達樂 (DG) 2008 Q3 法說會逐字稿

This is the Dollar General Corporation third quarter 2008 conference call on Wednesday, December, 3, 2008 at 9 AM Central time.

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

This call is being recorded by Conference America.

No other recordings 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 General's Senior Director of Investor Relations.

Good morning everyone.

In a moment Rick Dreiling, our Chairman and Chief Executive Officer, and David Tehle, Chief Financial Officer, will discuss the Company's 2008 third quarter financial results and deliver a brief update on our operating priorities, as well as share some thoughts on the fourth quarter.

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

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

Today's comment will include forward-looking statements, such as those about operating initiatives, sales and store growth, margin expansion, expense management, inventory levels, capital expenditures, future operating and financial performance, and the anticipated shareholder litigation settlement.

Because such statements are subject to significant risks and uncertainties, we cannot assure you that they will prove to be correct or that any trends will continue.

Important factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in our Form 10-K filed with the SEC on March 28, 2008, in our third quarter 10-Q, in our third quarter financial results press release issued this morning, and in the comments that will be made on this call.

Statements made in this call are accurate only as of today's date, and may not 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, as well as the calculations of SG&A improvement, excluding certain strategic and merger-related items, and the ratio of long-term obligations to adjusted EBITDA, are included in this morning's third quarter press release, 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 most recent Form 10-Q 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.

Good morning everyone, and thank you for joining us today.

We're very pleased to report strong results again for the third quarter.

David will provide more detail on our results in just a moment, but I wanted to review some key highlights of the quarter.

Same-store sales were up 10.6%, marking our second consecutive quarter of double-digit comps.

We expanded our gross margin rate by 175 basis points to 29.7%.

We reduced our SG&A as a percentage of sales by 68 basis points, and our adjusted EBITDA for the quarter increased by 61% to $228.6 million.

These results reflect Dollar General's commitment in this difficult economic environment to serving our customers and improving our operations.

They reflect a constant focus throughout the organization on our four basic operating priorities.

One, driving productive sales growth.

Two, increasing our gross margin.

Three, leveraging process improvements and information technology to reduce costs.

And four, strengthening and expanding Dollar General's culture of serving others.

Our customers are responding well to the changes we have made in our stores, which include improvements to store appearance, the introduction of new products and planograms, and the expansion of our private-label offerings.

Importantly, our commitment to providing quality product and great value in a conveniently located customer friendly, small box environment continues to resonate well with our customers.

With that, I will turn the call over to David to take you through the financial details of the quarter.

Good morning everyone.

As Rick said, we had a great third quarter.

Sales for the third quarter were $2.60 billion, up $286.1 million or 12.4% from last year.

Highly consumables sales increased 16.6%, basic clothing increased 4.1%, seasonal sales increased 3.0%, and home products increased 1.7% from last year.

Same-store sales increased 10.6%, with positive comps in all four of our merchandising categories in every geographic region.

Increased traffic and average ticket each contributed significantly to the sales increase.

As Rick mentioned, our customers have reacted favorably to the changes we have made this year.

While it is difficult to quantify the financial impact of cleaner, neater, more organized and better merchandised stores, we believe the improvements in store appearance contributed to our performance this quarter.

We have also experienced favorable customer response to our merchandising and other store operations initiatives, including extended store hours, new and expanded merchandise planogram resets and new impulse racks.

Our gross profit rates in the 2008 third quarter was 29.7%, compared to 28% in the 2007 quarter, an increase of 175 basis points.

This increase was the result of higher average markups, improved inventory shrink, lower markdowns, and improved transportation and logistics efficiencies, which more than offset fuel cost increases, and an additional $15.7 million non-cash LIFO charge resulting from continued inflationary pressures.

We continue to work closely with our vendors to eliminate unnecessary costs, but some increases have been unavoidable.

We have been effective in taking price increases this year as appropriate to offset those rising product costs.

Markdowns in the '08 quarter were in line with our expectations, and we continued to make good progress in reducing shrink.

For the quarter the average price of diesel was $3.97 per gallon, an increase of 34% from the '07 quarter, but down from the all-time high of $4.67 per gallon last quarter.

We continue to offset much of the impact from increased fuel costs through better trailer space utilization, expansion of backhaul opportunities, and improved fleet management.

Of course, higher sales volumes also contributed to our ability to leverage transportation and distribution costs in the quarter.

