達樂 (DG) 2008 Q4 法說會逐字稿

This is the Dollar General Corporation fourth quarter and fiscal year 2008 conference call on Tuesday, March 24, 2009 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 rebroadcasts 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 Senior Director of Investment Relations.

Good morning everyone and welcome to our 2008 earnings call.

In a moment, Rick Dreiling, our Chairman and Chief Executive Officer, and David Tehle, Chief Financial Officer, will discuss the Company's 2008 fourth quarter and full year financial results and deliver an update on our operating priorities, as well as share some thoughts about 2009.

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.

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

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 these actual results to differ materially from those reflected in the forward-looking statements are included in our Form 10-K filed with the SEC this morning, and our fourth quarter earnings press release issued this morning, and in the comments that will be made in this call.

Statements made in this call are accurate only as of today's date and may not remain correct at a later time.

Unless noted otherwise, all references in this call to full year 2007 results of operations and cash flows, including discussions of the separate components of each of these and any related ratios, are based on the combined full year results of the Company calculated by adding results for the premerger or predecessor period and the postmerger or successor period.

As a result of purchase accounting adjustments the successor and predecessor periods reflect different bases of accounting, and therefore the combined results are not derived in accordance with generally accepted accounting principles, or GAAP, and should not be considered a substitute for GAAP.

In addition, we will refer to other measures not derived in accordance with GAAP, including EBITDA, adjusted EBITDA and SG&A improvement excluding certain noncomparable items.

Reconciliations of these non-GAAP measures to the most comparable GAAP measures, as well as the calculation of the ratio of long-term obligations to adjusted EBITDA, are included in this morning's press release, which can be located on our website at www.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 10-K 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 and thank you for joining us today.

I want to say at the outset that we will have -- we have a good deal to cover today, and because of that our prepared remarks will be longer than normal.

This morning we will review our fourth quarter and fiscal 2008 financial results, update you on the progress of our operating priorities, and discuss our outlook for 2009.

First, I would like to review some key highlights for the year.

As we previously announced, our total sales increased 10.1% with same-store sales up 9%.

We expanded our gross margin to 29.3%, an increase of 143 basis points versus 2007.

We reduced our SG&A as a percentage of sales by 66 basis points, and our adjusted EBITDA increased 34% to $913.9 million.

I'm also pleased to report that we have -- now have in place our entire senior management team.

We're very pleased with our 2008 financial results, which reflect a strong commitment throughout our organization to improve our operations and provide our customers with the quality product, value prices, and customer service that they have come to expect from Dollar General.

During 2008 we made significant changes in the business to upgrade our merchandising and supply chain processes and to make improvements in our stores that will have a lasting impact on our productivity.

Our efforts were rewarded throughout the year as we consistently improved our operations and turned the challenges of a difficult economic environment into opportunities for growth.

We are continuing to work harder hard on our priorities for 2009, and while one month isn't necessarily indicative of a quarter or a year, we are pleased to report that February same-store sales were up 15.1%, with strong sales in seasonal and highly consumables.

While it is not our standard practice to report monthly sales, due to these uncertain times we thought that it was prudent that we update you.

With that, I would like to turn the call over to David.

He will take you through the fourth quarter and full year financial details, and then I will provide an update on our operating priority.

Good morning everyone.

As Rick said, 2008 was a strong year for us.

Sales for the fourth quarter were $2.85 billion, up $286 million or 11.2% from last year.

Same-store sales in the quarter increased 9.4%, with positive comps in every geographic region, and with strong increases in both customer traffic and average ticket.

As you would expect, in the economy we have been facing over the last few months, our sales increase resulted from higher sales of highly consumables, particularly food and snacks, pet and paper products, with highly consumables sales increasing 18.1% for the quarter.

Our unique combination of offering the right merchandise, great value, and convenience continued to resonate well with our customers in the fourth quarter.

Our stores were ready for the holidays and executed well during the quarter.

Although we would have preferred our seasonal sales to be higher, considering the shorter holiday selling season and the very difficult economic environment, a 1% sales decrease in this discretionary category compares very favorably with other retailers.

Our gross profit rate in the 2008 fourth quarter was 29.4% compared to 28.9% in the 2007 quarter, an increase of 51 basis points.

This increase was primarily the result of improved inventory shrink and transportation and logistics efficiencies.

