達樂 (DG) 2009 Q1 法說會逐字稿

This is the Dollar General Corporation first quarter 2009 conference call on Tuesday June 2nd, 2009 at 9:00 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 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 General's Senior Director of Investor Relations.

Ms.

Kauffman, you may begin.

Thank you.

Good morning everyone.

In a moment Rick Dreiling, our Chairman and Chief Executive Officer, and David Tehle, Chief Financial Officer, will discuss the first quarter 2009 financial results, and deliver an update 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.

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, actual results could differ materially from those projected in the forward-looking statements, and 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 24th 2009, our Q1 Form 10-Q filed this morning, our Q1 earnings press release issued this morning, and in the comments that will be made in this call.

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

We undertake no obligation to update any of these statements.

In today's discussion, we will refer to certain measures not derived in accordance with Generally Accepted Accounting Principles, or GAAP, including EBITDA and adjusted EBITDA.

Reconciliations of these nonGAAP measures to the most comparable GAAP measures, as well as the calculation of the ratio of long-term obligations to adjusted EBITDA, and the ratio of long-term obligations net of cash to adjusted EBITDA, are included in this morning's press release, which can be located on our website at Dollar General.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.

This morning David and I will review our first first 2009 financial results, update you on our operating priorities, and then allow plenty of time to answer your questions.

We are very pleased with the progress we have made, and our first results are a testament to our ongoing efforts.

During the quarter we maintained our focus on advancing our merchandising initiatives, and enhancing execution in the stores, the impact of these initiatives is reflected in our strong financial results for the first quarter.

David will provide more details on the financial results, but I want to share just a few highlights.

Our total sales increased 15.7%, same store sales increased 13.3%, on top of a 5.4% increase in the first quarter of 2008.

While consumables again set the pace, we are pleased to report strong sales in our Seasonal, Home, and Apparel categories.

Gross margin expanded 193 basis points, versus last year's first quarter.

We leveraged SG&A by 150 basis points, and our adjusted EBITDA increased 59%, to $291 million, and over a two year period first quarter adjusted EBITDA is up 104%.

Finally opened 104 new stores in the quarter, putting us well on our way to meeting our goal of approximately 450 new store openings in 2009.

Importantly this will enable to to add up to 4,000 new jobs for the year.

In summary, we have had a great start to 2009, despite the continued difficult economy.

Importantly our customers are shopping with us more often, and we believe that we are also attracting new customers with our quality products, value prices, convenience, and customer friendly service.

As we continue to enhance the Dollar General experience, and maintain an intense focus on our customer service standards, I am confident that consumers will continue to turn to Dollar General for their everyday needs, regardless of the economic environment.

Now David will walk you through the details of the first quarter.

Thank you, Rick.

Good morning everyone.

Sales for the first quarter were $2.78 billion, up $376 million, or 15.7% from last year.

Same store sales in the quarter increased 13.3%, on top of a 5.4% increase in '08 first quarter, with strong same store sales growth across all geographic regions, both customer traffic and average ticket were up from the prior year, and while our sales increases were strongest in the highly consumables, as Rick said, we showed robust growth across all categories, and particularly strong sales in seasonal merchandise.

Our gross profit rate was a first quarter record, up 30.8%, compared to 28.8% in '08 first quarter, an increase of 193 basis points.

Several key factors contributed to the improvement.

First, the average mark-up on inventories was higher than in the prior year, as a result of our efforts to reduce product costs, while maintaining our everyday low prices on the mix of items that our customers want and need.

Second, distribution and transportation costs were less than in the prior year quarter, due to lower diesel fuel costs, as well as improvements in the efficiencies of our distribution centers.

Third, our shrink rate continued to improve, as we focused on curbing merchandise shrink in our stores.

SG&A as a percentage of sales was 22.7% in the '09 quarter, compared to 24.2% in the '08 quarter, an improvement of 154 basis points, reflecting significant leverage on payroll and occupancy costs resulting from our strong sales increases.

