達樂 (DG) 2008 Q1 法說會逐字稿

Good morning ladies and gentlemen.

This is the Dollar General first quarter 2008 conference call on Tuesday, June 17, 2008.

at 9:00 a.m.

Central time.

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

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

No other recording or rebroadcast of this session is allowed without the Company's permission.

It is now my pleasure to turn the call over to Emma Jo Kauffman, Dollar Generals Senior Director of Investor Relations.

Ms.

Kauffman, you may begin.

Thank you Operator, good morning everyone.

In a moment Rick Dreiling our Chief Executive Officer and David Tehle, Chief Financial Officer will discuss the Company's 2008 first quarter financial results and update you on our operating priorities.

After they speak you will have an opportunity to ask questions.

Before they begin let me take a moment to reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Our comments on this call will include forward-looking statements such as those about future operating and financial performance and expectations regarding store growth and capital expenditures.

Although we believe the forward-looking statements are reasonable, they are subject to significant risks and uncertainties, accordingly we cannot assure you that they will prove to be correct or that any trends noted in today's call will continue.

Important risk factors that could cause results to differ materially from those reflected in the forward-looking statement are included in our Form 10-K filed with the SEC filed March 28, 2008.

In our press release issued June 16, and in the comments that will be made on this call.

Statements made in today's call are accurate only as of today's date.

You should not assume that the statements will remain correct at a later time.

Dollar General undertakes no obligation to update any information discussed in this call.

In addition, we will refer to certain measures not derived in accordance with GAAP including EBITDA and adjusted EBITDA, reconciliations of these measures to net income are included in our press release issued yesterday which can be located on our website at DollarGeneral.com under investor information, press releases.

EBITDA and adjusted EBITDA should not be considered alternatives to net income, operating income, operating cash flows or any other performance measure determined in accordance with GAAP.

Because not all companies use identical calculations these presentations may not be comparable to other similarly titled measures of other companies.

We encourage you to consult our Form 10-Q filed with the SEC on June 16, 2008, for our definition of EBITDA and adjusted EBITDA along with the limitations on the use of these measures as analytical tools.

Now I will turn the call over to Rick Dreiling.

Rick.

Good morning and thank you for joining us.

We have had a very busy start to 2008.

Since our last call I have had the opportunity become more fully immersed in the Dollar General culture and I'm happy to say that everything I've seen so far confirms my original impressions, we have a strong and compelling business model.

A solid foundation on which to build and great opportunities are ahead of us.

I will begin today's call by sharing some of the key financial highlights from the quarter.

Then David will go over the first quarter financial results in detail.

Following that, I will return to update you on our operating initiatives, and our plans for the rest of the year.

Turning to the first quarter highlights, we reported a 5.4% increase in same store sales, with positive comps in every geographic region in which the Company operates.

We expanded gross margin to 28.8%.

Which represents a 102 basis points of year-over-year improvement.

We reduced SG&A expense by 150 basis points year-over-year, and we generated year-over-year adjusted EBITDA growth of 28%.

We are encouraged by this strong start to our year.

Some of our initiatives have begun to take hold and we are developing momentum across the business as we move forward.

I cannot say enough about our team here at Dollar General.

Everyone has pulled together and we are collectively focused on addressing the challenges and maximizing our opportunities.

Despite the recent changes we still have a lot of work to do.

We are mindful of the difficult economic environment that is impacting retailers and customers alike.

Macroeconomic conditions are continuing to be challenging across the country.

We are monitoring these trends carefully and recognize that retail trends could get worse.

In particular, consumers have been delaying or avoiding discretionary purchases as they battle high fuel prices and inflation.

We believe that this is putting pressure on sales of our higher margin nonconsumable products.

That said it's worth noting that with 18 years of consecutive annual same store sales growth and a strong start to 2008, Dollar General has proven itself to be a resilient Company, one that has performed well in both good and bad economic times.

We see an opportunity to show new and existing customers what our Company is all about and solidify Dollar General as the value retailer of choice.