Higher purchase markups were partially offset by higher markdowns, primary related to slower sales of seasonal merchandise, a less favorable sales mix, and the write-off of approximately $9 million of merchandise as a result of a recent change in the interpretation of the law governing the sale of phthalate and a year-over-year increase in the fourth quarter LIFO charge of $6 million.

SG&A as a percentage of sales was 21.7% in the '08 quarter, essentially flat compared to the '07 quarter.

During the quarter we settled the class-action suit filed in response to the merger with KKR and recorded an additional $2.5 million of insurance proceeds related to the suit.

The settlement and related expenses of approximately $42 million, offset by estimated insurance proceeds of $7.5 million, were recorded in the third quarter.

From a cash perspective the insurance proceeds were received in January and the settlement payment was dispersed in February.

Interest expense of $93.2 million is a reduction of $11.2 million from last year's fourth quarter, and is the result of having no borrowings under our ABL facility during the quarter, and the reduction of the senior subordinated notes.

For the fourth quarter '08 we reported net income of $81.9 million, a 48% increase over net income of $55.5 million in the '07 quarter.

Adjusted EBITDA, which is defined in our credit agreements and is considered a material component in the calculation of certain covenants, was $276.9 million, up $23.6 million or 9% from last year's fourth quarter.

While the percentage increase in adjusted EBITDA is not as significant as prior quarters, the fourth quarter was impacted by increased markdowns to clear seasonal merchandise, as we continue to stay committed to the strategy of not packing away inventory.

Additionally, we had higher markdowns due to the recent interpretation regarding phthalates that I mentioned, a higher level of incentive compensation in the fourth quarter, and purchase accounting adjustments in accordance with the credit agreement.

For purposes of the 52-week discussion, my comparisons are based on the 2008 52-week compared to the combined predecessor and successor periods of 2007.

The combination of the two periods is a non-GAAP measure, so you should refer to the tables in the back of your press release for the reconciliation to GAAP, as well as the presentation of the 2007 pro forma results.

Fiscal 2008 sales were $10.46 billion, up 10.1% from the prior year, including a same-store sales increase of 9%.

Sales for the year were driven primarily by a 14.7% increase in highly consumables.

Basic clothing sales increased 3.8%, with seasonal sales slightly positive and home product sales slightly negative.

Our customers are shopping with us more frequently, and our results would imply that the economy has driven some new customers into our stores to look for great value.

For the full year gross profit increased by $417.6 million to 29.3% of sales, compared to 27.8% of sales for the combined '07 periods, an increase of 143 basis points.

Major contributors to gross profit -- to the gross profit rate expansion included higher average markups, a decrease in inventory shrink, lower markdowns, and leverage on our distribution and transportation costs.

This was partially offset by a $37.8 million year-over-year increase in our LIFO charge and the phthalate adjustment noted in the fourth quarter.

The increase in the LIFO provision is the result of commodity cost pressures, mainly related to food and pet products, which had been driven by fruit and vegetable prices and rising freight costs.

SG&A decreased as a percentage of sales to 23.4% in '08 from 24.1% in '07, an improvement of 66 basis points.

After excluding merger-related items and the impact of certain noncomparable items as outlined in the table to the press release, we leveraged SG&A for the year by 27 basis points, driven by sales leverage, coupled with decreases in workers' compensation expense and advertising, and offset by an increase in incentive compensation.

Net income for the year was $108.2 million compared to the '07 combined net loss of $12.8 million.

Remember that our '08 net income was negatively impacted by the $32 million net charge related to the litigation settlement.

Adjusted EBITDA as defined in our credit agreements, and as detailed in our press release issued today, was $913.9 million for fiscal '08, up 34% from $683.5 million in '07.

For the year we generated $575.2 million of cash from operating activities resulting from our strong operating performance.

Capital expenditures totaled $205.5 million for the year, including approximately $149 million for improvements, upgrades, remodels and relocations of existing stores, $22 million for new stores, $17 million for distribution and transportation upgrades, and $13 million for systems-related capital projects.

As we have said previously, our first priority for the use of cash is investing in our business, as we believe that provides a good return on investment.

That being said, in the fourth quarter of '08 we repurchased $44.1 million of our senior subordinated notes, resulting in a gain of $3.8 million.

As a reminder, in the fourth quarter of 2007 we repurchased $25 million of the notes.

