達樂 (DG) 2010 Q4 法說會逐字稿

Ladies and gentlemen, this is the Dollar General Corporation fourth-quarter 2010 conference call on Tuesday, March 22, 2011 at 9.00 a.m.

Central Time.

Good morning.

Thank you for participating in today's call, which is being recorded by Conference America.

No other recordings are 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.

Thank you, Operator, and good morning, everyone.

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

We will first go through our prepared remarks and then we'll open the call up for questions.

Before Rick begins, I will provide some cautionary comments regarding our forward-looking statements and non-GAAP disclosures.

Today, comments will include forward-looking statements, such as those about our expectations, plans, strategies, objectives, and anticipated financial and operating results, including but not limited to, our comments regarding our forecasted 2011 financial performance, planned merchandising, operating and expense control initiatives, store growth and capital expenditures, debt redemption, as well as our expectations with regards to certain consumer and economic trends.

You can put identify forward-looking statements because they do not relate solely to historical matters or they contain words such as believe, anticipate, project, plan, expect, forecast, guidance, intend, will likely result, or will continue, and similar statements.

Because they are subject to significant risk and uncertainties, we cannot assure that these forward-looking statements will prove to be correct, or that any trends will continue.

Important factors that could cause actual results to differ material from those reflected in the forward-looking statements are included in our fourth-quarter earnings release issued this morning, in our 10-K filed this morning, and the comments that will be made on this call.

We caution against undue reliance on these statements, which speak only as of today's date.

Dollar General disclaims any obligation to update or revise any information discussed in this call.

In addition, we will reference certain financial measures not derived in accordance with GAAP.

Except for return on invested capital, reconciliations of these measures to the most comparable GAAP measures are included in this morning's earnings press release, which can be found on our website at dollargeneral.com under Investor Information -- Press Releases.

The reconciliation of ROIC is located below the link to the webcast also on our website under Conference Calls and Investor Events.

You should not consider any of this information as a substitute for the most comparable GAAP measure.

Because not all companies use identical calculations, these presentations may not be comparable to other similarly titled measures of other companies.

Now my pleasure is to turn the call over to Rick.

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

2010 was just another great year for Dollar General.

We're very pleased with our financial results as well as the progress we've made towards building for the future.

We delivered strong results in the fourth quarter, capping off yet another great year.

While weather impacted our sales momentum in the second half of the quarter, we successfully balanced sales growth, gross margin expansion, and SG&A leverage to key performance metrics of the business.

2010 was the third year in our journey of building and strengthening Dollar General for sustainable growth over the long-term.

Given our continued growth in both basket and traffic, I am convinced that we are playing a more significant role with our customers.

David is going to talk about the details of the fourth quarter, but I'd like to quickly reflect on our accomplishments for the year.

Full-year sales increased 10.5% to a record $13 billion or $201 per square foot.

2010 represented the third year in a row of 10% or higher total sales growth.

2010 also marked our 21st consecutive year of same-store sales growth.

Same-store sales were up 4.9% for the year, which means that our average store volume is up more than 25% in three years.

Notably, customer traffic and average ticket were up, and all of our operating regions again turned in positive comps.

We expanded our gross margin rate by 76 basis points to 32%.

Since 2008, our gross margin has expanded by 277 basis points.

On an adjusted basis, we reduced our SG&A as a percentage of sales by 50 basis points.

Adjusted operating profit grew 27% over last year to a record $1.3 billion and a record 9.9% of sales.

Interest expense was down $72 million for the year, as we have made tremendous progress in reducing our debt.

The bottom line, our adjusted net income grew 53% over 2009, including the $6.8 million favorable tax benefit detailed in our press release.

We opened 600 new customer-centric stores across our 35 state market area and remodeled or relocated an additional 504 stores.

That's over 1,100 significant real estate projects, further expanding the face of the new Dollar General.

Finally, I'm pleased to say we ended the year with a return on invested capital of 22.3%.

These results continue to be a testament to the strength of our business model.

It's clear that our strategy of small box convenience combined with great value resonates with the consumer.

Before I turn the call over to David, I wanted to provide more color on our fourth-quarter sales.

Total sales in the fourth quarter were up 9.4% from the prior year.

Same-store sales increased 3.8% for the quarter, below our expectation of approximately 5%.

On a positive note, both same-store sale, the same-store customer traffic, and average ticket showed positive trends for the quarter.

I think some detail about our monthly trends for the quarter would be helpful.

Through early December, we were on track to achieve approximately 5% comps for the quarter; but as the month progressed, we were impacted by an unusually adverse weather around key selling days before the holiday.

As you know, it's difficult to make up a key selling day in the holiday cycle.

Once customers miss the chance to buy wrapping paper or bows or a stocking stuffer before Christmas, they aren't going to come in after Christmas and buy them.

Those sales are just lost.

In fact, our biggest disappointment in the seasonal category was Trim a Gift, which includes wrap, bows, bags, et cetera.

Despite this impact, we actually turned in a good performance in December.

We started January exceptionally strong until the record-breaking storms that hit in the back half of the month.