During this period of uncertainty, we are focused on staying relevant to our customers by providing the quality products, convenient locations, low prices and customer service that they prize.

Thus far our efforts in this difficult environment have proven successful.

In fact, in the first quarter our stores generated growth both in customer traffic, and average transaction size.

I will be back in a minute to give an update on our operating priorities that we outlined in the last call.

But now I would like to turn it over to David for a detailed overview of the quarter's financial results.

David.

Thank you, Rick.

Good morning everyone.

Sales for the first quarter were $2.4 billion, up $128 million or 5.6% from last year.

With a same store sales increase of 5.4%.

That compares to a 2.4% increase in same store sales in the first quarter of '07.

Same store sales accelerated through the quarter with comps of 4.6 in February, 2.3 in March and 10.4% in April.

Because of the complexities of the Easter shift we are providing monthly comp numbers to give additional insight into business but we do not intend on giving this level of detail on a going forward basis, i.e.

we don't want to get back in the business of getting monthly comp sales.

We had a very strong start in the second quarter too, with 9.3% comps for the month of May, continuing the lease and trend of increases in both traffic and ticket.

Gross profit as a percentage of sales increased to 28.8% in the first quarter from 27.8% in the first quarter of '07.

Most noteworthy components of our gross profit rate improvement were lower markdowns and decreases in shrink and damages.

As you know fuel prices have been high and continue to rise.

In the first quarter of '07 last year, diesel fuel averaged $2.66 per gallon.

This year in the quarter they averaged $3.78 a gallon, and the average price of diesel today is $4.69.

We have been able to offset much of the impact of the fuel price increase through better trailer space utilization, expansion of backhaul opportunities, and improved fleet management.

SG&A for the quarter increased $4.8 million from the prior year, but decreased as a percentage of sales to 24.2%, in the '08 quarter, from 25.4% in the '07 quarter, or 115 basis points of improvement.

SG&A in the '08 period includes $10.3 million of noncash amortization of leasehold intangibles, capitalizing in connection with the merger with KKR as well as approximately $6.8 million of severance costs.

SG&A also includes about $3.2 million of other new ownership related costs such as the KKR management fee, and certain consulting and legal expenses.

In comparison SG&A in the '07 period included about $29.3 million of Project Alpha store closing and inventory clearance expenses and $6.3 million of transaction and other merger related expenses incurred prior to the merger.

Excluding the impact of the items I mentioned SG&A improved by 44 basis points, primarily attributable to our ability to hold tight on variable expenses even with an increased rate of sales.

We also have lower advertising expenses in the quarter.

As expected, interest expense increased by $95 million, due to the interest on long-term obligations incurred to finance the merger.

For the first quarter we reported net income of $5.9 million compared to net income of $34.9 in the first quarter of '07.

And our reported EBITDA, increased by $62.9 million to $168.8 million.

After adjustments, as defined in our credit agreements, adjusted EBITDA, increased $39.8 million or approximately 28% from last year's first quarter.

We continue to have good news on inventories, as of May 2, the quarter end, total inventories were $1.32 down $127 million or about 9% from the first quarter of '07.

On an average per store basis this is a decrease of 10%, from a year ago, reflecting the elimination of pack away inventories in our own seasonal and apparel in addition to improvements in our merchandise planning and allocation.

Our accounts payable inventory ratio increased to 45% in the first quarter of '08 versus 34% in the first quarter of '07.

As you can see we have made considerable progress, in our working capital management.

We had total outstanding debt at the end of the quarter of $4.18 billion including the current portion of long-term obligations, this includes $2.3 billion outstanding under our senior secured term loan.

We paid off our asset based revolver in February, and have had no additional revolver borrowing since then.

We currently have excess availability under the revolver of $857 million, and we also have approximately $212 million of invested cash.

In the quarter we generated $151.6 million of cash through operating activities.

This reflects our strong operating performance in the quarter and improvements in our working capital management particularly in accounts payable.

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

Given our success in debt pay downs and EBITDA growth our ratio of long-term obligations to adjusted EBITDA has fallen from 7.1 times to 5.8 times since the merger closed in July of '07.