Now moving to the balance sheet.

As of January 30, total inventories were $1.41 billion, up 9.8% in total or 7.6% on a per store basis from the year ago period.

The year-over-year increase in inventories is primarily due to higher store level inventories needed to support higher sales volumes, as well as the rollout of the new planograms and the early receipt of spring seasonal inventories.

Inventories were down $205 million or 12.7% from the third quarter.

Our accounts payable to inventory ratio increased to 48% at year-end, up from 43% in 2007.

Inventory turns on a four quarter basis have improved to 5.2 times from 4.9 times in 2007.

We had total outstanding debt at the end of the year of $4.1 billion, including $2.3 billion outstanding under our senior secured term loan, and no borrowings under our asset-based revolver.

Our ratio of long-term obligations to adjusted EBITDA has fallen to 4.5 times from 7.1 times as of the close of the merger in July of 2007, and from 6.3 times at the end of fiscal 2007.

We're currently party to interest rate swaps with a notional amount totaling $1.7 billion, including a $475 million swap we entered into effective December 31, in order to mitigate the variable interest rate exposure under our credit facility.

Looking forward, in 2009 we intend to continue striving to achieve our goals to grow sales, expand gross margin, and manage expenses.

We anticipate our capital expenditures for the full year 2009 will be in the range of $250 million to $275 million.

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 this year, but we also continue 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 EBITDA all improved versus 2007.

Our adjusted -- our debt to adjusted EBITDA ratio has decreased 37% since the merger, with no borrowings outstanding under the ABL facility.

And finally, we continue to see opportunities for more improvement.

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

As David just highlighted, our financial performance in 2008 was strong.

And as I look back on this achievement, I feel confident that our success was driven by our continued focus on the four key operating priorities we set out this time last year, and that we continue to focus on today.

As a reminder, these four operating priorities are driving productive sales growth, increasing gross margins, leveraging process improvements and information technology to reduce costs, and strengthening and expanding Dollar General's culture of serving others.

The customer we serve is value conscious, and Dollar General has always been intently focused on helping our customers make the most of their spending dollars.

Over the past year it has been necessary and even popular for consumers to shop for value.

We give them that great value, and we go a step further by providing quality products in a comfortable and friendly shopping environment.

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

I would like to review the progress on each of our operating priorities.

First, driving productive sales growth.

We continue to improve our store standards.

We have a long way to go, but we are working on delivering a consistent look and feel across all 8,400 stores in the chain.

We defined standards and began a model store program in 2008.

Our district and regional managers are engaged in helping to further define those standards, which we are now translating across the chain.

To support our efforts to increase shopper frequency and expand basket size, we reset and expanded 75 consumable planograms in 2008.

And starting with the food sections, we began to raise our store profile from 66 inches to 78 inches in an effort to further increase the selling space in our stores.

We have expanded our convenience foods and beverage offerings.

We have added new impulses racks at the front check out stands.

And we have expanded our store operating hours.

We have also done a lot of work on the adjacencies in the various categories in the stores to provide an easier shopping environment for the customer.

We continue to focus on increasing our square foot productivity.

We are now planograming our end displays and taking out flex space, the space where nothing was planogramed.

Again, we are focusing on creating a consistent look and feel across the chain.

Our efforts in all of these areas have begun to pay off, as our average sales per square foot increased to $180 in 2008, up from $165 in 2007.

In regards to new stores, relocations and remodels, our overhauled real estate process allows us to be more analytical in our site selection, and as a result our new stores have been more productive and are ramping up faster.

In 2008 we opened 207 stores and relocated or remodeled 404.

Our second priority is to increase our gross margin.

In 2008 we focused on four major components of gross margin where we identified the greatest opportunities.

The first of these is reducing shrink, an area where we made meaningful progress in 2008.

Most importantly our regional and district managers made shrink reduction a top priority.

Together they identified the key indicators of shrink in the stores and developed an action plan to find, communicate and correct the problems.

This was an amazing effort in a very busy year.

During the year we began to leverage our technology, and now are installing new, exception-based shrink indicator tools.

With exception-based reporting we're able to see on a real-time basis specific locations where we're having problems, so our loss prevention team can start working on solving them as quickly as possible.

We also increased our surveillance camera coverage, which allows us to watch for and monitor theft in the stores.