Our performance in January was consistent with what many other retailers have echoed about the month, as we experienced some of the same softness as the broader retail markets.

We estimate that the impact of the weather on our comps for the quarter was about 75 to 125 basis points.

Additional highlights by category for the quarter include, first, consistent with the rest of the year, consumable sales were strong.

For a second straight quarter, we were encouraged by the positive comps in our Home category, an area where we have made some impactful changes.

Apparel performed below the earlier quarters of the year, driven primarily by Ladies.

As we continue to evolve our Apparel offering, we are learning more about our customer, her needs, and a response to changes we are making.

We are repositioning our Apparel offerings to focus more on infants and children's and men's apparel, as we reallocate space for women's apparel.

When we have completed this reallocation, we expect that roughly 50% of our space will be allocated to infants and children's apparel at great price points, leveraging more licensed brands such as Disney and Fisher-Price.

Without a doubt, Apparel remains one of our toughest overall categories, but I remain confident that we are doing the right things to achieve success.

I'm very pleased that once again we effectively balanced sales, gross margin, and SG&A leverage to deliver strong financial performance in the fourth quarter.

All in all, 2010 was another record year for Dollar General.

Now I will turn the call over to David for a more detailed review of our financial performance and 2011 guidance.

Thank you, Rick, and good morning, everyone.

As Rick said, we had a great year and we had a very strong financial performance in the fourth quarter.

Consistent with the full year, we were able to further expand our gross margins and leverage SG&A in the quarter.

Our fourth-quarter gross profit rate was 32.4%, an increase of 23 basis points over the '09 fourth-quarter gross profit rate, as we successfully lapped the highest gross margin performance ever achieved in the fourth quarter.

We recorded a LIFO charge in the 2010 fourth-quarter of $4.6 million versus a $2 million LIFO credit in the '09 quarter.

That's a $6.6 million or about 20 basis points year-over-year unfavorable LIFO impact.

Factors favorably impacting gross margin for the quarter include lower inventory shrinkage and higher net markups on sales, resulting from our success this year in reducing overall product costs, including benefits derived from our category management processing and increased volumes.

We successfully offset the impact of higher fuel costs in the quarter through improved transportation and distribution efficiency.

SG&A as a percentage of sales was 20.7% in the 2010 fourth quarter compared to 23.4% in the '09 quarter.

Including adjustments detailed in our press release, our SG&A rate was 20.6% in the 2010 quarter versus 21.3% in the '09 quarter -- a 72 basis point year-over-year improvement.

Our intense focus on cost reduction and productivity initiatives resulted in certain costs such as store labor, repairs and maintenance, severance, outside consulting, advertising, favorable processing, and waste management, either decreasing or increasing at a lower rate than the 9.4% increase in sales for the quarter.

We also reported lower executive -- excuse me, lower incentive compensation as a percentage of sales compared to the prior year.

Excluding the IPO and secondary expenses from both years, adjusted operating profit increased 19% to $413 million or 11.8% of sales compared to $347 million or 10.9% of sales in the '09 quarter.

We are very pleased with this improvement and with our ability to drive both gross margin expansion and expense leverage, even as we accelerate our investment in new store developments.

Interest expense was $66 million for the quarter, a reduction of $13 million from last year's fourth quarter, primarily due to our debt reduction.

Our effective income tax rate was 35% in the fourth quarter and 36.3% for the year.

Our full-year income tax rate was favorably impacted by $10.6 million, resulting from a tax adjustment related to a specific state and the related interest reserve, due to the effective resolution of an uncertain tax position.

Net of federal income taxes, the impact of this non-cash adjustment was approximately $6.8 million or $0.02 per diluted share.

Net income for the quarter was $223 million or $0.64 per diluted share compared to our net income of $87 million or $0.26 per share in the '09 quarter.

Excluding adjustments for comparability detailed in our press release, adjusted net income increased 30% to $226 million in the 2010 quarter.

Adjusted earnings per share were $0.65 in the 2010 quarters compared to $0.51 in the '09 quarters.

Please keep in mind this includes the approximately $0.02 per share tax benefit I just discussed.

Turning to our cash flow.

We generated $825 million of cash from operating activities for the year, an increase of 23% year-over-year.

Total capital expenditures were $420 million, which includes $156 million for improvements, remodels, relocations, and upgrades to existing stores, and $100 million for new lease stores.

In addition, we invested $91 million to purchase some of our more productive leased stores at attractive returns and to construct new company-owned stores.

We also spent $45 million for distribution and transportation investments, including initial costs on our 10th distribution center expected to open in 2012 in Bessemer, Alabama, and $22 million for IT projects and technology upgrades.

Finally, during the year, we repurchased $115 million principal amount of senior notes in the open market for $127.5 million.

This reduction in debt is consistent with our priorities for uses of operating free cash flow.

As of the end of the year, total inventories at cost were $1.77 billion, up 9% per store.

Four key factors contributed to the increase in inventory.

First, the addition of new planogram items in Phase 3 of the 78-inch profile are slower turning due to the nature of the products.