In addition, we continued to see significant results from our efforts to reduce workers compensation and general liability insurance expenses.

As we have said in the past, we remain focused on eliminating costs across the entire Company that do not impact our customers.

Interest expense was $89.2 million for the '09 quarter, a reduction of $11.6 million from last year's quarter.

This is primarily due to lower interest rates on our term loan and lower outstanding borrowings.

The effective income tax rate for the quarter was 38.1% in '09, compared to 44.5% in '08.

Both years included similar amounts of income tax related interest, but because the '09 pretax income was higher, the effective rate was impacted to a lesser degree.

Excluding the interest effect the '08 effective income tax rate was lower than the '09 rate, primarily due the impact of Federal jobs tax credits.

While the credits were higher in '09 due to the higher pretax income, the impact on the rate was less favorable than in '08.

For the quarter our operating profit was $224.9 million, up $114 million, or 102.8% from the '08 first quarter.

As a percent of sales, operating profit increased to 8.1% in '09, from 4.6% in '08.

Net income was $83 million, for '09 first quarter, compared to net income of $5.9 million in the '08 quarter.

Adjusted EBITDA, which is a material component to the calculation of certain covenants used in our credit agreements was $291 million, up $108.3 million, or 59%, from last year's first quarter.

We generated $108.9 million of cash from operating activities, resulting from our strong operating performance.

Capital expenditures totaled $51.8 million for the quarter.

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

Moving to the balance sheet.

As of May 1, total inventories at cost were $1.45 billion, up 10% in total, or 8% on a per store basis, significantly lower than our sales growth rate.

The year-over-year increase in inventories is primarily due to higher store inventory levels needed to support higher sales volumes.

Inventory turns on a four quarter basis have improved to approximately 5.2 times, from 5.0 times a year ago.

We has total outstanding debt at the end of the quarter of $4.1 billion, including $2.3 billion outstanding under our senior secured term loans, and no borrowings under our asset based revolver.

Adjusted EBITDA for the last 12 months, increased 41%, from the comparable year ago period, to $1.0222 billion, resulting in a decrease in the ratio of long-term obligations to adjusted EBITDA to 4.0 times, from 5.8 times a year ago.

Net of cash ratio our ration of long-term obligations to adjusted EBITDA was 3.6, at the end of the quarter.

We are currently party to interest rate swaps with a notional amount totaling $1.5 billion, in order to mitigate the variable interest rate risk under our credit facility.

In summary, the Company continued to perform extremely well during the first quarter, in an economic environment that remained challenging for consumers and retailers.

As we look at the remainder of the year, our solid first quarter performance gives us a great start to the year, and makes us confident that we are on track to achieve our goals to grow sales, expand gross margin, and manage expenses.

We will continue to work to manage costs ,and operate the business as effectively as possible.

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

Thank you, David.

As David just highlighted our momentum continued to accelerate through the first quarter, as we remain focused on the four key operating priorities that we launched just over a year ago.

Let me update you on our progress on these priorities.

On the store operations front, we continued to improve our store standards and work towards delivering a consistent look and feel across all of our nearly 8,500 stores.

Our main focus is on providing a clean organized and easy to shop store, every time the customer walks in.

We have been measuring against our defined standards for several quarters, and I am proud to say that we continue to make progress.

Despite this success, we will continue to focus on improving the Company based on these standards.

Recently we began to seek customer feedback on key attributes regarding store standards and employee behaviors that we believe to be the most critical.

We are beginning to evaluate and act upon our customers responses.

On the merchandising side in the first quarter we expanded the transition to the new 78-inch profile beyond food, into additional areas of the store, including candy, snacks, stationary.

The new profile allows us to add more selling space in our stores, and contributes to our square foot productivity.

On a rolling year basis, our sales per square foot are now at $185, an increase of 10% over the year ago period.