We spent $35.4 million for capital expenditures in the first quarter.

Including $15 million for improvements and upgrades to existing stores, $7 million for remodels and relocations, $6 million for new stores.

$4 million for distribution and transportation related CapEx and $3 million for systems related to capital projects.

In the first quarter we opened 73 new stores, and relocated or remodeled 125, bringing our total store count at the end of the quarter to 8265.

Now turning to our outlook.

We are committed to achieving our previously announced operating initiatives.

We intend to grow sales, expand gross margin, and manage expenses in 2008.

We continue to plan to open 200 new stores, and to relocate or remodel 400 stores.

Lastly, we continue to anticipate our capital expenditures, will be in the range of 200 million to $220 million for the year.

With that I will now turn the call back to Rick for an update on operating priorities.

Thank you, David.

As you can see, we had a solid start to the year, and our customers are responding to our efforts.

As outlined on the last call we are focused on executing four very basic operating priorities to maximize Dollar General's potential.

I would like to briefly detail the progress we are making on each of these priorities.

I want to continue to stress that while we've accomplished a great deal, there is much more to do.

Our first priority is to drive productive sales growth.

As we mentioned, we were successful in both driving traffic and basket size in the second quarter, and this trend has accelerated into the second quarter.

We are intently focused on improving store standards.

In the first quarter we instituted a model store program to demonstrate what a Dollar store should -- Dollar General store should be.

Bright, clean, well stocked, properly merchandised and reflective of the new Dollar General standards.

Through a series of in person group conferences, the management team and I have met with all 550 of our District Managers to outline the Company's four key operating priorities and introduce the model store program and how it will be executed.

In addition, we work to increase shopper frequency by adding more consumable items to our shelves.

We have also timed and distributed ad circulars more strategically.

We continue to focus on driving basket size and are evaluating our offerings in home, apparel, sundries and seasonal goods to maximize the potential in these areas.

We continue to recognize the need to be more trend relevant to better meet our customers aspirational needs.

As we move into the back part of the year you will begin to see this reflected in the stores.

Finally, we continue to work at improving square foot productivity by freeing up end displays, eliminating flex space and improving merchandise adjacencies.

We've completed the planning and product selection for 70 new planograms and have begun to roll them out into our stores.

We expect this will be completed by late fall.

Our second priority is to enhance our gross margin through a variety of targeted initiatives.

During the quarter, we continue to work on reducing shrink by managing our inventory more efficiently and implementing processes to identify the sources of shrink.

While we are definitely seeing results, from our efforts, there is certainly room for more improvement.

We continue to see shrink as an opportunity.

We have also made strides to improve our sourcing.

For example we have began participating in online auctions to find and source better products at better values.

To date we have utilized the auction process for approximately $100 million of merchandise, supply and service purchases.

This has resulted in significant cost savings.

We're also taking a fresh look at how and where we source all of our merchandise.

In particular, we believe we can enhance our sourcing efforts in our nonconsumable categories.

We have continued to move forward on plans to enhance our private label offering.

During the first quarter we worked to refine our private label strategy, carefully choosing products and labeling and establishing a rigorous quality control protocol to ensure that our private label products are all of comparable quality to the brand name products that we offer.

By the end of 2008 we expect to have about 800 private label products available in our stores.

That's a net increase of 112 SKU's that will be visible throughout our highly consumable category.

And finally, we are continuing to refine our pricing strategy.

We are closely monitoring our competitor's price changes and we are also partnering with our vendors to leverage those relationships and manage product costs.

In addition we are working to improve our price optimization and our price management process.

Our third priority is to leverage process improvement and information technology in order to reduce cost.

During the quarter, our cost savings work group was tasked with identifying and removing expenses that are not critical to our customers or our operations.

To give you just a few examples of our progress, we have worked to eliminate unnecessary store expenses and have started planning a Company-wide green initiative to recycle cardboard which we expect will reduce our waste management cost.

Additionally we have worked to reduce the cost of taking store inventories and transportation costs.

