達樂 (DG) 2009 Q4 法說會逐字稿

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 the session is allowed without the Company's permission.

It is now my pleasure to turn the call over to Mary Winn Gordon, Dollar General's Vice President of Investor Relations and Public Relations.

Ms.

Gordon, you may begin.

Thank you, operator.

Good morning, everyone.

On the call today are Rick Dreiling, our Chairman and CEO, and David Tehle, our Chief Financial Officer.

We will go through prepared remarks, which we do have slides on our website at dollargeneral.com under the Investor Relations section that you can follow along with our prepared remarks.

After the prepared remarks, we will open the call up for a Q&A session.

Before we 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 our expectations and plans, strategies, objectives and anticipated financial and operating results, including but not limited to our comments regarding our forecasted 2010 financial performance, planned operating initiatives, store growth and capital expenditures, as well as our expectations with regards to consumer trends, anticipated private brand expansion, foreign sourcing opportunities, anticipated investment in and performance of new stores, remodels and relocations, and our long-term store growth, and other long-term growth drivers.

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 2009 10-K filed this morning in our fourth-quarter and full-year financial results press release issued this morning and in the comments that will be made on this call.

Statements made on 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 reference certain measures not derived in accordance with GAAP, including adjusted net income and earnings per share, adjusted SG&A expense, adjusted operating profit, adjusted EBITDA and return on invested capital.

In 2009 these items as applicable have been adjusted to exclude certain charges related to the termination of the sponsored advisory agreement with KKR and Goldman Sachs, the acceleration of certain equity-based compensation, and the early retirement of long-term obligation.

In 2008 adjusted operating profit and adjusted net income excludes a litigation settlement and related expenses.

Reconciliations of these measures to GAAP, net income, EPS, operating profit and SG&A and the calculation of ROIC and certain ratios using adjusted EBITDA are included in this morning's earnings press release which can be found on our website at dollargeneral.com under Investor Information.

Adjusted EBITDA, adjusted net income, and EPS, and adjusted operating profit, and adjusted SG&A should not be considered alternatives to net income, earnings per share and SG&A, 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-K for our definition of adjusted EBITDA, along with the limitations on the use of these measures as analytical fields.

It is now my pleasure to turn the call over to Rick.

Thanks, Mary Winn, and thanks to everyone for joining our call today.

This morning I will review the highlights of 2009 and provide an update on our current priorities.

Then David will go into more detail on our financial performance and share our current expectations for 2010.

We are very pleased to report our results for 2009, which by any measure was yet another great year for Dollar General.

Additionally we ended the year on a high note, delivering very strong results in the fourth quarter.

I would like to start by reviewing some key financial highlights for 2009.

Sales increased 12.8% to a record $11.8 billion.

Same-store sales were at 9.5% on top of a 9% in 2008 with every one of our geographic regions turning in positive comps.

Notably 2009 marked our 20th year of consecutive same-store sales growth.

We expanded our gross margin rate by 201 basis points to 31.3%.

We reduced our SG&A as a percentage of sales by 79 basis points.

We reported net income of $339.4 million or $1.04 per share, adjusting for several charges related mainly to our IPO which David will discuss in more detail.

Net income for the full year was $425.1 million or $1.31 per share.

Adjusted operating profit increased 67%.

Our adjusted EBITDA for the year increased over last year by 41%, on top of a 34% increase in 2008.

We reduced our debt by $734 million.

We ended the year with return on invested capital of 21.8%, and we opened 500 new stores and remodeled or relocated an additional 450.

These results are a testament to the strength of our business model and how well our strategy is resonating with our customers.

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

one, driving productive sales growth; two, increasing gross margin; three, leveraging process improvements and information technology to reduce costs; and four, strengthening and expanding Dollar General's culture of serving others.

Turning to our first priority of driving productive sales growth, in 2010 we are opening stores in our new customer-centric format, improving the layout and the convenience of existing stores and further transforming our product assortment.

We plan to open 600 new customer-centric stores while also remodeling or relocating an additional 500 stores that fit our new model in 2010.

The store format is a dramatic improvement in the appearance of our stores and creates a compelling shopping environment based on extensive customer insights from focus groups and from proprietary market basket data.

By the end of our fiscal year 2010, we expect to have 1500 stores in our new format.

We are completely rebranding our new stores through the use of signage and visuals that explain our value proposition to the customer at the point of sale.

The new store format has layouts and adjacencies that significantly improve the customer's ability to shop.

I am also pleased to report that our disciplined real estate process is contributing to our new stores ramping up faster and showing stronger growth than in prior years.

Additionally in 2010 we will benefit from Phase 2 and Phase 3 of our 78-inch profile expansion.

Phase 3 includes health and beauty aids and home and apparel.

Two important new merchandising initiatives also correspond with the expansion of our health and beauty aid offerings.

First, we continued to transform small box retailing with the launch of L'Oreal cosmetics.

