達樂 (DG) 2010 Q1 法說會逐字稿

Ladies and gentlemen, this is the Dollar General Corporation first-quarter 2010 conference call on Tuesday, June 8, 2010 at 9 a.m.

central time.

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

This call is being recorded by Conference America.

No other recordings or rebroadcast of this session are allowed without the Company's permission.

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

Mary Winn Gordon, Dollar General's Vice President of Investor Relations and Public Relations.

Ms.

Gordon, you may begin, ma'am.

Thank you, David and 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 our prepared remarks and then we will open the call up for a Q&A session.

Before we begin, let me take a moment to reference the Safe Harbor provision 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, as well as our 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 long-term store growth and other long-term growth drivers.

Because such statements are subject to significant risk 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 on March 31, 2010, in our first-quarter earnings press release issued this morning and in the comments that we will be made on this call.

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

Dollar General takes 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 and adjusted EBITDA.

Reconciliations of these measures to the most comparable GAAP measures and the reasons we believe these measures are useful to investors are included in our earnings press release, which can be found at our website at dollargeneral.com under Investor Information.

Adjusted EBITDA, adjusted net income and EPS, adjusted operating profit and adjusted SG&A should not be considered alternatives to net income, earnings per share, 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.

Please note that our discussion of our results and our guidance are all on an adjusted basis.

We have included a reconciliation of these adjustments in our press release.

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

Thank you, Mary Winn.

Good morning and thank you all for joining us today.

We are very pleased with the results of our 2010 first quarter.

We maintained our focus on serving our customers, continue to advance our merchandising initiatives and further enhanced our store execution and the impact of our efforts is reflected in our strong first quarter.

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

Our total sales increased 11.9%.

Same-store sales increased 6.7% on top of a 13.3% increase in the first quarter of 2009.

Gross margin expanded 136 basis points versus last year's first quarter.

Excluding expenses relating to our secondary offering that was completed during the quarter, we leveraged SG&A by 37 basis points.

Our adjusted operating profit increased by 36% to $306 million, or 9.8% of sales.

Our adjusted net income increased 75% to $145 million, or $0.42 per share, a first-quarter record for Dollar General.

Interest expense was down substantially from last year due to our ability to significantly reduce our debt in 2009.

Finally, we opened 155 stores in the quarter, bringing our total store count to 8,965 with nearly 700 stores in our new customer-centric format.

This new layout dramatically improves the appearance and convenience of shopping our stores and by the end of the year, we expect to have 1,500 of these stores across the chain.

During the quarter, our customers shopped with us on a more regular basis and we also believe that we are continuing to attract new customers.

It is evident that consumers continue to make significant behavioral changes in their spending habits as a result of the difficult financial realities that many continue to face.

I think it is fair to say that most consumers have reset their spending norm.

Our consumers in particular continue to feel pressured.

As a result we remain cautious with their discretionary spending.

We've continued to see that the quest for value at all economic levels is very real.

Retailers across all channels, including discount, drug, mass and grocery, have increasingly relied on value-based messaging to entice consumers.

At Dollar General, delivering quality products, valued prices, convenience and customer-friendly service has always been our goal and we remain focused on ensuring that we deliver those things for our customers.

Our key point of difference with our customers is our everyday low price in a convenient location.

As always, our customers know that they can count on us to be there for them.

As part of this effort, we continue to focus on our four key operating priorities, including, 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.

Thus far in 2010, we have accelerated our new store growth as planned, opening 155 new stores and relocating or remodeling an additional 128 stores using our new customer-centric format.

We have been very pleased with the sales performance of these stores.

Stores opened in 2010 are currently exceeding sales of our prior format stores by 7% and hitting above 90% of our comp store average.

You may recall that in 2008, we began raising and standardizing our shelf height to 78 inches throughout the store.

The strategy has been to raise a section at a time across all stores to ensure that we have space for the expanded product offerings we have selected through our improved category management processing.

Phase 1 of the 78-inch profile, which concentrated on the food area, is still comping positively.

Phase 1 of the strategy, which began in 2009, primarily focused on party supplies, snacks, has continued to comp in excess of the Company average.

The most recent phase of the strategy began to roll out in quarter one 2010 and focuses on health and beauty, apparel and home.

The new areas rolled out year-to-date are driving comp sales increases above the Company average.

The health and beauty expansion supports the launch of L'Oreal cosmetics within our stores, enhancing our cosmetic suffering and helping to strengthen our competitive position.