SG&A improved 68 basis points to 24.4% of sales in the '08 quarter, from 25.1% in the '07 quarter.

This is the first full quarter that we anniversaried many of the merger-related costs.

However, the '08 quarter includes approximately $6.5 million of incremental merger-related expenses consisting primarily of severance and legal expenses.

SG&A in the '07 quarter included $7 million of Alpha-related strategic store closing costs, and a $3.4 million accrual related to distribution center leases which resulted from the merger.

In addition, both '07 and '08 quarters include $10 million of leasehold intangible amortization.

Excluding these strategic and merger-related items, we leveraged SG&A by 42 basis points due to the impact of higher sales volumes, in addition to having lower workers compensation expense, lower waste management cost resulting from our cardboard recycling efforts, and lower depreciation expense.

The impact of these improvements was partially offset by higher incentive compensation associated with our 2008 financial performance.

Our third quarter statement of operations reflects a charge of $34.5 million, net of anticipated insurance proceeds, relating to the proposed settlement of the shareholder lawsuit that arose out of the merger with KKR.

We have reached an agreement in principle with regards to a proposed settlement, although the terms of the settlement are subject to the negotiation of definitive documentation and approval of the court.

We believe this is beneficial to the Company in order to avoid costly and time-consuming litigation and to put this matter behind us.

For the third quarter of '08 we reported a net loss of $7.3 million, after recording the $34.5 million charge related to the shareholder lawsuit, compared to a net loss of $33 million in the '07 quarter.

Adjusted EBITDA, which is defined in our credit facility, and is considered a material component to the calculation of certain covenants, was $228.6 million, up $86.5 million or 61% from last year's third quarter.

Now I would like to comment briefly on our year-to-date results.

Year-to-date net sales were $7.61 billion, up 9.7% from the prior year, including a same-store sales increase of 8.8% on top of a 2.8% same-store sales increase in the comparable '07 period.

While sales have been driven primarily by highly consumables, year-to-date same-store sales are positive in each of our four merchandising categories and in every geographic region.

Year-to-date gross profit increased by $320.3 million to 29.2% of sales, compared to 27.4% of sales in the '07 period, an increase of 177 basis points.

Major contributors to our year-to-date gross margin expansion include higher average markups, a decrease in inventory shrink, lower markdowns, and leverage on our distribution and transportation costs, partially offset by a $31.8 million increase in our LIFO reserve.

SG&A decreased as a percentage of sales to 24.1% in the '08 period from 25% in the '07 period, an improvement of 91 basis points.

Excluding certain merger-related and noncomparable items between the two periods, we leveraged SG&A by 46 basis points.

These items are detailed in a table in our third quarter financial results press release that we issued this morning.

Year-to-date net income for '08 was $26.3 million, compared to a net loss of $68.2 million for the combined pre and post merger 2007 period.

Year-to-date '08 EBITDA was $531.3 million, compared to $230.7 million in the '07 period.

As a reminder, net income and EBITDA in the '07 period were impacted by $102.6 million pretax of transaction and other merger-related costs.

Our adjusted EBITDA was $637 million in the '08 year-to-date period, up 48% from the '07 period.

Year-to-date we generated $261.1 million of cash from operating activities, resulting primarily from our strong operating performance and improvements in working capital management.

We have spent $159.7 million on capital expenditures year-to-date, including approximately $99 million for improvements and upgrades to existing stores, $22 million for remodels and relocations, $15 million for new stores, $11 million for systems-related capital projects, and $9 million for distribution and transportation upgrades.

Our first priority for use of cash flow is investing in our business, because we believe it is the best return on investment.

And we expect to continue to invest in our capital expenditures and our inventory as long as we can keep the turns up.

Through the third quarter we opened 175 new stores and closed 23, bringing our total store count at the end of the quarter to 8,346.

We have also remodeled or relocated 356 stores this year through the third quarter.

Now moving to the balance sheet.

As of October 31, total inventories were $1.62 billion, up 9% in total or 7% on a per store basis from the year ago period.

This increase in inventories is primarily due to higher store inventory levels needed to support higher sales volumes, as well as the rollout of the new planograms.

Through the end of the third quarter our sell-through of seasonal items and the related markdowns were on track with our expectations, although we remain cautious with regard to the possible outlook for sales of discretionary items in the fourth quarter.