Importantly we are working very closely with our vendors, and we are excited about partnering with some key new vendors, as we continue to bring great new products to our customers at everyday low prices.

In real estate, we opened 104 new stores, relocated or remodeled 100 stores, and closed four stores, ending the quarter with 8,462 stores.

Our real estate processes have become increasingly more analytical over the last couple of years, and as a result, our new stores have become more productive, and are ramping up faster.

We are very pleased with the operating results of the stores we have open so far in 2009, with average weekly sales running ahead of plan, and ahead of our 2008 openings.

We attribute this performance to our improved site selection, as well as improvements in merchandising, and our other operating initiatives.

We continue to focus on enhancing our gross profit through improving our product selections in category adjacencies, expanding our private brand offering, managing our inventories to minimize markdown risk, continuing to emphasize shrink reduction, managing and controlling our distribution and transportation costs, improving our sourcing capabilities, continuing to refine our pricing strategy, and working with our vendors to eliminate unnecessary costs, to assure that we share in the benefits as raw materials costs decline.

I am pleased to say that a results for the quarter reflect solid progress in each of these areas, and we believe we still have significant opportunities for improvement ahead.

As we said last quarter, after focusing most of our energy in 2008 on improving the consumable side of the business, in 2009 we are beginning the transformation of the nonconsumable side of the business.

As our first quarter results indicate along with continued strong growth in consumables, we are delivering some positive results in Seasonal, Home, and Apparel, as some of our new initiatives come online.

And we still see significant runway for improvement going forward.

As David said, we continue to be committed as an organization to extracting costs that do not affect the customer experience.

For example, after a thorough review of work processes at our nine distribution centers, we implemented significant cost reduction initiatives in the first quarter.

The changes we made were primarily focused on reengineering our merchandise handling processes, and centralizing various administrative and logistic functions, we continue to strengthen and expand Dollar General's culture of serving others, through the way we serve our customers, and the communities where we operate.

We are working towards better defining our brand, and communicating a much stronger brand proposition at the point of sale.

We are now utilizing our tagline of 'Save Time, Save Money Everyday' in virtually all of our customer communications, and our new in-store signage.

We have developed and updated our logo and branding platform, that clearly communicates Dollar General's unique and differentiated value proposition, consumer response in pilot studies overwhelmingly positive, and we are now rolling out the updated decor across all new, relocated, and remodeled stores.

Finally we are constantly focused on creating a work environment that retains key employees, and attracts strong new talent, as we continue to grow our store base.

As we have said in the past, we are facing a very difficult economic environment, which restricts our customers ability to spend, and poses challenges to Dollar General, as we strive to increase our sales and our gross profit.

From the competitive standpoint, advertising that is focused on the consumers desire to save money, with promotional pricing continuing to be at lows that we have not seen in recent years.

It is important to note that we have stayed true to our EDLP strategy, while improving on communicating our story to our customers.

We believe our results indicate that our customers recognize and appreciate the everyday great values, and convenience that our stores offer.

While we expect the economic environment to remain challenging for some time, we believe we are very well-positioned to continue delivering solid performance.

Before we conclude, I would like to thank our 73,000 employees for another great quarter, and ask them to keep up the good work as we move forward.

With that, operator, I will open up the call for questions.

Thank you, sir.

Ladies and gentlemen, (Operator Instructions).

Our first question will come from Karen Eltrich, Goldman Sachs.

Thank you.

Just to start, you have continued to make steady improvement on the shrink reduction, can you maybe talk about how you keep achieving that, how much opportunity is left?

And maybe in conjunction, what you are seeing with regards to employee turnover?

Yes, Karen, in regards to shrink, we are focused on a few key areas.

We now have, our exception based reporting is now driven by IT, which allows us to get shrink opportunities to see them quicker, than the manual processes that were in place before.