In addition, we are moving forward with the exclusive expansion of the Rexall brand in health and beauty, building upon the successful launch of Rexall vitamins we already have in the stores.

By the end of the third quarter, we expect to have almost 100 new SKUs featuring the Rexall brand.

During the first quarter, we completed 40% of our major planogram resets for the year, accelerating the pace from last year.

We are also making good progress on the transformation of our non-consumable merchandise across apparel, home and seasonal.

We had strong seasonal sales during the quarter, including Valentine's Day and Easter, exceeding our forecasted sell-through.

Additionally, we saw encouraging sales of our two living outdoor items in lawn and garden and early summer seasonal merchandise.

Importantly, our team has created great products in non-consumables that are trend-relevant and are generating the wow factor in our stores.

The success of our seasonal offerings is a strong example of this effort.

In women's apparel, we are in the process of adding our proprietary brand, Bobbie Brooks denim products and later in the year, we will be launching our marketing campaign for the complete Bobbie Brooks line, using employee models from across our stores, distribution centers and store support center.

We have also reintroduced our Open Trails brand for men and boys with a focus on everyday basics such as work clothes for men.

Finally, our conversion to Hanes products in the quarter went very smoothly and has been well-received by our customers.

Our second priority is to increase our gross margins where we expect to benefit throughout the year from the ongoing transformation of our private brand products, as well as continued focus on shrink reduction and additional efficiencies in our sourcing, distribution and transportation discipline.

Across private brands, we are benefiting from the upgraded quality of our product offerings, value prices and redesigned packaging.

In the first quarter, our private brand penetration of consumables was 21.7%, an increase of 110 basis points from last year.

Improving our overall sourcing and increasing our direct imports have also been a focus.

I am pleased to report that we are ahead of plan and gaining traction.

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

We remain focused on mining the organization for cost reductions that are transparent to our customers.

We continue to see strong results related to our energy management efforts throughout the installation of automated energy management systems.

Not only do these systems reduce utility expenses, they also provide specific information to notify us on any potential problem, allowing our operations team to respond with preventive maintenance as needed.

Through the first quarter, 55% of our stores were equipped with these automated systems.

Our rollout of back-office computers in the stores has enabled us to significantly reduce costs.

We now have the ability to transfer advertising information to the stores, transmit shelf labels, download training programs and perform preemployment screening through the use of the computers.

Sizable postage and printing costs have also been minimized.

The computer has also enabled us to capture tax credits related to new hires as we continue to expand our store base in 2010.

To offset rising fuel costs, our transportation team has continued optimizing the network through better store allocation and routing by decreasing the number of miles per load and improving the cartons per trailer through technology modifications.

Our final priority is our commitment to strengthening and expanding our culture of serving others, including our employees, the communities we serve and our shareholders.

As you know, our hometown of Nashville and many of the surrounding communities, including our employees, were recently impacted by the worst flooding in the area's history.

Thank you to those who have expressed your concerns for the residents of the impacted communities.

We have partnered with the Red Cross providing much-needed cleaning supplies and water in addition to cash donations to support the communities we serve.

I want to note that the impact of these floods to Dollar General as a company was minor.

75 of our stores were closed for a short period of time and only two stores were completely lost to the flood.

In summary, we have made great progress in the first quarter of 2010.

We are optimistic about the rest of the year.

Our customer is responding to the steps we've taken to improve our stores and our product offerings.

All of our initiatives seem to be paying off.

At the same time, we recognize that there are uncertainties that remain in the market.

The economy, in particular unemployment, still has our customers carefully spending their dollars and the competitive environment is very focused on delivering value for the customer as it always is in tough economies.

We will closely monitor how our customer responds to the coming months to both the economic and competitive climate as we continue to focus on our four operating priorities.

Our hard work over the last two years and our recent results convince me that we have the right plans in place to serve our customers and to continue to deliver profitable sales growth.

As a result, we believe it is appropriate to raise our guidance for the year.

Now David will walk you through the details of our first-quarter financial results and provide additional information on our outlook for the rest of the year.

Thank you, Rick and good morning, everyone.

Sales for the first quarter were $3.11 billion, up $331 million, or 11.9% from the first quarter of last year.

Same-store sales in the quarter increased 6.7% on top of a 13.3% increase in the '09 first quarter.

Both customer traffic and average ticket continued to improve in the quarter.

We are very pleased with our seasonal merchandise sales, which were up a strong 20.6%.

Our gross profit rate was a first-quarter record of 32.1%, an increase of 136 basis points over the '09 first quarter, primarily due to higher average markups.

Several factors are contributing to our higher markups.