However, they deliver a higher sales per unit and higher margins.

Second, we accelerated the scheduling of import orders to avoid shipping delays, due to the timing of the Chinese New Year, and minimize the potential for limited shipping capacity, as we experienced in the prior years.

Third, the softer sales in the fourth quarter that Rick mentioned also impacted our inventory levels.

And finally, as a strategic move, we completed some forward buys in an effort to balance some inflationary concerns mainly related to cotton and petroleum-based products.

So we have increased our inventory levels to support store growth, new merchandising initiatives such as the 78-inch profile, and increase sales volumes.

The increases across multiple categories, primarily in basic merchandise, which historically has limited markdown risk.

The quality and aging of our inventory is in great shape.

Importantly, the sell-through of our overall holiday seasonal merchandise was essentially in line with our plans and was cleared in the quarter through our markdown strategy.

Overall, we expect that our inventory position will improve over the next three to four quarters.

Total outstanding debt at the end of the year was $3.29 billion.

Net of cash, our ratio of long-term obligations to adjusted EBITDA was 1.8 times at the end of fiscal 2010 compared to 2.5 times at the end of '09.

We continue to deploy capital efficiently with industry-leading returns on invested capital of 22.3% in 2010, a 50 basis point improvement over 2009.

To summarize, we have continued to deliver strong financial performance in a volatile environment, including exceptional cash flow generation and return on capital.

We have an excellent retail management team in place that is making strategic decisions that are driving productive sales growth.

Over the last several months, we have developed our plans for 2011 and we feel good about our priorities.

Please note that 2011 is a 53-week year for Dollar General.

We expect total sales for 2011 to increase 11% to 13%, including approximately a 200 basis point of that is due to the 53rd week.

Same-store sales on a comparable 52-week basis are expected to increase 3% to 5%.

Adjusted operating profit growth is forecasted to be 14% to 16%.

The Company intends to redeem some or all of the senior notes at the redemption price on or after the first call date of July 2011, or to retire some of the notes through open market repurchases.

In that event, our earnings per share growth would be stronger in the third and fourth quarter, due to the lower interest expense.

We are forecasting net interest expense for the year to be in the range of $220 million to $230 million.

We expect our full-year tax rate to be approximately 38%, although it will likely vary from quarter to quarter.

Finally, for the 53-week fiscal year, we expect diluted earnings per share of $2.20 to $2.30, excluding any losses related to the repurchase of the senior notes.

This assumes about 346 million weighted average diluted shares outstanding for the year.

This includes an estimated impact of positive earnings benefit from the 53rd week of approximately $0.06 per share.

2011 capital expenditures are forecasted to be in the range of $550 million to $600 million, including about $90 million for the construction of the new distribution center.

Approximately 55% of capital spending is for investments in store growth and development, including new stores, remodels, relocations, and purchases of existing store locations.

Approximately 25% is for special projects, including approximately $90 million for a new distribution center in Bessemer, Alabama.

The remaining 20% is for maintenance.

In 2011, while we expect to experience commodity cost inflation across select categories and higher fuel costs, we still continue to expect modest gross margin expansion.

We are addressing the product cost increases in various ways, and have multiple initiatives underway that should have positive benefits to gross margins.

Given the uncertainty in the geopolitical markets, fuel cost is a variable that we are watching very closely, as it impacts both our transportation and product costs.

We will stay true to our everyday low price commitment to our customer.

In the current environment, we believe our customers need us as much as ever to provide both convenience and value.

We expect 2011 to be another strong year for Dollar General.

We believe we have the right plan and the right team in place to achieve our goals.

We continue to strengthen our financial position and, importantly, we are confident that our customers are depending on us.

We are starting the year off on a strong note with same-store sales growth coming in very nicely in February and continuing that trend in March.

Across same-store sales, gross margin, adjusted operating profit, and earnings per share on a comparable 52-week basis, we expect that growth rates in the second half of 2011 will be modestly stronger than the first half.

On the top line, we expect our growth in the second half of the year will be slightly stronger, given the strength of comps we are lapping in the first half of the year.

While we expect gross profit rate to increase for the full year 2011, we are facing gross margin headwinds in the first half of the year.

Three factors that are impacting gross profit rate include rising fuel costs, product cost inflation, and the laps we face from the prior year's gross profit rate performance.

Gross profit rate will potentially be flattish in the first half of the year.

For the year, we continue to expect modest gross margin expansion.

As a result, operating profit growth will likely be stronger in the second half of the year.

Additionally, we anticipate that earnings per share growth will be higher in the second half of the year, due to lower interest expense in the second half of 2011, as we benefit from the expected debt paydown.

I'd like to now turn the call back to Rick to summarize our 2011 initiatives that support our guidance.

Thanks, David.

We outlined our 2011 initiatives for you in our third-quarter conference call and expanded upon those in our December 15th analyst meeting.

I would like to reiterate our four operating priorities and remind you of our most significant initiatives going into 2011.