We have a much higher focus the ops team, over the course of the last 18 months at shrink in retail, and being an operator where the focus is, is usually what gets done.

We also are doing a much better job of screening and hiring employees, and we are doing thirdly, I think we are doing a much better job of controlling damages that are shipped out of our warehouse and distribution system.

In regards to the opportunity that exists, we have a lot of upside there.

We have a long way to go on the initiatives, and we are taking it in baby steps.

In regards to employee turnover Q1 continued to see the declines we saw through all of last year, with store manager turnover still operating at much, significantly lower than it has over the last six or seven years.

Great.

On the same line of systems, as you get these incredible sales volumes in your store, as you increase inventory, do you feel you have the systems in place to make sure that you do have the adequate staffing to maintain customer service levels?

Yes.

Obviously at the rate we are growing, keeping the stores full and keeping them staffed is an issue.

But what is happening is we have spent the last year really working on the work environment, and we are attracting a higher caliber employee more often.

We feel really good about that.

Great.

Very well deserved congratulations on the quarter.

You are actually starting to make me feel like a terrible analyst, for how much you keep beating my numbers.

Congratulations.

Thank you very much Karen, that was very sweet.

Next question is from Grant Jordan with Wachovia.

Pretty impressive numbers.

These are great.

Just digging into the sales trend a little bit.

Just trying to make sure that we are not missing anything that really drove the strong performance in Q1.

Trying to see if you have seen trends generally continue into the month of May?

I don't want really talk about the May numbers.

But I am sleeping really good at night if that means anything.

I can imagine.

My second question, you guys have a very strong cash balance, even with the expansion of stores this year, I think you will continue to generate nice free cash flow.

What are your thoughts on debt reduction, and the capital structure as a whole?

I will take that question, Grant.

As we have said before, our top priority remains investing in the operations of our business.

We want to make sure we have ample cash for the capital expenditures and the inventory needed to fuel our grow as a Company.

As you can imagine, when you are comping 13%, you have some pretty good needs there.

We do have a long-term objective of deleveraging the Company, however growth right now is our top priority.

Given the volatile environment, the economic environment that we are still in, we believe it is prudent to have some conservatism in our cash holdings.

Just as it relates to the business, private labels, an initiative you talked about in the past, maybe give us an update in terse of where that stands, if you can give us more detail on the new vendor relationships you are focused on?

Sure.

We have approximately 950 private label SKUs right now.

That is up 350 from over a year ago.

We are actually continuing the branding effort with private label this year.

It is actually moving very nicely, and will accelerate through the balance of the year.

The merchandising and marketing team, Grant, is now beginning to tie the private label as more, as part of the total store brand.

As you see our new decor roll out, and you see the new private label roll out over the course of the year, you are going to see how the two of those are tied together.

On the vendor front, we continue to work with the manufacturing community and the vendor community.

I personally have participated in a couple of top of the tops through the Q1, as well as our Chief Merchant, and as I have said in the past, when you are driving the kind of numbers we are driving right now, and getting the level of execution at retail, the vendor community is really willing to play with you.

We are very, very pleased with the vendor relationships we have now, we are working together, and we view it as partnership of advancing sales on both sides of the table.

Great.

Thank you very much.

Thank you.

Our next question will come from [Bill Reuter], Banc of America Securities.

Good morning.

You guys highlighted about four different buckets in terms of the gross margin improvement, I think those were merchandise mix, transportation, and shrink.

I was wondering if you could give, were those listed in order of magnitude, meaning that the largest was first?

Bill, I never listed anything in order, what we are doing right now is we are working on so many things.

I don't like to call anything out specifically as a driver.

They are all great initiatives.

We are putting a lot of horsepower around them.

Ultimately they are all going to add value.

If you look at it, Bill, as examples of what we have done so far, we have been very successful in reducing shrink, working with our vendors on more solutions, to benefit both ourselves and them, enhancing our private label offerings, taking cost out of our supply chain and distribution system, finding our pricing strategy and improving sourcing, all of those have gone into helping us on our margin.