That being said, we continue to manage our inventory levels closely.

More than offsetting the increased inventory, our accounts payable to inventory ratio increased to 44% at the end of the third quarter, up from 37% in the year ago period.

Inventory turns on a fourth quarter basis were 5.0 times compared to 4.6 times a year ago.

We had total outstanding debt at the end of the quarter of $4.18 billion, including $2.3 billion outstanding under our senior secured term loan, with no borrowings under our asset-based revolver.

Our ratio of long-term obligations to adjusted EBITDA has fallen to 4.7 times from 7.1 times at the close of the merger in July of '07.

With regard to the remainder of this year, we're committed to achieving our previously announced operating initiatives with regards to growing sales, expanding gross margin, and managing expenses.

We continue to anticipate our capital expenditures for the year will be in the range of $200 million to $220 million, which includes the opening of an additional 25 to 30 stores and the relocation or remodel of approximately 45 stores in the fourth quarter.

Before I turn the call back to Rick let me summarize.

Not only has the Company performed extremely well in an environment that is challenging for consumers and retailers, but we are also continuing to strengthen our financial foundation.

Our operating priorities are focused on increasing the financial productivity of our stores.

The results of these efforts are reflected in our numbers, same-store sales, gross margin, SG&A and EBITDAR.

Our debt to adjusted EBITDA ratio has decreased 34% since the merger, with no borrowings outstanding under our ABL revolver at quarter end.

And we continue to see opportunities for even further improvement.

With that, I will turn the call back over to Rick.

As David just highlighted, we had a very strong third quarter.

Our operating initiatives are continuing to gain traction, and the current economic landscape is driving more consumers to Dollar General.

To leverage this, we are intently focused on helping our customers make the most of their spending dollars as we were to keep our prices low, while maintaining the selection of products that our customers prize.

We believe that our strategy is allowing us in this difficult time to prove to both our new and existing customers that they can count on Dollar General for quality, value and convenience.

While we are encouraged by the third quarter results, as we look ahead we remain cautious about the fourth quarter and the holiday season, because of the many challenges and the uncertainties posed by the economy.

We believe Dollar General is more prepared for the 2008 fourth quarter than it has been in many years.

We are pleased with the continued decrease in employee turnover in our stores, which has helped us accelerate the execution of our operating priorities.

Our stores look better.

Our inventory shrink is down significantly.

And our recent sales results indicate that our customers enjoy shopping more at Dollar General.

We're glad to see lower gasoline prices, which we hope will have a positive impact on discretionary consumer spending.

We continue to watch trends very closely so that we can respond quickly and appropriately.

And at the same time we will continue to manage our business and execute our priorities to capitalize on current market conditions, while driving toward long-term productivity of the Company.

In preparation for the holiday season we began our marketing and advertising campaigns earlier this year to let customers know that Dollar General is an ideal destination for many of their holiday decorating and gift giving needs.

We launched our Millionaire Sweepstakes chainwide in October.

During the holidays we plan to announce a Dollar General customer as the winner of $1 million.

This contest highlights our great selection of holiday merchandise, national brands, and our newly improved private-label offerings, while also driving customers to our recently redesigned website, where they can find great gift ideas, decorating tips and savings on everyday necessities.

From an inventory management perspective, our planning and allocation processes for seasonal merchandise are much improved from last year.

And we are also able to react more quickly with regard to competitive pricing.

Customer response to the ad we released on Sunday, November 23, announcing our great holiday values, was very favorable.

Our stores opened early on both Thanksgiving and "Black Friday", and we are pleased and encouraged by the sales we experienced in both of those days.

Finally, I would like to announce the appointment of Todd Vasos as Chief Merchandising Officer.

And with his appointment our leadership team is now complete.

Todd started this week, and comes to Dollar General from Longs Drugs, where he most recently was Executive Vice President and Chief Operating Officer.

We are excited to have Todd join the Dollar General team.

And as we begin to wrap up fiscal 2008 and prepare for 2009, we believe he will have a major impact.

In summary, we have always been there for our customers through both good and challenging times.

Dollar General's purpose is to provide basic consumable needs at everyday low prices in a convenient shopping environment, helping our customers to make the most of both their time and their budgets.

We intend to support the needs of our long-time customers, as well as our new customers, throughout this difficult and volatile economic environment and beyond.

I would also like to thank all of the dedicated employees at Dollar General for their hard work throughout the year, and especially during the holiday season.