We are pleased that our initiatives are helping keep expenses down and as David mentioned to date, we have been able to successfully battle the increased cost of diesel fuel.

Also, we continue evaluating the work processes of the retail team.

We are looking for additional ways to better engineer value driven protocols and streamline our store operations.

Our final priority is to strengthen and expand Dollar General's culture of serving others, we are on a passionate mission to make Dollar General a retailer and employer of choice.

During the quarter we worked to develop more consistent store standards and execute them across the chain.

We want to ensure that our customers have a good and consistent shopping experience in every store across the chain including the look and feel of our stores, the delivery of service and the availability of merchandise at everyday low prices.

As new initiatives are rolling out, we continue to explore and develop meaningful ways to measure customer satisfaction.

In addition, our employee turnover level has decreased significantly.

We continue to see reduced turnover throughout the organization, and are most proud of the fact that turnover among our store managers is down to 37%.

The lowest level in over ten years.

We believe that our recent process improvements, commitment to higher store standards and clearly defined expectation, have not only made our stores easier to run but have also increased a manager's sense of pride in operating them.

Finally, we have continued with our rich history of being active in responding to the needs of our communities.

In fact I'm sure you have seen that our Literacy Foundation recently donated $4.9 million to nonprofit organizations leading the effort to support adult literacy.

This is a longstanding focus for our Company and we are delighted to be committed to supporting such a worthy cause.

With over 8200 retail stores in 35 states we are able to reach out to a broad base of our customers and provide support in many of their communities.

We believe our strategic initiatives are beginning to have a positive impact on our employees, our customers, and our results.

We sense that our continued attention to the overall customer experience in our stores through service, quality, convenience, value, and consistency will protect and strengthen our retail leadership position and our brand.

Our team continues to be cautiously optimistic about the remainder of 2008.

We are continuing working to maximize the opportunities that each of our priorities presents and we look forward to updating you on our progress throughout the next several quarters.

With that I would like to open the call up for questions.

Operator?

Thank you very much.

(OPERATOR INSTRUCTIONS) Our first question will come from Grant Jordan, Wachovia.

Thanks for taking the questions.

It seems like there is a lot of positive things going on in Q1 particularly given the increase in margins and revenue.

You talked about a number of things and what's working.

I was wondering if you could call out what were the two or three main drivers in the big jump in profitability in Q1, was shrink, the reduction in shrink, was that a huge move for you?

Just trying to get a handle around what are the main drivers here.

Grant, I think as you look at us, we are not silver bullet operators, we have a lot of initiatives in play right now.

We are very fortunate in that we are seeing a lot of growth in the initiatives.

Shrink, I can't say enough about the retail team and the progress we're making on shrink.

However, we got a long way to go on it.

David called out the work on damages that we have been dealing with in the stores.

We are doing a much better job of managing mark downs.

When you look at the sales side of the equation, I believe the lower turnover we are seeing in the retail stores is helping drive a more consistent look and feel in the stores.

We made a lot of advances in store standards but we have a long way to go.

And it's very basic things like freeing up end displays so promotional merchandise can be put on them.

Timing of our ads.

We have a lot of positive things moving our way right now.

The other thing, Grant, we were able to level our SG&A very nicely in the quarter, that was due to both the volume being up as well as very tight expense control across the board.

We are starting to see the positives of that.

The other thing in the stores, obviously our stores are much cleaner, much more organized, we have a much more exciting presentation within the stores and our turnover rate of the employees is as low as it's been in ten years.

As you well know, when you have low turnover in your employees you tend to have better performing stores.

So as Rick said, I think we have many many items coming together here to give us the positive that we are seeing in the business right now.

That's very helpful.

Second question, maybe if you can just help us think about how Dollar General and particularly the consumable category works in the inflationary environment we are in.

I think you mentioned that you are continuing to examine your price strategy.

Have you actually moved prices up as we've moved through this period?

Yes, we are -- as we work with the manufacturer community and the vendor community we are working really hard on keeping our costs in line.