Increased sales volume and improved global sourcing capabilities have contributed to our ability to reduce product costs.

Additionally, the increase in private brands contributed to the higher markups in the quarter, which were partially offset by higher markdown.

The increase in the markdowns was due in part to the accelerated resets of several of our consumables planograms versus last year.

Transportation costs were higher than in the prior year quarter, primarily due to increased diesel fuel costs, which averaged $2.92 per gallon in the 2010 quarter versus $2.16 in the '09 quarter, a 35% increase.

Distribution costs were also up as we transition to voice pick and added smaller ship sizes as part of our merchandising and inventory management initiative.

SG&A as a percentage of sales was 22.8% in the quarter, including approximately $15 million of expenses related to our secondary offering.

Excluding these expenses, SG&A decreased 37 basis points to 22.3% of sales in the 2010 first quarter from 22.7% in the 2009 first quarter.

This SG&A leverage was due to increased sales and our cost-reduction efforts.

Operating profit was $291 million, up $66 million, or 29% from the '09 first quarter.

Excluding the expenses of the secondary offering, operating profit increased 36% to $306 million, or 9.8% of sales compared to 8.1% in '09 and 4.6% of sales in '08.

Interest expense was $72 million for the quarter, a reduction of $17 million from last year's first quarter, primarily due to our significant debt repurchases in 2009.

The effective income tax rate for the quarter was 37.8% compared to 38.1% in '09.

First-quarter net income was $136 million, or $0.39 per share compared to net income of $83 million, or $0.26 per share for the '09 first quarter.

Adjusted to exclude the expenses of the secondary, this year's first-quarter net income was $145 million, or $0.42 per share.

We generated $87 million of cash from operating activities, which was down slightly from last year's quarter as we invested in inventories to support our anticipated higher sales levels.

Capital expenditures totaled $91 million for the 2010 first quarter.

Now moving to the balance sheet, as of April 30, total inventories at cost were $1.6 billion, up 10% in total, or 4% on a per-store basis.

Inventory turns have improved to approximately 5.3 times from 5.2 times a year ago.

We had total outstanding debt at the end of the quarter of $3.4 billion with no borrowings under our asset-based revolver.

Adjusted EBITDA for the last 12 months increased 33% from the year-ago period to $1.4 billion resulting in a decrease in our ratio of long-term obligations to adjusted EBITDA to 2.5 times from 4.0 times a year ago.

Net of cash, our ratio of long-term obligations to adjusted EBITDA was 2.3 at the end of the quarter compared to 3.6 a year ago.

Subsequent to the end of Q1, we repurchased an additional $50 million of our senior notes with excess cash on hand.

This will result in a charge in the second quarter of $6.5 million, primarily related to the premium paid to repurchase the bonds.

Looking ahead, while we successfully lapped our most challenging comp resulting in a two-year stack of 20% in the first quarter, and our traffic and average ticket continue to be healthy, we recognize that there are uncertainties in the market as Rick discussed.

That being said, we had a great start to the year and we are updating our guidance to reflect the strong performance in the first quarter.

As a result, we are raising our full-year outlook for 2010.

We continue to expect total sales for 2010 to increase 8% to 10% over last year.

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

Adjusted operating profit growth is now forecasted to increase 18% to 22% versus our previous expectations of 15% to 20%.

We continue to 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.

We now expect to deliver adjusted earnings per share growth of 24% to 29% or adjusted diluted earnings per share of $1.62 to $1.69.

That assumes about 345 million weighted average diluted shares outstanding for the year.

This compares to our previous expectation for earnings per share growth of 18% to 24% or diluted earnings per share of $1.55 to $1.63.

We continue to expect capital expenditures to be in the range of $325 million to $350 million.

In summary, we have made tremendous progress in improving and enhancing our store operation and upgrading our store standards and merchandise selection in the recent timeframe that has allowed us to drive sales and profitability.

Notably, our financial results in the first quarter have also allowed us to strengthen our balance sheet.

Finally, we are confident in our ability to execute our plan for the rest of the year.

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

(Operator Instructions).

Meredith Adler, Barclays Capital.

Meredith Adler Good morning.

Congratulations.

How are you?

So a question for you.

I would like to talk a little bit -- we've talked about the consumer being very cautious on discretionary.

Maybe talk a little bit about apparel and if -- apparel is obviously something you source in Asia.

What else are you sourcing in Asia and how much -- if apparel doesn't take off this year, how much benefit do you get from that direct sourcing?

Meredith, the large bulk of our non-consumable -- seasonal, apparel -- the bulk of that is all sourced from China.

