quarter, including the current portion of long-term obligations of $4.51 billion, including $2.6 billion outstanding under our senior secured credit facilities.

Year to date through the third quarter, we generated $168 million of cash from operations versus $19.8 million in the same period last year with most of the improvement related to better inventory management.

We believe our cash flow from operations and existing cash balances combined with availability under our new credit facility will provide sufficient liquidity to fund our current obligations, our projecting working capital requirements and capital spending over the foreseeable future.

Importantly, given our success in debt paydown and EBITDA growth, our leverage ratio has fallen from 7.3 times to 6.6 times since the transaction closed in July.

The leverage ratio was calculated using total debt outstanding over adjusted EBITDA.

As of this morning, our tranche A borrowings were zero.

Our tranche A-1 was zero and we have about $28 million of cash invested.

Our calculation of adjusted EBITDA, which is a material component to the calculation of certain covenants in our new credit facility, is included in our quarterly report.

Adjusted EBITDA increased 11.9% to $142.1 million in the 2007 13-week period from $127 million in the '06 13-week period.

On a year-to-date basis, adjusted EBITDA increased 9.3% to $430.2 million in '07 compared to $393.7 million in the '06 period.

Adjusted EBITDA and the leverage ratio that I discussed that's based on adjusted EBITDA are non-GAAP measures.

We have provided a reconciliation of adjusted EBITDA to net income in our quarterly report.

We encourage you to review the reconciliation along with other disclosures regarding the limitations of this nondebt measure contained in the quarterly report under the heading adjusted EBITDA and MD&A.

Now I would like to turn the call back to Dave to wrap up.

Thank you, David.

As you can see, we are pleased with our third-quarter performance and with the progress we've made on our strategic initiatives.

Elimination of the packaway strategy not only allows us to stock our stores with newer, fresher merchandise, it also contributed to an overall improvement in the appearance of our stores and increased job satisfaction for our store managers and employees.

Just as sidenote on that, we are pleased with the fact that we have had a significant decrease in store manager turnover since last year.

As you know, we've worked closely with KKR during and subsequent to the merger.

As we discussed last quarter, we have defined our top six initiatives as follows -- one, better merchandising and category management; two, improving our real estate processes; three, refining our existing pricing strategy; four, increasing direct foreign sourcing; five, improving our private-label offerings; and six, continuing to improve our store standards.

And controlling shrink remains a critical effort for all of us.

As we have talked about before, we have formed teams within the organization to lead us in our efforts with regard to each these initiatives and we have defined very specific operational and financial benchmarks to facilitate and measure our progress on these initiatives.

We are continuing to make very good progress and we expect to show measurable favorable results from our efforts in 2008.

I hope that many of you have taken the time to visit some of our stores.

I think you'll notice some exciting improvements.

Finally, as we wind down the Christmas season, we have been focused on giving our store teams the support and resources they need to help us generate a successful fourth quarter in a very difficult and uncertain economic climate.

Thus far, we have been generally pleased with our efforts.

The Christmas sets are fresh and appealing.

We've been able to offer our customers some great toys and other gift items at great prices and our stores are clean and well-stocked.

At the same time, we know we face some challenges this holiday season.

We have a tough comp comparison in the fourth quarter.

We are up against a 5.8% same store sales increase in 2006 and the environment is tough with retailers fighting for every sale.

We're facing some aggressive competition in the holiday season, as well as some difficult and unpredictable weather issues.

Despite this, I think we will hold our own through December.

By the way, we will update you on the results of the fourth quarter when we release our quarterly and year-end earnings.

Despite the current retail pressures, I'm confident that as we prepare for 2008, we're probably focused and that we're doing the right things for the long-term success of Dollar General.

Now I will be happy to answer some of your questions.

(OPERATOR INSTRUCTIONS) Grant Jordan, Wachovia.

Great.

Thanks for taking the questions.

First is just a follow-up.

Did you say that, as of today, you had no borrowings under the revolver?

That is correct.

So that is on the whole revolver, no borrowings?

Okay.

My second question, you touched on it a little bit.

Part of the -- I guess one of the big issues when the deal came was you had pro forma to a certain markdown level that you thought was going to be appropriate going forward.

Can you just update us as to how that has performed versus your plan as you have gone to the non-packaway inventory strategy?

Yes, I would be happy to comment on that.

Right now -- and obviously we're putting together our budgets for next year and looking at a lot of data.