L'Oreal gives us a unique positioning and helps strengthen our competitive position with the number one cosmetic line in the US.

L'Oreal significantly enhances our cosmetics offering and will be offered at price points that are familiar to our customers.

The second initiative is our exclusive licensing agreement for Rexall brands.

Based on the successful rollout of Rexall vitamins in the fall, Rexall gives us a tremendous opportunity to leverage the brand's heritage across health and beauty as a proprietary brand for Dollar General.

Also, driving productive sales growth in 2010 is the transformation of our non-consumable products across apparel, home and seasonal.

For example, in apparel we are currently relaunching several proprietary brands, including the Bobby Brooks brand for women and Open Trails for men and boys.

The apparel lines have improved quality across fit and fabric and are exclusive to Dollar General at price points that are attractive to our customers.

We are also leveraging national brands to reinforce our quality message through the introduction of Hanes products for the entire family.

Additionally we are launching our new True Living brand across home decor, including kitchen and bath, True Living Outdoors for lawn and garden products, and True Living Kids, our outdoor toy line.

Finally, our new merchandising team has complete responsibility for restaging our holiday style seasonal brand for Valentine's Day.

This is the first holiday that the team has had total control over, and I am pleased to report that our sell-through was just outstanding for Valentines.

Our second operating priority is to increase our gross margins where we expect to benefit in 2010, again from the transformation of our private brand products, as well as updates to our sourcing, distribution and transportation strategies, and a continued focus on shrink reduction.

We have been making great progress on our private brand program, which is a significant driver of gross margin.

In addition to the upgraded quality of our private brand items, we have completely redesigned the packaging of our brands to convey that the products are fresh and inviting.

We ended 2009 with a private brand penetration of more than 21% of our consumables, and we ended with about 1300 SKUs.

We continue to have significant opportunity to expand our margins through the further development of our private brand program.

Our current private brand initiatives will be supported by a new comprehensive in-store marketing campaign.

Another opportunity for expansion of our gross margins is direct sourcing of our merchandise.

During 2009 we realigned and overhauled the organizational responsibilities of our Hong Kong office and expanded into India, an initiative that is already producing great results.

We are currently developing new sourcing alternatives such as improved sourcing for our apparel products.

In the area of distribution and transportation, engineered labor standards are being implemented and should be completely rolled out by the end of the year.

Finally, we continue to be extremely focused on shrink reduction.

In 2010 we believe we should benefit from relocating high shrink items, adding closed-circuit TV, scan-based trading, and automated exception-based reporting.

Our third third priority is to leverage process improvements and information technology to reduce costs.

Over the last two years, we have developed a culture of mining the organization to reduce costs that are not critical to the customer experience, and in 2010 we will continue to build on our success.

For example, we are introducing electronic pay cards for our employees, enhancing our handheld technology for the retail stores and further expanding our energy management system.

Finally, our fourth operating priority is to strengthen and expand Dollar General's culture of serving others where we remain committed to both serving our employees and the communities that we serve.

We are focused on attracting, developing and retaining talented employees and have developed improved training initiatives, including in-store e-learning modules for store managers and leadership development tools that will help to further our associates' career paths.

We are making great progress as evidenced by our continuing reduction in store manager turnover, which declined another 5% in 2009, to the lowest level in 16 years.

Before I turn the call over to David, I wanted to thank our nearly 80,000 associates for a terrific 2009 and their commitment to an even better 2010.

With clear priorities and a strong track record of execution, I am confident that we have the right plans in place for a great 2010.

Now I will turn the call over to David to review our financials for the fourth quarter and full year.

David?

Thank you, Rick, and good morning, everyone.

We are very pleased to report another great quarter and a very successful 2009.

We ended the year with a stronger balance sheet than a year ago, and we are poised for continued progress in 2010.

First, I would like to review our fourth-quarter results.

I will then summarize the full year, and finally, I will share our outlook for 2010 before opening the call up to questions.

As you know on November 13, 2009, we took Dollar General public.

At that time we terminated our sponsored advisory agreement for $58.8 million and incurred $9.4 million of equity-based compensation expense, both of which are included in SG&A expenses.

We also repurchased long-term obligations in the quarter, and our income statement reflects charges of $55.3 million relating to these repurchases.

When I referred to adjusted numbers in my discussion, I'm generally referring to measurements excluding these charges.

The net impact of these items reduced our earnings per share by approximately $0.25 for the quarter and $0.26 for the year.

A detailed non-GAAP reconciliation is provided in a table to our press release.

We reported favorable results on every metric for the fourth quarter.

Sales increased 11.9%.

Our gross profit rate improved by 275 basis points.

We leveraged SG&A by 40 basis points on an adjusted basis, and interest expense was down $14.3 million year over year.

Same-store sales increased 7.4%, and as a reminder, that is over a 9.4% increase in 2008 or a two-year sack of 16.8%.

Total net sales increased across all four merchandise categories led by 14% growth in both consumables and seasonal.