Okay.

In terms of the strong comps that we saw in the quarter, can you guys remind us when you guys increased the hours of operations in your stores?

And whether on a year-over-year basis this was still helping to drive comp increases?

We have been experimenting with what I like to call customer friendly hours now for over a year, perhaps even a year and a quarter.

And what we have done, Bill, is allowed every district manager to go in and adjust their hour, to the needs of the various markets that we compete in.

Like all retailers, we view adjusting the hours, making them longer or contracting them, is part of our everyday operation.

We will continue to focus on hours going forward.

You guys, obviously inventory was up a little bit in the quarter, and your gross margins were so much stronger, did you get any opportunistic purchases that may have impacted margins favorably?

No, I think what you are seeing is as you look at the margin, the initiatives that David called out, as well as a real focus on the mix of what is in the store.

Okay, that is all for me, thanks, guys.

Thanks so much.

Our next question will come from Karru Martinson, Deutsche Bank.

Good morning Karru.

Good morning.

Just to go back quickly to Grant's question on the long-term objective of deleveraging the Company.

Do you have a target leverage that you are guiding the business towards?

We continually have discussions with our Board on that topic.

Again, it is not something we are going to openly share, but we continuously talk about it, and have ideas of where we would like to see that, both in the short-term and the long-term.

The improvement in Seasonal, you guys certainly buck the trend that has been out there, and for everybody else weakness in that category, what were some of the drivers of the improvement for you guys?

As we look back on Seasonal, we started talking last year about doing a better job with the quality of product we offer.

There is a difference between cheap and inexpensive.

As I think as you look at the nonconsumable side of our business crew, you are seeing us move towards inexpensive at a great retail, and the sales results are showing that.

With the momentum continuing to accelerate through the quarter, and possibly in to May since you are sleeping so well, what are the bigger macro drivers we should be looking at for your consumer confidence has improved, unemployment is still up, what are the sorts of things that you guys track on that front?

Right now we are focused on the box, we are focused on making sure that it is merchandised properly, the adjacencies are right, and we are focusing very hard on the shopability of that box.

I think what you are seeing happen is we are seeing our customers respond, our current customers come more often, which means taking a purchase out of somewhere else they are going, and because of the changes that are taking place, the box is more appealing to another subset of customers that we haven't had previously.

We have 19 years of comp store sales increases consecutive years, so regardless of the economic environment, we are able to produce positive comp sales.

In spite of our margin expansion, we are working very hard on keeping our prices low.

Excellent.

Lastly if you have it handy, the restricted payments capacity, do you have that?

It is a complicated calculation in the agreement.

It is somewhere in the 100 million to $200 million range.

It varies quite a bit depending on what the net income is quarter-over-quarter.

Thank you very much, guys.

Thank you.

Thank you.

Our next question will come from Colleen Burns, Oppenheimer.

Good morning Colleen.

Hi, good morning.

Nice quarter.

Obviously a strong gross margin performance in the quarter, and I think typically your gross margin is highest in Q4.

Do you see upside from the current gross margin level today?

We have a lot of initiatives in place in regards to our gross margin.

And what I would rather do is not forecast what I think it is going to be in Q4.

What I would rather tell you is that we are going to continue to work on shrink, continue to work on sourcing, continuing to work on our private label, and we have just so many opportunities, and I think we are just seeing that all play out right now.

Thanks.

The lower merchandise cost that benefited gross margin in the quarter, was any of that driven by your sourcing efforts, can you just remind us of where you stand on sourcing, if you have target for the year?

In regards to the sourcing initiative, as we said in the last quarter we will start to see some of that beginning to play out towards the end of the year, we have put the team in place, we are beginning to historically we have been very concentric in Hong Kong and China, we are now expanding out to other countries, we are on target to where we wanted to be in Q1.