We have some exciting plans in place for 2011 that build on the four key operating priorities -- driving productive sales growth, increasing gross margin, leveraging process improvement and information technology to reduce costs, and strengthening and expanding Dollar General's culture of serving others.

In 2011, we expect to drive productive top line sales growth [at] approximately 9% to 11% on a 52-week basis, including same-store sales growth of approximately 3% to 5%.

The aggressive stance we have taken towards improving our store in-stock position is of the utmost importance in this effort.

We expect better in-stock levels to drive sales as well as improve the overall customer shopping experience.

In addition, we have several significant merchandising initiatives in 2011, including the addition of 16 feet of core Health and Beauty products, which is well underway; expanded emphasis on our extreme value offering devoted to $1 items, many in the Health and Beauty category; and additional space devoted to the further expansion of frozen and refrigerated food items.

We plan to execute 550 relocations or remodels in 2011 and to open 625 new stores, including entrance into Nevada, New Hampshire, and Connecticut, resulting in square footage growth of approximately 7%.

And as we mentioned last quarter, we are in the process of revisiting our Dollar General market concept, given the growth opportunities we see for this format.

We anticipate additional expansion in the second half of the year for DG markets.

We have several key initiatives aimed at expanding gross margin, our second operating priority.

Key drivers for our gross margin expansion in 2011 include -- first, savings from our direct sourcing program; two, further expansion of our highly successful private brands, which have been growing faster than our national brands for the last two years -- the addition of approximately 150 new private brands and Rexall SKUs in 2011 should help extend this trend; third, continued improvements across all three of our non-consumable categories.

The focus on our seasonal business has paid great dividends as the improved quality and attractive price points has resonated with our customers.

We believe that this same opportunity exists across other non-consumable categories, as we are beginning to gain traction in our Home Decor and Houseware categories.

We plan to continue to do more research with our core customers and to evolve our apparel strategy with more of an emphasis on fashion basics.

We expect infants and children to increase as a percentage of our offerings, and we also expect to see benefits from our improved approach in men's, and particularly, ladies.

We are seeing growth across some categories in Apparel, including shoes and accessories.

We have more product news that will be hitting the stores over the next several months, as the transformation of our seasonal category continues and as we introduce new merchandise in Home and Apparel.

Our third priority is to leverage process improvement in IT to reduce costs.

The two most important improvements planned for 2011 are -- first, the completion of the rollout of our centralized procurement function to leverage spending with suppliers, allowing us to consolidate our not-for-resale purchasing, including retail fixtures, store supplies, printing, information systems, and transportation equipment.

And second, the implementation of our new store workforce management system, which should help us better align our customer service with our customers' needs and shopping trends.

Already in 2011, we have completed the rollout to 15% of our stores and are already seeing benefits.

Our fourth and final priority is to strengthen and expand our culture of serving others.

We will continue to focus on serving our customers, our shareholders, the communities where we operate, and our employees.

In 2010, we achieved an important milestone, as nearly 50% of our positions were filled from internal candidates.

The investment in our employees is an important investment in our future.

As Dollar General grows, our employees have the opportunity to grow both personally and professionally with the Company.

My personal thanks and gratitude goes out to all of our 86,000 DG employees that are committed to serving our customers every day.

Dollar General is a strong company because of our employees.

We have a great foundation for growth that we have built together as a team over the last three years.

The track record of executing our key initiatives gives me great confidence that the Dollar General team can successfully execute our 2011 goals and continue to deliver long-term sustainable growth.

With that, Operator, we'd now like to open up the lines for questions.

(Operator Instructions).

Deborah Weinswig, Citigroup.

Good morning, Deb.

Hey, good morning.

It's actually Tina Wang on behalf of Deb.

So, two questions for you guys this morning.

First is, I was wondering if you could update us on private label penetration as of the year-end and opportunity going forward?

And secondly, you had mentioned at your Analyst Day that you were going to implement price optimization this year, and I was wondering if you could elaborate on those plans and kind of what percentage of the store-based that might impact, and the rollout time frame?

Thanks.

Yes.

On the private brand, 21.6% versus 21.3% last year, and that's -- and we have a 13% increase in private brand consumables sales for the year.

We've introduced a lot of new items in HBA, food, paper, and pet, and we're very happy with where private brand is going.

And again, we see continuous improvement in that, as we look forward into 2011.

Tina, I might also throw out -- when we report our private brands, we only report the consumables side of the table.

We have a very strong battery program now.

We have a very strong diaper program.

In fact, they're off the charts in what they're delivering.

And we don't take into account the work we've done in our seasonal.

So, that's strictly, strictly a consumable number.

In regards to our work with zone pricing, we are now officially experimenting with that across the entire chain.

And we are seeing opportunities where we cannot only adjust up but down as well.

And we're taking our time with this.

As I've said previously, this is a very methodical process and it's playing out very nicely.

Are there particular categories that you're focusing on sooner than later?

Actually, in all honesty, it's probably more on the consumables side now than the non-consumable, as you can imagine, because of the cost increases we're seeing out there.