We continue to see strong sales performance across all geographic regions where we operate and positive trends in both traffic and average ticket.

Additionally we were very pleased with the sell-through of our holiday seasonal merchandise, and we are encouraged by the progress we have made in the apparel area.

For the quarter gross profit as a percentage of sales was 32.2%, an increase of 275 basis points from the prior year quarter.

LIFO resulted in a $2 million credit in the '09 quarter compared to a $12.1 million charge in the '08 quarter.

Consistent with the third quarter, this change reflects of flattening of merchandise cost increases for comparable items for the year.

Comparability of the periods was also affected by an $8.6 million write-off in 2008 related to a phthalates recall.

Excluding LIFO and the phthalates charge, our gross profit rate increased by 196 basis points as we continued to make progress through our category management efforts by adding more productive, higher-margin SKUs, including escalation of our private brands, as well as adding more effort on optimizing our vendor relationships to keep costs low.

We have also refined our business process review of markups and markdowns.

Finally, gross margin improvement also reflects good progress on reducing inventory shrinkage.

SG&A, excluding the charges I already discussed, decreased 40 basis points to [21.3%] of sales in the '09 fourth quarter from 21.7% in the '08 fourth quarter, resulting from leverage attained as a result of higher net sales and our continued cost reduction efforts.

Our energy management program, cardboard recycling efforts, and worker's compensation expense reduction initiatives are all contributing significantly to our improved expense structure.

Adjusted operating profit was $347 million or 10.9% of sales, up 58% from adjusted operating profit in the 2008 quarter of $220.3 million or 7.7% of sales.

Our interest expense was $79 million, down $14 million.

The fourth-quarter income tax rate was 39.5% and was impacted by the non-deductibility of some of our IPO-related costs.

Our fourth-quarter net income increased by $5.3 million to $87.2 million or $0.26 per diluted share.

Adjusted for the previously discussed charges, net income was $172.9 million or $0.51 per share.

Adjusted EBITDA, which is defined in our credit agreement and considered a material component to the calculation of certain covenants, was $409.6 million in the '09 quarter, up 48% from last year's fourth quarter.

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

Full-year net sales were $11.8 billion, up 12.8% from the prior year, including a same-store sales increase of 9.5% on top of a 9% increase in 2008 for a two-year stack of 18.5%.

Gross profit increased by $629 million to 31.3% of sales compared to 29.3% of sales in '08, an increase of 201 basis points.

Excluding LIFO and the phthalates adjustment, gross profit increased by 149 basis points primarily due to higher purchase markups.

Our increased volume has enabled us to better manage our net purchase cost of merchandise.

In addition, our category management processes have helped us better optimize our merchandise selection in pricing, allowing us to increase our purchase markups which were partially offset by increased markdowns.

In addition, we expanded penetration of our private brands, which generally have higher gross profit rates.

Lower average fuel costs and improved distribution efficiencies, coupled with the impact of higher sales volumes, contributed to improved leverage of our distribution and transportation costs.

And finally, our inventory shrinkage rate continued to decline.

Full-year SG&A in 2009 was $2.74 billion or 23.2% of sales compared to full-year 2008 SG&A of $2.45 billion or 23.4% of sales.

Excluding the IPO-related charges, SG&A decreased by 79 basis points, primarily due to higher net sales with most of the impact on the store occupancy costs, including rent and utilities.

Utilities costs as a percentage of sales were further reduced by savings resulting from increased preventative maintenance and greater usage of energy management systems in our stores.

In addition, we further reduced our worker's compensation expense through safety initiatives implemented over the last several years, and legal expenses were lower in 2009 than 2008.

We recorded record operating profits of $953.3 million for the year.

That is 8.1% of sales.

Adjusted for charges our operating profit was $1.02 billion or 8.7% of sales, up 67% from adjusted operating profit in '08 of $612.5 million or 5.9% of sales.

Interest expense in 2009 was $345.7 million, a decrease of $46.2 million or 11.8% from 2008, primarily resulting from our repurchase of outstanding long-term obligations using proceeds from our IPO and excess cash.

The effective income tax rate for 2009 was 38.5% compared to a rate of 44.4% for 2008.

The '09 effective tax rate is less than the '08 rate, due principally to the unfavorable impact that the nondeductible merger-related shareholder litigation settlement had on the '08 rate.

This reduction in the effective tax rate was partially offset by a decrease in the tax rate benefit related to federal jobs credits.

While the total amount of job credits earned in 2009 was similar to the amount earned in 2008, the impact on the effective tax rate was reduced due to the higher pretax income in 2009.

Fiscal 2009 net income was $339.4 million or $1.04 per diluted share compared to net income of $108.2 million or $0.34 per diluted share in 2008.

Adjusted for the items we have discussed, 2009 net income increased 200% to $425.1 million or $1.31 per share.