It is their teamwork and their commitment that enables us to carry out our mission of serving others and to accomplish our operating priorities and financial goals.

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

Operator.

(Operator Instructions).

Emily Shanks, Barclays Capital.

You had very nice gross profit margin improvement.

I was hoping you could give us just a sense of what the magnitude of that improvement by way of contribution was between the average higher markups as well as the decreased shrink?

We don't break that out specifically in terms of the basis points.

As I mentioned in the prepared comments, the markup, which -- I will give you a little bit of flavor on what the markup is.

The markup was provided by sharpener purchasing on the part of our merchants, as well as some higher rebates we were able to get from our vendors, as well as some pricing initiatives that we took.

Then after that the inventory shrink and the lower markdowns versus last year also had a pretty large impact on margin.

And then followed by the improved transportation and logistics costs, some of the things we are doing to increase cube in the trucks, and change our transportation routes and things of that nature.

So hopefully that gives you a little bit more flavor of what makes it up.

If I could add anything, as you all think about our growth in our margin is a lot [up] front.

We have a private-label initiative.

The work we're doing on negotiating with the vendors.

The work that is being done on the warehouse and transportation side and the work on shrink.

So we're trying to keep all of those balls in the air.

That is definitely helpful.

Is it fair to say that we should think about their weighting by order that they were listed, is that fair?

They are all pretty important, the ones we listed there, yes.

In terms of -- as I think about next year's store growth, can you comment on how many new stores that you are already locked into the leases for fiscal year '09?

We will -- at the end of the fourth quarter -- well, the next time we have a call, we will lay all of that out on the table.

And what we would like to do is wait until that time.

Fair enough.

If I could, just one last final question.

You had mentioned that shrink was seen across all geographies.

Can you speak to any trend differentials across the country, some stronger than others, recognizing, of course, that all were positive?

We are seeing, it is -- in my many, many years of retailing we are seeing pretty consistent growth in every region we are in.

There is really no region outperforming the others.

We are seeing really, really solid performance everywhere.

Karru Martinson, Deutsche Bank.

When we look at the SG&A, should we consider this the runrate going forward or are there other initiatives here that you feel that could have a meaningful or similar type reduction going forward?

We always look at cost savings and SG&A.

Currently we talk about our cardboard recycling and what that has done for us, but we have initiatives in every aspect of the business.

We look at our real estate area.

We look at our common area maintenance.

We look at our property taxes.

In shipping we look at our UPS charges.

We look at our inventory services, travel services.

We don't -- we scour everything, and hopefully every quarter we can make some improvements in our costs.

I'm not going to give guidance here for next year, but we have a continuing effort to control and reduce costs in this Company, and I don't see that changing at any point.

And that is not even mentioning the sourcing initiatives that we have going on in the cost of sales side of the business.

When we look at the shareholder lawsuit, just to be clear, we're done with the expenses -- we're done with the settlement, maybe a little bit of leftover.

That is how we should be looking at that?

That is exactly right.

Just as you guys are driving traffic and certainly impressive comps, are you seeing your new products -- people coming to you in terms of the merchandising, is there anything that you would single out as drivers here?

We're very fortunate right now.

And while the evidence that we have is more anecdotal, we are seeing new customers and we are seeing our customers that historically have come in, coming in more often.

There is no doubt that the new planograms that we have rolled out, the new items we have added, our new private-label operating, are definitely driving traffic into the store.

Just lastly, with fuel costs coming down and benefiting your consumers, would you expect to see a benefit from that as well?

Yes.

As we're looking at the drop in fuel costs, you're taking an item that the consumer was dealing with, that they have to have, gasoline being down $1 a gallon, one can argue that puts more discretionary income into their pocket.

And it should bode well.

And in terms of your own cost structure?

We're definitely seeing declines in the price of diesel.

It definitely will help our distribution and transportation costs as we move forward, assuming that it stays down, of course.

It is hard to predict what it will do in the future.

Grant Jordan, Wachovia.

Congrats on the very strong numbers.

I guess my first question, as you look at the quarter, obviously very strong comps.

Can you just directionally give us a thought as to how those comps played out over the quarter?

And maybe if you have seen any significant changes in consumer behavior since the end of the quarter?

The comps tracked pretty much consistently across every week.

They did not accelerate.

They did not de-accelerate.