Just about -- think in terms of domestic, all the little kitchen gadgets, all of that comes from overseas.

We have made a major change on the non-consumable side in every category in regards to inexpensive versus cheap, in regards to being trend-relevant.

And when I say trend-relevant we need to keep that phrase in focus.

I don't want you to think that we are out there pushing the envelope.

We are talking about very basic items being current.

The product is beginning to roll into the stores.

The sell-through in Valentine's and Easter is a very bullish signal to us that we have made the right decision.

And when I talk about Easter and Valentine's, that is not just candy, that is decor, that is a bunch of other items that would be more of a discretionary purchase.

The jeans have rolled out into -- the Bobby Brook jeans have rolled out into about half the stores in the chain.

We are very pleased with what we are seeing there so far and that is without a launch telling the consumer that we have the product.

The reception on the Hanes products has exceeded our expectations significantly.

So we feel that we have -- we feel like we have a lot of runway here yet and as the year unfolds and those items come in, we are very bullish on what is going to happen.

And then I had just one other question about the cost of the consumable merchandise that you purchased.

I am mostly interested in your dealings with vendors.

Are you able to negotiate better deals?

I am sure they are happy with your growth, both your comp growth and your store growth, but how does that translate into better procurement costs?

When we talk about category management, we talk about selecting the right items, we talk about the placement in the store, we talk about the pricing of those items and also the relationship we have with the vendor community.

That all kind of rolls together.

So when I talk about -- when I talk about a product, I talk about all of those components.

So we continue to work on building a world-class merchandising organization, establishing a world-class relationship with the vendor community, then it all plays out because it becomes a win-win for everybody because our volume is increasing.

Meredith Adler Okay, great.

Thank you.

Alan Rifkin, Bank of America.

Good morning, Alan.

Good morning.

How are you?

Congratulations.

Thank you.

Rick, there has been a lot of talk on Wal-Mart's part that after admittedly losing share to you in this space that they are recommitted.

In anticipation of this, are you willing and able to share with us what, if any, proactive steps you are taking to defend the shares that you have captured?

Yes, Alan, I think rather than commenting on a specific competitor, I would rather take a more holistic approach and look at you and say, during tough times, it always gets competitive at retail.

It is been that way forever.

There is a lot of great competitors out there doing a lot of great things.

I can tell you that we understand our pricing where we are across the country better than we ever have before.

And I can also tell you, if you look at what we are doing with our margin and our costs, we are better positioned to compete than we ever have been before.

So we understand our customer and I think the key takeaway for not only you, but everybody on this call, is we are committed to our EDLP strategy.

It is all about consistent prices that the customer knows they are going to get every day.

The consumer today -- if you think of what has happened in this quarter between the oil spill and the riots in Greece and the consumer is bombarded with information and all they want to know is what is it going to cost every day.

And we think that is our strength.

Okay.

I appreciate the color that you gave on the continued success of the different phases.

When you look at the gains that you have achieved from Phase II of the resets over the past six months, can you tell us how that would compare to the gains achieved in the first six months of either phase 1 and phase 2?

In other words, are you seeing greater gains from the implementation of these phases as you get further along in the program?

Yes, I would look at you and tell you that the growth is pretty consistent the first six months across all three phases.

You get a nice spike and then it kind of holds for a while and then you cycle through it.

And one last one if I may.

With results certainly exceeding your expectations and free cash flow likely greater than your expectations at year-end, would it be reasonable for us to expect that the incrementally greater cash flow would be used to pay down debt at an accelerated rate or would you accelerate investments in your business?

As we look at that, and we have been pretty consistent that our number one priority is investing in the business and then our number two priority is retiring debt and taking the leverage down in the Company.

So I think again being consistent with that, we would invest in the business first with our excess cash and then take down debt second in terms of the priority.

Deborah Weinswig, Citigroup.

Good morning.

Congratulations on a great quarter.

So a few questions.

Can you boil down in terms of traffic and ticket and help us understand some of the details there a little bit better?

Traffic and ticket are both up for the quarter.

Great.

Should we think about kind of traffic being a bit stronger than ticket or can you elaborate there a bit more?

We really don't break that out separately.

Again, we have been pretty consistent -- we are willing to discuss directionally how each of them are doing.

I will say they both contributed significantly in this quarter.

Okay, great.

And then with regards to your improved global sourcing capabilities, it sounds like that was a pretty big driver of some of your gross margin results in the quarter.

Can you elaborate in terms of what really drove that and where you are in terms of your capabilities there right now?