Fiscal '09 adjusted EBITDA as defined in our credit agreement was $1.29 billion, up 41% from '08.

Now moving to the balance sheet, at year-end total merchandise inventories at costs were $1.52 billion compared to $1.41 billion in '08.

That is an increase of 7.4% or 1.7% on a per store basis.

Increases in the consumables and seasonal inventories were partially offset by decreases in apparel and home product inventories.

Annual inventory turns improved to 5.3 times in 2009 compared to 5.2 times in 2008.

As of the end of the year, our outstanding long-term obligations, including the current portion, were $3.4 billion, a decrease of $734 million from the end of fiscal 2008.

Details of our debt reduction are included in our press release.

Our ratio of long-term obligations, net of cash to adjusted EBITDA, decreased from 4.1 at year-end 2008 to 2.5 at year-end 2009.

We generated $669 million of cash flow from operating activities, up 16% from the $575 million generated in '08.

We added property and equipment in the year, totaling $274 million, including amounts in accounts payable.

In September, prior to our IPO, we paid a special dividend to our shareholders of $239 million from excess cash on hand.

Then we raised $444 million through the issuance of common stock, which, as I discussed, we used along with additional cash on hand to reduce long-term obligations.

We ended the year with $222 million of cash and no borrowings under our ABL facility.

Now I would like to provide you some more details on our outlook for 2010.

Given our continued strong performance over the last couple of years, I believe our 2010 outlook builds on the excellent foundation and focus that we have built for the new Dollar General.

Total sales for 2010 are forecasted to be up 8% to 10%.

This includes a 4% to 6% increase in same-store sales.

Our outlook represents strong growth given the impressive comps we will be up against from 2009 that we just discussed.

Adjusted operating profit growth is forecasted to be 15% to 20%.

We expect our full-year tax rate to be in line with our long-term guidance of 38% to 39%, although it may vary from quarter to quarter.

Additionally we expect to deliver earnings per share growth of 18% to 24% or diluted earnings per share of $1.55 to $1.63, assuming about 345 million weighted average diluted shares outstanding for the year.

Capital expenditures are forecasted to be in the range of $325 million to $350 million.

All-in we expect 2010 to be another strong year for Dollar General.

As Rick mentioned, we are confident that we have the right plans, processes and teams in place to achieve our goals.

Operator, we would now like to open the lines for questions.

(Operator Instructions).

Deborah Weinswig, Citigroup.

Congratulations on a great quarter.

Just a few question.

You stated in terms of outlook for 2010, that either margin guidance would be gross in the 15% to 20% range.

Can you help us think through that in terms of the breakdown between SG&A and growth?

Yes, I think again we are not going to give a specific breakdown, but I will give you some of the good things we have going on in both of those areas in terms of how we are growing our margins and what we're doing to get more leverage on SG&A.

And these are some of the things that we had talked about over the last six months as we were out on the road.

We believe that as we look at our gross margin for 2010 the top four items that will provide us leverage there are growing our private brand business as we have discussed, and we have shown in '09 how we have already been able to do that.

There is additional leverage that we can get out of distribution and transportation, again mainly looking at Q and then reducing stem miles.

Also, on the foreign sourcing, I think you are well aware we've just started that effort, and again, that starts to kick in a little bit more as we get into 2010.

And then, of course, our non-consumable business, we have a big push in 2010 to grow our non-consumable business.

So we think those four items will really help us on the margin.

As we look at the SG&A, there are several items we are looking at there in terms of helping us leverage our SG&A in 2010.

Retail labor productivity, utilizing technology to help us schedule our labor in the stores better, as well as doing things between the distribution centers, how we are managing product, and bringing it into the stores, will help us in the labor scheduling in the stores versus what we are doing in the DCs.

Continuing rent reduction.

We have a very big effort going on to reduce our rent in our existing stores.

Had a lot of progress in that in '09 and we see that continuing in 2010.

Energy management.

In our stores we continue to have -- put energy management systems in, which again we had a nice impact on our utilities expense in '09, and we see that continuing into 2010.

And then, of course, I think you are aware we put -- at our store net effort, we put PCs in the stores, and we are just starting to see the benefits from that -- reduced postage, reduced printing, reduced paper, and in helping us cut our trading costs.

So we see again improvement from both gross margin and SG&A that we are aiming for in 2010.

Okay.

And then with regards to the guidance, in terms of 4% to 6% same-store sales growth, should we think about that being more traffic or ticket, and I guess inherent in that question, how should we think about kind of your deflation or inflation outlook for this year?

Yes, we have actually planned to have no inflation or deflation, and we intend to grow ticket and transactions through the year.

Okay.

And I guess lastly, as we think about the success you have had with the new format, can you help us think about what has been the key drivers there in terms of what has really been critical in terms of what is driving the strength in the new format?

Has it been either the location or the store?

Has it been the layout of the new box?

Has it -- you know, which are the new driver -- the real driver in terms of the returns or the quicker returns on the new box?