We are reengineering our consumable mix as we need to in order to hold costs down, retail down.

We are also working very hard on private label, which is a great alternative to our consumer and we feel that we are doing a better job of managing the cost of goods, doing a better job of interacting with the manufacturer community, and if we are not successful in holding the line we are doing what we need to do in passing those increase costs through in a more timely manner than we have in the past.

Then my last question, you mentioned the obvious significant improvement in working capital, clearly if these kind of trends maintain you're going to generate a decent amount of free cash flow.

What kind of priorities do you have in terms of how to use your cash?

We have two priorities, the first one is to take care of the operating needs and the capital needs of the Company.

The second one is to pay down debt.

We are in continuous discussions with our Board on the second piece of that n terms of what to do with paying down the debt.

Obviously we have a little bit of cash on the balance sheet right now.

We have a tendency to be -- again, a little bit conservative on that.

It's hard to say you're conservative when you have $4 billion of debt on your balance sheet.

We do our best to try to hold the line there in terms of our conservative nature on our cash.

So that's really what our plans are for it.

Great.

Thanks very much.

Thank you, Grant.

Thank you, our next question will come from Mary Gilbert, Imperial Capital.

I wondered if you could tell us what was the May 2007 comp increase so we can see what that 9.3% increase is going against?

Where does the average ticket stand currently?

At one point it was 9.31, is it closer to $10 now?

Yes.

Our average ticket came in right around $10, I would rather not be any more specific than that, Mary.

It's up about 4% over last year.

Okay.

Their comp number is--.

4.1.

We're up against a 4.1 comp in period four from last year.

4.1.

Strong comps against strong comps.

Also, the same trends in May where consumables is driving it in seasonal merchandise and basic clothing and how home goods are down?

Both categories?

No, we are seeing in May more of a balance between the categories.

Clearly consumables is still leading the way but we are seeing a little more performance out of the other three categories.

Okay.

So now you're starting -- so were the other categories up?

Or down less or flat?

Versus last year?

Yes.

They generally were up a little bit versus last year.

Okay.

Now some of those categories are starting to improve.

Okay.

When I look at cash on the balance sheet, as you pointed out, you don't need all this cash that you're showing on the balance sheet, right?

That's correct.

How much of it is cash used in operations actually that you need to keep -- to support the business and then how much of it represents really excess cash?

Well, the $212 million is all cash that we are investing right now, I mean that's cash that we could use to again pay down debt or to use for our capital expenditures as we move forward in the business.

Again, as we move forward we are going to look for ways to invest that cash.

We were probably a little bit overly conservative in the quarter with how much cash that we kept on hand.

So is it like a certain amount, like $30 million or something like that that you need to keep just to keep it in the stores and keep it--?

Probably like $70 million, something like that.

$70 million is the float?

Yes.

Okay, great, that's very helpful.

Great, that's helpful.

Then the $7.8 million of merger related costs is that primarily the 7s that you disclosed in the SG&A?

Yes.

Great.

Then how how much of that is going to continue as we move forward?

Are we going to continue to see that number in that magnitude?

Yes.

I would look at you and say Mary, that when the a CEO comes in they build a team.

I'm building what I would consider to be a cracker jack team of really high potential people and I don't really want to say there will be any more or any less but we are going to concentrate on building our team.

It's the cost of doing business to get the right players in here.

I understand that.

Fair enough.

Perfect.

Thank you very much.

Hey, thanks, Mary.

Our next question will come from Karen Eltrich from Goldman Sachs.

Couple questions.

First, I noticed on your website you have the rebate program for the stimulus checks.

Curious to see how that was formulated, what the vendor involvement is and if you think it's driving business into the stores.

Obviously May comps are amazing even in any environment, and how much of that do you think is a lift from the stimulus checks?

Karen, as I look at our comps, they started to accelerate prior to the rebate checks going out.

The rebate checks came out towards the middle or end of May.

They will run all the way until the middle of July.

So we are -- so we started seeing improvement in comps prior to that.

The other thing I would say is -- there is no doubt that people are spending that.