Everything seems to indicate that our assumptions that we had when we were going away from packaway are correct both in terms of what it would take to clear that inventory, as well as on an ongoing basis what it will take to go to a clearance strategy on our nonreplenishment items.

So we have not seen anything that would lead us to believe that we are going to see something substantially different from what we anticipated when we put those plans together last year.

Okay, can you give us any color as to why apparel looked so strong during the quarter?

Overall, we have been very pleased with apparel not only in -- for the quarter, but year to date and it continues to show very strong trends.

There have been a lot of things.

We did a reset on the men's underwear earlier in the year.

Ladies is significantly up due to some new items, including scrubs.

Our shoes are way up.

We had the clogs out there and that is continuing to do well.

On the men's side, the collegiate wear has been very successful.

Not only that, we've significantly reduced inventory with the strong sales.

So we are very encouraged by the apparel performance.

Great.

Then any update on the CEO search by KKR?

Yes, this is Dave Bere.

As you know, the selection of a permanent CEO certainly rests with the Board.

Therefore, I do not have any insights of where they really are in the process.

I can tell you that in the meantime, I and the management team are very focused on the financial performance and driving the initiatives that we've talked about and this really has not been a distraction.

Okay.

Then my last question, obviously very strong performance in the quarter, particularly against the backdrop of retail and some of your competitors.

Do you feel like you are taking marketshare or taking more marketshare from your competitors or just more from your consumers' wallets?

I think that -- I really don't know the marketshare.

What I can say is I think that our whole concept of value and convenience continues to play well and I'd have to say that we have seen a marked improvement in our store standards and I think that has a lot to do with it.

Again, this is the first year that we changed a lot of our merchandising, and so I think it is a combination of the model of value of convenience with the store standards, as well as the new merchandise.

Great, thank you for the details.

Appreciate it.

Karen Eltrich, Goldman Sachs.

Thank you.

Congratulations on the quarter.

Maybe you can give us some updates on some of the other longer-term initiatives such as the SKU rationalization, implementation of zone pricing and direct sourcing.

Yes, let me deal with each one of those.

All three of those are very important and a lot of work has been done on each one of them.

Let me begin with the SKU rationalization.

As we talked about last time, we are running a test of significantly reducing our SKUs, our low profitable SKUs.

Early indication of that test has been very positive and there are some things that have worked extremely well there and there are some things that we need to continue to work on, but we continue to feel that we have real opportunity on the SKU side.

On the pricing side, as you remember, there are really two pieces to the pricing.

One is to really improve our capability that we can look at competitive pricing a lot more on an on-time basis.

We're doing that and we are able to react a lot quicker now to price changes in the marketplace and that's going to benefit us.

Regarding zone pricing, we are looking at several ways to test that and again, there's different types of zone pricing, but as I think we talked about last time, we certainly have the capability to do that.

So we feel very good about that initiative and again, will have huge impact I think in 2008.

Foreign sourcing, again, that continues to -- we feel that continues to have a lot of potential.

We have already started to increase our foreign sourcing.

I know there has been a lot in the press regarding quality and pricing and despite those things, we do not think that is going to be barriers.

We feel we continue to have huge opportunities there.

That is all great.

Final question -- having been to several of your stores, I have noticed the increased focus on shrink by your employees.

They all mention it.

How big of an opportunity is that?

What initiatives are you putting in place to kind of get that back down?

Yes, we do think there is opportunity for shrink.

Shrink is slightly up this year, but we've had a lot of initiatives in the last six months or so.

We've put a team together that is totally focused on this.

We are relooking at our practices.

I think cleaning up the stores is going to have a huge impact on this.

I think store manager turnover is going to have a huge impact.

So we are hopeful that in the coming years that we will be able to reduce shrink.

Can you put a percentage improvement that you're targeting?

No, I do not think -- we historically have not disclosed our shrink number, nor any targets, but we will improve it.

Great, thank you very much.

Colleen Burns, CIBC World Markets.

Hi, good morning.

In light of your new merchandise strategy to clear out the seasonal merchandise, can you update us on where markdown levels are currently?

Are they in line with your expectations?

Yes, the markdown levels are pretty much in line with where we thought they would be at this point.

Okay, then just a follow-up on the revolver question.

Do you expect to have nothing on your revolver at year-end or do expect to tap into it for working capital for the first half?

I don't really want to give projections going forward here on debt level, so I'm going to stay away from that.

I would rather just give you the facts of where we are today.

Okay, then just lastly, can you give a sense of how comps progressed throughout the quarter?

Were they stronger in the beginning of the quarter versus the end?