I think primarily it has to do with the adjacencies and the shopability of the store and the way it flows.

It is very conducive to incremental purchases as you go through it, and the environment is more customer-friendly just in terms of how aisle width and how everything is laid out in the store.

So it drives traffic, and it increases the basket size.

Okay.

Great.

Well, thanks so much, and best of luck.

Colin McGranahan, Bernstein.

I wanted to focus on gross margin first.

If you could potentially give us any more quantification of some of the drivers of the great gross margin performance here in the fourth quarter?

And then what -- it was obviously a little bit more than we were expecting.

What was the upside versus potentially your plan or your expectation?

And then thirdly, was there anything exceptional in the fourth-quarter gross margin that you think you would not be able to build off of as we think about the fourth quarter of 2010?

Let me say a couple of things about the margin, and then I will turn it over to David.

I think what you are seeing in the fourth quarter is the things David has been talking about now.

They are all gaining traction.

I don't want -- David did not mention category management, and again, you got a category management process now that I would say is very robust in which we are constantly evaluating SKU productivity.

There is no doubt there is a new consumerism out there, which is driving private brand trial, which is helping us expand that, and as you know, the margins there are considerably higher than national brand merchandise.

David did not mention shrink.

We continue to work very hard on shrink, and we're getting some traction there.

Our distribution and transportation, the work that's being done on cubing trailers, the work that is being done on reducing stem miles, the work that is being done on utilizing empty trailer instead of backhaul merchandising, turn that into a process.

And also, I want to throw in that we started seeing in the fourth quarter albeit not to the degree that we are seeing in the first quarter of this year is the transformation of the non-consumables.

Some of that nonconsumable merchandise started rolling into the stores at the tail end of the fourth quarter.

And, David, I don't know --

Yes, that is exactly what I was going to say.

The only thing I would add to that is there really is not anything that we would point out as unusual or one-time in gross margin in the fourth quarter.

It all came from operating performance.

Okay.

And then just anything notable that really exceeding your internal plan, or this was pretty much as you had thought through it?

We have high expectations.

Good to hear that.

Second question just on the sales trend, obviously any comments you could make around holiday, post-holiday, and then clearly you have got two of the three months of the first quarter already under your belt.

You are lobbying against a pretty tough compare for the prior year.

If you can provide any commentary around how sales progressed and what you have seen so far this quarter.

We had a very good Thanksgiving and Christmas.

We were very satisfied with habit in the fourth quarter.

As you can imagine, I need to be a little more sensitive now talking about the quarters we are in.

I will tell you this.

We came out of the fourth quarter and entered quarter one with our inventory in wonderful shape.

We have sold our way through the quarter four nicely, and we are positioned very nicely going into quarter one.

I will tell you Valentine's is the first holiday that the new merchandising team all came together from all the different disciplines inside the organization, and we achieved an 85% sell-through on Valentine's.

I could actually argue that is too high, but what is important for you is it did not come by managing the inventory position.

It came from better quality, better mix and better pricing, and I will sum it all up with I'm kind of happy where we are right now in the first quarter.

Bill Reuter, Bank of America/Merrill Lynch.

It seems like your guidance for next year is obviously pretty strong.

I was wondering if you could comment broadly on your uses of free cash flow that you guys would be planning on and whether you guys would be thinking about bond room purchases or how you are thinking about that?

Yes, I would be happy to talk about that.

Our goals continue to be the same as what we have talked about over again the last six months on our usage of cash.

Our number one goal is investing in the business and investing in two different ways.

One for growth and two for return.

We have different projects that are obviously related to growing the business, particularly in the store area and the remodels and relocations, and then we have projects that give us a return, and we are doing both of those.

So that clearly is our number one priority.

And then our second priority, as we mentioned before, is retiring debt and taking the leverage down on the Company.

So really that has not changed at all.

That will continue to be our priorities as we move forward.

Okay.

And then it seems like you guys are investing in the non-consumables category.

I was wondering whether you guys test these initiatives in a limited number of locations before you roll them out to the whole chain and what you guys -- I guess how that went?

And to answer your question, yes, we did.

To be frank about it, we tested them in the fourth quarter, and the sell-through exceeded our expectation.

Okay.

And then just lastly, in terms of your expectations for advertising expenditures this year, are you guys planning on changing that budget significantly or changing the way in which you communicate with customers?

No.

No, we will still continue to run inserts once or twice through the course of the month like we always have based on the calendar.

And again, our primary advertising vehicle is the in-store experience and our reputation for everyday low pricing.

Joseph Parkhill, Morgan Stanley.

I was just wondering if you could comment on the competitive environment and how you have classified the promotional intensity over the holidays and has that changed at all over the last few months?

Yes, I think it is a wonderful question.

Everyone right now is pushing the value proposition across every channel.

I think that as -- when I sit in my shoes and look back on the fourth quarter, I think we saw a lot more full revenues sales this year versus last year in a lot of the different channels.