I wish I could tell you exactly how much I thought they were spending.

But I do know that our traffic is increasing.

I believe it's increasing because people are looking for inexpensive quality alternatives to where they've been shopping.

I believe Dollar General provides that.

And I also believe that with 8200 stores we are incredibly convenient.

That's -- we are fulfilling the need of someone having to drive a long distance to get the products we offer.

What kind of vendor partnership did you have for the rebate program?

Did you have a lot of vendors that were particularly eager to participate?

That program is vendor supported.

Also my channel checks, I've noticed extended hours on some of the stores.

I was curious to see is that something you're testing or is it more widespread, how long that's been going on?

We have a lot of initiatives underway as we seek to play on the convenience angle that we offer, Karen.

It's one of many initiatives.

Hey we are experimenting.

Final question, also my channel checks, I actually was pleasantly surprised to see no markdown tables particularly in the Spring.

If anything it looked like (inaudible) was actually out of stock.

Do you think you were a little too conservative in your ordering?

It's a high class problem to have, but definitely looked that way to me.

I think I will say two things, as you look at the fact that the Company went through the Alpha exercise last year, I think we might have been a little conservative on the placement of some seasonal ordering and you also have to take into account that we're seeing a nice increase in comps at the same time.

Congratulations on the quarter.

Thank you.

Thanks, Karen.

Our next question will come from (inaudible).

It's [Mike Shrekis with Longacre].

I was just wondering if you could talk a little bit about historically I think the dollar store segment has been negatively impacted by rising gas prices and now we are seeing maybe it's the rebate checks which are obviously helping out right now but I guess how are you addressing when you look backwards what happened with rising gas prices in the past and how are you applying it now?

One of the incredible things about Dollar General, it has 18 years of same store sales growth, Mike, irregardless of the economic conditions.

And that's something that I think has to do because of the quality products we offer, consistency in pricing, the everyday low price, and I believe when you roll in to 8200 stores, in convenient locations, I actually believe that while gasoline is a large part of our consumers spend from their income, the fact that we are so convenient, we are not a long way away.

I think that's why the Company's probably done so well over the last 18 years.

.

Then, just one other question was with regards to the inventory per store, how much longer -- it was a very good display this quarter on how far it came down, how long is inventory per store going to be declining in let's call it mid single digit range?

It seems like also, on top of that when I look at your competitors and where days and payables range you guys versus some competitors you seem to have a big opportunity to maybe increase days and payables, which would favorable to cash flow.

Can you just talk about that also?

On the inventory side, our inventory turns are at 5 right now, 5.0, versus 4.3 where they were in the same quarter last year.

We have made substantial progress.

A piece of that obviously is the Alpha project where we got away from the pack away strategy.

I think the biggest lump of inventory so to speak, has probably come out although we continue -- it's a continuous process for us in terms of looking at inventory and we're always trying to be more efficient in our allocation and how we take care of the stores on inventory.

On payables we made some changes last fall and last winter on the payable side with our vendors, and again, we are always trying to adjust that and benchmark with our competitors and what people do on a world class basis in the industry.

I think we've made some changes there and there is some potential for some further changes and some further work there.

However, I will say, on both fronts that we are very pleased with what we have done on working capital.

I wouldn't expect huge changes like you seen over the last 6 to 9 months.

Then just with the rising gas prices, with regards to deliveries, how often are you delivering to a store and has that changed at all whether you're dropping, four days a week, five days a week?

Most stores delivered once a week.

There are some stores--.

Okay.

There are some stores that are delivered once every two weeks.

Obviously that's something we look at.

Clearly we have to balance that out with making sure that the stores are in stock and they have the appropriate inventory, we haven't made many changes to our deliveries in terms of the number of deliveries to the stores.

We have done a lot on the transportation side to address the gas prices in terms of cube on the truck and trying to reduce stem miles and things of that nature.

We are very careful not to impact the stores in any negative way, something that might hurt our sales.

Thank you.

Thank you, Mike.

Our next question will come from Carla Casella, JPMorgan.