Yes, David and I will -- I will put a little color on it and David will give you probably a little more meat here.

I think the power of what is happening in our global sourcing is the reorganization that took place at the end of the year last year.

We've totally restructured the Hong Kong office.

We now have an office in India and we are actually exploring opportunities in Vietnam.

And I think what we have seen is the fact that we have been incredibly -- China (technical difficulty) and we are broadening that out to different areas of the world and we have been able -- very successful at being able to negotiate some relatively good costs.

The only thing I would add to that is that, like many of our initiatives, global sourcing is a stairstep type of function and we probably went up another step in a positive fashion in the first quarter as we saw our percentage receipts that foreign source grow in the quarter and we are very pleased with the progress we are making and the results and we feel like we are right on track with everything that we have talked about previously on foreign sourcing.

Great.

And then last question, can you also elaborate on the planogram resets that were accelerated and how does that affect future planogram resets?

Yes, great question, Deb.

One of the things that the merchandising organization is trying to do is align itself more with the manufacturing community when they release new products and it makes it -- it gets the new products into our stores faster.

And also what we are trying to do is take away from any kind of planogram activity in the fourth quarter of the year where we can commit ourselves to just focusing on sales.

So it is a little bit of a structural change is all it is, but the benefits are pretty big for our customer.

Great.

Well, thanks so much and keep up the great work.

Charles Grom, JPMorgan.

Good morning.

I think, for everybody on this call, the last seven or eight weeks in retail has really changed and we have seen a pretty big slowdown across the board.

Just wondering if you could help us out with, when you look at your discretionary categories, have you seen similar compression or are you guys kind of bucking the trend here.

Yes, I don't really want to give second-quarter guidance, but I remain very comfortable with the guidance we have given of 4% to 6%.

So I think that would probably give you your answer.

Okay.

Well, the answer to that would be -- it looks like you're guiding a pretty big deceleration on a two-year basis if that is the case.

Is that just you guys just being conservative, which clearly you were here in the first quarter?

Yes, I think the two year stack is probably going to be well north -- if you hit the upper end of that range, well north of 15%, which I think would be pretty admirable.

You haven't seen any changes in that from what we said in March.

We mentioned that we would be at 8% to 10% in total sales and 4% to 6% in comp.

So again, we are consistent with what we said at the beginning of the year.

Okay, great.

And then one for you, David.

Just if you look at SG&A on a very, very strong 6.7% comp, you got I think you said 37 bps of leverage.

I guess I'm a little bit surprised that you wouldn't have a little bit better leverage on that, particularly given that you had -- that you are recycling these productivity initiatives from '09 and you had these recycling efforts.

Just wondering if you could dig into some of the headwinds and I guess looking ahead, which one of those headwinds are going to persist.

Well, first of all, we are fairly happy with the 37 basis point leverage.

I will tell you that, particularly with us growing the business the way that we are growing it.

Remember, we are adding a lot more stores than we did last year.

We have accelerated our store growth and that adds a lot to our SG&A as we open new stores and they come down the productivity curve.

We had a lot of good things happen in the quarter in terms of our utility management.

We are seeing the energy management systems that we put in kick in and help us save on utilities.

The cardboard recycling project that we put in about 15, 16 months ago is really coming to a head here and we are seeing cardboard recycling really provide income, a lot of income for us.

We also had some good news in both our healthcare and our workers' comp.

Efforts we have going on there in safety and health programs within Dollar General are paying off.

Keep in mind we are up against minimum wage increases that we have to offset that also hit us in the quarter versus last year.

So I think we had a lot of good things go on in the quarter and keep in mind, we are a growth company and as we continue to grow stores, we will have a little bit of a headwind against SG&A to get that number of stores opened.

Okay, fair enough.

And then my last question is with regards to the Wal-Mart factor.

I think when I was down visiting you guys in April, I believe the average rollback was 12%.

I think you said 8% to 10% on food and than 12% to 15% on nonfood.

I was wondering if you guys could share with us what those rollback percentages looked like in May.

Did they get sequentially more challenging from Wal-Mart?

I am not the guy to comment on that, Chuck.

I would tell you we are pretty comfortable with our pricing, where we are in relation to them and I think that is a good question for them.

Okay.

All right.

Congrats on a good quarter.

Michael Baker, Deutsche Bank.

Thank you.

Two questions.

One, I was wondering if you guys provided any color on the sales trend throughout the first quarter?

A lot of retailers had very, very strong Marches, particularly in the seasonal and then it started to fade a little bit.