Everybody last year was marking everything down 70% or 80%, and I think trying to really get an understanding to how many units people were pushing across the check stand is really important right now.

In regards to the competitive environment in quarter one versus quarter four, I would say it is about the same.

It is certainly intense out there.

It is interesting as you follow the month and look at the adds, you cannot most tell when someone is a little disappointed with previous weeks' sales based on the intensity of the items that are in the ads and the price points that are there.

So it's still very much promotional.

Everybody is focused on the value equation right now, and that is why I'm so proud of where we are.

We have stayed true to the EDLP process, and as you can see by our numbers, the customer continues to respond to it.

Great.

And then I was also just wondering if you could comment as gas prices have been up on a year-over-year basis, have you seen any difference in the performance of the rural stores versus the rest of your chain with respect to either ticket or traffic?

Yes, I was reading an article the other day that said they are forecasting gas prices to be north of $3.00, and I think they are also the highest point they have been in almost a year and a half, maybe even two years.

But I would look at you and tell you the convenience of our locations -- and if you look back on the history of the Company with 20 consecutive years of same-store sales growth, the fluctuation in gas prices have not affected the Company in anyway.

We are seeing the same kind of growth in our rural communities as we are in our urban communities.

John Zolidis, Buckingham Research.

A couple of quick questions.

One, can you give us the store closing numbers for this year?

34.

I'm sorry, is that the 2010 plan?

No.

That is the '09 actual.

Okay, and then a question on shrink.

As you have been raising the height of the gondolas and I just noticed walking through the stores, does that contribute at all to higher shrink in those areas?

I know you said shrink was a benefit and you expect it to continue to be a benefit, but have you seen any warning signs that the higher gondolas have led to increased shrink at all?

John, that is an excellent question.

The answer is no.

As we have raised the profile in the store, you have to remember we are also changing the adjacencies and moving the higher shrink lines to better site lines with the cashier, and we have also created that secured selling area behind the check stand where you would go certain high pilferage items there is literally a card on the shelf.

You pull that off, take that up to the checker, and then they pass the item from behind the check stand.

So we continue to feel really good about what is going on.

And you have got to remember, now one thing about the 78-inch profile, which I tell everybody all the time, the profile was very erratic in our stores until we went to the 78-inch profile.

There would be places in the store that might be 100 inches.

So the 78 inches, that consistent profile, I think it's actually benefiting us.

It has taken away those zones where people could hide before.

Thanks.

Continued success.

Alan Rifkin, Bank of America/Merrill Lynch.

Congratulations.

Relative to either the 7.4 comp posted in Q4 or the 9.5% comp for that year, how was the performance of the products within the Phase 1 and Phase 2 categories?

Yes, another good question.

We continue to comp positive in Phase 1 and the Phase 2 since it is at the early part of its rollout is comping at a higher rate than the overall chain number.

Any sort of quantification of that above -- (multiple speakers)

Yes, it is above.

Okay.

Your ability to attract brands like L'Oreal and Hanes is very admirable.

Are those exclusive lines and what is the prognosis for further brand additions going forward?

Yes, another good question.

No, those two brands are not exclusive.

The Rexall brand is exclusive to us.

Bobbie Brooks is exclusive to us.

But when you look at the Rexall or excuse me you look at the L'Oreal and the Hanes, what you are seeing is the merchants here -- remember when we first started on our journey two years ago talking about being trend relevant.

And what you are seeing here is the expansion of our cosmetic line by 4 foot with the introduction of L'Oreal making it more relevant to our customer, particularly when you look at the price points we are going to have.

Hanes is the same thing.

Our customer -- you know, the main spokesperson for Hanes is Michael Jordan, and our customer at Hanes resonates with our customer.

And we are continuing to explore the brands that we feel that still -- that we don't have that we should have.

And, as we make decisions on those, we will have a marketing release exactly like we have on these two.

Okay.

Thank you and then one last question if I may.

Your gross margin gains in absolute terms in both the second half of the year are very admirable.

As you look further down the road and those gains are coming from no fewer than half a dozen initiatives -- category management, private label, fuel costs, shrink, distribution, procurement, to name just a few -- as you look at the long-term opportunities beyond 2010, can you rank in order, if you will, where you see the greatest opportunities for further gross margin gains long-term?

Yes, that would probably be -- the number one would be the sourcing long-term, the foreign sourcing because again we just started that.

And then the nonconsumable business, what we are doing in non-consumables, and then private brand and then DC and transportation.

And remember, all that will be managed with good solid category management at the same time.

Dan Wewer, Raymond James.

Rick, what are the other merchandise editions that we have seen in some of our stores visits is adding beer to some of the Dollar General stores.

I was curious about how many stores carry that, and how long has that been in place?

About 350 so far primarily located in Florida.

The Carolinas we are starting to move into in Texas, and it has been in place about a year, and we are rolling it out very methodically.