Colin McGranahan, Bernstein.

First question just on SG&A.

Pretty good performance here in 4Q; big dollar growth of about 6% in the quarter versus 8% for the year and 9% last year.

As you think about the levers going forward with goods not for resale, and the workforce management, but against a year where you're looking at 7%-plus square footage growth, how are you thinking about the dollar growth rate of SG&A on a go-forward basis?

Yes.

Well, we have a lot of targets as we move forward on SG&A.

Let me talk a little bit about that.

We still have room in our energy management systems that we're putting into stores; the labor standards we have in the stores are starting to kick in and give us value as well as workforce management.

We have initiatives on damages to reduce the damages that we get from vendors.

A lot of emphasis on supply reduction, shopping bag usage, you name it, all the little things that can add up to quite a few dollars.

We have programs on maintenance that are paying off for us, rent reduction.

And then we're always looking at hardware and software maintenance.

So we have a lot of things in place as we move forward here.

And we're still confident that, as we look at our guidance moving forward, that we have a lot of levers to pull, in terms of leveraging SG&A versus the prior-year, as a percentage of sales.

Karru Martinson, Deutsche Bank.

In terms of the timing shift here for Apparel to Infant, what's the timetable here?

And what's going to be entailed in making that transition?

Yes -- great question.

It's actually underway as we speak.

And what it really entails is 50% of the space in the stores being converted over to Infants and Children's.

And then what we're actually doing is we're pulling into the front of the store -- through the front of the lineup.

So as our customer comes in to the department, the first thing they experience is Infants and Children's.

Okay.

And then just on the bonds -- is this going to be just a use of cash and a revolver draw for the retirement there?

Or how are you approaching that?

Yes, I think as we look at that, again, we're very consistent with what we've said on our usage of cash.

Our number one priority is investing in the business and making sure that we're growing the business, because we believe that has the highest return.

We'll see where we are in July on cash, and make a decision how much of those bonds we want to buy back and if we want to use part of -- some of the revolver to also buy back the bonds.

And then potentially make a decision in fourth quarter to buy back the remainder of the bonds.

Again, based on our cash position and making sure that we continue to invest in the business.

Scott Ciccarelli, RBC Capital Markets.

Good morning, Scott.

Good morning.

This is actually Austin Pauls on for Scott.

My question -- my first question is on the Dollar General market store concept.

Could you remind us how many of those stores you have currently?

And maybe talk about where you see that concept going over time?

Yes.

We currently have 57 of them in operation and we have three that we have remodeled to the new concept.

The new concept is very similar to what we've done at Dollar General, where we've gone in and applied the science and art of category management, and done a much better job of aligning the selection and the adjacencies and the flow of the store.

We've also gone in and looked at -- it's a much more heavily concentrated in perishables, and the team's gone in and evaluated perishable performance.

And as you go into the store, what you -- in essence, as you walk into the door, one piece of the store feels like a little fresh grocery store and the other side feels exactly like a Dollar General.

And the numbers that we have experienced in these have been very satisfying.

And now what we're doing is we're stepping back and evaluating the future of that concept.

And we'll have more to say about that as the year unfolds.

Dan Wewer, Raymond James.

I want to ask two questions because this Operator is cutting people off quickly.

(laughter)

See, first, David, confused with your comments that we're off to a great start in the first quarter.

I'm assuming that implies same-store sales are 5% or better.

And yet you're saying that the second half of the year is going to be stronger than the first half; if you could help reconcile that.

And then the other question, Rick, for you -- I know you're right on the eve of making a big move to the West Coast.

Could you talk about the competitive landscape with regards to the traditional grocery stores, drug stores and discounters, let's say in the California and Nevada market compared to your core territories?

Go ahead, David, then I'll take the second half.

Sure.

I think as we talk about our guidance and, yes, we were referring to the comp sales, I'm not going to comment on any exact number, but we'll tell you that we are pleased with what we're seeing in comp what we saw in February and what we continue to see in March.

As we look at the margin, and particularly, the margin percentage, I think that's more of what we were talking about in the guidance.

We're up against some very strong numbers the first half of last year.

In Q1 of last year, we had a 32.1% margin percentage and in Q2, a 32.2% margin percentage.

Okay.

So it's the margin comparisons, not this -- you would expect kind of a similar pace in sales or comp sales.

(multiple speakers) It's the margins that will be --

Yes, it's a little bit of both.

I mean we're -- again, we're very pleased with what we're seeing in our sales right now, but as always, we're being cautious in terms of how we give our guidance.

Okay.

Okay.

And then in regards to what's going on on the West Coast in terms of competition, I think the competitive environment now is -- I know I've been saying this for a couple of years -- it's pretty intense out there still.

And you're seeing -- as I look at the West Coast, quite frankly, I tend to see more high/low activity.

And as you all know, the West Coast is a little more expensive to operate in than other areas of the country, requiring a little bit higher gross margin to offset those operating costs.

To be very honest, that's why I'm very bullish about our opportunities on the West Coast.

We are formulating our strategy for Nevada now.