And then my second question would be on the inventories.

They are up a little bit more than they have been.

Can you tell us in general what kind of categories there are there?

Is there any kind of markdown exposure?

And should we expect what happened with the planogram resets, which added to the markdowns, does that continue throughout the year?

Michael, I will handle the first one and turn the second one over to David.

As I look back on the first quarter, sales were pretty even.

Obviously, we had the shift in Easter, which affected one month, but our sales have --as they have been for the last couple of years -- have been pretty consistent as we roll through the different periods.

Michael, as we look at the inventory increase, it was in three main areas.

It was in -- and this has to do with the accelerated planograms that we did for strategic reasons.

It was in our HVA products, our food products and then our dollar toys, all of which we are very comfortable putting inventory in in terms of -- we have talked about the markdown risk.

It really was from items of that nature versus items where you have a huge markdown risk.

Keep in mind also that we did raise our turns in the quarter from 5.2 last year to 5.3 this year.

And then on a per-store basis, the inventory only went up 4% and that generated a 12% sales increase.

We balanced serving our customer with the products they want and need with our working capital management.

Additionally, if you look at our ROIC, our ROIC was higher in the quarter.

We came in at 22.1% on ROIC versus 18.3% in the prior quarter.

So again, we feel like we are managing our assets pretty well.

All good points.

Thanks.

So when you say you accelerated the planogram, so then does that suggest that the planogram resets sort of slow down later in the year and then the inventory sort of per foot, the trend there flattens out a little bit?

Yes, Michael, that would suggest that our turns will continue to accelerate.

Thank you.

Operator, next question.

Operator, can you hear us?

John Zolidis.

Hi, good morning.

Congratulations.

A question on the long-term sustainability of the gross margins.

Just looking at your results and also a lot of the other results across the discounter space, it seems like many of the discounters are reporting significant improvements in gross margins.

And so that seems to me to be a little bit at odds with the idea that discount retail serves a financially-challenged consumer that is looking for the lowest possible price.

So I guess looking into the future, do you guys -- do you think that there is a chance that, as a sector, you will see the need to kind of reinvest in price, which could lead to the reversal of some of these recent gains?

Yes, John, I think it is fair to say that, sooner or later, the rate of improvement in margin is going to moderate.

But let's step back and really address the real question.

I think there is a level of sophistication that is entering our channel, where there is a focus on private brands, there is a focus on category management, there is a focus on where we are buying product, there is a focus on how we are sourcing product.

And I think there is just a major change, particularly in Dollar General, how we look at procuring product.

I think that the margin expansion that we have been able to enjoy puts us in a position where we are able to compete whenever we need to to make any decisions.

David, I don't know if you have anything else to add on that.

Several of our margin initiatives really don't have anything to do with price if you look at it.

I think this is an important distention for Dollar General.

If you look at sourcing, that is the way that we drive cost out of our -- price of our product out of our margins and it has nothing to do with changing the price for the customer.

If you look at private brand, the same thing on private brand.

Again, it is a way of helping our margins and actually helping the customer get a better deal.

A lot of things we are doing in category management, the same thing there.

The things we are doing in distribution and transportation, optimizing our network, increasing the number of miles per load, improving our cartons per trailer, again, those are all things that help our gross margin that have nothing to do with price.

So I think we have a lot of things that we're working on in margin that don't involve having to change the price of the product to a customer.

Tom Roller, Credit Suisse.

Just a quick question for you on appreciation and amortization.

It looks like that expense has been down now for two quarters in a row.

Is that due to fully depreciating certain assets and should we expect that going forward or what are your projections there?

That is just a leasehold amortization that has rolled off over the last couple of quarters.

I think year-over-year I think D&A was down $1 million, so it's just leasehold improvement that rolled off.

Okay.

And then just one other question, kind of looking at some of the macro factors that drive the low-income consumer.

It looks like food stamps grew at an outsized pace beginning in April of 2009.

We have now maybe anniversaried that.

We are set to anniversary the last minimum wage increase in July and we are rolling through some of the larger income tax refunds.

Is that something that you think about in terms of the continued strength or maybe softening of low-income consumer spending?

Yes, a lot of good information there, Tom.

First off, the food stamp is slightly less than 5% of our overall business.

I will tell you that food stamps though are growing with us at a higher rate than they are growing in the country.

I look at the minimum wage, the tax refund checks drying up.

I would say to you, we have 20 consecutive years of same-store sales growth and I think our customers come looking for us when they have money and when money is a little tight.