We now have coverage in approximately 80% of our stores, and we plan to further expand that coverage in 2009.

In addition, we improved our hiring practices, and we're doing a much better job of screening employees prior to hiring.

To date these screening processes have identified more than 15% of the applicants as not being a good fit for Dollar General, helping us to build a stronger, more dependable and more productive retail team.

In 2008 our shrink reduction efforts resulted in a year-over-year shrink improvement of $55 million at retail.

Second, we began the development of a true pricing strategy in 2008, enabling us to learn and understand the nuances of pricing across the 35 states where we operate.

In 2008 we were faced with unprecedented commodity cost increases.

Our first challenge is to keep our cost as low as possible by negotiating with our vendors and working with them to eliminate unnecessary cost.

Our second challenge is to use our pricing tool and analytics to help us consider all available information before passing any costs on to our customers.

Third, can we continue to stay focused sharply on our private brand efforts.

In 2008 we added over 300 new SKUs, an increase of over 50%.

We have redefined our packaging, repositioned the product within the store, and have done a good job of improving the quality and consistency in our private brand program.

Most of our private brand efforts in 2008 were centered on our highly consumable categories, including food, pet, paper and health and beauty, resulting in increasing our private brand penetration in consumables by 170 basis points.

In addition, we are beginning to employ tactics in the stores to encourage customers to try Clover Valley.

In 2009 we plan to devote more effort to developing our private brands in seasonal and domestics.

That being said, national brands are very important to our consumable strategy, and we're diligent in our efforts to have the right mix of products for our customers.

Finally, sourcing.

We're still in the early stages of accelerating our sourcing activities.

Our new sourcing executive has spent most of his six months at Dollar General overseas, as we continue to define and develop a strong sourcing operation.

We expect our increased sourcing efforts to begin having a positive impact later this year.

Our third priority is leveraging process improvements and information technology to reduce cost.

We are committed as an organization to extracting cost that do not affect the customer experience.

For example, we began recycling cardboard in July.

In the second half of 2008 we recycled 70,000 tons of cardboard, saving 1.2 million trees.

This effort not only benefits the environment, but has also helped us save money.

We have improved our energy management in the stores, with utilities being the third-highest store operating expense behind payroll and rent.

We also continue to mine the organization for ways to reengineer processes to lower cost.

We improved our distribution and transportation efficiencies throughout the year, and plan to continue to drive efficiencies and reduce controllable distribution costs in 2009.

We have reduced our workers' compensation expense by further promoting a culture of safety.

We have been able to negotiate better costs on insurance, the taking of physical inventories, and third-party shipping.

We have also done a better job of managing travel expense and employee benefit cost.

All of these have absolutely no impact on what the customer sees or feels when he or she comes into our stores.

We have taken a close look at our IT program and have focused our efforts on technology designed to improve retail and merchandising first.

So our IT organization is playing a more meaningful role in helping the stores and the merchandising teams perform better.

Our fourth and final priority is to strengthen and expand Dollar General's culture of serving others.

We have a very rich history as a Company.

And as we have stepped back and considered the definition of serving others, we wanted to be broader and more impactful.

We are on a journey now to redefine a much stronger brand composition at the point-of-sale.

We have a fabulous tagline in Save Time.

Save Money.

Every Day.

But have not effectively translated that message at the point-of-sale.

In 2009 we will begin to roll out a marketing and merchandising plan designed to better articulate that message in the stores.

We're now measuring customer service, and have defined metrics that are beginning -- that we're beginning to track.

We're focusing on a very clean, very fresh, and very easy to shop experience every time the customer comes into the store.

We are working hard to create an environment that attracts and retains key employees throughout the organization.

As we have worked to make the stores easier to operate, we have seen employee turnover decrease dramatically, with store manager turnover at its lowest level in 15 years.

We continue to give back to the communities in which we operate.

The Company actively participates in disaster relief efforts, Habitat for Humanity.

And we have continued to support literacy programs in the US, primarily through cash cube contributions in our stores, which fund the work and contributions of the Dollar General Literacy Foundation.

Looking forward to 2009, as David said, we're continuing to focus on these four priories.

In 2008 we focused on getting the consumables side of the business right, and we believe that focus has served us well.

In 2009 we're beginning the journey of improving the nonconsumable side of the business.

Our merchandising leadership team is now fully staffed.