As I have said in my notes, we were happy with what happened in the organization on Thanksgiving Day and "Black Friday".

It seems like you have definitely taken a stance to put more holiday merchandise on the floor, maybe more in the toy area particularly.

Have you seen any early customer response to that?

I assume that flows through with your comments about Thanksgiving and "Black Friday".

We actually put our holiday merchandise into the stores earlier this year, which gave us a better job of being -- it put us in a position of the being able to have a fuller assortment more quickly.

And in regard to the toys, much the same thing.

We put the toys into the stores earlier.

And one of our strategies going forward is to be in the seasonal business earlier.

And I think some of our sales numbers reflect that.

My last question.

I believe now that you are down under 5 times leverage, you don't have to pay anything off on the free cash flow sweep under your bank loan agreement.

What are your thoughts about excess cash going into next year?

And do you still think we'll see a good debt pay down after the end of the year?

You are correct in your assumption there on the cash sweep.

Our first priority is investing in our business, as we have said, because we believe it is our highest return on investment for our dollars in terms of capital expenditures to support the business and inventory to support our customers.

We are okay holding some excess cash right now due to the volatile environment that we are in, and we think being conservative is actually prudent.

Clearly we will continue to evaluate our business trends over the next couple of quarters.

And we are in continuous discussions with our equity sponsors, and we will consider a debt buyback when it is appropriate.

We have not backed away from our long-term objective of deleveraging the Company.

Clearly taking down the debt is a key long-term objective, and it is obviously still on our radar screen.

Karen Eltrich, Goldman Sachs.

You guys, obviously very impressive across the board.

I think that it was expected you would do well in consumables, but obviously all categories are doing well.

And particularly standing out was apparel.

What do you think in merchandising you are doing right, because it was particularly impressive relative to your competition?

Do you attribute it to merchandising, to layout, products, what you think you got right there?

There's a couple of things going on.

Number one, I think our stores are much cleaner and much more orderly than they had been in the past, which believe or not enhances the shopping experience, and allows us to be in a position where the product in the store can be the star.

I think also we are doing a -- while we have a long way to go, we're doing a better job of sourcing and a better job in the quality of product we have at the price we're offering it at.

As you -- particularly as you reflect on what has taken place in regards to the improvement in store standards, albeit we have a ways to go, we're getting trial from customers who haven't been in the store in a while.

And they are coming in and they are going, oh, my gosh, this isn't the Dollar General we had two years ago, or I was in two years ago.

It is laid out properly.

They are seeing fresher product.

Because of the Alpha strategy last year the past pack away is all gone, and there is fresh merchandise there.

I think a couple of other things also would be the lower turnover of the store employees.

We have a more experienced workforces out there.

And it helps take care of the customer better when they come into the store.

Then our signage is better in the stores too, so people can find things easier.

And it is a little more appealing to them, particularly in some of the nonconsumable areas.

Final question.

Not to be greedy, given how good these results are, but it has definitely exceeded our expectations far earlier.

As we look at some of the margin opportunities you had outlined at the time of the deal, it seems like for a lot of them you are just kind of hitting the tip of the iceberg.

Is that a fair assessment?

If you look at things -- [it says] SKUs rationalizations, direct sourcing, zone pricing, are we early on still in some of those initiatives?

If this was a football game, we're still in the first quarter.

Fair enough.

Thank you very much.

And congratulations, Rick, on your new appointment.

Thank you, Karen.

Colleen Burns, Oppenheimer.

Nice quarter.

On the private-label side I think in the second quarter you said your penetration was about, I think, a little less than 16%.

Did you see that number increase in the third quarter?

Yes.

Our private-label penetration in the third quarter is at 20.2% now.

And that is compared to last year at 17.2%, so we saw a nice acceleration through the quarter.

That's great.

Do you see that as the main driver of further improvement in gross margin as you look ahead?

Yes, I think there is -- we have many, many opportunities on our margin side.

And there is no doubt private-label will play an ever-increasing role in that as we move through 2009 and beyond.

Then just lastly on the competitive front, have you started to see any changes from your competitors given your success or anything out there that you could comment on?

As I look across the competitive environment, I would tell you it is more promotional than I have ever seen.

And I think I have said that a couple quarters in a row now.

Do I see anybody doing anything specifically against us, the answer is no.

I think as you look at retailing in general, everybody scrapping for every dollar and they are doing everything they can.