Okay.

None of the lower merchandise costs is really attributable to sourcing per se?

Some of it is.

But it is really too soon in the game for that.

On inventory, obviously you turned it up a little bit.

Do you see further improvement opportunities there as the year progresses, on an inventory turn basis?

Yes, our #1 priority now is making sure we have the right inventory for our customers when they come in.

David Tehle and his team have really focused on helping us manage our way through that.

having said that though, there is always opportunity to work on inventory.

We are comfortable with our inventory levels right now, keep in mind, the 15.7% sales increase in the quarter, only went up 8% on a per store basis.

We are always watching our inventory levels, and we are focused on making sure our inventory is productive, and that we are meeting our customers expectations.

We don't want to be in a position to miss valuable sales that are out there.

Our planning and allocation team is working closely with the stores to optimize our in-stock positions, and again as Rick said, our inventory turns continued to improve, at 5.2 times this quarter, versus 5.0 times for the rolling 12 months from last year.

Great, thanks.

Congrats on the quarter.

Thank you very much.

Thank you.

Our next question will come from Carla Casella, JPMorgan.

Hi.

This is [Melise Iotti] for Carla here.

You had raised gondolas in your stores, in some of your stores, and when did that take place, and when will you be cycling against that change?

We raised a piece of the store last year to 78 inches.

We are now raising another part of the store to 78 inches this year, and we will finish the project next year.

All right.

Going back to shrink, can you give us an idea of the range, how much is there a difference between the stores with the best to worst, and if that varies by state, or if you are tracking any of that information?

The distribution of shrink in the stores is after I think I have been in retailing for 34 years, or something like that, pretty much what you see everywhere else, certain states have issues, certain urbanicities have issues.

But we manage the shrink as a bucket, and we deal with it accordingly.

What I would rather not do, is sit here and give you some specific ranges, other than to say it is very consistent with retailing in general.

All right, thank you.

By the way, I am seeing improvement everywhere.

Great.

Thank you.

Thank you.

Thank you.

Our next question will come from Emily Shanks, Barclays.

Good morning Emily.

This is actually Jason Trujillo in for Emily.

Can you comment on performance by geography?

As David said in his opening comments, we are seeing good performance across every region we operate, and continue to see that.

So there is not much variability then at all throughout regions?

No.

Okay.

Great.

Then second we noticed that you guys did not include an adjusted SG&A reconciliation this quarter.

So have we cycled through those items for the most part?

Our belief is the SG&A was relatively comparable to last year, so we stopped doing that, if we have unusual items you can find them on the adjusted EBITDA schedule, but the SG&A is pretty comparable year-over-year now.

Great.

That is very helpful.

Lastly, you mentioned you are seeing some new customers come into the stores, do you have any sense demographic wise what those new customers look like, average income, gender, age, and such?

Unfortunately I do not.

Great.

Thanks a lot for the answers, and good luck.

Thank you.

Thank you.

Our next question will come from Jack Baylis, Midwood Research.

Emma Jo still there?

You had a question for her?

It has been time since I spoke to her.

I started out speaking with her when she was at AutoZone.

Regarding new stores, I did a little calculation, I was just wondering, how close to the sales volume of established stores are new stores ramping up, also are you getting any better occupancy cost deals?

Let me answer the second question first, the answer is yes.

We are seeing, we are actively negotiating lease term as we speak, so the answer is yes.

In regards to the first question, I would rather say that we are very pleased, they are obviously much closer to our average operation store operation than they have been in the past.

Right.

So you are stepping up your expansion pace versus last year?

Yes, we have announced that we are going to open 450 new stores this year, that is correct.

A square footage growth of 5%.

Right, okay, so something that you can maintain.

As you occupancy costs have declined, are you also getting that as leases expire on existing stores?

That is primarily where we are seeing it.

What about new stores?

Obviously seeing it in new stores also.