We are rolling it out trying to understand -- I think we have demonstrated we have rolled things out really understanding what the impact is going to be.

I can tell you we are pleased with what we have seen so far.

And that will eventually be in all stores?

I think it is fair to say a fair chunk of stores before it is all said and done.

Okay.

The second question I had is we are calculating that your operating expenses per store grew about 4%.

I know that you're talking about SG&A leverage going forward.

That is clearly benefiting from the strong sales.

But are you expecting the rate of inflation at the in-store level will be less in 2010 than it was in 2009?

No, I think we are pretty flat on inflation.

Yes, I think the answer to that -- to answer your question, it would be less, yes.

So when we are looking at the SG&A per store, you would think that it would probably grow at the same rate in the coming year?

Flat or slightly down, yes.

Okay.

The third question I have, do you have an interest expense that you're using in 2010 that equates to that 255 EPS estimate?

Yes, we are not giving specific guidance on interest expense.

I can tell you if you look at the debt reductions that we did in '09 and just roll those forward, you get a $50 million to $60 million reduction in interest year over year, and you will probably see that the biggest piece of those reductions happened in the latter half of the year if you're trying to model for 2010.

And then the last question I had was regarding the services provided by KKR and Goldman, could you talk about what type of services these were?

Is this going to be an additional overhead that has to be added now that that service agreement has been terminated?

There will not be additional overhead, and the services they provide are the advisory things to help us evaluate our plans and help us manage our way through the turnaround.

Okay.

So you will not be incurring additional expenses to offset what they are no longer providing?

That is exactly right.

Tom Roller, Credit Suisse.

When you think about your new store growth for 2010, can you describe what geographies you are thinking about?

Is it an equal balance between existing core markets and markets that are less penetrated?

Yes, the growth is spread across the entire 35 states that we are operating in now, and it is equally balanced between rural and urban.

Okay.

And then on the capital spending budget, it looks like a decent increase from 2009 to 2010.

Are there any timing shares, or is that just relating to new stores and increased rate models?

Yes, that is exactly what it is.

The store growth going up to 600 new stores in the 500 relocations and remodels that is the biggest piece of the delta year over year.

Okay.

Great and then one last question.

It seems when we lost the stores that standards are improving nicely.

Is there anything you can comment on in the way of incentivizing the local store managers to keep up the store standards in a better way that you are working on?

Yes, we have a component of our district managers and store managers bonuses that is based on service metrics and store standards fall into that.

So to answer your question, yes, they are getting compensated for it.

And have you reshifted that in the last year or two?

We have introduced it in the last two years.

That is very true.

Meredith Adler, Barclays Capital.

A couple of questions for you.

It is really a coup to get L'Oreal cosmetics into your stores.

I was wondering if you could just talk a little bit about the discussion you had with them about your customer base and then maybe how you think the reaction from other high quality vendors will be as you try to expand the quality of the brand?

Yes, I think that every manufacturer out there is looking for growth opportunities.

And I think every manufacturer -- I will use L'Oreal as an example -- is probably dealing in channels of trade that are flat or negative, and I think L'Oreal, when our Chief Merchant started to explore this, was very interested in the fundamental shift that was taking place in Dollar General.

Dollar General is not the place it was two years ago and saw an opening to come in and appeal to another base of customers.

And I think it's going to be a fabulous partnership going forward.

Great.

And then I know you don't have any frequent shopper data, but do you have some sense of the extent to which the mix of customers has changed?

I think you said the growth has come from higher income customers, but are they entirely new or or are they just buying more?

Yet, we did some research about six months ago that identified we were, indeed, attracting and retaining new customers.

I cannot give you that specific data though, but I can tell you that the fastest-growing segment we have are customers making more than $70,000 a year.

One could make a leap that you are probably attracting them, and they were not there two years ago.

And I can also tell you that we are growing the share of wallet of our existing customers by 13%.

So there's this nice balance of the new and the old, and I have said this, and I apologize if I'm repeating myself, what fascinates me is that, as you look at the research, our new customers are talking about if there is a change in the environment, 97% of them said they would continue to shop with us, which is the exact same number as our existing customers.

And I have never seen that in my retail career.

All right.

And then my final question is just about you did talk about having tested the discretionary merchandise.

I am kind of more interested in, given that the customer is still feeling pressured and being very focused on value, do you believe that the time now is right in increasing your discretionary assortment?

Yes, that is an excellent question.

I believe that in regards particularly to the nonconsumable side of the table we mixed up cheap and inexpensive.

And we believe that the overhaul that we are making, the transition we are making, is going from cheap to inexpensive.

And when we make that move, people are still buying jeans.

They might not be buying as many, Meredith, but they are buying them somewhere.

And we believe our new Bobbie Brooks line with the improved fit, the improved color, the improved quality at a $12 retail will be enticing enough that we're going to draw some nonconsumable business into the stores.

Great.

Thank you very much.