So we still feel very bullish on where we are positioned, particularly when you take into account that we are an EDLP operator, that we are well-positioned to weather any storms going forward, any changes in consumer behavior.

That's helpful.

Thank you.

Joseph Parkhill, Morgan Stanley.

I was just hoping you could comment a little bit on the strong seasonal sales in the first quarter.

If you could give us a little bit more color as to what you believe drove the excised growth there.

Yes, well, first off, you had the Easter and Valentine's.

Both of those seasonal events exceeded our expectations significantly.

We have rolled out our redefined summer merchandise and quite frankly, it is performing above expectations also.

And Joseph, this is what we have been talking about when we began this journey at Dollar General about the intersection of quality and value.

And what we have been able to do is go in and elevate the quality of this type of merchandise yet keep the price points at levels that are familiar to our customer.

Okay, great.

And then onto home and apparel, those also accelerated during the quarter versus the previous few quarters.

I was wondering if you could comment -- were those sales trends pretty consistent for the quarter.

Do you see any volatility and is that just more improvement in quality as well?

Yes, the problem I have got with answering that is our new quality offering is beginning to roll out, so it is kind of hard for me to tell you if they are deaccelerating or accelerating because of the economy.

It is accelerating for us because the product is rolling into the store.

So I think that would be a great question probably at the end of next quarter once we get a little more of that product in there.

Joseph Parkhill Okay, great.

And then just finally, as we think about gross margin performance for the rest of the year, what kind of variability do you foresee and what are some headwinds and tailwinds versus the performance that you had this past quarter.

Sure.

Well, again, keep in mind, our first-quarter level was an all-time record for the first quarter.

So let's start there.

Now having said that, I think what I would like to do is direct you back to our guidance and our operating profit.

We don't actually give guidance on gross margin, but if you look at the operating profit, our current guidance on that is to grow 18% to 22%.

And we have taken that up from the previous guidance, which was to grow 15% to 20%.

So I think you can see we are pretty bullish about our operating profit growth as evidenced by the fact that we increased it from what we had told you in March.

Okay.

You don't want to highlight anything that could differ, that would bring you to the higher end of your range versus the lower end of your range?

Again, on gross margin, I'd say if you looked at the factors that helped us in the quarter, it was the category management, all the things that we are doing, Todd Vasos and his team, on category management, whether it be finding the product, sourcing the product, putting it into stores, how it is displayed, was it private brand, everything we did on private brand and increasing the private brand percentage for the quarter, as well as the sourcing that we talked about.

And then of course the seasonal growth that we just spoke about and how that grew approximately 21% in the quarter.

Okay, thank you.

Matt Nemer, Wells Fargo Securities.

Good morning.

This is actually Trisha in for Matt.

Just a couple questions.

I am wondering if you can add any detail about the lift in comps that you are seeing from store remodels and relos into the new customer-centric format.

Is it consistent with what you have been seeing or are you perhaps getting even better at this over time and seeing a stronger customer response?

Yes, they historically are running about 7% above the remodels and relos we have done in the past.

Okay, great.

And then if you can provide a little more detail around some of the merchandising initiatives, specifically the cadence of future rollouts like L'Oreal and Hanes over time.

Let me back up for a minute, Trisha.

I just gave you -- I was thinking about remodels and relos.

It's the new stores that are running about 7% of historical -- I didn't want to give you bad information.

The remodels are about 5% and then you need to repeat your second question for me.

I am sorry.

Just a little more detail around the merchandising initiatives similar to L'Oreal and Hanes over time and just your expectations for future rollouts.

Yes, the biggest merchandising initiative we have got coming is the Rexall brand, which will be launching.

That should start gaining some traction in the fall.

In regards to other things, it's a little premature to announce those yet.

Okay, great.

And then on the gross margin, you mentioned a good deal of the direct sourcing benefits coming from the restructuring you did at the end of last year.

So should we think about comparisons becoming a lot more difficult at that point and what are your expectations for just cost increases over the next --?

On the foreign sourcing piece, again, that is a long-term initiative for us that we see playing out really over the next -- this year and the next two years after that.

So it is -- we still think there are a lot of legs overall on foreign sourcing.

That is one of our longer-term initiatives that we have.

So no, I think there is still lots of room in foreign sourcing for us.

Any changes to your cost expectations?

I am not sure what you are asking.

Just from a product standpoint overseas, as you try to diversify away from China, how might that mitigate those cost increases?

That is a little premature to answer.

I mean there is a lot of activity, as you all know, going on right now in China and we are doing a really good job of mitigating a lot of those cost increases.