Thanks.

That's helpful.

Nice quarter again.

[Mike Shrecast], Longacre.

I was wondering if you could talk about your comps, how much comp store hours were up, as you indicated that you had extended store hours in a number of stores.

Those sorts of things are very difficult to measure because we have so many things going on.

So as we are looking at comp stores and looking at extended hours, we look at it as merely another step, similar to cleaning up the stores, similar to merchandising the end displays better.

What we have done is basically given every district the opportunity to increase the store hours in order to meet the customer's needs for convenience.

And we let them making the call on that.

Do you know what percentage of stores increased store hours?

We have touched every store in the chain in some manner.

And then just one other is, with regards to -- you said, customers were coming in more often.

Any sense what the -- is the average ticket still the same when they come in more often?

Meaning, is someone coming twice and spending half as much each time?

No, we are seeing our average ticket increase.

So they are coming in more often than spending a little more when they come.

[Doug Con], Royal Bank of Scotland.

Just a quick follow-up on the competitor question.

If you could just share a little bit now your strategy, philosophy on price points, on what sort of the average price points you're looking for now in the stores?

Then also -- you know, vis-a-vis the competitors.

And then also your SKU levels, has that changed at all over the last couple of quarters, and how you might characterize it versus the competition?

A couple of comments.

As I look across the price points, we are seeing -- we are an EDLP operator.

We are highly focused on delivering everyday low prices.

That is where concentration is.

Now occasionally we do supplement that.

When we get better deals on product we will supplement that with promotional merchandise.

As I survey the competition, I am seeing more and more promotional pricing out there.

My view on the advantage of being an EDLP operator, the consumer knows what they can get when they come into your store.

A promotional price, you never know what the price is going to be.

And you hope that is better when you go in.

I've always subscribed to the theory that promotional pricing is renting sales, as opposed to EDLP pricing, where you create a bond with the customer.

In regards to our SKU rationalization and the work that is taking place, we have added approximately 500 SKUs through the course of the year in the new planograms.

We're very pleased with the sales they are driving.

And we also believe that that changed -- the addition of those items has broadened the appeal of our categories to customers that are coming in.

That is a net growth of 500?

I assume you have taken some away as well?

That is direct.

Net, net we are 500 ahead.

Overall your price point versus some of the competitors out there, would you say on average you are slightly higher than what we are seeing at some of the other stores in the category?

I would say that I'm very comfortable where our pricing is across all the major channels when we're compared against it.

Just one other follow-up question.

Just could you characterize for us right now your ability to repay debt in terms of the capacity you might have right now if you chose to repurchase some of your debt, or to pay down some of your debt?

There are several baskets that you have to look at in the credit agreement.

It is a little bit complicated in terms of giving an answer on that.

It would be somewhere in excess of $50 million.

Mary Gilbert, Imperial Capital.

On your average ticket, where is your average ticket now?

It used to be just under $10, right?

It is still in that vicinity.

It is still just under $10?

It might be slightly north of that.

Okay.

It is still right in the $10 range.

Also, given just the performance dynamics that we are seeing, I realize that the equity markets are pretty lousy right now, but could there be an opportunity in 2009 of conducting an IPO and taking advantage of the drivers that we see here?

It is a little soon for me to be talking about that.

Right now we're just really focused on managing the Company and meeting the expectations of our customers.

Hey, when the time comes to talk about that, we will throw it on the table.

That make sense.

When we look at free cash flow that the business is going to throw off, essentially what you want to do is redeploy it back into the stores.

So is that sort of how you are going to look at your capital programs?

Clearly our number one investment is in our stores, and making sure that we have the merchandise, and that it is displayed properly through fixture programs and things of that nature.

Then the support structure to support the stores, whether that be systems or distribution or transportation, making sure that everything focuses on the store though, you're right.

But also, what about expansion as well?

You're talking about store expansion into other markets and --?

Yes.

Again we're really focused.

It is a same-store sales story right now, and we will announce our growth plans on our next call for 2009.

And when it is appropriate to look out further, we will be the first ones to tell that too.

Andrew Berg, Post Advisory Group.

It was already asked and answered.

Thanks.

(Operator Instructions).

Ryan Bloom, The Hartford.

I was curious to get some insights as to what you're doing right in terms of your vendor negotiations?

You seem to be getting a good deal of concessions.