And having recently hired an experienced merchant to overhaul our nonconsumable business, we're going to make changes in our soft goods and home decor presentation.

And I believe we will see some good things by the end of the year.

Obviously, we're making these changes in a difficult economic environment and they will take some time to implement.

But we believe that ultimately these changes will lead to growth and margin enhancement.

We are committed to driving the nonconsumable side of the business just as hard as we're driving the consumable side.

Finally, as we announced in February, we are accelerating our new store openings in 2009 with plans to open 450 stores during the year, a square footage increase of 5%.

By adding new stores we are also adding new jobs at a time when unemployment has been soaring.

We have plenty of opportunity to grow our store base in the states where we currently operate, so our focus in 2009 will remain on our core 35 states.

I have been asked what makes me comfortable with expanding in this uncertain economic environment, and I can assure you that we do not take this decision lightly.

First, the basic Dollar General model has proven over the years that it can be highly productive regardless of the economic environment.

And although there may have been a few years where expansion took priority over productivity, over the course of 2008 we have become very comfortable with our box.

We understand our model, and we believe we can continue to make it even more productive.

Finally, we believe that continuing to invest in our stores is a wise use of our funds.

The fact that we are accelerating our new store growth does not change the fact that we are, and will remain, a same-store sales story.

We will be focused on all of our stores, both new and old, to make the entire chain more productive in 2009.

We expect to continue to face a difficult economic environment in 2009, which will restrict our customer's ability to spend, and therefore will challenge our efforts to increase sales and gross profit.

We also believe that competitive pricing and advertising will continue, and are likely to increase if overall retail sales continue to decline.

Before I open the call up for questions, I want to congratulate all of our employees on our significant progress in 2008, and thank them publicly for a job well done.

We made many changes in the way Dollar General operates in 2008, and we could not have succeeded without all of their ideas, their hard work and their dedication.

I'm looking forward to even more successes in 2009, as we continue our mission of serving others.

With that, we will open up the call for questions, Operator.

(Operator Instructions).

Grant Jordan, Wachovia.

My first question, I appreciate the additional color on February results.

It certainly seems like you guys saw a rebound in your business in February compared to the fourth quarter.

Maybe you can just talk about, have you seen a change in the behavior of your customers?

Is there anything specific driving that?

You know, I look at February very similar to the fourth quarter.

We were pleased with our numbers through the quarter.

And what we were pleased with is that they were consistent through the quarter.

We had a very good holiday season.

We had one week less this year than last year, and our seasonal only being down 1% we viewed as very positive.

We have made an initiative out of drawing our seasonal merchandise further ahead, allowing us to be in the seasonal business earlier.

We were in Valentine's earlier this year.

We are in summer seasonal earlier this year.

And I think that is playing out in the stores right now and leading to some of that sales comp that we're driving.

That's helpful.

Second question, obviously you guys have done a great job managing your liquidity and have built up a nice cash balance.

Clearly you are going to be spending more on CapEx this year.

But just give us some thoughts, if you have any, about additional debt paydown or bond repurchases, given the liquidity you do have.

This is David Tehle.

I will take that question.

Our first priority, and we have been very consistent on this, is investing in our business, because we believe it is the highest return for our money right now.

As you mentioned, you have seen our capital expenditures and what we're planning on doing in '09.

We will continue to invest in inventory as appropriate.

And certainly we need to do that when we have comp sales like we have been having.

We are okay holding some excess cash right now because of the volatile nature of the environment that we operate in, and we think being conservative is prudent.

Having said that, certainly on a long-term basis our objective is to continue to deleverage the business, and we will consider continuing to buy back debt as appropriate.

And we have regular discussions with our Board where we discuss that.

Then my last question, you talked about the seasonal inventory.

Maybe you are a little too heavy in some of the seasonal and you had to mark stuff down.

Any estimate as far as what that cost you in terms of gross margin in the fourth quarter?

Actually, we weren't heavy on inventory.

What happened is, I think as you know in the retail environment everybody started marking down earlier and deeper.

What we chose to do, we thought the prudent thing to do, is while we didn't go as deep or as early, we had to take some action to ensure that we wouldn't have a problem.

The other issue we had in the quarter was the phthalates inventories we mentioned.

We did take a $9 million hit on that.

And was that phthalates, was that added back to your EBITDA?