It varies quite a bit, depending upon the area we are going in to, we like to look at the rent as a percentage of sales, really to gauge how productive we think the store is going to be.

Regarding the new decor, what is the impact of that, how does it affect, how much does it affect sales, and how many stores have it?

Jack it is just beginning to roll out through the chain, we have five or six stores that have it now.

The rollout plan was for starting in June of this year, all of the remodels, relos, and new stores will get it.

In regards to the impact for sales, the fact that my competitors are probably listening to this call, I would rather skip that.

(laughter).

So do you have a number in terms of how many stores by the end of the year will have the new decor?

I would say we would push close to 250 to 300 probably, maybe a little north of that, it just depends on how it goes.

Thank you very much.

Thank you, ladies and gentlemen, (Operator Instructions).

Our next question will come from Mary Gilbert, Imperial Capital.

Good morning Mary.

Good morning.

Following up on opportunities to refinancing, it just seems that given the stellar financial performance that you are experiencing, and the attractive financial markets that we are in, and then the significant free cash flow that you guys should be throwing off this year, it seems like now is a better time than ever to take advantage of that, and refinance some of the debt.

Also looking a at the equity markets, you guys obviously have a great story, and looking at where some of the other dollar discount retailers trade, I just wondered what you are thinking there, in terms of timing?

On the refinancing, Mary we are pretty comfortable with our deal right now.

We have got one of the last covenant like deals that got done in '07, we like the flexibility that it gives us, we like the range of borrowings that we have, and we really don't see a need to change that right now, again, we are comfortable where we are.

It gives us plenty of room for growing the business.

As you can see, we have been very successful at doing this past quarter.

I was thinking on the bond side.

If there were opportunities there?

There are always opportunity to buy back those bonds obviously, and take some of that out.

We look at that on a regular basis in discussions with our Board.

Okay.

Could you give us an update on your new store opening model, given the more attractive occupancy costs, and then also the trends you are seeing in the stores as they ramp up?

In regards to, I will do the second part first, we are very pleased with the opening trends in the '09 stores, we were very excited with what happened in '08.

We have been able to improve on that with the new stores in '09.

I attribute that to the wonderful work that has been done on the real estate department on doing a much more analytical job in site selection, followed very closely with all of the work that has been done with merchandise mix, adjacencies, store flow, and store standards.

In regards to the change in the model, or our return because of the performance of the stores, again taking into account that there are people listening onto this call, what I would rather say is we are very pleased with the financial performance.

Rather than discussing exactly what it would cost to open up a new store, and what the--?

Oh that.

The cost of opening up a new store, I thought you were look for the return.

Yes, so in other words, the costs to open up a new store what that is, and how it ramps up, just to give us an idea of the ROIs, and that sort of thing?

Our investment when we open a new store is about $230,000, $130,000 in capital and $100,000 in inventory, in general, we get a positive cash flow after the first year, and the sales mature in four to five years on average, although we have been seeing better than that currently.

So is it maturing closer to like three to four years, is that fair to say?

I would rather not dance in that area right now.

Other than to say we are really exited with what is happening with the '08 and '09 stores.

Fair enough.

When we look at your cash position, how much of that cash is the minimum amount that you need to support operations?

I can answer that question two different ways, if you look at our stores, we need about 80 million to $100 million in the till out there just to run the stores.

I guess another way to look at it, would be to look at the cash flows on a yearly basis, if you look at last year, our cash interest was $377 million, our cash taxes were $7 million, and if add that together along with our base CapEx, our maintenance CapEx of $80 million, you come up with about $464 million, and just to refresh your memory our LTM on adjusted EBITDA was 1.022 billion.

That is very helpful.

Going back to the cash that you have in the stores, the 80 to 100, is there another amount that we should add to that, that would be cash in float or anything like that, or is that the bare minimum of cash that you need to keep in operations, so when we look at 435, is it really like 335 of excess cash that you are sitting with?