Have you seen any changes in consumer purchasing behavior since quarter-end?

We will have to get back to you on that.

I think it got a little stronger toward the end of the quarter, but I'm not totally sure.

Okay, thank you.

Karru Martinson, Deutsche Bank.

In terms of the aggressive competition that you were citing, what exactly are you seeing in your markets?

Is it more discounting, couponing?

How are you going about combating that?

Well, I think, first of all, we do not have any hard evidence yet of what is happening in the marketplace, so I think what we appear to be seeing is heavy discounting by some of our competitors.

I think the way we combat is stick to our strategy, and our strategies is everyday low price and we have felt all along that the best way to combat that is to stick to that strategy.

Are you seeing some other retailers -- Wal-Mart Springs to mind -- coming into your space with their discounting?

Or is it really just the traditional competitive guys?

I think it is the traditional competitive thing.

In fact, we really have not seen a significant change in the pricing environment.

Our competitors go up and down on occasion, but generally that has been historically true, so we really have not seen any dramatic difference in pricing strategies.

Capital expenditures for the year seem to be a little bit lower.

Is that just a timing issue or there are some delays in terms of the projects that you are undertaking?

I think it's more timing than anything else.

We say in our document that we posted we are anticipating about $150 million to $180 million of capital expenditures.

We continue to invest in our distribution center productivity and technology on the IT side.

We invest in software that helps us advance our business, particularly in merchandising.

We have capital per store enhancement, some of which we've talked about related to shrink with closed-circuit TV and burglar alarms.

We continue our relocations and remodels to drive sales and a whole variety of other things.

So I think it is more timing than anything.

Okay.

In terms of the addbacks here, we are done with the store closures; we are pretty much done with Project Alpha.

So next quarter should be a clean quarter from you guys.

There will still be some Project Alpha.

We're not quite done with that.

As Dave mentioned, there's still some apparel and a few other items that we will get rid of between now and the end of January.

So there still will be some of that.

Just lastly, housekeeping, since we know there is nothing wrong now on the revolver, I was wondering do you have a current cash balance as well?

Yes, I think I mentioned that actually, that it is $30 million or something like that.

Thank you very much.

Carla Casella, JPMorgan.

Did you say many stores you were looking to open in the fourth quarter and the remodels?

It looks like you are ahead of where we had expected you to be at this point in the year, so it is a slower pace now to the end of the year?

Yes, it probably will be.

We have opened 323 new stores year-to-date and we have relocated/remodeled 214.

And traditionally, we do slow down as we hit the end of the year.

Obviously, we are focused on the holiday season and keeping the store people working on that.

So we are pleased with where we are and what we have accomplished to this point.

Have you given any sense of your plans for next year?

Now that you have completed the store closure program, approximately how many stores should we look on a run rate for you to open annually?

Yes, we don't publicly talk about our stores, but what we have said, we said on the roadshow that we are going to get better before we get bigger, so that for a few years we were going to slow store growth down.

There is no question, though, that in the future we think we have a lot of opportunities to continue to grow stores.

Okay, great.

That's helpful.

Then on the inventory front, you mentioned packaway inventory.

Do you have the dollar amount of how much inventory right now is packaway?

And does that mean you will take a -- as you sell that off, you will take a charge again in the fourth quarter, or should we be done with the packaway inventory charges?

No, there will still be some charges, and we don't disclose the exact amount of that inventory, but there will be a small amount that will be done as we close out the year.

Okay, great.

Also on the inventory front, can you give us a sense for how much of your inventory right now on your balance sheet would be seasonal or holiday-related merchandise, either in general terms or specific, if you have got it?

Again, we don't really give that amount of detail out.

I am sorry.

Okay, that is all right.

Then did you give an exact shrink number?

You talked a lot about shrink.

Did you give the number of it, what percent?

No.

Okay, and you don't disclose it?

No, we don't.

Okay, great.

Thanks a lot.

One quick follow-up to a question we had on the business in the third quarter on the sales; the comp grew as we got to October, just to give you a little more flavor.

August and September were fairly solid in terms of their level, and then it did jump up when we hit October, so there was some increase in business as we got towards the end of the quarter.

Emily Shanks, Lehman Brothers.

Good morning.

Just a couple of follow-ups from points that have been touched upon already.

Around the CEO search, I understand that that stands with the Board, but can you comment at all if there is actually a time target that they have in mind to make a decision?

Again, I don't have that -- obviously, that is a board decision and since I am an internal candidate for that, I really don't have any insight to that.