Hi, I'm wondering in the current interest rate environment whether you've hedged any of your bank line now at the lower rates?

We have two hedges in place, Carla.

We've got a $1.6 billion hedge, that's a five year hedge.

It was actually put in place right when the deal closed last July.

That's at 7.683%.

Then recently last quarter we did a $350 million hedge at 5.58%.

That's a two year hedge.

If you look in total about 92% of our debt is fixed right now and about 8% of it is floating.

Then I'm wondering if any of your stores are either positively or negatively impacted by the flooding?

We have four stores that have been impacted, but only two of them have actually sustained any really damage.

We have -- we service a lot of customers, there is is a lot of our customers out there that have been impacted.

And employees as well.

We have Carla, working with the Red Cross to raise some money and in stores for the relief and recovery efforts.

We are also donating some cleaning and other supplies to the victims.

Okay.

Great.

Then, you have a free cash flow sweep, do you have a estimate of -- actually I don't think you have a payment this year.

But do you have an estimate of -- actually, I don't think you have a payment this year, but do you have an estimate of how much you may have to pay in '09?

Or you should trigger that this year shouldn't you?

Well, that's something, obviously we'll take a look at as we get further along in the year we'll do that calculation in January.

It's a rather complicated calculation.

There are a lot of pieces to it and it can vary based on our leverage ratio at that time also.

At this time I don't have a estimate on that but we will certainly take a look at that.

Then if you were to prepay a term loan this year would that reduce the amount you would have to sweep for next year?

Yes.

Thanks.

Our next question will come from Emily Shanks, Lehman Brothers.

Good morning.

Morning.

Looks like you guys made a nice improvement on shrink.

Can you speak at all about which categories this was in and also if you're seeing any improvement particularly in the deodorant and Axe line?

The shrink improvement that we've seen has been very broad based.

You're calling out two categories that are very sensitive and we have seen improvement in them.

Then in terms of the outstanding DC lease negotiations, I noticed that it was noted in the Q that those discussions are ongoing, is there any time frame that we should expect to see a resolution?

I wish I could say there is, we are still in negotiations with the various players there and no there is no particular time line on that, obviously it's been going on for a while now.

Because of the nature of those negotiations there is really not a whole lot more I can say except we are doing our best to get that closed out.

We have no time period when that's going to happen.

Great.

Then if I could just ask around the Ashley River Insurance Co., we noticed that some of the -- some of those, the balance became a short-term investment.

Can you just remind us how exactly that particular entity works within the DG operations?

Right.

We use that entity to pay our Worker's Comp and recently the State of South Carolina is in the process of allowing us to take money out of that entity.

We had balances that we were holding.

And we are in the process of moving that and because of that we have the treatment now in the balance sheet where we reclassified where that is from geography point of view on the balance sheet.

What type of instruments is that invested in now?

The same government securities, money market funds, things of that nature.

Okay, great.

Then if I could just ask one final question.

I know last quarter we heard a lot of about the new Coke offering and we certainly have seen it in our channel checks, can you speak at all about how much you think that's boosting your comps?

I couldn't begin to make that guess.

What it really reflects is our commitment to having the right items in the stores that consumers are looking for.

We are pleased with the results, there is no doubt that it attracts a different customer from just Pepsi.

It's like everything else we have a lot of balls in the air.

Great.

Thank you, good luck.

Our next question will come from [Colleen Burns].

Hi, good morning.

The supply chain initiative that you mentioned that benefited gross margin in the first quarter, do you expect the benefits to continue in subsequent quarters and believe they will be sufficient to offset the higher fee costs?

We are being very proactive on managing costs all across the board.

Not just diesel fuel, not just transportation costs.

Our diesel full was up 65% in the first quarter versus the same quarter last year.

We are very focused, very committed to managing the cost and we're just going to have to let it play out as the year goes on.

Then I guess just broadly on gross margin, obviously a nice improvement in gross margin do you see this level as sustainable?

Just generally speaking?

Yes.