Do you think that there is an inflection point, some industry dynamics, or this is just your typical going back to the table?

I think two things are happening at Dollar General.

I think, number one, I think the team has gotten really tough on cost increases.

The advantage we have as a Company is we need to have bottled water.

I don't specifically have to have everybody's bottled water.

That puts us in a position where we can leverage that.

And I think we're doing a better job of negotiating cost.

The second thing, and probably the most important, is that with the same-store sales number we're driving, we're getting growth, and consequently that means the vendors that are dealing with us are getting growth also.

It is easy to want to promote with someone who is winning.

Finally I would say this too, and I think we have reached -- we are reaching the level now where the retail team is executing at a far, far, far superior rate than it has in a very long time.

And when we make a commitment that there is going to be a display of a merchandise, or we're going to make a commitment we're going to move X number of cases, because of the support we have from the retail team, we're able to pull that off.

And there the vendors respond to -- they respond to that.

I think the vendors are very excited when they see our comp store sales, and they really want to participate in that.

So it makes the discussions easier when your comps are growing like ours are.

Perception is everything, to the extent that you are participating in this favorably positioned into 2009 there is a real recognition of that in the vendor trade?

I would say so.

Yes.

I wanted to understand more broadly, I mean, historically I guess the industry -- the dollar store industry has suffered -- when gas prices did go higher, typically the dollar stores felt a little bit more pain than they have within the past year, year and a half.

And that has worked to your advantage.

Do you think that there is any risk now that gas prices are lower that you will lose some of -- maybe of the share gains that you have had from say the discounters, people more willing to go take a longer trip for bigger purchase?

How do you think about that?

I think as I reflect on it, even though gas prices are down, they still are high.

I think what we are seeing is that pricing a dollar -- the fact that the price of a gallon of gasoline is down $1, it is actually putting more discretionary spend into the consumer's pocket.

And consequently they are spending -- it appears they are spending it with us.

You can't lose sight of the fact that this Company is on the verge of having 19 consecutive years of same-store sales growth.

That has come in good times and bad.

I think the Company, particularly Dollar General, has survived irregardless of what is going on around it.

That is helpful.

Thank you.

Just a couple of more.

Now that you have been at the helm here for awhile, do you get the sense -- is there any area that you would revisit where there may be a structural impediment to your closing the gap versus your competitors from a gross margin standpoint?

Or do you think you're more confident than ever before that you can get there and maybe even exceed original expectations?

Again, I don't really want to stand up and threw a number out on the table.

But I will say this, that I continue -- every day I come to work I continued to be encouraged by the opportunities that exist at Dollar General.

Not only in terms of our chances to grow the margin, but to grow sales and reduce costs at the same time.

I would say, again my comment, if this is a football game, we are all somewhere in the first quarter.

That is the opportunities that I believe still exist here.

The last question I have is, where do you see most of your private-label growth coming from?

Is it broad based?

Is there something that is -- a category that is outperforming another?

It is -- at this stage of the game, because of the changes we have made in quality, the changes we made in the selection and the labeling, it is very broad-based right now.

[Steve Parkowitz], Admiral Capital Management.

Just based on the inventory surge this quarter, obviously it drops off for the fourth quarter, February '09 quarter end.

Give me a rough idea where you expect that to be?

If we're at $1.6 billion right, where you see in February '09?

We're not going to give guidance on inventory quite that granular, but we really manage by the turns more than anything else.

Again, when you have comps like we have, in some of the new initiatives that we put in the stores, we have to be increasing inventory to continue to feed the business.

So we really more concerned about that turn number.

As I mentioned, our turns are at 5.0, and we are well above where we were last year at, I believe, it was 4.6.

So that is how we will continue to manage the inventory as we move forward is through the turns.

What you see the turn going to for this quarter?

Again, that is a little more guidance than we are willing to give.

We just keep working on that -- in that turn number.

[Mike Shrecast], Longacre.

Just following up, I want to see how long do you have the hedge on your bank debt for?

We have several hedges on the bank debt.

We have one set of swaps that are for five years that went in in July of '07.

And then we have -- that is $953 million.

Then we have another swap that has two years that we put in in February of this past year.

And that is a two-year.

And how much was that?

$350 million.

(Operator Instructions).

There are no further questions at this time.

Thank you all again for joining us today.

We look forward to updating you on our full year results and our plan for next year in March of 2009.

Thank you.