No, it was not.

So that was not.

But the LIFO charge that was added back.

Is that correct?

That is correct.

Yes.

So do you anticipate that phthalates -- will there be any more of that going forward or was that a one-time?

No, we believe that should take care of it.

We take a very aggressive stance on the phthalate issue.

Being a good corporate citizen, we wanted to follow through, and we did a wonderful job of cleaning it up.

Bill Reuter, Banc of America Securities.

Just one other question on the bond repurchases.

Can you remind us what your ability to buy back bonds is under your current most restrictive covenants?

It is a little bit complicated, because there are several buckets that we have to look at, and there are buckets that refer to the senior notes, separate buckets related to the subnotes, and then related to term loan.

So instead, again, I would rather not get into all the specific details.

I would say that under our current thought process obviously we have to watch those buckets, but we don't see those buckets as being a major impairment to us buying back debt in 2009.

I think, if my understanding is correct, you guys don't have to prepay any term loans in early calendar year '09 based upon your leverage ratio.

Is that right?

Yes, we do have -- on the term loans starting in September, we start paying down 1% of the principal.

That continues on, 1% per year.

Then one last one.

In terms of leases that might be coming due in '09, I was wondering if you guys -- one, if you can comment on just a ballpark number with which this might be, and whether you guys are looking at this as a potential opportunity to negotiate better leases?

To answer your question, yes, we are.

Right now we actually have an initiative underway to go back to landlords, both in terms of who we have agreements with, we are working with, as well as those where we're going to renew.

And the exact number of leases is about 1,800.

Great.

Thanks guys.

That is ever the next 18 months, that number.

Okay, thanks guys.

We try to look at it on a little broader basis than just one year out.

Karru Martinson, Deutsche Bank.

I guess on that same vein, just to follow up for your new locations are you seeing a shift in the lease opportunities in the location opportunities, perhaps broadening out from your traditional targets?

Yes, as a matter of fact we are seeing when I would classify as maybe a more premium site available at a lower rate.

That is correct.

But in terms of the locations, we're still targeting that 20,000 plus location in terms of population, income, and so forth, or are we moving even beyond that as well?

We continue to stay focused right now.

I believe about 63% of our stores are in rural locations, 20,000 people or less.

We are continuing to stay focused in that area.

Okay, just better properties.

Just better property.

You mentioned earlier that as the economy lags that we will continue to see competitor pressure increasing.

What are you seeing from your competitors and from others who may be trading down themselves into your space?

In terms of the retail landscape now, as you look at the ads across mass, drug and grocery, the ads are incredibly competitive.

The discounts are deep.

It started toward September/October of last year.

The strength we have is that we are an EDLP operator, and we are not nearly as promotional.

With our retails being rather reliable, we are seeing not only our customers come more often, but we are starting to see some trade down.

As you have been growing out the Clover Valley and private-label here, what vendor support are you seeing?

And on some of the brand-name of products are you seeing new additions?

I know in past quarters you had highlighted some, Coke and others that have joined you.

Have there been new additions on that front?

What we continue to do through our business review and category management process is continue to massage the category, eliminate unproductive SKUs, and bring in from different vendors more productive product.

We have a great relationship with all of the major manufacturers right now, driven by the fact that our comps are so great and we're moving a lot of cases.

So, yes, it is a little bit of everybody right now, rather than one specific manufacturer.

Just lastly, on SG&A, as you guys have done a good job taking costs out, reducing shrink here and everything else throughout the business, should we look at that as kind of a stable line item going forward, or do you feel that there is still material room for you guys to improve on that going forward in '09?

We always believe there is room to take cost out of the business.

There are a lot of items that we continue to look at, as well as some new items, as we move forward into 2009.

Rick talked about cardboard recycling in 2008.

We continue to look at many items in '09, including workers comp, purchasing initiatives, IT vendor review, and just general contract review with many of our different vendors.

So, no, I think we will continue to hit hard on cost reductions in the Company.

[Ann Wareheim], Van Kampen.

Just a few questions.

First, I was wondering if you could tell us what February same-store sales were for last year?

4.6%.

Then looking at your clothing category during the fourth quarter, those sales seems to be pretty strong.

I was wondering if you could talk specifically about products within that category that performed well?

We saw good growth in infants, good growth in men's.