Okay, thanks.

Also on the CapEx question, I understand around the timing and thank you for that explanation, but just a question; going forward at one point in time, I think you had conveyed to the market that the right number was kind of a 2% to 3% of sales.

As we look forward, is that really a good run rate to think about still?

I don't think we have changed our viewpoint on that.

Obviously, as we do our individual budgets for each year, we will phone in on that and see where we are.

But again, you can look at what we are saying this year and how we see the past years, and I think we are still comfortable with that.

Great.

Then just one follow-up housekeeping question.

Is there any way you can give us what you know adjusted EBITDA to be for 4Q '06?

I am sorry, can you say the question again?

Is it possible to give us what your calculation of adjusted EBITDA is for 4Q '06?

No, you will get it next quarter.

Okay, thanks.

Duncan Vise, AIG Investments.

Good morning, guys.

A few questions.

First is I was just seeing if you maybe could give us any color what your view of the consumer or the demand in your store levels in your rural markets versus your urban markets.

Are you seeing any kind of differentiation there?

No, we haven't.

I think that both our rural markets and our metro markets are performing about the same.

Okay.

From a competitive perspective, do you feel that they are about the same as well, or do you feel that your rural markets are helping you in terms of being more defensive?

Well, you have a balance there.

Clearly in the metro market, you have more competition, but you also have higher population centers and so the opportunity to increase the sale.

So those two balance each other out.

Okay.

I was trying to get a sense just too, as well, for gross margin sequentially.

I've had a hard time kind of really discerning whether or not gross margin in your fourth quarter is higher than what you would typically see in your third quarter.

Can you comment on that?

Is that something we should expect?

You can go back and look at our history, and obviously, fourth quarter contains holiday, and holiday traditionally has a lot of seasonal product that is sold, and seasonal product generally has higher margins than our other categories.

so you can kind of take a look at that.

Again, we're not going to give a forecast on that.

But historically, you have seen higher gross margins in the fourth quarter.

Historically, we sell more seasonal that has higher margins in the fourth quarter.

Obviously, you would have to look at each fourth quarter and see; there could be other factors that happen that might offset that.

But historically, if you look at the types of items we sell, the mix of seasonal is higher in the fourth quarter.

Okay.

Then just lastly, you have paid down debt this quarter.

You paid down a lot of debt in the last quarter, and you're talking about a clean revolver balance.

I guess as we look into '08, clearly this is a priority for you guys today.

How long should we expect you to focus on -- is there a target in terms of where you want to see your leverage go or your debt paydown go to, or just any kind of color you can give us on debt repayment?

Yes, we continue -- obviously, those are some pretty heavy discussions we have continuously with our equity sponsor.

And I think at this point, we are not going to share a specific target except to say that, obviously, we are going to continue to work that issue and figure out what makes sense for the business in terms of driving the most value for the business going forward.

Okay, thank you.

[Howard Goldberg], Brownstone Asset Management.

Good morning.

My first question would be if you can give us a little bit of perspective on what the typical Dollar General customer looks like.

Obviously, interested in how you think they stack up from a financially, economically.

I guess we all have a perspective about what your typical customer is, but I thought to hear it from you could be especially helpful.

I think there's a few characteristics of our customer.

The first just from an income standpoint, the majority of our customers are in the $40,000 to $50,000 range.

And just to remind everybody, that half of our population is at the $50,000 range.

So we think we have a very broad customer base, primarily women in that, and obviously people looking for value and convenience.

So is there something about your customer that you think is different than some of your competitors where you have been able to outperform so broadly over the last couple of quarters?

I think -- that is a good question.

I think as we discussed on the roadshow, one of the reasons we really like this model is that historically, this company has really performed consistently in both good and bad economic times, and this year has been no exception.

As we look at our same-store sales for the third quarter and we look at our same-store sales year-to-date, we tend to outperform our competitors.

And I think that the primary reason for that, I go back to the reason we exist, and that is I think the combination of value.

We have a model that even in our nonconsumable business, we really stick to basics and of convenience, and couple that with the friendliness in our stores.

So I think that's what has driven this model for the last many, many years.

It is what has driven it this year, and it is going to continue to drive it in the future.

Thanks.

One other question that has come up a couple of times.

You have commented on the reduced turnover for your store level employees, district managers.

Can you share with us some of what you are doing to reduce turnover, what kind of steps you're taking?

Yes, I think we are taking numerous steps, and this has been a real initiative in the last few years.

I think, first of all, I think we have improved the working condition with Project Alpha.