It's coming together very nicely.

And we plan on using that as a launching pad into California.

Okay, great.

Thank you.

Matt Nemer, Wells Fargo Securities.

So, two questions.

First is, as it relates to guidance, could you talk to the implications for inflation -- how much inflation have you baked in either to the top line or the cost lines?

And then, secondly, on your CapEx guidance, if it back out the DC and the incremental IT spending, it seems like spend per store per renovation relo is a little higher than last year, but maybe I'm misreading something.

So could you just talk about CapEx per new store and per relo?

Sure.

First, your inflation question.

We do have a modest amount of inflation played into both our costs and our sales as we look in particularly the first half of the year.

We're doing everything we can to work with our suppliers to try to control that cost.

We're also leveraging our private brands, as we mentioned earlier, giving our customer a choice to buy an item that will be a little bit less expensive than the branded items, and also boost our margins, because we get more margin off of the private brand.

And we have the capability to design and source that a little closer than the branded items.

We're also trying to increase our usage of direct foreign sourcing, which is, again, helping us to try to offset some of the inflationary impact.

But it's definitely there, and we're battling it and we saw it in cotton, coffee, sugar, and resins in the fourth quarter.

On the capital expenditures, I think if you -- maybe a different way to answer it is, if you look at the year-over-year increase that we have in CapEx, going from the $420 million that we spent in 2010 versus where we're guiding you for 2011, the new DC is around $90 million of that increase.

Store growth is probably $30 million to $40 million in terms of the new stores, the remodels, the relocations.

Then we're making some investments in the stores, some new programs that we're putting in, that right now we're not going to exactly describe what that is for competitive reasons, but there's probably $15 million to $20 million related to that.

And then the rest of it is really just general investments in the business, some things we're doing in the DCs related to conveyors, racking, rotators and things of that nature overall.

You know, the mix of our stores, you have to look at the build-to-suit versus the conventional in terms of what it costs for us to put in a store year-over-year, and then we are doing more coolers, as we've talked about.

So, definitely, the coolers would add to the capital expenditures that we have in the stores in 2011, and we've seen a great return out of those coolers.

We feel very comfortable with the IRR we get from increasing our cooler square footage in the store.

Joseph Parkhill, Morgan Stanley.

I know you mentioned that weather impacted your seasonal sales, but overall, it seems they were a little weak, given that you had increased shelf space for the holiday season.

It looks like maybe they were down a little on a same-store basis.

I was wondering if you could attribute anything else besides weather to the weakness in that category?

Yes.

You know, I -- Joe, the work that's been [done] on seasonal in this Company is incredibly strong.

We've done a wonderful job of increasing the value of the product and holding the retail right.

We got soft with the weather.

And I've got to tell you, no one hates to discuss the weather worse than I do.

And I think if you all reflect on it, it's the first time you've ever heard me bring it up.

But we saw some wild trends.

And again, the days when we didn't have the blizzard condition, our comps were fine.

Right.

Okay.

And so -- but there was no -- you also mentioned there was no incremental markdown expense?

That's correct.

We -- our sell-through on seasonal was well within the window where we wanted it to be.

And we have cleared it all out of the system.

Okay.

And then just a few quick housekeeping.

Do you have an estimate for your LIFO charge next year?

And then also I was wondering, your tax rate came in a lot lower this year versus the 38% that you're guiding to for next year, so I was wondering what's different from this year to next year?

Yes, you bet.

On the LIFO, I will say right now in our guidance, we have what I would call a modest LIFO charge played in.

I'm not going to give a specific dollar amount on that.

And obviously, if you go from the low end to the high end of the guidance, you could have a little bit of a higher charge on the low end of the guidance than on the high end.

And obviously, that's something we're watching very, very carefully with what product costs are doing.

On the tax rate, we mentioned that we had one specific state that closed out in the fourth quarter that gave us a $0.02 per share gain, and we consider that to be an unusual item.

So we wouldn't play that into our tax rate on a go-forward basis.

So, again, we believe the tax rate will get closer to that average approximately 38% on a go-forward basis in 2011.

I will say if you look at it on a quarterly basis, we can definitely have differences in the quarters, with some quarters potentially being higher or lower than that; a lot of that depending upon what goes on in individual states and the activity we have in various audits.

And as you can imagine, when you operate in 35 states, you always have a lot of activity going on in your tax area.

Thank you.

Operator, we'll take the next question.

Colleen Burns, Oppenheimer.

Based on your earlier comments, it sounds like you plan to pay off the senior notes over the next year as opposed to refinancing a portion.

Is that the right way to think -- how you're thinking about it?

Yes, I think if you look at it, that's definitely correct.

What our idea is, is to take that down because we don't believe we need it in the business any more with the cash generation that we have.

So our goal would -- again, would be either substantially take it down between now and the end of the year, or totally pay it off.

And then our hope is that the rating agencies will take notice of that.

And if you look at what our credit statistics should be at that point in time, it would definitely point you to an investment grade status for Dollar General.