If you want to look at the investable cash, that is probably a good estimate for it.

Great.

That is most helpful.

Great, also any challenges that you see to the business going forward.

It sounds like you are expecting this momentum to continue, one, I wondered because we are seeing such dramatic improvement year-over-year, it sounds like that momentum continues, but does it continue at a slower pace, are there any challenges that you see to this continued favorable outlook?

We should talk about challenges.

The retail landscape in regards to promotional pricing, I think I have been on here for a couple of quarters, Mary, where I have said that it is the most intense I have ever seen.

It is still the most intense I have ever seen.

People are scrambling for retail sales out there.

I also think we are seeing a lot of retailers really step back and look at the mix of products that are in the store, and really trying to understand SKU productivity, which is going to add yet another dimension to the mix when it is all said and done.

I am not at the stage of the game, where I would want to forecast going forward, what our same store sales are going to be.

What I will talk to people about is we have opportunities in our 78-inch profile.

We have opportunities that are in the items that are in the store.

We have opportunities on the adjacencies that are in the store.

And we have opportunities yet in store standards, we have opportunities yet on customer service, and all of those things add up to growth.

And as a Company, we are focused on doing what we can for the customer, and we are going to let the customer vote going forward.

Got it.

That is most helpful, thank you.

Thank you.

Thank you.

Our next question will come from Christina Boni, RBC.

Good morning, how are you Rick?

My first question is a follow-up, you talked about the transition of merchandise to more of an attractive mix on the nonconsumable side, particularly you called it inexpensive.

Can you talk about where you are in the transition, maybe what areas of the store you have worked on first, and when do you think you will have the product mix that you would really like to have within the store?

I would like to equate everything to a football game, alright?

Let's say we are on the football field right now, I would say we are on about the 10-yard line from our own end zone, with 90 yards to go.

We have seen improvement in the quality of our Seasonal.

If I had my team here with me, there is still a tremendous amount of growth that can take there, as we work on that quality.

When you deal on the nonconsumable side, unlike the consumable side, your initiatives take considerably longer to get put in place, because you are dealing with foreign sourcing.

If everything goes according to plan, we believe towards the very tail end of the year, we will begin to see a few things taking place, and then 2010, is when we think we are going to be more trend relevant, and opportunistic with what we can do on the nonconsumable side.

That is definitely helpful.

Just a follow-up question to the new store economics, you said $230,000 was the cost per store, and you said $100,000 in inventory, is that net inventory or is that gross inventory, is that net of your Payables leverage?

That would be gross inventory.

You don't have a net number I guess we could look at your typical Payable leverage?

Yes.

You could take a look at that.

Thanks so much, congratulations on the quarter.

Thank you.

Our last question will come from Grant Jordan, Wachovia.

I just had one follow-up question, it looks like the cash tax number in the quarter was relatively high, I assume that is because you are earning more.

How should we think about tax cash obligations going forward?

If you look at the quarter, it was higher compared to the last year, the cash tax in Q1 of '08 was $2.2 million, versus the $34.9 million in Q1 of '09.

The majority of the tax paid in Q1 this fiscal year is usually based on the prior year's taxable income, however due to unusual nonrecurring expenses that were associated with the '07 merger, the required payment last year, Q1 '08, was greatly reduced.

So I think the '09 amount that we paid reflects the fact that we don't have these expenses any more, and is probably more typical of a run rate for the business.

So with that number, typically you would pay most of your cash tax obligation in Q1, with limited amounts over the remainder of the year?

No.

I don't think that would be the case.

I think it would be more prorata over all four quarters.

Okay.

All right.

Thank you.

Thank you, speakers at this time we have no further questions in the queue.

Listen, thank you everybody for showing interest in Dollar General, and we will talk to you in the second quarter.

Thank you very much ladies and gentlemen, at this time the conference has ended, you may disconnect.

Have a great rest of the week.