And the ladies apparel was relatively stable.

Then lastly, I guess, you talk about now you're sort of capturing the trade down customers.

Looking towards the light at the end of the tunnel, and when and if the recession does abate, how do you keep those customers coming to your stores?

Is it just a service thing?

Is it even possible to really keep those customers once the economic conditions improve?

I think we have now recorded our 19th consecutive year of same-store sales growth, which really tells you that the business model performs exceptionally well in good and bad times.

While I talked that there is trade down taking place, I want to reiterate that it is stories that I am hearing from store managers, they are recognizing people that aren't coming in.

And we're reading a lot about trade down, and I think we believe we're experiencing some.

I think what is happening is the economy is giving us a lot of trial with a lot of people who haven't experienced Dollar General in a year or two or maybe never.

And they are coming in and they are seeing the improvements that we're making, and they are appreciative of those and they are responding to those.

I think that as the economy -- even though the economy is going to turn around eventually, I think it is safe to say that there is going to be a new consumerism, and that saving money is going to be fashionable for a very long period of time.

We happen to be positioned to offer value and convenience, like we always have, and I believe the model has a lot of vibrance going forward.

That's great.

Thanks.

Congratulations.

Emily Shanks, Barclays Capital.

I wanted to ask around the balance sheet.

It looks like you guys continue to nicely expand your accounts payable leverage and extract some pretty nice working capital as a cash source.

Do you think that there continues to be upside on that as we look forward, or do you feel as though you have kind of maxed out where you stand with all your suppliers and so forth?

We continue to look at that, and we've got some new eyes in here now with Todd, our new Chief Merchant, and I believe that there may be some additional room there and some additional ways of looking at that, how we haven't look at it before.

I would stay tuned on that.

And it is definitely something we're looking at as we move forward into 2009.

Then if I could, just one more.

As I look at adjusted SG&A dollars per store, it looks like it is up year-over-year.

I can't promise that all of my adjustments are 100% right, so I may be missing something.

But I just want to get a sense from you if that is correct.

Is it that you are spending more on advertising, or how should we think about that year-over-year growth on a per store basis?

A couple of items.

Over the year we had higher repairs and maintenance in the stores.

2008 was a year where we made some pretty major investments in making sure that stores were set to the standards that we wanted them to be set at.

And there was probably some catch up from prior years there in terms of what we did.

Then additionally, because of the performance of the Company this year, the incentive accruals for the bonus payouts are higher than they were in the previous year.

Those are probably the two bigger items that would have impacted it.

Karen Eltrich, Goldman Sachs.

A couple of questions.

If you look at the remodel program, which obviously you're ramping up as well, what elements of the remodel are you finding to be most impactful with the customer in terms of lifting comp store sales?

And what is the average cost per remodel now?

I will let David answer the cost on the remodel.

As I look back on our new stores and remodels, through the course of 2008 we did a lot of work on, I think, laying the store out to the point where it is much more consumer friendly.

The store shops easier.

And the way the store is being laid out, it stimulates purchases.

I think a lot of what we are seeing is because of that.

Throw in all of the work we have done with merchandising, throw in all of the work that is being done with consistency and application of standards, and then some work on customer service, and I think that all goes a long way in rolling it out.

The remodel is about $75,000 at cost.

And again that will vary per store depending upon what we find when we go in the store and what actually needs to be done, but that is an average figure.

Great.

I know you have identified all the locations for the stores that you're opening this year, but what kind of pipeline are you building for the outer years?

And theoretically how many any opportunities, how many store locations do you think there are potentially for Dollar General in existing markets?

If you go back to the roadshow that took place when the Company was purchased, there was a lot of discussion that the Company could almost double in size over the years.

Right now we believe in the 35 states we're in we are underpenetrated significantly, and that is what we're focused at on this time.

The most important thing is we -- as we launch our new store program and this Company has a history of several years of growing 700 or 800 stores.

What we want to do is we want to grow the stores, and grow them where they are productive and producing, rather than just growing for the sake of growing.

So going to continue a measured approach in the near future?

That's correct.

We're basically almost doubling our output this coming year.

Final question.

You touched on some elements of this, but obviously working capital is an enormous source of cash for you this year.

But as we look to next year, how much opportunity is there?

And given the growth in inventory, should we anticipate it be a use of cash?

We continue -- we talked about accounts payable a little bit earlier.