And then, certainly, once we're investment-grade, we would look at our capital structure going into 2012 and make some decisions as an investment grade company, and obviously, have much lower borrowing costs at that point.

Right.

Got it.

So there's no thoughts about taking out the subs potentially earlier?

No, not right now.

And again, we have a buyback provision on those in July of 2012.

That would be the time to take a look at that.

Great.

And then you don't hedge any of your commodities, right?

Oil --?

No, we do not.

No, we don't.

Okay, great.

Thank you.

Carla Casella, JPMorgan.

You talked about the workforce management system.

I may have missed (technical difficulty) --

Carla, you're breaking up on us.

I don't know if you're on a speakerphone or a cell phone?

Yes.

How's that?

That's better.

You want to ask your question again?

Go ahead.

There we go -- is that all right?

(multiple speakers) Okay.

So on the magnitude of the benefits you're seeing from the workforce management system, can you give us any details of what you're seeing in the stores that already have the systems in place?

And then my other question was just on shrink trends.

You're not talking about shrink much any more.

I'm wondering if the shrink is where it needs to be.

Two great questions.

The workforce management, I will tell you, since it's just starting to roll out, I will tell you it's meeting our expectations.

We're happy with how it is balancing the load of work and how we align the customer flow to the balance of the work.

And we'll have more to say about that as it gets a little deeper through the course of the year.

And then the second question was on --?

Shrink.

Shrink, yes.

We're still intently focused on shrink.

We continue to make improvement.

As I sit and talk to our Chief Operator, she would tell you we both agree that we still have lots of improvement there.

A couple of other comments on shrink.

Our new store shrink right now is the lowest that it's ever been in history.

We've made tremendous progress when we set up a new store.

Also, on the exception-based reporting, we had a manual rollout on that in June and we've started to automate it.

We put out a Phase 1 on that in January.

And then our Phase 2, that will give us a look at each individual line item in terms of inventory, will go out in Q2.

We also have made progress on scan-based trading.

We changed over DVDs to scan-based in July, and then we're going to have point-of-sale activation on phones in second-quarter.

So we continue to do a lot of innovative things on shrink.

And again, we always believe there's room on shrink, but we are pleased with the progress that we've made on it over the last three years.

Great, thanks.

Mark Mandel, ThinkEquity.

I was just wondering if you were seeing any changes in spending patterns or --?

You know, the use of EBT cards, a paycheck cycle, the use of credit cards, that might reflect higher gas prices or additional stress on the consumer.

Yes, another really good question.

You know, our consumer primarily plays with cash and debit card.

Those trends are basically the same.

EBT, quite honestly, is about the same also; haven't seen an increase in that either.

You know, it is fair to say -- I still believe, contrary to what a lot of is being written, there's a lot of stress on the customer out there.

Mark, I'll give you -- this is just an interesting observation.

I was at the Bristol car race this weekend.

And talk about our customer, our customer index is incredibly high with car racing and country music.

I estimate the stands were 30% empty.

And that car race is one of the biggest events in the car racing cycle.

So for what that's worth, I still think there's a lot of stress out there still.

How about on the pricing side?

Are you seeing Wal-Mart and other competitors get tougher?

We've done some surveys which shown a widening gap between Wal-Marts prices and yours in recent quarters.

Are you seeing that?

And how are you reacting to that?

You mean widening as they're getting higher than us or lower?

Lower.

Yes.

We track their pricing every -- we track our competitors' pricing every month.

We look at the sensitive items as well as a full [boat] check every quarter.

We continue to be very happy with where we're priced.

We are monitoring it.

And I just want to reinforce, we're very committed to everyday low price.

We believe that's our strategy, that's what's built this Company, and that's what we're staying focused on.

Great.

Thank you very much.

You bet you.

Thank you.

Operator, we'll take the next question.

Patrick McKeever, MKM Partners.

Good morning, Patrick.

Good morning, Rick.

Thanks.

I guess staying on the same subject of Wal-Mart then, I have two questions.

But the first one -- just wondering if you had any thoughts on Wal-Mart's testing of these 15,000 square-foot Wal-Mart Express Stores?

And I guess there's -- and they're talking about potentially rolling out a very large number of those small stores.

I was wondering if you had any even big picture thoughts on that, especially as it relates to the Dollar General market stores.

And then, secondly, this is probably a little sensitive, but there has been some speculation about Dollar General maybe making a bid for Family Dollar.

And just with two out of the four publicly traded dollar store offers -- proposed offers out there for two of the four publicly traded dollar stores, I just wondered if you might make a comment or two on that as well.

Thanks.

Yes.

Good questions, Patrick.

First, on the Wal-Mart Express.

I mean, Wal-Mart is a world-class competitor.

I mean, they've built that company at $400 billion in sales.

I know they have historically done a lot of experimentation with a lot of different things and been very successful.

Hey, what we're going to do is focus on what we've done in the last three years, and that's continue to build on the foundation that we have laid.

I learned a long time ago you can only control what you can control.

And we're going to stay focused on our business; stay focused on convenience; stay focused on everyday low price, and let it play out as it has.