We have cleaned up the back rooms, so it is just a lot more pleasant working environment.

A few years ago, we had EZ Store, so it made it a lot easier for us to unload our trucks, which made it better on our store employees.

I think thirdly, we have done quite a bit of leadership training on our district managers and hiring practices of both our district managers and our store managers.

So I think it is a combination of a lot of things that have driven this number.

And this is a big deal because there is a direct relationship between store manager turnover and other huge benefits, including sales, shrink and things of that nature.

That is great.

Thank you very much.

[Danny Chang], KKR Financial.

I just have two quick cleanup items, like what were cash taxes and cash interest expense during the quarter?

Could you speak up?

We missed that question.

I just have two quick cleanup items.

What were cash taxes and cash interest expense during the quarter?

Thank you.

We will get that for you.

Hello?

We will have to get back to you on that.

We will get that for you.

All right.

Thank you very much.

We will look it for you.

Thanks.

Mike Shrekgast, Longacre.

I was just wondering on the gross margin, you guys had taken some write-downs earlier this year for product, and was just wondering are you seeing better margins on items that you had written down?

Yes, you know, obviously, if the item has been written down and we sell it, yes, you would see a little bit of a better margin on that.

I think, though, in the quarter, one of the things that really drove the margin was our PMU, our purchase markup.

And we had better PMU across practically all of our departments due to better buying and some mix changes done by our merchandising people.

So I think a lot of what you saw in the gross margin was real-time better purchasing that we are doing now than what we had done previously.

Okay.

Then can you just talk about your accrued expenses have been a source of cash and have been a growing source of cash throughout the year.

What is going on there that that has been such a source of cash and working capital?

Accrued expenses, again if you look at our balance sheet that we posted, there was a pretty big jump from February to November, and it is predominantly the interest accruals.

Obviously, we're paying a lot more interest right now, and so that is a big piece of it is the growth in interest.

And then there are property tax accruals in there, as well as other tax accruals additionally.

Okay, thank you very much.

[Anne Wehrheim] from Van Kampen.

I was just wondering if you could give us an update on the home products category.

I know you said last quarter that you were revising product offerings, and it still looks like there was a little bit of weakness this quarter.

So I was just wondering if you could give us an update with that.

Be happy to.

As you suggest, the home category especially versus year ago has not done as well as our other categories.

I will say that as I said last time, this is driven more by a shift of strategy than any other -- than economic factors.

We have greatly reduced our exposure in noncore, high-markdown risk categories.

The fact is historically, we were just way too broad in our assortment.

And so when you look at our core items for the quarter, things like mops, brooms, storage items, windows, curtains and things of that nature, we are actually showing some positive comps.

Of course, a big piece of Alpha was clearing out some of the home products, especially in the giftware category, figurines, small novelty, things like that.

So I think you will see -- we have already seen a rebound in our core items, and you will see a rebound in the total category in 2008.

Okay, great.

Thank you.

Mary Gilbert, Imperial Capital.

A couple of things.

One, so when we are looking at the adjusted EBITDA of, I guess for the latest 12 months it is around $682 million.

So you're sort of saying that in looking at the business, once we have completely worked through the packaway, the Alpha initiative to eliminate the packaway strategy and we have normal markdown activity, that that is indicative of what the profitability of the business is on a go-forward basis?

I think what it is indicative of is for the prior 12 months how the business performed, taking out those items; not only the packaway but the transaction expenses and then the expenses from shutting down the stores.

The unprofitable stores, right?

Right.

Okay.

So, in other words, when we look forward, that kind of margin is something that we should sort of expect, barring any other significant factors; is that fair to say?

Well, again, you are asking for a projection.

And all I can say is that, again, we present that to kind of show a basis of how we think the business is tracking under the new model if we take out those specific expenses.

Okay.

The other thing is could you help us in looking at average borrowings throughout the year?

Especially since the Company's sort of newly leveraged, we don't have a lot of history on figuring out what the average might be throughout the year.

So could you help us with that, and then looking at the peak and trough?

Yes, I can help you with -- I can talk directionally about it.

If you look at historically our borrowings in the business, we tend to peak our borrowings in the late October, early November timeframe, and then that tends to come down as we reach the late December/January timeframe, and then come up a little bit and hold constant, again, until we hit the next October/November time period.

The reason for that is that our biggest purchasing takes place for the holiday season, and obviously, we do all of that purchasing and the bills come in in the October/November timeframe, and then the cash from those items comes in in the December/January timeframe.

Okay.