Patrick McKeever, MKM Partners.

Just a question -- I know you do not want to say too much about current trends, but you're up against that stiff comparison with last year and the first quarter.

There is some speculation -- maybe it is fact -- that tax refunds are up this year versus last year.

So I was just wondering if you have spent any time on that particular issue, and if you think that is having any kind of an impact on the business right now?

I will be frank.

I have not spent a lot of time on it.

As I said before, I'm happy where we are right now.

Okay, fair enough.

And then second question, and no one has asked this, so maybe there is a more obvious answer than I thought.

But I was just wondering if you could provide a little color on those two shelf registrations or those two registrations that were filed this morning?

Yes, I would be happy to do that.

One of them was just a standard refiling of the market maker that we do every year so Goldman Sachs can trade in our notes.

And again, this is nothing new.

I think this is the third or fourth year that we have done that for them.

That is a requirement.

The second one is something new.

That is that a S-3 that we've filed.

That is a shelf registration statement that will enable us to opportunistically engage in a wide variety of transactions over the next few years.

We made the filing today to maintain our flexibility in the capital markets, as well as to satisfy our contractual obligations to our shareholders.

And again, we continue to focus on running the business and delivering our long-term shareholder value.

Bret Jordan, Avondale Partners.

A couple of quick questions and one of them really around Rexall.

Some details behind the brand and what you have to pay to use what is an established brand and whether as a house brand it is much margin differential compared to your existing house brand?

Yes, our idea is to play the Rexall brand between private brands and the national brands, and we successfully negotiated the deal with them without having to pay a yearly fee.

Okay.

And I guess when you look at that as the SKUs you plan to be branding with Rexall, are there particular categories?

We are going to start in the health and beauty area, and we will see how it plays out from there.

Okay.

And then once on the Valentine's, maybe more detail than you want to give, but talking about 85% sell-through, how does absolute dollar volumes comp to the prior year?

Was it a clear inventory so you saw through better, or did you use merchandise much better and you got a net gain in the category as well?

You just said it perfectly.

It was a combination of both.

We did a much better job on selection, a much better job on quality.

Our inventory position was right and I have to complement the stores in that the retail team is more rigorous on executing the merchandising plan.

Do you want to give us a feeling for the volume improvement year over year?

It was nice.

We will move on to the next question, please.

This will be our last question, operator.

Tricia Dill, Wells Fargo.

I'm wondering if you can just comment on the early results from the reset in the home category specifically, as well as the rollout schedule for the other nonconsumable products this year?

Yes, I would tell you right now we are on track as far as rolling the product out where actually I can argue a little bit ahead of schedule, and what I would like to do is have another quarter under my belt.

I would like to have the first quarter under my belt before I actually talk about that, which I will in the next earnings call.

Great.

And the non-consumables refreshes is mentioned as one of the drivers of guidance.

How much should we expect this rollout to contribute from both a sales and a margin perspective this year?

I would rather -- let's let those things unfold right now.

I don't want to mislead anybody, and there is so much movement now on the nonconsumables side.

Let's let it play out for a quarter.

Okay.

And are you seeing any changes in consumer behavior just in terms of basket size or your ability to attract new customers now that the consumer is generally feeling better about the environment than a year ago?

When we think about the consumer feeling better, I think they are feeling better because the environment has stabilized.

I don't know that there necessarily feeling better about the overall where things are and where it is going.

I can tell you there is still -- our basket is still growing.

We are still growing transactions.

But I can also tell you we continue to see signs of this new consumerism where people are shifting channels.

They are trading down.

They are changing their habits.

I think what you're seeing in our private brands and the changes we have made there, and I also think the fascinating thing is it used to be -- and this is my opinion -- when people ran Coke in the ad, people would buy four or five weeks of Coke and put it in the closet, and that's not taking place anymore.

They are buying enough Coke -- they are getting them as long as they can, and they are not stockpiling, which is again is indicative of the fact that people are holding back.

Great.

And then lastly, on SG&A when do you start to cycle some of the bigger initiatives that have been helping the energy management system improvements, worker's comp, expense reduction initiatives, etc.?

I think the way I would look at it is we are continuously cycling items, and we are continuously adding items because of our mining for cost reduction.

And, as I mentioned, as I look to the future, we still have a lot of room on energy management.

We still have room on retail labor in terms of what we can do there.

Rent reduction.

We have just begun to get the benefits out of the PCs in the stores and many other items that we are working on in our mining.

So I view it as a continuous process where items cycle off and items cycle on, and we are continuously looking for replacement items when something cycles off.

And then finally, operator, and for everyone on the call, as I look back on 2009, I'm very confident that we're going to look back on this as a period in which we have provided exceptional opportunity to gain market share, and we have improved our competitive position.

We look forward to updating you on our continued progress on our first-quarter call.

Thank you all very much for taking the time to chat with us today.

This concludes today's teleconference.

You may now disconnect your lines.