And again on inventory we continue to look at the productivity of inventory on a turn basis, and make our investments based on how we see inventory turns in 2009.

Yes, we did have some rather large pluses come out of that in '08, and some in '07, as we got through the Alpha process.

But we continue to be aggressive with what we think we can do on inventory turns in the model as we go forward.

We have opportunities in the amount of inventory we're carrying.

Thank you very much, and congratulations on the quarter.

Mary Gilbert, Imperial Capital.

Following up on those less couple of questions, can you give us an idea of the number of new store opportunities that you see in existing markets where you see driving profitable growth?

Could you also remind us on the new store opening model?

For competitive reasons it is probably not appropriate for me to stand up and really say, hey, here is how many stores I think I can add in the current 35 states we're in.

But I would reinforce to you that we obviously are focused on the core 35 states, because we believe there is a tremendous amount of opportunity still existing there.

Then what was the second question?

The new store opening model.

The store economics.

It is about $230,000 to open a store between the capital and inventory that we invest.

Then can you give us an idea of the payback?

General -- and again these are all average statistics.

The store tends to be cash flow positive the first year, with the sales maturing in four to five years.

That is very helpful.

Then also in looking at your capital structure and looking at how the discount sector is performing very well with some of the other dollar stores, and then you guys are by far the much -- largest, the most profitable and driving the best growth in terms of comp store sales, are there opportunities to tap the equity markets, is that something that you're considering, or do you think that that is a ways away?

Yes, right now -- that is a great question.

Right now we are really focused on just managing the business.

Our partners at KKR and I will make that decision when we think it is appropriate.

Michael Baker, Deutsche Bank.

You talked about some of the things that you're looking at in terms of pricing.

Can you tell us where you are in terms of differentiated pricing by region, zone pricing type thing, and what kind of opportunity you see there?

We are continuing to -- I would categorize zone pricing as very much in a testing stage at this stage of the game.

I will be very frank.

We worked very hard last year with the state of the economy to try and figure out with our manufacturing partners how to keep costs down.

So we invested very hard in that.

We see an upside, and what I would rather say to you is that, give me a couple of more quarters to let it all play out, and then we will be in a position to tell you what is really going on.

But I guess so this remains an opportunity, I guess (multiple speakers).

Yes.

We are very excited about it.

One more question, if I could.

You talked about February comps.

I am wondering why you sort of stopped in February?

Does that -- do we read anything into March because of that, or it was that just you felt like only talking about one month?

I thought I was being generous when I laid February out there.

I don't disagree.

But I figured I would ask anyway.

We want to let March get over, you know.

Fair enough.

Carla Casella, Dollar General.

This is [Monique Sinmao] for Carla Casella, from JPMorgan.

Now that you seem to be fully finished with [facility] inventory, has that changed any of your vendor relationships in terms of are you getting better deals or pushing for any better deals?

Do you get any volume-based vendor allowances or markdown money, and do you anticipate getting any?

Yes, I will come back -- let's come back to the first question.

In regards to the pack-away, that really doesn't improve your relationship with the manufacturer community, because quite frankly they already sold it to you.

And they could really care less how much inventory -- of their inventory you have on hand.

The key to the pack-away strategy is really two things.

Number one, it puts us in a position where we have a fresher inventory for our customer, and it makes the store easier to manage.

And quite frankly it helps us on the shrink side.

In regards to what we're getting and how we're negotiating with the vendor community, what I would rather do on that is say that we continue to work with them to do everything we can to secure the best possible costs for our customers.

(Operator Instructions).

Grant Jordan, Wachovia.

Now that you are generating net income, can you give us an idea on the cash tax line what that should look like going forward?

We really don't want to give guidance on that as we move forward.

I will tell you for -- we can talk about 2008, give you a little bit of flavor there.

In terms of the cash taxes for 2008, the cash taxes were $7.1 million.

And out of that, $6 million happened in the fourth quarter.

So I think that gives you a little bit of flavor on that.

Okay, so applying that fourth quarter rate, whatever we project next year might give us a decent idea of what it could look like?

That would be one way of doing it.

We have no questions at this time.

Thank you all for your time.

While the Dollar General story is not nearly complete, and there is still much left to do, we look forward to our future.

Thank you very much.

This now concludes today's teleconference.

You may disconnect.