As we continue to work on shrink, the opportunities that exist in pricing as we continue to work with the vendor community on cost of goods we are really focused on sourcing, particularly overseas, we see opportunities for margin expansion.

Great, that's great to hear.

Then the increased accrued expenses in the first quarter, what is driving that increase, was that just a timing or anything in particular?

I think that's more timing than anything having to do with interest payments and things of that nature.

Interest can swing us on our accrueds pretty heavily, obviously.

Right.

Then just broadly, your expectations for working capital this year, and do you expect to have a source given the accounts payable payment terms and your focus on inventory management?

I would rather not be that specific.

I will say we continue to work for continuous improvement both in inventory and in payables, we are always looking for ways to be more efficient and again I believe the biggest problem that has occurred, particularly on the inventory side is what we did with the Alpha project.

Great.

Then just lastly I think you said you had lower advertising expenses in the first quarter.

What's your expectation regarding advertising expense for the remainder of the year?

We really don't want to comment on our advertising expense until the end of the year, particularly this year as we are really evaluating where we want to spend our money.

We are an EDLP operator, word of mouth is probably the best advertising we can look for.

Or encourage.

We are shifting circulars around to hit the proper timing in the month more.

So I would like for you to say, hey, stay tuned and we'll give you an update towards the end of the year on it.

Sounds good, thanks a lot.

Our next question will come from Charles Grom from JPMorgan.

Good morning.

Just on that last question, could you speak to your ad circular strategy in the first quarter?

Did you do more circs or was it just more efficiently managing the process?

It was more efficiently managing the process and timing the release of the circulars better.

Fair enough.

Then on your model store program could you quantify how many stores you've rolled that out to?

The comp lift that you've seen in those stores and expectations going forward on that program?

When I talk about model stores I need to clarify that, I don't want anybody on the call to believe that we are rolling out a new generation of store.

What a model store is is really us standing up and saying today, at the state of play this is exactly how the store should look.

It's what should be in it, how it should be merchandised and how we are executing.

We would probably have anywhere from two to three model stores in every district in the Company right now and this is a process we are going to work on and roll through as we get towards the end of the year.

Then, last question would be on mix 70% consumables this quarter, historically you guys have been much higher than your direct peers.

Just wondering, Rick, if you could comment on what you think the right mix is for Dollar General going forward over the next couple of years.

That's an excellent question, and one that we are continuing to work on and focus on.

I really don't know, I do know that we don't want to turn ourselves into a grocery store long-term, that we want to be a general store.

What I would like to do is have you give me the chance to work on the sourcing side and the nonconsumable side before we commit to what we think it should be.

Thanks.

We do have time for one more question.

It will come from (inaudible).

I have a few questions.

The first one, just on your pricing strategy, are you still using a national pricing model or have you moved to market pricing?

We are currently still using a national model.

Is a market pricing model something you're considering rolling out or any kind of time frame associated with that?

We are doing a lot of research and a lot of working pricing right now, I would like to leave it like that if I could

Okay.

Then just looking at the home category, I know in previous quarters you had mentioned that you felt it was -- the under performance was more related to the Company of product mix in that category.

I was just wondering if that's still your view and if you are still expecting it to rebound later in the year?

We are really focusing on being more trend relevant.

We have a lot of initiatives under way as we look at that category and some of the other nonconsumable categories.

We need to see how the year plays out.

Then lastly, just on your traffic, wondering if you think the increases are more a result of your current customers increasing their shopping frequency or if you think that you're benefiting more from customers trading down and coming to Dollar General instead of going to Target or other higher priced places?

I actually think it's a combination of both.

I don't think there is any doubt in these economic times people are looking for EDLP pricing, they are looking for consistent quality and I think we are attracting a segment we haven't before.

I also think with the increasing gas prices, our 8200 plus convenient locations that we are an easy stop for the other customers that we have, our current customers.

Congratulations on the quarter.

Thank you very much.

Well, with that I would like to thank you all once again for joining us today.

We appreciate your interest in Dollar General.

I look forward to updating you on our progress throughout the year.

Thanks again.