As regards to FDO, I've got to tell you, another great competitor out there.

But I have to be honest with you -- we can't really comment on market rumors out there.

So we'll have to let that one play out just like the Wal-Mart Express.

Okay.

Maybe I could get a quick third one in then.

Sure.

Of course.

Just on the timing of adding more dollar price points to the mix, I think you said this will be particularly the case in HBA.

Just wondering about the timing of that strategy, given these emerging inflation pressures.

Yes, another -- that's a very good question.

We anticipate the additional dollar merchandise to start rolling into the stores in June.

We're in the process now of adjusting the fixture sets to get those in.

And just for everybody on the call, it's an expansion and reinforcement of the highly successful 10-for-10 consumable stuff that we have in the stores now.

All right -- Patrick, that help?

Yes, very much.

Thank you.

Okay.

Sure thing.

Operator, we'll take the next call, please.

Anthony Chukumba, BB&T Capital Markets.

I just had two quick questions, sort of housekeeping.

One was on the -- you called out incentive compensation, lower incentive compensation as one of the things that benefited from your SG&A in Q4.

I guess I was a little surprised by that, given the fact that you had a very strong Q4.

So I was wondering if that was an issue of just lower actual incentive compensation or just some -- or just the timing, maybe you did enough accruals -- a larger accruals in the first three quarters.

And the second question, I just wanted to know if you could just give some guidance in terms of projected store closings for fiscal year '11?

Thanks.

Yes, on the incentive compensation, it's really a matter of, quite honestly, we had a pretty difficult budget for 2010 that we had to perform against.

And I would say it this way -- in 2009, looking at the bonus payment there, we had a great year in 2009.

We had a great year in 2010.

Our budget was just a little bit tougher in 2010, and therefore, the payout -- again, as we stretch to give the maximum return to our shareholders, our budgets get more and more difficult.

So, that's why the payout is a little bit less year-over-year.

It really doesn't have anything to do with quarterly accruals.

Yes, and in regards to store closures, probably around 60.

Yes, it varies in that based on weather and different situations and such.

[Like] maybe you're expecting about 60 for the full year?

Yes.

In 2010, we closed 56, for example.

Got it.

Okay.

That's helpful.

Thank you.

John Zolidis, Buckingham.

This is Jody Yen calling on behalf of John.

Looking into your 2011 guidance, which component of traffic versus ticket is going to be driving that plus [3 to 5] comp?

Well, they both are.

Again, we don't break those two out separately.

But similar to what we saw in 2010, we expect both traffic and ticket to contribute positively to our comp sales in 2011.

We continue to work really hard on both, feeling that you have to drive both.

Okay.

And then a question on the fourth quarter.

How much did incentive comps help the SG&A rate?

We don't break that down, Jody, specifically, but it was a -- clearly, it was a factor year-over-year.

Okay.

Thank you very much.

Thank you.

Our last question comes from Joe Feldman with Telsey Advisory Group.

Thanks for taking the question.

I wanted to drill down a little more on traffic ticket, if you could.

Just in terms of -- are you seeing the same customers shopping more frequently?

Are you starting -- are you seeing more new customers?

We're just kind of curious as to what might be driving the traffic and ticket.

And also, are you seeing just more items in the basket?

Or is it a higher average price point or --?

Just trying to get a gauge of where the consumer is at.

I know you gave a little color earlier but wanted a little more detail.

Yes.

Yes, good question.

What we're actually seeing is that our basket is increasing slightly and the customer is coming a little less often.

However, it's still positive.

As regards to the trade-down customer, we're still seeing them out there.

This whole customer around $70,000 a year continues to be trading with us.

Got it.

That's helpful.

And if I could ask one more?

Sure.

Can you just remind us how you approach new market entry -- with New Hampshire and Connecticut and Nevada -- just how do you go in?

What's the marketing strategy to tell people you're there?

If you could just refresh our memory on that.

Sure.

I think what would be helpful here if I told you how we used to do it versus how we're going to do it in the future.

Used to be, we would enter a market like Phoenix and put one store in the North, one in the South, one in the East, and one in the West, and wonder why no one knew who we were.

Our strategy now is where the real estate people have coined it as a cluster strategy.

And our -- the idea is we want to enter a market and have enough presence, where the investment into advertising to tell the world we're there, is beneficial.

And as we enter these three new markets, that's what you're going to see.

You're going to see a group of stores open up followed by another group of stores.

I do want to reinforce, though, that we are an EDLP operator.

We believe the best advertising for us is word-of-mouth.

And once we get those stores open and define who we are and communicate that, we want to cycle into our normal advertising activities as quickly as we can.

Got it.

That's helpful.

And I assume that new store productivity has actually been better with this kind of a strategy.

Is that fair to say?

Yes.

Our new store productivity in my career is some of the best I've ever seen.

And we continue to be pleased.

Thanks.

Good luck, guys, with the next quarter.

Thank you very much.

And, hey, Operator, thank you and then thanks to all of you who joined us today, and thanks to all of you who had time for a question.