So I think, Trisha, that would be -- again, as the year unfolds, I think we would be a little closer, have a little more detail for you at that stage of the game.

The other thing to keep in mind that right now still a relatively small percentage of our business is foreign sourced.

So just going to that foreign sourcing helps our margin versus a domestic source.

Patrick McKeever, MKM Partners.

Good morning, Rick.

Good morning, everyone.

Congratulations.

Sorry to keep bringing up Wal-Mart or mentioning Wal-Mart.

That's all right.

I would do the same thing if I was sitting where you are.

But just thinking about the meeting in Arkansas, the meetings in Arkansas on Friday and how the company just kept going back to high gas prices, high unemployment and how that has really been affecting their business and looking at unemployment and talking about how stores and markets where unemployment is high did worse than stores in markets where unemployment is low and that sort of thing.

I am just -- and then here you are with a 20% two-year stacked comp in the first quarter and yet most of us assume that you have a very similar customer demographic.

So I guess the question is is it convenience here trumping -- convenience and price trumping some of these other issues or just I guess how do you see it and why aren't you talking about those things more than you are as real issues right now?

Thanks.

Again, Patrick, really, really thoughtful here.

I would -- I fall back to -- when you look at -- all I can talk about is Dollar General.

We have over 20 consecutive years of same-store sales increases.

I mean there has been unemployment, there has been recessions, there has been high gas prices, there has been low gas prices.

I think that what that really signals is that the consumer is as enamored with convenience as they are with the price of products.

And I think that we are there when our customers need us most.

And I keep coming back to this concept of an everyday low price.

We are there, the customer comes into our store, they don't have to worry about what the price of tide is going to be or the price of a pair of jeans.

They don't have to worry about buying it on sale and I think that is resonating, particularly in these very difficult economic times, quite significantly.

Now that being said, there is a lot of great competitors out there.

They all have got wonderful strategies.

They are all looking at the economics a little bit differently and what I tell this organization absolutely every Monday morning, all we can focus on and all we can control is what is in our little world.

And I think as you look at that [20-year] two-year stack, it really reflects on the fact that we are focused on our customer and our little world and by delivering consistent pricing day in and day out and really working hard on this intersection of value and quality, the right price with the right quality.

I don't know if that helps or not, Patrick.

Yes it does, very much so.

Thank you.

And then just maybe a quick one here.

Where do you stand with the beer and wine test/rollout?

Not sure exactly how you would characterize it.

Great question.

We are methodically rolling through the Company as we speak.

We are in Florida, South Carolina, Tennessee getting into a couple other states.

I anticipate -- we are taking our time.

We will probably only have about half of the stores at the end of the day will probably be selling beer and wine.

So it is a good initiative for us and it's like everything else.

We are just slowly taking our time and getting it done right.

Thanks very much.

Bret Jordan, Avondale Partners.

Good morning.

This is (inaudible) in for Bret.

Great quarter.

Just had a quick question following up something you said last quarter.

Last quarter, you said Valentine's Day was the first seasonal that the merchandising team had complete responsibility over.

And I was just wondering going forward if you are going to continue with that, does that continue with Easter, does that also continue into the summer seasonal?

Yes, exactly.

What I was saying was Valentine's was really the first holiday that the new team was able to influence not only in terms of their thoughts on how to merchandise the category, but the selection of items and the pricing of those items and my hats are off to them.

They turned around and delivered on Easter.

We are very pleased with our summer seasonal and of course, they are putting together the whole Bobbie Brooks relaunch and the rest of our non-consumables, it is the same team.

And I also want to throw out that when you roll these new products out, when you put these new plans together, a really great plan has to be executed and I think, at the end of the day, not only are you seeing the development and maximizing this intersection, but you're seeing our retail team doing a very consistent job of rolling that stuff out to the stores.

Okay.

And then just one last quick question.

I'm not sure if you are going to be willing to share this, but what percentage of your sales were private brand for the quarter?

Yes, our penetration was slightly north of 21%.

It was up about 110 basis points over the year before and that is just on the consumable side.

Okay, perfect.

Thank you very much.

Operator, listen, I will end the call here.

Leave it with this.

I think Dollar General, as you think about us, is better positioned today than it ever has been before.

You've got a very energized team here that is dedicated to accomplishing our long-term goals and really delivering positive results for our shareholders.

And I look forward to giving everybody an update at the end of the second quarter.

Thank you all very much for your interest in Dollar General.

Ladies and gentlemen, that concludes today's conference.

You may now disconnect.