So then when we are looking at an average number -- that is sort of what I was trying to get to -- could you kind of give us sort of a rough level of what we should look at for average borrowings on the revolver?

You know, I think we're going to stay away again from giving a direct number there, a direct forecast.

I would just say that you could anticipate the borrowings to be at their lowest point in the December/January timeframe, and then again start to reach the peak as you reach October/November.

Okay.

I guess I will kind of work through those numbers.

The other thing is how should we look at cash costs, either restructuring or other kind of cash costs in 2008, and also working capital, changes in working capital?

Again, in terms of restructuring in 2008, I don't know of any significant restructuring at this point in time that would cause us to have cash costs.

But yes, I don't think there would be -- again, who knows what might happen.

But as of right now, obviously, we're trying to get most of that behind us in 2007.

Okay.

So you are saying we shouldn't have any kind of miscellaneous cash costs that we have to consider flowing through the statement of cash flows.

What about on the working capital side; are there continued opportunities in terms of inventory reduction, or is that something we will see relatively stable year-over-year in terms of looking at the overall working capital changes?

There are always opportunities in the inventory area.

I will say we made tremendous strides this year, both with the Alpha effort in terms of taking that inventory out, as well as the changes that our merchandising area has done in their buying and staying very close to that.

So I think we're made tremendous improvements this year.

Is there room for some improvement next year?

Sure, but again, we are pretty happy with what we've done this year and the levels that we have been able to get our inventory down to.

So we should sort of look at changes and working capital as being relatively flat unless we have some inflation; is that kind of fair to say?

Again, like I said, there is always some room for improvement, but I think the majority of that improvement we have done in 2007.

Okay.

What should we use for like a cash tax rate?

Again, I don't think we are prepared to give that level of guidance.

All right, great.

Thank you very much.

Brian Broadband, Highland Capital.

Just a couple of questions.

On paying down the revolver, did you see receive the -- I guess it is a tax refund that is on your balance sheet, and did that contribute to some of the paydown?

Yes, I think we received -- I'm trying to remember how many dollars -- there was a piece of it that was related to that.

Obviously, the biggest piece of it is just the everyday business in our sales and controlling expenses and things of that nature, but there was a piece related to taxes.

Okay, thanks a lot.

Reade Kem, Merrill Lynch.

Just had a couple of housekeeping items.

I was wondering if you could tell us how many stores were in the same-store sales count, as well as your selling square footage and what you accrued in rent for the quarter.

Thanks.

Could you repeat that questions?

Yes, just wanted to give the number of stores that were in your count when you measured the same-store sales growth in the quarter, and then just what you ended the quarter with as far as the square footage, and then what your rent number was for the quarter?

And then maybe while you are looking at that, I could ask another one.

We don't have that level of detail in front of us.

Okay.

Maybe I can follow up with you offline.

I was also wondering, you have about 5% of your store base I think in Florida, and a good southeastern component.

I was just wondering specific to that area, especially given housing, are you seeing anything particular going on with your customer down there?

No, we have not.

We have been pretty consistent on our performance across the country, and Florida is very consistent with that.

So we have not seen any economic impact impact our business in Florida or anywhere else.

Okay.

Then within the categories, I didn't hear you comment specifically on seasonal within the quarter.

That grew at a slower rate than the other categories.

It is small, but I was just wondering what may have been going on there and what are the biggest categories within this particular quarter in seasonal?

First of all, I think just on a broad comment on seasonal, this is the first year -- we had a lot of seasonal items that went through Alpha, and this is the first year that when you look at Halloween, Valentine's and Easter, this is the first year that we have had clean sets.

And overall, we feel pretty good about the performance that we have had in our seasonal items.

And obviously, the big seasonal items here in the fourth quarter is Christmas.

Okay.

Last one is just that you overlap with your main dollar store competitor.

Could you just define for us what you look for us what you look at as sort of a market area and what your overlap is with them -- I'm talking about Family Dollar -- and then whether you think you cater to a different customer, because it sounds like their customer is pooping out a little bit here?

Thanks.

First of all, I can't remember the exact numbers of where there is an overlap.

I think it is in the 30% to 35%, but I would have to check that.

I can't speak for Family Dollar; I can only speak for us.

And I think that we just made a lot of improvement in our store standards and a lot of improvement in our merchandising.

Thank you very much.

One final answer to a question; cash taxes in Q3 were around $600,000.

Thank you very much, everybody, and have a wonderful holiday.

This concludes today's presentation.

You may now disconnect your line.